FOFOA: Euro Gold

Here’s a new post from FOFOA. It gives a different perspective of the Euro than what is being presented in MSM. The question it seems is will the ECB succumbs to the pressure to print. Our Fed must print because it is an entity of our government and exists to serve it. The ECB is theoretically not bound nor controlled by any government. But, it is controlled by the consensus of its member countries. So the question should be whether the members will choose to print to ensure nominal payment of debt owed? History says YES! It is what the participants of the system want and demand, access to money.

The EURO uses a floating price for gold, marked four times a year to market. This is the counter-balance to its printing on the balance sheet. It advertises to all who care to look the degree to which they print. A careful observer can then decide for himself where his long term wealth should be stored. Currently, many Euro holders are deciding gold is a superior storehouse of wealth and propelling gold in Euro terms to all time highs.This is the essence of Freegold, where gold’s function as a reserve asset and long term unit of account re-emerges.

Monday, July 11, 2011

Euro Gold

(Photo: REUTERS)
A gold bar carrying the Euro sign is seen during the European Central Bank’s Euro Exhibition organised by the Romania’s Central Bank in Bucharest March 10, 2011.

A little over a week ago on “Snapshot Day” (Thurs., June 30), the Eurosystem MTM party began with the CB rendition of “Whoop, There It Is” –-> Gold: EUR 1,043.382 per fine oz. – promptly followed by a dip down to EUR 1,022. Of course it has now recovered and is up at the all-time high in the EUR 1,100s. And even though this wasn’t the all-time high quarterly snapshot in EUR terms, it was only 1% under the previous ATH and it was the first ever quarterly close over $1,500.

Then on Wednesday the ECB released its quarterly ConFinStat (Consolidated financial statement) for the Eurosystem. Here are the top two lines from that statement (my emphasis):

In the week ending 1 July 2011 the increase of EUR 12.6 billion in gold and gold receivables (asset item 1) reflected quarterly revaluation adjustments.

The net position of the Eurosystem in foreign currency (asset items 2 and 3 minus liability items 7, 8 and 9) decreased by EUR 0.6 billion to EUR 176.6 billion.

In other words, the decade-long trend continues, with the Line #1 asset gold floating upward while the Line #2 asset, foreign currency, sinks downward.

Value and Volume

Now, the ECB puts out a ConFinStat every single week, 52 weeks out of the year. And every week it makes quantitative volume adjustments, like net increases or decreases in both gold and foreign currency reserves. But it only makes qualitative or value adjustments on four of those 52 statements. This is when the ECB marks its reserves to what the market says they’re worth. The MTM party! And for the last 12 ½ years the trend has been that, proportionally, the Eurosystem’s gold reserves have been rising while their foreign currency reserves (mostly dollars) have been falling. Here’s the chart:

Yet if we look at those reserves only quantitatively by volume, the opposite is true. Foreign currency reserves (again, mostly dollars) have grown over 12 ½ years in volume, from roughly $260 billion to $310 billion from a dollar-denominated perspective. Meanwhile the Eurosystem’s gold reserves have fallen, again, only quantitatively, from 402 million ounces to 347 million ounces in volume.

This view, the volume-only view, is the fundamental modus operandi of the $IMFS that praises quantitative (voluminous) expansion and “growth” while ignoring qualitative (value) degradation. The reason is that governments and central banks can only print volume, not value. Think about this for a moment.

A clear example, of which I’m sure you are all aware, is that the official US monetary gold stockpile is still held on the books at $42.22 per ounce. But would you believe that this arcane (some would say moronic or worse) treatment of national reserves is actually codified in the official guidelines governing global central bankers operating under the $IMFS?

It’s true! Since 1993, the last word in international reserves has largely gone to the IMF as set forth in the Fifth Edition of its Balance of Payments Manual which can be found on the IMF website here. Under ‘Structure and Classification’ you’ll find chapter XXI: Reserve Assets, paragraph 444 on Valuation (my emphasis):


444. In principle, all transactions in reserve assets are recorded at market prices—that is, market exchange rates in effect at the times of transactions, market prices for claims such as securities, and SDR market rates as determined by the Fund. Monetary gold transactions are valued at the market prices underlying the transactions. For valuation of stocks of reserve assets in the international investment position, market prices in effect at the ends of appropriate periods are used.

