Sunday, October 31, 2010

The Market, Gold, and other Myths

A talk given at the Committee for Monetary Research and Education, posted by Jesse on 22 October, caught my attention due to the high praise Jesse heaped on its author, Ben Davies. Ben Davies is an investment manager who claims to be having a hard time in the markets, which are not operating as they should. He begins by referencing Rumsfeld (Donald), Heisenberg, Popper and Soros, an illustrious group variously famous for their work on uncertainty, with Davies’ point being that The Market is about as uncertain a playground as you can get. His belief is that they whir quite closely around dynamic equilibrium unless interfered with. Sadly governments do interfere, then markets suffer, then we all do. It’s that simple, despite the uncertainty and complexity. One thing is crystal clear; The Market, in Davies’ world, is the god of truth and blind wisdom, and must not be tampered with, ever. It is beautiful in its awe inspiring complexity, merciless, all-knowing, rewarding and punishing participants with unerring accuracy.

We mortals, on the other hand, are cripples of imperfect knowledge, Davies laments. No matter how smart a particular Master of the Universe might be, “No one person can likely understand everything.” This is an honest admission, since perfect knowledge is one of the prerequisites for perfect competition, without which markets cannot work as Davies eulogizes. Nevertheless, he leaps deftly from all this uncertainty and imperfect knowledge straight onto the broad shoulders of Rational Economic Man, who sadly is not always allowed to be rational:

Rational behavior becomes irrational in the thickening of the maddening crowd until the crash wakes us from the insanity.


There is rational behaviour as a rule and things are generally fine, then folk get crazy and bubbles form. Accursed bubbles, blemishes on the beautiful face of The Market. How dare they!

How indeed. Davies blames government:

Intervention in or manipulation of markets by the state is such a distortion. Its acts postpone the day of reckoning for years or even decades. It creates false sense of equilibrium that ultimately gives way to disequilibrium and heightened instability. We have not experienced free markets -- that is, the invisible hand -- for decades.


Only The State can do this of course, no other person or entity. It wouldn’t be in a businessman's or corporation's interest I suppose, it wouldn’t be rational of them, because they understand full well that The Invisible Hand takes care of everyone, a beneficent Big Daddy quietly doing good by coordinating our rational, self-interested pursuit of ever more money far better than anything else possibly could. This is why there is never any fraud or other crime, or market manipulation from business, unless The State comes along and pokes its nose where it's not needed. Things were so good in the past, when Hand, The Invisible was free to work his magic.

But governments are peopled by the economically ignorant, and can’t keep their busy-body fingers to themselves. Nowadays, “financial markets are the mirror of state intervention, revealing our every hour of labor confiscated, our lack of personal ownership for our decisions, and the resources the state absolves us of.” If only government could be rational, like Economic Man, we wouldn’t be in this fix. Perhaps we should privatize it. Or establish laws making market intervention illegal. Maybe that would be a rational solution. Without government in the way, there’d be no crime, because The Market would be free at last!

Ah, Rational Economic Man, how I hate him. How I want to punch him in the mouth, knee him in the gonads, then, as he doubles over to vomit out his rationally consumed breakfast, stab a ball point pen into his neck. Is this rational of me, this venomous rage? Am I being infantile? Probably, but I don't care. I don’t even know what rationality is.
 
My wife met a piano tuner earlier this week, who told her the following tale. A musician friend of his could no longer play, and was forced to sell her grand piano. Its value was €15000, known to her at the time. She sold it for €4000. Obviously no one was prepared to pay €15000, right? Wrong. She had offers of €15000 from various parties, but sold it to the buyer who she believed loved her piano. This buyer could only afford to pay €4000. Rational, or irrational?

If we were indeed as rational as economics theory needs us to be, fashion would not be fickle yet pervasive, advertising would be a waste of money, we wouldn’t flock to watch sentimental, or horrific movies in our millions, and a million other ‘anomalies’ we indulge in daily. The world would be a very different place. We irrational, untrained ones know this, but worshipers of Market Almighty and orthodox economists alike won’t. On purpose. They belligerently refuse to allow a rich and complex human beast full play in their theories. They can’t. It would be too difficult. And economics would have to change from the bottom to the top.

Another element of Davies’ speech which irritated was about money.

Twenty years ago, according to the Forbes Rich List, there were 140 billionaires. Three years ago there were almost 500. This year there are close to 800, each with an average net worth of $3.3 billion. Why the surge? The "invisible hand"? No. Animal spirits? I doubt it. Did the world just get eight times more get-up-and-go? Hardly. So what then?

Money -- that's what.


Not money per se, Davies lambasts fiat debt-money (rightly, though fails to mention money is created by private banks), but reckons gold to be the ultimate money, and that what we are witnessing in gold’s price rise is the inexorable return to gold as money because, well, paper’s just paper, right? Anyone can print some of that shit off the press with some fancy markings on it, whereas gold has history, longevity, stays shiny, has heft, charisma, and can’t be created out of thin air. And that forever. Even the direction of the Earth's spin is uncertain for Davies; “Remember: Just because the sun rises in the east and sets in the west doesn't mean it always will. That, I know, is unknown.” But gold is eternal.

