Monday, November 8, 2010

"Free gold" — Shiny, New and Good?

Respect for Edwardo is why I took his invitation to look into "free gold" seriously, and acted upon it. Over the last few days I have spent much of my free time reading about it, and written many thousands of words in note form, with the plan to write a coherent article and post it here. In terms of being able to put something interesting and flowing together on this idea, I have failed, but it is not for lack of effort.

If I compare my efforts to understand MMT with those I've just expended struggling with free gold, the overriding impression is that the MMT promoters do their best to make a difficult subject accessible to the layman (see my first post on MMT), whereas the free gold promoters do their best to confuse what should be an easy enough concept. Indeed, the main proponent of free gold seems not to have written one article laying out, in introductory form, what free gold is about. I am not alone with this impression:

FOFOA’s blog consists of many extremely long and erudite posts that keep referring — often tangentially — to Freegold theory. This is a brief explanation of Freegold theory as I currently understand it, for those who are flummoxed by the enormous quantity of information on FOFOA’s outstanding blog. Source.

Goldsubject, the author of the above, says, "often tangentially". "Often" is not always. And yet even he fails to refer the interested to any article which explains free gold. I am forced to conclude there is none. My efforts yielded only tangential references, even in FOA's article entitled "Freegold":

the coming revaluation that I call Freegold. [... snip ...] But what is most significant about this ongoing redistribution of gold, the "important element of global monetary reserves", in preparation for the Freegold value reset, is that in countries like India, China and in the Eurozone this redistribution is even inclusive of us little people, not just the central banks, elites and giants! [... snip ...] I read where some of you say I am wrong about Freegold. That it won't or can't happen because country A isn't ready for it, or country B doesn't want it. Or that "the elite" will never allow it. Etc... etc... Blah blah blah... [... snip ...] Well, Freegold, or whatever you want to call it, is kind of like a runaway freight train coming right at us. It is not stoppable and it is not controllable. It has a mind of its own and too much momentum to do anything but prepare for its arrival. It is not for any elite or any country to decide when and if it happens. It is only for them and us to be as prepared as possible when it does. [... snip ...] This striking paradox WILL be corrected, by the way, through Freegold.

Sadly, the one article I found which should have been, as its title suggests, directly about it, mentions free gold five times, claiming it will cure all sorts of ills and even that it is unstoppable, yet it signally fails to explain how it will have these effects. The bold claims smack, to this reader, of salesmanship, an impression bolstered elsewhere:

Some day in the future we will know what that magic number was on October 10th, 2009. And anyone who went double that number, doubled their savings... and so on. Imagine if you put 20% of your savings into gold coins! Or 40%! How about 80%? Or even 90%! Or, God-forbid... 100%. So grab your calculator and have some fun with numbers!

I looked elsewhere for some clue about how free gold would function, what it actually is, and found Goldsubject's article quoted from above. His brief take looks like this:

Money, stocks, bonds etc. represent more wealth than really exists –> massive default inevitable –> paper no longer trusted to store value –> only gold is trusted to store value –> buying power of gold massively increases. Value of gold set by free market; money used for transactions; gold used to store value. The biggest and most dramatic revaluation in history.

Again I get the impression of snake oil and 'no way this can fail' type of thinking. A supporter of the idea trying to set it out for newcomers fails to explain how it would actually work.

But what really stuck in my craw was the anti-collective, anti-socialist slant that comes through very strong on multiple occasions:

If you would like to be an activist for a better world, this may not be the blog for you. But if you are a hard working producer and a saver worried about how to protect your purchasing power from the hungry collective, this blog may be just what you are looking for!

In other words, gold only gets in the way of man's socialist credit expansions.

Gold can still be held as a wealth reserve by the money-diluting collective

"socialist credit expansions"!? The vast majority of money in existence is created by privately owned companies whose profit-maximising business it is to loan money into existence. No collective here, no socialist programme to build schools for the nation, just good old capitalist money-making, in more ways than one. The resultant flavour of all this is very confusing; free gold is for the little guy, to protect him from the collective, a wisdom offered for free by someone working hard to make the world a better place for those who listen to him. Gold is set to increase in 'value' to some figure like $50,000 per ounce — whatever that really means — and then somehow be there for us all as a store of value while we use paper money for the day-to-day. The collective is served by this of course — even though they are greedy and grasping — because it will be the best system ever. It sounds to me like nothing other than the invisible hand, an untestable claim made centuries ago in the context of international trade, by a man who signally failed to explain value in the first and longest volume of his Magnus Opus, "The Wealth of Nations". Read his weird contortions and twists of logic if you don't believe me.

I've come away from my swim in free gold's waters suspicious about its purpose. The author FOA is anonymous, highly intelligent, well read, and fixed of purpose, and yet, to me, he 'smells' like a salesman. For all the interesting insights into many aspects of the global economy and finance and history, his message boils down to this; invest in gold and you'll make a killing, guaranteed. Maybe I've not invested enough time into his work, maybe I've missed something obvious, nevertheless I'll not do as he advises and continue with my own efforts to remove value from money and place it, notionally, where it has always been, in the networks that enable ecosystems and society to operate healthily.

For me, Soddy (and others) have the best idea about money:

Money now is the NOTHING you get for SOMETHING before you can get ANYTHING. "The Role of Money", p24.


Money exists not by nature but by law.

John Locke:

Observe well these rules: It is a very common mistake to say that money is a commodity ... Bullion is valued by its weight ... money is valued by its stamp.