In other words, the IMF guidelines are out of step with modern best practices insofar as they lamely prescribe that reserve assets be recorded at the market price in effect at the time of the transaction that acquired them. Hence, there is no provision for periodic MTM adjustments to provide a rational reassessment of the evolving market-health of the balance sheet.

Recognizing this particular valuation/accounting shortcoming (along with “a few” others), the ECB has been at the institutional forefront implementing useful deviations. Essentially acknowledging the IMF’s own admissions of ambiguity within the manual, the ECB tactfully says, “the definition of reserve assets included in the 5th edition of the IMF Balance of Payments Manual leaves some room for interpretation,” setting the stage for its own definitive refinements as put forth in its “Statistical Treatment of the Eurosystem’s International Reserves” formally published October 2000 and found on the ECB website here.

So, from this volume-only view loved by the $IMFS, here’s what a chart of the Eurosystem’s gold would look like:

But from the volume times value view (which ldo makes tonnes more sense and also assists the little guy deciphering the monetary mess), here’s the true picture:

A different view, wouldn’t you say? Do you remember this quote from ANOTHER?

“Know this, “the printers of paper do never tell the owner that the money has less value…”

The funny thing is that writing this post made me want to go look up that quote. It was written on 5/26/98, six months before the euro launched as a unit of account and 42 months before the ECB launched its euro medium of exchange. Now yes, of course, at that time (1998) no printers of paper currency told you their product was losing value. The dollar was still showing gold on its books at $42.22. But here’s what I started to think about: Today, the printer of the euro, the ECB, tells all the owners that the money it prints has less value in gold… once every quarter! And not only that, but it encourages people to save in gold through system-wide mandates. Dang, now that’s quite a ‘something different’ when you really stop to think about it!

You see, there are two fundamental differences between the euro and the dollar that most Westerners simply can’t grasp, no matter how many times you try to explain their significance. Wim Duisenberg, the first ECB president, stated them pretty clearly in this 2002 speech:

“The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro.”

There’s a lot in that one paragraph, but the two fundamental differences with the dollar are the severed links to gold and the nation-state. Hopefully I have sufficiently addressed the former above. I will now try to explain the significance of the latter.


Homo sapiens generally tend to focus on the minutiae of any situation, or else on what everyone else is saying about it. And in the case of the euro, that would be “the debt” or “Greece”. Somehow most people always seem to miss the giant big-picture elephant tromping about the room. And in this case, that elephant is the euro’s severed link to the nation-state. When Duisenberg said this was a “first”, he meant it. And Milton Friedman also said it in 2001 (my emphasis):

“The one really new development is the euro, a transnational central bank issuing a common currency for its members. There is no historical precedent for such an arrangement.” [1]

In the world of currencies, there are many varieties. The way a nation chooses to manage its currency relative to the world outside its boundaries can have a wide range of effects and consequences, ranging from long-term stability to periodic hyperinflation. If you want a hard currency, then, ideally, you want it managed by someone else—a disinterested third party. Here’s Milton Friedman again:

“A hard fixed rate is a very different thing. My own view has long been that for a small country, to quote from a lecture that I gave in 1972, “the best policy would be to eschew the revenue from money creation, to unify its currency with the currency of a large, relatively stable developed country with which it has close economic relations, and to impose no barriers to the movement of money or prices, wages, and interest rates. Such a policy requires not having a central bank.” [Milton Friedman, Money and Economic Development, (Praeger,1973), p.59] Panama exemplifies this policy, which has since come to be called ‘dollarization.'”

Currency instability is a common problem for smaller nations. The hard fixed exchange rate described above is one way a small country can share the same currency stability enjoyed by larger nation-states. This is in contrast to the (dirty) floating exchange rate among most large, modern economies or the pegged rate of countries like China today, where a central bank uses brute force to try and overpower the normal market adjustment mechanism in order to maintain its desired valuation peg.

Bretton Woods was a pegged system, and one of the characteristics of pegging seems to be the buildup of market pressure that must be periodically released through a currency crisis like we saw in 1933, 1971 and again in the 90s with Mexico and East Asia. The market wants what the market wants, and trying to fight a force as powerful as that always ends in tears for someone. But sometimes the market simply bypasses the choices of the currency manager by using secondary media of exchange.