The fact that gold can be manipulated via clipping and other scams; can support debt-created money via ever thinner fractional reserves; is finite in amount on the planet (at least until technology can create it) whereas man’s economic imagination is infinite; that is has been the cause of deflations in the past, as well as inflations, Davies does not mention. No, everybody just knows gold is the real deal. All you have to do is look at it, so pretty and shiny. And though he does not mention store of value, his gold-love is dripping with that notion. For Davies, money is wealth, or should be. I’m sure he would agree with the following:

In most of the world's advanced economies, the local currency can be counted on as a store of value in all but the worst case scenarios. However, currency can sometimes come under attack as a store of value (such as in hyperinflation). In those instances, other stores of value have proved their consistency over time, such as gold, silver, real estate and art. The price of gold, in particular, will often skyrocket during times of national peril or when a financial shock hits the broad markets, as demand grows for other widely recognized stores of value. [Source]


I shouldn’t be disappointed, but I am. Have these people not read the story of King Midas? Have they not considered that a world suddenly robbed of all its gold would present humanity with a minor problem, but stripped of its soil humanity wouldn’t last another year? Similarly, if all notes and coins disappeared, along with all digital records of all money everywhere, we could recreate money and go through a system reset, or (small chance) try out a resource-based economy. Money does not make the world go around. Money is a medium of exchange, not a commodity. I’m repeating myself, I know, but this needs to be said again and again, because the wrong idea of money is out there still, and deeply so.

Money’s value and stability cannot possibly be intrinsic, in gold or art or anything. If they were intrinsic, inflation and deflation would be impossible. Money gets its value relative to goods and services available for sale. It is a legal invention, a fiat whether paper, gold or cow—there can be no market without some sort of state apparatus, however simple, laying down the laws of its operating, and no money without consensus—and represents value and performs stably only for as long as social, economic and environmental conditions allow it, not from inside itself.

Davies’ analysis of money is woefully ignorant, and that Jesse touts him as eloquent and knowledgeable surprised me; I had held Jesse in high regard. There is a growing nostalgia out there at the moment for 'the real deal,' whether this be gold, or genuine capitalism, or rational behaviour, or the Invisible Hand unmolested and free. Perhaps those who love these notions can sense their end is near, and turn to such melancholy musings as Davies'. Whatever the reason for their increased appearance, the sentiments are as wrong now as they always were. I can only hope we are able to wise up to it this time around.

48 comments:

Edwardo said...

Hi Toby.

Another well written epistle. The single issue that Mr. Davies appear to not have specifically, directly articulated, the real reason that gold persists-it is, in fact, the only reason that gold persists, and will continue to do so as the ultimate store of value, despite it's obviously non essential nature-(pardon this very long sentence) is that many of those who heave wealth, want to store it, they want it to last into perpetuity. This is especially the case in the last six or seven generations where those with the most wealth on the planet had it in the form of oil. When one depletes one's capital so quickly one wants something lasting to compensate.

Gold has acted, for a variety of reasons, as the most effective device to allow wealth to be stored, to be passed on from one generation to the next. Land can be taxed, or simply confiscated, as can gold, but gold can be hidden and moved. Land, of course, can't. Objet d'art are far too subjective and fragile to work as reliable wealth storage mechanisms. Paper money, as we know, is utterly hopeless.

So, ultimately, my friend, your beef with gold is, in fact, with human nature itself, specifically that part of human nature that wishes to persist in a very specific way.

Toby said...

Yes, but no, too. Yes, gold has served as a fairly effective store of value, but only because there has been sufficient value 'out there' to be represented by it, and because of its history. And it's not really 'storing' value, we just perceive it as doing so. It's a self-deception. The value lies elsewhere. This time around, if we're not careful, we're going to end up with nothing but 'gold,' and the planet will stop its current job of hosting our civilization. Gold would then be as useless as paper money. If we fail to see this, we have our priorities wrong. And we can only get away with that for so long.

And no, not with human nature exclusively, but with western civilization. Other cultures did not have this problem, this immature lust for eternal youth, to quite the extent we do. Who said the white man will only realize you can't eat money (or gold) after he's trashed everything else? I forget his name, but he was certainly a human with more or less the exact same nature we have. To paraphrase Bill Clinton, it's the culture, stupid. ;-)

Edwardo said...
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Edwardo said...

You can't say it's just a perception that gold has stored value when gold has, in fact, allowed wealth to be transferred over generations.

Your bet, Toby, on gold's inability to, as it were, deliver, seems to be a "coming to a theater near you" apocalyptic one. I'm not sure planet Earth is with you on that, but making that determination is beyond my grade.

Toby said...