Jerry Kohlberg on value and ethics:

Around us there is a breakdown of ... values in business and government... It is not just the overweening, overpowering greed that pervades our business life. It is the fact that we are not willing to sacrifice for the ethics and values we profess. For an ethic is not an ethic, and a value is not a value, without some sacrifice for it, something given up, something not taken, something not gained. We do it in exchange for a greater good, for something worth more than just money and power and position.

In my notes I wrote the following paragraph, and still think it sums up my feelings on this matter well:

If my father had purchased for me 100 ounces of gold 44 years ago, I would today have access to quite a lot of money. But in that time the quality of food has declined, crime has risen, literacy decreased, water tables have fallen, communities have fragmented, geopolitical tensions have increased, and so on. What then is the good of that increase in monetary wealth? What exactly has been stored?

It may well be that gold increases in monetary value through times of economic uncertainty, but that is not the issue here. The danger I fight, of seeing wealth stored in money while ecosystems and society rot, lies at the heart of the breakdown investing in gold is supposed to protect us from. It no longer can. The breakdown is now too wide and deep, and getting worse.

On that note, and as Bill Mitchell would say, that is enough for today!


Unknown said...

Nice article Toby.

Greg said...

Well done Toby

I've been at FOFOA as well the last few days. Have made many comments there. I'm sure they are talking behind my back as that "crazy fuckin' socialist MMT guy GREG!!"

I share your frustration with figuring it out. It seems in my discussions with FOFOA that he is pursuing a third way solution, a King Solomon divides the baby answer. I appreciate that because I think we are locked into many improper and incomplete dichotomies. What I cant do is get a picture of how it works and what are the tradeoffs. There must be some tradeoffs, it is not "THE" answer that will make everyone happy. That doesnt exist.

It seems to be a gold money system for savings and a fiat money system for transactions day to day, but I cant get a clear delineation of HOW it would supposedly work. But I'm still trying. There are some very thoughtful commenters there so I'm gonna stay awhile. Bill Mitchell and Warren Mosler explain MMT so well it seems ridiculously obvious and I bang my head wondering how ANYONE couldnt figure that out!

Keep up the good work

Toby said...

Thanks guys.

"It seems to be a gold money system for savings and a fiat money system for transactions day to day,"

That's how it reads to me. It differs from the gold standard in that 'money' is not tied to gold, gold is priced 'freely' by the market so as, I guess, to expose the 'real' value of the paper stuff. That does not strike me as a system. The only diff is 'gold' prices are not manipulated. But how is that to be achieved?

These calls for the 'real' free market, for 'true' capitalism, are folly in my opinion. In the 1600s some Italian trader/financier wrote a book detailing all the scams of that time. Markets and manipulation go hand in hand. The goal is to win, to accrue monetary wealth, so it can't be free since the big players--the winners--will always have a huge advantage over the small guys. The myth of the medieval farmers' market is just that, a myth. Even there I'm sure there were scams and corruptions.

I could write more, but my mind is made up. The world I'm battling for is diametrically opposed to those wanting to make a killing out of the current breakdown. If that means I lose out on a golden opportunity to become rich, then so be it.

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

I'm moved, Toby, that out of respect for me you took the time to explore Freegold. And while I think your assertion that FOFOA is less than straightforward in describing Freegold is fair, for my own part I feel I have a decent understanding of what Freegold is as a result of time spent on the blog.

As for the idea that all does not seem to be worked out with respect to a monetary system under Freegold, I have a few comments:

First, no system of economic organization has ever managed to overcome various flaws and internal contradictions that have, in time, ultimately sundered the system.
The tendency towards corruption, sometimes unbridled corruption, is, as you note, ever present, and while physical gold is substantially less easy to, for example, counterfeit, it is hardly immune to jiggery pokery.

And this brings me to my final comment on Freegold as it relates to the claims of its proponents. I am not aware, other than the quote you provided in your post, that, in the main, Freegold proponents feel Freegold is an economic cure all.

Their claim about the utility of Freegold is quite specific as it relates to the primary ill that they feel besets the global monetary system. I am speaking, of course, about the condition whereby the primary international medium of exchange is also the international unit of account, as well as the planet's store of value. This is, simply put, an untenable state of affairs.

In the meantime, your world view, which, as I understand it, seems to feature imminent global ecosystem collapse, does not allow for, or perhaps better stated, transcends anything so mundane as an epochal swing back to a monetary system that recognizes and acknowledges gold in a qualitatively different way than at present.

As for the prospect of missing out on a fortune, while we can not be sure what the future holds in store as regards gold being revalued at a much higher level-in whatever currencies exist in future- the record, so far, given the appreciation in precious metals over the past decade, shows that many already have.

Toby said...

"I am speaking, of course, about the condition whereby the primary international medium of exchange is also the international unit of account, as well as the planet's store of value."

Untenable yes, but the cure, in my view, is not to seek another (whether new or old) store of value other than those stores that do the actual job. Here we differ fundamentally, you and I. My position is; monetary wealth is an illusion to be penetrated and unlearned. Gold is an obstacle to that objective.

"In the meantime, your world view, which, as I understand it, seems to feature imminent global ecosystem collapse"

If by "imminent" you mean next week, or next year, then that is not my position. But if you mean imminent in terms of decades, perhaps a century, then yes, that's where I think we are at, not from my own field work, but from books I have read. And yet, more importantly, collapse is happening right now, because the depth and breadth of change needed to restore the planet's ecosystems will take decades to affect.

Like a car falling from a cliff, the impact might be a way off and as yet 'not happening.' Impact is, though, inescapable. Some scientists say ecosystem degradation is so advanced we no longer have a chance; it's already in free fall, others that there is still hope. I'm with the latter group, not because I know what I'm talking about, but because, with 2 young daughters, I prefer to live in hope. I would otherwise not be writing this blog.