There are many examples over the last century where the dollar was used by the marketplace as a hard currency in conjunction with a local, unstable currency. Even today it is a common practice in small nation-states for the dollar to be the market’s longer term store of value circulating in concert with the local medium of exchange, which you only want to hold for the short term. And this is an example of how the market force, or the demand side of the currency equation, fights back against profligate nation-state printers.

As I explained in Big Gap in Understanding Weakens Deflationist Argument, the value of any currency is determined by a kind of tug-of-war between supply and demand. The demand side is the marketplace and the supply side is the printer. This was true even when gold was the currency. If the market demand for gold was rising faster than it could be pulled out of the ground, the value would rise and the circulation velocity would slow, often causing a slow-down in the economy sometimes resulting in recession or even depression. This tends to lead to monetary revolt and the re-emergence of easy money.

The point is, all the market wants is a stable currency, not too hot, not too cold. It is like a sleeping giant. Give it a stable currency and it will keep sleeping. Wake it and you (the printer) will lose control of the value of your currency and everything else you try to control. The market is the demand side of the equation. And the market is by far the more powerful of the two sides in this tug-of-war. If this isn’t making sense, please read my post linked in the paragraph above because I’m not going to explain it all here.

To summarize, there is a whole menu of options for the aspiring money printer to choose from when stepping into the supply side shoes of the monetary game. And as a supply sider, his job is providing a service to the demand side, the market, which wants one thing and one thing only, a stable currency. And if he wants to keep his job, he’d better give his clients what they want, because if they wake up to an unstable currency, they can easily take the reins of control away from him. So if his mandate is—or evolves into—anything other than a stable currency, he will not be long for this monetary world. And one last thing; instability means quick changes both up and down. The client doesn’t want drastic inflation or deflation.

The Debt

Most of you already know this quote from FOA:

“My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction.”

Now that’s not the whole quote, of course. But that’s enough to warrant some extra thought. Just think about it for an extra few seconds before continuing onward. And then next I want to jump from that to this; chapter 82 from The Triumph of Gold by Dr. Franz Pick, written in 1985:

“82. How currencies die

As currencies become more and more devoid of substance, they perpetuate their existence through their multiples. The milreis replaced 1,000 reis, and the bilpengoe tried to substitute for a billion pengoe. The conto was worth 1,000 escudos. The Greek talent was equal to 6,000 drachmae or 36,000 obols. In Java, the bahar was good for 100 million candareens. In India, the nil replaced one hundred billion rupees

Some coins were flattened to the point where they were as thin as a sheet of paper, or actually chopped up into strips, or cut into bits of all sizes and shapes. Some were punctured and the holes then plugged with inferior metal.

These strategems did not and will not save currencies, which are all doomed by the passage of time.”

He’s talking about debasement. Debasement is not monetary expansion through credit expansion. Debasement is the base money behind the credit being expanded in volume by the supply side as its only possible response to value degradation coming from the demand side. Note in particular the last line: “doomed by the passage of time.” And here is some more FOA from 2000 which I reposted in Freegold in the Proper Perspective:

“…Our dollar has had a usage period that corresponds with the society that interacts with it. Yes, just like people, currencies travel through seasons of life. Even gold currencies, in both metal and paper form have their “time of use”. Search the history books and we find that all “OFFICIAL” moneys have at one time come and gone with the human society that created them. Fortunately, raw gold has the ability to be melted so it may flow into the next nation’s accounts as “their new money”.

This ebb and flow of all currencies can be described as their “timeline”. We could argue and debate the finer points, but it seems that all currencies age mostly from their debt build up. In a very simple way of seeing it, once a currency must be forcefully manipulated to maintain its value, it is entering the winter of its years. At this stage the quality of manipulation and debt service become the foremost determinant of how markets value said money. Suddenly, the entire society values their currency wealth on the strength and power of the state’s ability to control, not on the actual value of the money itself. Even today our dollar moves more on Mr. Greenspan’s directions than from the horrendous value dilution it is receiving in the hands of the US treasury.

This is where the dollar has drifted into dangerous waters these last ten or twenty years. If you have read most of Another’s and my posts, it comes apparent that preparation has been underway for some time to engineer a new currency system. A system that will evolve into the dollars slot once it dies.