I can say it's just perception, because the actual wealth is elsewhere. Gold is not storing value, it's acting as a medium of exchange in a period of uncertainty. Then, when things settle, gold drops in value as sufficient stability returns for another, perhaps more convenient money type to take over as medium of choice. If gold really 'stored' value, such fluctuations would be impossible. For example, if gold disappeared along with all knowledge of paper money, something else would be used. Gold is not essential for carrying out trade, it just has a particular history. Wampum worked pretty well too during rough times.

King Midas, even though it's just a story, demonstrates all this well, as do historical finds of gold lowering gold's value, as does that period of American history (during Van Buren's presidency) characterized by a terrible depression precisely because they relied on gold exclusively. There wasn't enough gold to power the economy, even though there was plenty of actual wealth to be distributed. In that case gold failed to even represent the wealth. Paper money rescued the day in that instance, if memory serves.

The ongoing 'attempt' to store wealth in money focuses too much cultural energy on money, whether it be paper or gold. Gold has periods of working well as a store--though such is always an agreed upon illusion--but typically as some rough economic weather is endured, meaning something is broken, and that rough economic weather is probably always the consequence of having a bad money design of one type or another. This isn't to say that your point is invalid--it isn't--it just isn't the whole story.

And far be it from me to predict apocalypse's due date, I'm way too cowardly for that! But nor will I say that no apocalypse (I think the word means 'a revealing') is coming. Various scientists say we are going through a sixth extinction event. Humanity is largely responsible for this, and I think it's because we've concerned ourselves too much with illusory stores of value, and not enough with real stores of value; soil, water, education, community, etc. At close to 7 billion and rising, and what with climate change threatening real havoc, peak oil wearing us down, I don't think it's crazy talk to say a time may come when even good old gold will be of no use. If things get that bad, no money will be of any use.

Civilizations have collapsed before. Ours will be no exception I'm sure...

Edwardo said...
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Edwardo said...
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Edwardo said...

I can say it's just perception, because the actual wealth is elsewhere.

-Where is it?

Gold is not storing value, it's acting as a medium of exchange in a period of uncertainty.

-It's not a medium of exchange, that's fiat's role. No one is using gold to avoid barter transactions which is the very definition of a monetary medium.

Then, when things settle, gold drops in value as sufficient stability returns for another, perhaps more convenient money type to take over as medium of choice. If gold really 'stored' value, such fluctuations would be impossible. For example, if gold disappeared along with all knowledge of paper money, something else would be used.

-Because your premise is flawed, Gold=a monetary medium, so is your conclusion. In the meantime, the fluctuations you refer to are the result of the attempt to operate without having gold play a role. Unfortunately, the more "they" try to stamp it out, the larger it looms.

Gold is not essential for carrying out trade, it just has a particular history. Wampum worked pretty well too during rough times.

-Comparing gold to wampum is silly. One has a very circumscribed, brief history, and the other has something quite the opposite. In the meantime, with respect to gold and trade, I would like to suggest you investigate the work of Antal Fekete, especially as regards the Real Bills Doctrine which worked very well, and likely would again should it, or something like it be allowed a chance to operate.

King Midas, even though it's just a story, demonstrates all this well, as do historical finds of gold lowering gold's value, as does that period of American history (during Van Buren's presidency) characterized by a terrible depression precisely because they relied on gold exclusively.

There wasn't enough gold to power the economy, even though there was plenty of actual wealth to be distributed. In that case gold failed to even represent the wealth. Paper money rescued the day in that instance, if memory serves.

-No system is perfect, but The Panic of 1837 wasn't simply the result of the bank's decision to only accept silver and gold. In the meantime, I don't advocate the reinstatement of an old fashioned gold standard, but I do think the concept of Freegold is very interesting.

Civilizations have collapsed before. Ours will be no exception I'm sure...

-Indeed. And gold has managed to remain in use even as all those civilizations perished.

Edwardo said...
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Edwardo said...
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Greg said...

Ok Edwardo we get your message!!!


Very nice piece Toby

I just finished reading Innes' piece on money

http://www.ces.org.za/docs/what%20is%20money.htm

and everyone should read it.

Here's my problem with gold. It has no value without a currency to give it value. All currencies really are are pricing mechanisms. If anyone can give me a gold value without using a currency I'll give them a thousand dollars. Gold is not wealth its simply something that is coveted for various reasons by a lot of people.

I chuckle when I hear people criticize those they refer to as Keynesians by saying "If we could spend our way to prosperity we already would have" Guess what we already HAVE all the prosperity we need!! ITS ALL HERE! We can do everything TODAY to feed everyone, house everyone and provide health care for everyone. We are as prosperous as we will ever be. All we can do is screw it up and we are working real hard at doing that every day.

Pathetic

Edwardo said...

"Here's my problem with gold. It has no value without a currency to give it value. All currencies really are are pricing mechanisms. If anyone can give me a gold value without using a currency I'll give them a thousand dollars."