Out here, in deep water, we can feel what the Euro makers are after. No one is looking for another gold standard, or even something that will match the long life and success of the dollar. We only know that the dollar’s timeline is ending and a new young currency must replace it. No great ideals, nor can we save the world! But a reserve currency void is not acceptable.

Now look back to shore and watch the world traders kick ankle deep water in each other’s faces over the daily movements of Euros. From here, up to our necks in blue water, you ask “What the hell are they doing?” I’ll tell you. They are trying to make $.50 on a million dollar play! Mostly because they are seeing the chess game one move at a time. (smile) Truly, their real wealth is in long term jeopardy.

Our dollar has already entered a massive hyperinflation. Its timeline is ending and there will be no deflation to save it…”

And a little more from Franz Pick:

“85: Few people understand the concept of currency debasement

This process of debasing the currency to pay for government deficit spending has been going on for centuries. The Egyptians did it, the Greeks and Romans did it. Countless other nations have done it. Now it’s going on all over the world. The process of monetary inflation – and its result, soaring prices – is a simple concept. Adam Smith understood it, as did John Stuart Mills, David Ricardo, and other classical economists.

But, alas, today few people understand the concept. Instead, thanks in large part to the writings of John Maynard Keynes, higher prices are laid at the feet of excessive labor wage demands, greedy corporations, Arab oil sheihs, and the disappearance of anchovies off the coast of Peru. Mon Dieu! The media – woefully ignorant of currency theory – propagandize these stupid explanations, and the public is left totally in the dark as to the real cause.”

And to complete FOA’s quote at the top of this section:

“My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today’s dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)”

Saving the Debt

Now I want to talk about “the process of saving debt at all costs, even buying it outright for cash” because this is something they are doing in Europe as well, and, therefore, is one of the arguments the euro critics use to claim that the euro is no different—or even worse—than the dollar. Should we be surprised or shocked that they are doing this in Europe having read A/FOA all those years ago? Well, no. Unless, like many, you didn’t really understand what you read.

In my 2009 post Gold is Money – Part 2, I wrote, “And it was always known, but has now been proven, that the system will be saved at ANY cost.” When I wrote that I was discussing the dollar and the dollar system, aka the $IMFS, aka Wall Street. But this applies to any monetary and financial system. The system always takes political precedence over the currency. The currency will always be debased if that is needed to keep the system functioning nominally. This is nothing new and it should not be surprising, yet it’s apparently very surprising to 99.9% of all financial analysts.

Politicians and central bankers can only expand the monetary base in volume. They cannot expand its value. And at the first sign of systemic trouble, this is what they do. They do this because to not do it would make them redundant. A void, a vacuum of empty space with no politicians or CBs would do nothing which would allow our money, credit, to collapse down to its base, so the politicians and CBs have to do something to distinguish their fine selves from nothingness. Sure, they talk the hard money talk during normal times, but at the first sign of systemic trouble they print. Here’s one more chapter from Franz Pick, 1985:

“83. The pious pronouncements to hold the money supply in check will not be kept

The fellows in the central bank make pious pronouncements about fighting inflation and holding the money supply in check. But they panic immediately when they see signs of distress-borrowing in the banking system, as debtors, many of whom are corporations having interest payments larger than their pre-tax profits, try to keep their enterprises from going under.

Although the Federal Reserve system makes a lot of noise about controlling the money supply and reaching monetary targets, it is at times difficult to understand just what exactly they are controlling. Be that as it may, they will in time revert to form and resume the process of what is coyly referred to as “reliquifying the economy.”

This will lay the groundwork for another cycle of currency destruction, which could assume unprecedented dimensions. Though “to deflate or not to deflate” may be the question, the only answer to America’s growing financial and economic malaise is to debase.”

The point is that the Eurosystem’s response (volume expansion) to its current systemic threat (the debt crisis) is not surprising. Does this mean the euro will collapse (experience hyperinflation)? No. Because, for one reason, it has severed the link to the nation-state. The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed.

But the dollar, on the other hand, is nominally on the hook not only for the debt mistakes of the past, but for all future dollar-denominated liabilities, obligations, entitlements and promises of the biggest debtor in all of history, on top of a debt mountain that is probably another $100T in size depending on your measurement criteria. That’s a big difference. The dollar is an old currency in the winter of its life, linked to the greatest profligate debtor the world has ever known. The euro is a young currency that has severed its link to the nation-state. The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy.

Here are a few simple principles that will save you the hassle and embarrassment of constantly being surprised by the actions of politicians and central bankers. They will never sacrifice the system to preserve the value of the currency. But they will always sacrifice the currency to save the system. And there is a very simple formula for how they do it.

There are four players to keep in mind; the debtors, the savers, the banks and the printer. They never print and give the money directly to the debtors to pay off their debt. Instead they print and give the money to either the creditors (banks) or the savers (e.g. pension funds) in exchange for the older bad debt which they then put on the public balance sheet to socialize the lost value.

So they “bail out” the banks and the savers nominally, which in turn (through currency debasement) actually bails out the debtors and screws the savers. The banks come out even because they only require nominal performance. But the retirees and pensioners that require real performance at the supermarket get screwed.

It is important to understand the difference between nominal and real. Nominal means you get the number you expected. Real means you get the purchasing power you expected. Nominal expansion is volume-only expansion which is all the politicians and central bankers can do. Real degradation is the value degradation that goes along with nominal expansion or debasement. The banks don’t mind this because they only require nominal performance and their CEO’s are comfortably seated at the business end of the printing press where they can turn their personal share of the bailout into real returns.

So now that you know what is, and always has been, perfectly predicable and expected, perhaps you will not be so surprised at the news coming out of Europe. Instead, far more interesting is the news coming out of Washington DC.

A Fairy Tale Expanded

Now I’m going to share with you an analogy that I think will help as we compare and contrast the EU and the USA from a currency perspective. As I have discussed on several occasions, the pure concept of money which maintains continuity from thousands of years ago when it first emerged until today, is the common knowledge of the relative values between real goods and services conceptualized and symbolized by a shared and agreed upon unit. And currency, in the context of the pure concept of money, is nothing more than the clearing system for the trade of real goods and services.

As a foundation for this analogy, please read A.E. Fekete’s “A ‘fairy’ tale” from a speech he gave in 2008 (pdf) which I have used on a few occasions:

A ‘fairy’ tale

Let us look at another historical instance of clearing that was vitally important in the Middle Ages: the institution of city fairs. The most notable ones were the annual fairs of Lyon in France, and Seville in Spain. They lasted up to a month and attracted fair-goers from places as far as 500 miles away. People brought their merchandise to sell, and a shopping list of merchandise to buy. One thing they did not bring was gold coins. They hoped to pay for their purchases with the proceeds of their sales.

This presented the problem that one had to sell before one could buy, but the amount of gold coins available at the fair was far smaller than the amount of merchandise to sell. Fairs would have been a total failure but for the institution of clearing. Buying one merchandise while, or even before, selling another could be consummated perfectly well without the physical mediation of the gold coin.

Naturally, gold was needed to finalize the deals at the end of the fair, but only to the extent of the difference between the amount of purchases and sales. In the meantime, purchases and sales were made through the use of scrip money issued by the clearing house to fair-goers when they registered their merchandise upon arrival.

Those who would call scrip money “credit created out of nothing” were utterly blind to the true nature of the transaction. Fairgoers did not need a loan. What they needed, and got, was an instrument of clearing: the scrip, representing self-liquidating credit.

The Modern European Fair

Now imagine if you will a giant fair with dozens of E-Z Up tented booths and tables full of merchandise, kind of like a swap meet at your county fairgrounds. As Fekete says, you show up at the fair with your goods and services for sale, your E-Z Up tent, your table and your shopping list. But when you arrive you must first check in with the fair operator to pick up your scrip money. I imagine the husband then works the booth while the wife goes shopping.

At this particular fair we are imagining, let’s call it the Eurosystem, when you register with the fair operator you pay a small fee, deposit your gold for safekeeping during the fair and also for publication of your amount of gold to the other fair participants, and you are issued your scrip money for trade at the fair. But your scrip money is not a receipt for your gold. It is simply the clearing system for trade at the fair, so you are issued an amount consistent with the goods and services you brought to market.