You, sir, can pay me now since gold can easily be valued in barrels of oil. Contact me at my blog and I'll give you instructions on where to send the check.

In the meantime you have been utterly brainwashed (by the stewards of out fast decaying monetary system) to believe that the medium of exchange makes the anchor for the medium of exchange possible.

Toby said...

The wealth that gold represents resides in the environment's ability to sustain civilization and in humanity's ability to do things like trade, that is, it is not inside gold. That it stores value is an agreed upon perception.

I take your point about a medium of exchange, but not all the way down to the bottom of what I'm saying. Gold can function as a medium of exchange, and should paper-money suddenly be non-functional, gold may well be used in that way again, otherwise one is hoarding gold and doing nothing with it for some unknowably long period of time. In a genuine breakdown, a person with plenty of gold but no access to food will want to use his gold as a medium of exchange, else he won't last very long.

I suspect there's an element of cross purposes here, especially considering your mentioning of some possible future use of gold--Freegold, which I hadn't heard of but have just had a quick look at. The assumption I see there is that fiat money is debt money, and that it cannot store value. I find that argument vacuous because paper money need not be lent into existence at interest, there are alternative paper-monies. Also, to say gold stores the value of the wealth 'out there' is to ignore that it would be useless if ecosystem collapse wiped us out, and many other species too. The wealth of the planet is the planet's health of a particular dynamic balance suitable to human civilization, period. Gold has been the best 'store' of value these last millennia BECAUSE the planet has been healthy enough for gold to 'store' or represent that value.

A good paper money would purposefully not be a 'store' of value in my opinion, because culturally believing that something that does not rot should store wealth is an unhealthy belief to hold. This is my deeper point, and you're not addressing it, Edwardo. Your argument is accurate in and of itself, but fails to look at the broader, environmental picture.

Human population is enormous compared to any other period of history. We have productive capacities that dwarf those of our ancestors. And still we expand, desire infinite GDP growth, etc. This is unsustainable. One of the many and varied reasons we are embarked on this foolish, headlong crash with the planet's carrying capacity is the ill-conceived notion that wealth should be stored in money or some non-rotting commodity.

Silvio Gesell's demurrage paper-money is one that really interests me, a medium of exchange designed to rot, to lose value. This prevents hoarding, and allows culture to focus its energies where the real wealth is, in the environment and in society and human knowledge itself.

And the wampum comparison was not silly, no need to be rude. That gold has been the 'store' these thousands of years is happenstance, and has to do with early religions' temple-based power, and the high priests stores of gold from tribute, worship and other payments. All the way through my point has been about the arbitrariness of how humanity might, for trade reasons, represent 'value' or wealth, so to my way of thinking almost anything will do. I'm not arguing that gold has not done that job, but that we ought to be reversing our thinking here before it is too late. I include fiat debt-money here to.

I shall look into freegold more deeply. Never say never.

Toby said...

Hi Greg and thanks for dropping by.

Yes, value is a relative term and exists between things, not inside things. Value cannot be intrinsic, by definition. So you are right, gold can itself only be valued relative to something else, whether it be a currency or another commodity, and these relative values fluctuate over time for all sorts of reasons. This furthermore means nothing can store value that is not a web of life in which something like animals 'value' the things they need to survive.

Greg said...

Sorry Edwardo, no winner

The only reason you can come up with a price for gold in barrells of oil is that barrels of oil are always priced
................................IN DOLLARS. Its the existence of a reserve fiat currency which create the exchange you cite. If the dollar stops being the reserve currency it will be replaced by another and it will be a floating exchange rate fiat type.

Edwardo said...

The only reason you can come up with a price for gold in barrells of oil is that barrels of oil are always priced
................................IN DOLLARS.

Wrong again. That is patently false. All oil is not priced in dollars, and it won't be too long when very little oil will be priced in dollars. In the meantime, the Saudis have a longstanding agreement with the U.S. to be paid in gold if they so choose.

And if you think the two parties couldn't agree on specific amounts of gold to be exchanged for barrels of oil in the event that all currencies suddenly vanished over night, you would be, again, mistaken. Currency smooths the wheels of commerce, but its existence is not essential for them to turn.

You lost the bet the second you made it.


Toby, I think you might want to spend a bit more time on the concept of free gold, but even if you choose not to, you are still standing on a small spit of terra (not so) firma that says, to put it crudely, "gold won't be golden when it all turns to shit."

Toby said...

" Toby, I think you might want to spend a bit more time on the concept of free gold, but even if you choose not to, you are still standing on a small spit of terra (not so) firma that says, to put it crudely, "gold won't be golden when it all turns to shit." "

That's a patronizing misrepresentation. I don't know why, but you're pointedly ignoring the points I make.

A question for you: How, physically, does gold store value?

Also, that oil might be valued in gold, or gold valued in oil, or dollars in gold, or gold in euros, or oil in euros, is a major part of the point. What we socially decide upon as our measure of value is arbitrary (though hard won), and changes over time. When the measure changes, value does not evaporate, wealth does not disappear, we just create a new measure--albeit with bloodshed and revolution and upheaval etc. That's a problem of vested interests though, and the immaturity of our civilization in thinking money should store value...

Looking into free gold now.

Edwardo said...
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Edwardo said...

I'm sorry that you feel patronized, but, when you keep defaulting to the same line of argument, you leave me little choice but to point out the obvious. As for the arbitrariness of gold as a wealth storage mechanism, your desire to see it as arbitrary is where the arbitrariness of gold- which has been time tested, through every travail of mankind, ends. Gold has always been, and still is, accepted especially under extreme conditions. If you would prefer to store, to the extent you can, cut (or uncut) timber or some other material, I wish you good luck.

Edwardo said...

I forgot to add that the best place I know of to investigate free gold is
at http://fofoa.blogspot.com/

Greg said...

Never said CURRENCY was necessary to grease the wheels of commerce, but in order to do anything other than barter, CREDIT must be issued in some form. Currency is just form of credit, but it takes other forms as well.

Money is a pricing mechanism, gold is a commodity that varies in price.

Edwardo said...

Here's what you said,

"If anyone can give me a gold value without using a currency I'll give them a thousand dollars."

I can go to all manner of places on the planet and find a gold value in all manner of things, including labor/professional services or goods that are too numerous to list.

"Money is a pricing mechanism, gold is a commodity that varies in price. "

No, it isn't. The Forex market, for example, is a pricing mechanism because it matches buyers and sellers of currency. Markets are pricing mechanisms, but currency itself isn't any more a pricing mechanism than a bale of hay or a hub cap.

As for gold being a commodity, not really, though the authorities have done an excellent job of fooling a great many souls such as yourself that it is but a mere commodity. Silver is a proper commodity, and, at various times in history, it has also functioned as money.

Gold is a monetary metal that has very few uses, i.e. jewelry, outside of its historic role as money, or as something to protect against that which masquerades (for a generation or two) as money, but which is nothing but a medium of exchange that is systematically debauched to the point of de facto or de jure extinction.

Toby said...

"you keep defaulting to the same line of argument"

As do you, and I have accepted your arguments with two, to my mind, important caveats, which you dismiss.

"If you would prefer to store, to the extent you can, cut (or uncut) timber or some other material, I wish you good luck."

It has never been my intention to advise anyone how to make money, nor is that a concern of mine, not because I am monetarily wealthy, but because I try (though mostly fail) to be wealthy in other ways. My strong belief is that the human community needs to get away from that type of thinking, that money stores wealth.

I notice you did not answer my question on how wealth is stored in gold.

I've just started reading the latest print of "The Ecology of Commerce" and this sentence fragment stood out:

"we have decimated 97 percent of the ancient forests in North America; every day U.S. farmers and ranchers draw out 20 billion more gallons of water from the ground than are replaced by rainfall; the Ogallala Aquifer, an underwater river beneath the Great Plains larger than any body of body of fresh water on earth, will dry up within twenty to thirty years at present rates of extraction; globally we lose 25 billion tons of fertile topsoil every year, the equivalent of all the wheat fields in Australia."

And yet gold shines still, does not rot, and carries on be 'golden.' Exactly which wealth is it storing?

Edwardo said...

Regarding the lamentable condition of the forests, you make my point for me since had you chosen to store timber decades ago, even with the decimation of woodlands, you almost certainly would not have found that your timber had turned into a proverbial goldmine. Now as to your question:

"Exactly which wealth is it (gold) storing?

When gold comes out of storage, its owners are able to acquire whatever they want to, and generally at a favorable price compared to what they were was able to buy when the gold went in to storage. If that isn't storing wealth, then I admit I don't have an answer to your question.

Toby said...

"had you chosen to store timber decades ago, even with the decimation of woodlands, you almost certainly would not have found that your timber had turned into a proverbial goldmine."

That's totally irrelevant. It has absolutely nothing to do with my point, which is about not storing wealth in commodities or money, but in environmental and societal health. Timber is dead wood, a commodity. Why are you even mentioning it?

"When gold comes out of storage, its owners are able to acquire whatever they want to"

And if there's no water, no fertile soil, no society? How can their wanting create these things? They can purchase what's available to be purchased. Hell, even without gold new money systems can be established. How did humans make it thus far, before money? The wealth is out there as the produce of nature.

Edwardo, I know you to be intelligent and considered, but in this discussion those attributes have failed you. You are deliberately ignoring my points.

FYI, I had already found FOFOA's blog, and read a few of his articles, and have looked at more today. He is erudite, a good writer, and intelligent, but his premises (and others' I have seen) are wrong. I shall continue looking into free gold, but since they describe the problem of paper money fallaciously, I hold no hope that the solution I seek will be in that idea.

Edwardo said...
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Edwardo said...