There are a wide variety of booths at this fair. To give you a bit of a mental image, there’s a large booth called Germany where you can buy fast cars and good beer! (I know, a strange combination.) There’s another one with a fancy custom tent called France. There you can buy funny hats and cheese. And then there are smaller booths, one is called Greece. At Greece you’ll find a table loaded with stacks of colorful vacation brochures.

Our fair, however, is a little different than Fekete’s fair above. What we’ve seen over time at our fair is that some of the smaller booth operators like Greece took home more goods and services than they brought to market. And they did so on credit. Large operators like Germany, it turns out, gave Greece some extra goods in return for promises to pay later, and those promises were denominated in units of scrip money from the fair.

After some time, it became apparent that Greece could never pay back the debt at full value. This realization actually threatened the system, I mean the fair. So what the fair operator decided to do was to buy those promises to pay from Germany at face value, with newly printed scrip. This kept Germany in the game although it did devalue the scrip since now there was more of it than there were goods at the fair. But this was fine because the fair operator published a ConFinStat in which he told all the fair participants that the fair’s scrip money was now worth less.

Those, like Germany, that had actually saved some income in promises to pay denominated in scrip, and then found those promises severely devalued by the recognition they would never be paid back at full value, received a nominal gift of the same number loaned to Greece, even though it was now devalued. Those that had not saved in scrip, but instead had cleared with gold at the end of each fair, simply carried on trading at the new, lower value of the scrip. You see, the fair operator, we’ll call him the ECB, did not participate in the fair itself, primarily because he had severed his link to any specific booth operator. His only job was providing scrip, announcing its value, and maintaining the system, I mean the fair, even if it came at the cost of debasing the scrip money.

Back Across the Pond

Now in your mind’s eye I want you to take a bird’s eye view of this fair, looking down on all the colorful tents, and then zoom way out as if you were using Google Earth, spin the globe and zoom back in on a different fair “across the pond.” We’ll call this fair the USA.

On the surface, this new imaginary fair looks very similar to the other one. There are many different tents, tables, goods and services, buyers, sellers, debtors, creditors and, of course, a fair operator who we’ll call the Fed/USG. And that’s the first difference you’ll probably notice, probably because I will point it out. The Fed/USG is not only the fair operator, but also a participant, just like Sy Sperling. At this fair, the link is not severed.

Here are a few more differences. The fair operator is not only a participant, but he is also the biggest debtor this fair or any other throughout all of human history has ever seen. He is literally printing up scrip to buy things from the fair. He is not only funding his ongoing (perpetual) trade deficit by printing and spending scrip, but he is also paying the interest on his past debt by printing scrip. And whenever his creditors start to worry about him paying his debts, he simply prints more scrip to buy back the promises to pay at face value. And he does all this without ever telling the fair participants that his scrip now has less value.

But it gets worse. This fair operator is truly cashing in on the reputation of his forebears. He’s emptying his bank of credibility like there was no tomorrow. You see, for a long time his scrip has been used as the inter-fair clearing system instead of gold. So he is not only able to purchase goods and services with his freshly printed scrip within his own fair, he is also able to shop at far away fairs with his printed scrip, simply on the basis of squandering past credibility. And don’t think this isn’t getting noticed. Ooh baby, you better believe it is getting noticed!

But it gets even worse! The other participants at this fair include a wide variety just like the Eurosystem, including a large surplus vendor called Texas where you can buy ten gallon hats and concealed carry permits. There’s also a large deficit/debtor vendor booth called California where you can pose on a fake wave while someone takes your picture. But these participants don’t have to deposit any gold when registering, mainly because the fair operator confiscated the gold from their economies 78 years ago and hid it away out of sight. (Note: gold does not have to be in the hands of the state itself to benefit the economy in its stabilizing role in clearing.) So, unfortunately, they don’t have any gold unlike the participants at the Eurosystem fair.

Some of the participants in the USA fair, like California, have lots of debt just like Greece. But unlike the ECB, the Fed/USG can’t really deal with that right now because it has its own debt problems it is dealing with (printing away). Here’s a thought… The USA states are republics not unlike the Eurosystem participants, and certainly as large. What would happen if the Fed/USG just gave that gold it confiscated 78 years ago to the states? Then the District of Columbia, with its modest population of gentlemen busily trying to distinguish themselves from nothingness, could just default on its ridiculous debt and unfunded liabilities. I, for one, would call that move “distinguished!”