Toby said,

"That's totally irrelevant. It has absolutely nothing to do with my point, which is about not storing wealth in commodities or money, but in environmental and societal health. Timber is dead wood, a commodity. Why are you even mentioning it?"

-We obviously have very different ideas as to what constitutes "the point" since your point seems to me to be based on a notion with little to no basis in the real world. To wit: how, exactly, does one store wealth in societal health? Before you endeavor to answer that question you will, of course, have to define what societal health is, bearing in mind that one man's idea of societal health is likely another man's idea of a societal sick ward.

-When gold comes out of storage, its owners are able to acquire whatever they want to.

"And if there's no water, no fertile soil, no society? How can their wanting create these things? They can purchase what's available to be purchased. Hell, even without gold new money systems can be established."

-And here we are again, back to your end of the world scenario, which is the sole condition in which gold is stripped of its capacity to store wealth.

"How did humans make it thus far, before money? The wealth is out there as the produce of nature."

-The use of gold and silver as money goes back a long, long way. Perhaps you might ask another question, which is, how far did humans make it - define "make it"- before they discovered reasonably sophisticated money systems that have underpinned the vast majority of all that mankind has wrought, both good and bad? Wampum doesn't, by the way, qualify.

"Edwardo, I know you to be intelligent and considered, but in this discussion those attributes have failed you. You are deliberately ignoring my points."

-I've addressed your point(s), but you don't care for my rebuttals, which is hardly the same thing as ignoring your points. Your argument against gold's efficacy is based on the world in a state of utter depletion. I have no difficulty conceding that should mankind find itself in such a deplorable state that gold will almost certainly have no value.

Toby said...

"I have no difficulty conceding that should mankind find itself in such a deplorable state that gold will almost certainly have no value."

Well OK then. This is precisely what we are looking at as a species. From "The Ecology of Commerce":

"The global economy already exceeds carrying capacity--that point beyond which further growth will decay and effectively decay its host. There is not one peer-reviewed scientific paper that suggests otherwise."

I cannot predict when "The End" will arrive, no one can, or even if, only that we are well and truly on that path and resolutely don't want to see it. As far as I can tell, our cultural fixation with storing wealth in monies and commodities is one of the many reasons we are on this path.

"end of the world scenario, which is the sole condition in which gold is stripped of its capacity to store wealth."

Not true. Finds of gold reduce gold's value, as do other factors. It is instability in the medium of exchange du jour and economy generally that make gold 'a good investment.' People have lost money investing in gold, as well as gained. Timing is key, as with all trades.

"how, exactly, does one store wealth in societal health?"

By living sustainably. This is not the place to go into endless details, each of which can be argued till the end of time, but "The Cancer Stage of Capitalism" makes a good case for looking at 'need' when judging things like societal health.

"bearing in mind that one man's idea of societal health is likely another man's idea of a societal sick ward."

This is probably not as true as you seem to think it is, but yes, there will always be differences of opinion. I don't have it to hand, but McMurtry's definition of a need (in "The Cancer Stage...") offers to my mind a good foundation to build on, especially when combined with sustainable living.

Gold does not store value, the perception that it stores value 'stores' value. The 'value' that is being stored exists as environmental and societal health outside of the gold. The perception that gold stores values is powerful, powerful enough that it has been virtually irrelevant to point this out these last millennia, but, this time it's different.

Greg said...

Edwardo

"No, it isn't. The Forex market, for example, is a pricing mechanism because it matches buyers and sellers of currency. Markets are pricing mechanisms, but currency itself isn't any more a pricing mechanism than a bale of hay or a hub cap"



Forex gives relative strengths of currencies and treats them as a commodity. How do markets price anyhting........ by stating how many dollars or pesos or yen someone will part with to obtain it.



"As for gold being a commodity, not really, though the authorities have done an excellent job of fooling a great many souls such as yourself that it is but a mere commodity."


HA HA HA! Now its a conspiracy to make gold a commodity ?? People have made gold a commodity. Only a few zealots are driving the price of gold. Gold as money is DEAD! It doesnt meet the needs of a modern economy..... its a barbarous relic.



Question for you Edwardo

Youve just been appointed the Treasury director of the new country of Texas after they seceded form the union. They need their own currency, otherwise they will just be a USER of someone elses currency, tell me how would you design it?

Edwardo said...

"I have no difficulty conceding that should mankind find itself in such a deplorable state that gold will almost certainly have no value."

Well OK then. This is precisely what we are looking at as a species. From "The Ecology of Commerce":

So you and The Ecology of Commerce say. Pardon me if I harbor a few doubts as to when, let alone if.

As for new discoveries of gold reducing the value of the rest of the gold stock. Please point me in the direction of the last instance where

Finds of gold reduced gold's value...for more than a few days, if not hours.

As for "other factors", I don't know what you had in mind, but sound money policies keep gold prices stable, and not much else. Otherwise you have what we have had for the last decade steadily rising prices every single year. But lets keep that tidbit down to a dull roar since barbarous relic Greg is sure that gold as money-which has been more lively than any asset on the planet and looks to continue to be so for quite some time- is dead.

In the meantime, BR Greg asks:

How would I design the nation of Texas' new currency?

Well, Greg, obviously I would design the new "currency" such that it featured images of Texas or Texas luminaries. But I would only do so were I offered (and subsequently accepted) the job of Treasurer, which I wouldn't, since I would be a citizen of another country.

Toby said...

No more from me. This has become too bitter, and there's nothing to be gained.

Toby said...

Just for the record, this is the element of blogging I really do not enjoy. Although learned, this has been an exercise in bickering, and for my part in that I am ashamed. If I learn anything from this I hope it is more restraint and patience.

Greg said...

Cmon Edwardo, dont wuss out.

Now you are Treasury secretary how would you set up your new currency. It doesnt matter whose pictures you put on it. How would you give it VALUE??!!


Toby, I understand what your saying but at the same time there are some things which need to be decided in this country. I imagine there was at one time still people who were holding to the non heliocentric model of the solar system and they just had to be embarassed, humiliated and laughed off the stage at some point. Being part of the large public discussion is a huge responsibility, you better have the goods.
Gold bugs dont have the goods. A gold standard would be a disaster for a new country or as a change for an existing economic power. I dont know that Edwardo really wants gold standard buy I want to find if he's even thought about what it would entail.

A gold standard would solve nothing and create a lot more problems

Toby said...

Hi Greg,

I appreciate the call to arms, but will not continue in this style. I've had many fruitful and stimulating conversations with Edwardo, whom I count as an online friend. I will continue to fight the fight; will write more on all things that concern me; see this as a planetary crisis of converging, epochal threats and challenges; see too that gold/value/wealth is but one part of a very large jigsaw indeed; but want to conduct my personal battle staying true to the maxim; "The means are the ends." The means that attract me are fairness, openness, honesty, egalitarianism and sustainability. If I cannot stay true to them, I cannot ask others to.

Greg said...

Toby

I totally respect your wishes here. I've read many of your articles and your "means" definitely shine through. Thats why I've saved much of what you've written.

Do you object to my thought experiment? I simply want Edwardo to think what a gold standard would look like, what it might do to the economic health of a new country. I also want him to think, along with me, about what currencies are and how they work. Many folks make glib statements like "we just need to return to a gold standard" as if that could just happen and not cause major problems, or "fiat currencies always fail" as if gold backed currencies havent.

These are trying times and how we move forward with our money system will have a lot to determining the fate of my childs and (eventual) grandchildrens prosperity.

We need to get this right.

Edwardo said...

Put simply, Greg, a monetary system tied to gold, not backed by it, is what I would advise. The monetary authorities would allow gold to trade freely, without interference or manipulation of any sort. Likewise The Treasury and commercial banks would be allowed to hold physical gold on their books at market rates and subject to periodic audits.

With that in mind, accounting practices would reflect actual market prices, not exaggerated/ fictitious mark to convenient myth metrics.

Paper currency would be used (and advertised) as nothing more or less than a medium of exchange existing for the sole purpose of allowing trade to be conducted smoothly.

On another note I want to thank Toby for his courtesy and kind words. I am sorry as well for my part in this "discussion" becoming less than cordial.

Greg said...

Edwardo

How can something be tied to gold but not backed by it? This seems a curious way to word something. Are you suggesting that people would not be able to trade their dollars for a guaranteed amount of gold? If not how is this any different than NOW?

I want to see you start from ground zero on this and talk me through this. I'm not being a smart ass, I want to be sure I understand what you are advocating. Theres lots of ways to do things and I want to understand strengths and weaknesses as well as I am capable.

Toby said...

Greg, thank you for your kind words, I really appreciate that.

Edwardo, you're welcome, and thank you too for regaining composure with grace and generosity.

As to the thought experiment and as to any efforts to improve understanding, I am 100% behind such things. I only ever wanted to improve my own understanding of this corrupted world here at Econosophy, and hoped as a side-effect to pull some people along with me.

I am writing a long article on gold and free gold, value, wealth etc., as they appear to me, and will post it in due course. Meanwhile I shall be happy to follow you two hammering out each other's comprehension, and may well ask questions of my own from time to time.

Rupert said...

any chance you boys could look into a little situation in the Middle East? Worth a pop.

Edwardo said...

Presently gold can not be exchanged at The Treasury for gold, This has been the case for almost eighty years. Foreign nations have been prohibited from doing so for almost forty years. Before foreign nations were prohibted the price was fixed at an arbitrary rate which caused a variety of distortions. with free gold there the price of gold would be set by the marketplace not at some arbitrary fixed price. It would float. Greg, I strongly suggest that you visit FOFOA's site where the details of Free gold are available for your consideration.

Greg said...

I will check out the site but I cant see the difference between what you suggest and how it is now. The price of gold floats NOW. All dollars can buy gold at this floating price. WHERE"S THE BEEF!