Believe me, I know I’m fantasizing here. Remember? This is an imaginary world of fairs and E-Z Ups. But just think about it. We could still have the scrip (common currency) we are all used to (see: Mises’ Regression Theorem here), the US dollar. The Fed’s mandate could be modified to “only a stable currency” giving the marketplace the one and only thing it wants. Instead of “End the Fed” we could “End the Fed/USG”. Doesn’t that sound nice?

And in such a fanciful utopia as I am imagining right now for the dollar fairgrounds, one could rightfully proclaim that the dollar had joined the euro in severing its links to both gold and the nation-state. But, of course, this is just fantasy. Such a thing could never happen by choice of the printer, the supply side, because the USG is so large today that it literally forms its own giant parasitic organism, fighting for survival. In the EU, however, there is no such thing.

Quarterly Reflection

Over the latest quarterly cycle we have witnessed several curious advances in Europe. To name just a few, on May 24th the European Parliament’s Committee on Economic and Monetary Affairs agreed unanimously to allow gold to be used as collateral in clearinghouses. [2] And then on June 7th the ECB encouraged investors to buy new Greek bonds to replace maturing securities with two separate unnamed European officials saying investors may be given collateral as one possible incentive to roll over the debt when it matures. [3] And finally, on “Snapshot’s Eve”, June 29th, we learned that China’s SAFE (State Administration of Foreign Exchange) is actively doing all it can to transfer billions of its dollar-denominated holdings into euros. [4][5]

The monetary plane is changing. The signs are everywhere. Euro gold just broke EUR 1,100 today. Here’s what it looks like in dollars:

Tuesday, January 1, 2002 – Launch of euro transactional currency
Friday, February 8, 2002 – GOLD ABOVE $300
Monday, December 1, 2003 – GOLD ABOVE $400
Thursday December 1, 2005 – GOLD ABOVE $500
Monday, April 17, 2006 – GOLD ABOVE $600
Tuesday, May 9, 2006 – GOLD ABOVE $700
Friday, November 2, 2007 – GOLD ABOVE $800
Monday, January 14, 2008 – GOLD ABOVE $900
Monday, March 17, 2008 – GOLD ABOVE $1000
Monday, November 9, 2009 – GOLD ABOVE $1100
Tuesday, December 1, 2009 – GOLD ABOVE $1200
Tuesday, September 28, 2010 – GOLD ABOVE $1300
Wednesday, November 9, 2010 – GOLD ABOVE $1400
Wednesday, April 20, 2011 – GOLD ABOVE $1500

Do you think this is the top? Do you think gold is expensive at $1,550? Do you think gold is just another commodity and will therefore collapse back to its 2002-2005 range if the economy tanks? Think again.

On timing, look up. It’s already begun. But here is, I think, the question you should be asking yourself. It comes from John Rubino with a couple of Freegold edits from me [in brackets]: “Do you wait until it [the rapid RPG-Freegold revaluation] is underway at the risk of missing the discontinuity [gap up, punctuation, phase transition, etc.] that growing imbalances make likely, or do you load up on precious metals [sic—only physical gold IMO] and short Treasury bonds now, and just accept the fact that the coming year might be dominated by delusion?” [6]

Do you remember my “Orbital Launch Pattern” from Gold: The Ultimate Un-Bubble? “For all you technical analysts out there plotting and planning your eventual exit from gold before the blow off phase, I have a new pattern to introduce to you. I call it the Orbital Launch Pattern, or the Inverted Waterfall. In this pattern there is no blow off! It looks something like this…”

Feel free to reflect on this while you enjoy the music below!


[1] One World, One Money?
Robert Mundell and Milton Friedman debate the virtues—or not—of fixed exchange rates, gold, and a world currency.
[2] Bid to Use Gold as Collateral Advances (WSJ)
[3] Trichet Gives First Signal Endorsing Greece Bond Rollover (Bloomberg)
[4] It’s Official: China Is The “Mystery” Daily Buyer Of Billions Of Euros (ZH)(WSJ)
[5] I also discussed these stories in this comment under the last post.
[6] Bondholders Should Be Under No Illusions (Rubino)

Posted by FOFOA at 10:01 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