I think most of what the gold bugs have issues with is accounting rules....... and I agree. But the way to deal with this doesnt involve gold it involves banking regulations and how assets are marked on balance sheets. We have real issues in the banking system that have NOTHING to do with the currency being fiat, gold backed or whatever. I completely support revising banking regulations and you might be surprised to see what the MMT crowd has to say about this. Its probably the area they focus on the most. Check out Moslers site and Bill Mitchells site and see what the MMT academics say about banking.

Short version.... the asset side of banking is where the regulations SHOULD be focused. Right now they are on the liability side.

Edwardo said...
This comment has been removed by the author.
Edwardo said...

You may decide that free gold isn't for you, Greg, but I can tell you that Modern Monetary Theory certainly isn't for me.

In the meantime, Gold, physical gold that is, is treated very differently than one would expect in an environment where gold was allowed to float freely in an environment devoid of massive amounts of fraud and market manipulation.

For example, what gold is said to be held by The Treasury at Ft. Knox-holdings which have not been audited since The Eisenhower Administration-is marked down at an artificial price.

What's more, owning physical gold, while legal, is effectively discouraged through newly instituted reporting requirements and a much higher rate of cap gains taxation, and, via the financial sphere, which tends to denigrate, when they don't simply ignore, the viability and efficacy of owning precious metals in physical form. This, even after a decade when PMs have outperformed all other asset classes, including mining shares.

This rather perverse state of affairs is in opposition to the tax one pays when selling widely offered paper proxies for gold-proxies created for the purpose of suppressing physical gold's price- proxies which will, in all likelihood, disintegrate in record time when it is discovered that there is insufficient gold being held by the aforesaid.

No, I am afraid that in The land of the free, the existence of free gold, much like the existence of Democracy, is more fiction than fact.

Greg said...

Edwardo

Actually just finished reading a post over at FOFOA. It was quite good actually. Made me think differently about a couple things. Didnt actually get into the free gold yet but his analysis of deflation/hyperinflation was rather convincing. I'd actually rattled a couple of those things around in my head before. He actually is quite complimentary of MMT right up to the point that they dismiss hyperinflation in the US. Not a minor difference for sure but he see's all their other economic analyses as very sound as best as I could tell. Glad I found that site, I will go back. Its now on my list.

Exactly what are your criticisms of MMT? How much time have you spent reading guys like Bill Mitchell or Warren Mosler.

Edwardo said...

Regarding the problems with MMT. Read the commentary by FOFOA at the linked post.

http://fofoa.blogspot.com/2010/11/dilemma-2-homeless-dollars.html

Toby said...

From the article you link to:

"The "Chartalists" (and their useful idiots everywhere) claim that the Federal Government simply spends money into existence, and thus they can do this all they want."

If FOFOA supports this childish misrepresentation then he hasn't looked into MMT properly. But he (or she) cannot look at MMT with an open mind, since for him (or her) gold is money, and money is wealth. For the Chartalists, money is a legal declaration, a fiat, a chit, a ticket, to be spent into existence if need be. The important part of all this is not the metal/paper argument so much, but the quantity and how it is controlled. Too little leads to deflation, too much to inflation, to put it crudely. No one can know exactly what the sweet spot might be--which of course changes all the time--but one can react via taxes and other methods to reduce quantity, or via spending to increase it.

Real wealth is in society, community and environment. Money merely enables economic exchange and acts as a (never perfect) unit and measure of value. Kind of like language assists (yet often confounds!) communication but does not 'contain' it (a dog could make no sense of these shapes you are reading and understanding).

Edwardo said...

I think you should take the matter up with FOFOA who has,
in my view, cogently and convincingly addressed the shortcomings of MMT.

Greg said...

Edwardo


"I think you should take the matter up with FOFOA who has,
in my view, cogently and convincingly addressed the shortcomings of MMT."


I HAVE taken the matter up with FOFOA and I dont think your statement is accurate. He has addressed HOW HE UNDERSTANDS MMT which is not very well.
He needs to visit billyblog and get in to some discussions there before he can credibly say he has
"cogently and convincingly addressed the shortcomings of MMT." Its simply not true.

That being said I think he is pursuing a third way solution in his mind, which I have sympathy with for various reasons. Not the least of which is that our dichotomous thinking is almost always seriously incomplete.

I'm obviously a biased judge but I think he (and other commenters at his site) have actually moved MORE in my direction than in his direction during our discussion, but the scorekeeping is truly irrelevant in my mind.

I like the serious discussion of what I think are serious issues and many there have an intellectual curiosity and intellectual honesty more of us would be better off with if we adopted it.

I agree with Toby, there is a "salesman" aspect to FOFOA that I smell but hey he is trying to promote, what to me is, a new idea. I'm sure Mosler and Mitchell sound like salesmen too. I just can see under the hood of Mosler and Mitchell and not freegold....YET!!