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Since winning
WWII, we in the West have been the driving force of the greatest era of
peacetime growth, prosperity, expansion, technological advancement and human
achievement the world has ever seen. Right? Well, without knocking the
wonderful experience of the last 60 years, let us take a look at how this
boom was financed.
In my last post, I began with the difference between equity and debt (or
credit). Here are three illustrations I drew to conserve a few words...
(To be continued...)
Down to Brass Tacks
IronHead
asked about my Thoughts on a Freegold price discovery mechanism. Peter
Asher then suggested (through some old posts) that if gold was declared to be
"international legal tender", then there would be no
"price", simply exchange rates between gold and various
international fiat currencies.
Let me first tackle the legal tender issue. Legal tender only kicks in once a
debt is established, like when you eat in a restaurant before paying. It
relates to the settlement of that debt. But I view legal tender rules as they
relate to two separate functions, cash and credit. We are already free to
barter amongst ourselves on a small scale. Craigslist even has a barter section!
What is stopping you from paying for second-hand merchandise with your gold?
If you make a business out of it you will probably run into trouble with the
IRS, but not for small individual purchases. But for larger cash deals which
require official registration, like purchasing a car or a home, you must pay
in dollars so that the government can collect the appropriate tax.
In Freegold
I imagine that these types of cash purchases will be explicitly allowed in
gold, in order to collect the tax. Otherwise governments will run the risk of
revenue lost to a black market. By allowing cash purchases in gold, the
government can track and tax a certain segment of commerce that would
otherwise go underground during a crisis. Much like the arguments for
legalizing illicit drugs. But I wouldn't go so far as to call this legal
tender. More like "allowed tender".
The credit deal, or debt portion of legal tender is the contractual
protection offered by the court system. I imagine that this will not change.
Courts will only be able to enforce settlement in dollars. You can't force a
closed tractor factory to deliver a tractor it never made, but you can force
it to pay the equivalent in dollars. You can't force a barren mine to dig up
gold it never had in the first place, but you can force it to liquidate
assets and pay in cash. In this way, gold will not be legal tender and will
not trade as a currency as a means of price discovery.
No, price discovery will be through physical delivery only. Price discovery
will be strictly on the cash market.
When I buy gold from my dealer face to face (the only true cash market), he
quotes me a price based on his ability to replenish his stock immediately.
Usually he phones his supplier and receives a current quote. This will be the
price discovery mechanism. Each gold dealer will rely on his most trustworthy
supplier. And that supplier will rely on his supplier. And so on. This will
create a network of gold dealers that will monitor the flow of Freegold
in and out of the system. If the price is too low, then no gold will be
flowing in and too much flowing out. If the price is too high, then everyone
will want to sell and there will be no buyers. This global network of gold
dealers will efficiently set the physical price based on immediate physical
restocking after any purchase.
And on the inflation/deflation debate... Forget about it. For us savers, just
focus on the dollar and gold. When you hear about a "dollar
devaluation", what that means is an across-the-board price inflation
based solely on PAST monetary inflation. That is the very definition of a
dollar devaluation. Jim Sinclair has offered some important information
recently. (See: "The New Definition Of The Dollar" and "The
Non Safe Haven US Dollar")
What he is saying in a nutshell is that some Global Giants with very deep
pockets have rationalized that gold is going up and the dollar is going down.
And in order to make themselves some ENORMOUS profits, they will be turning
their considerable market-moving weight to work with, rather than
against, this trend. He has given us a specific date when this will all start
happening in earnest. And for those of you that have read "Our
Crowd" as he advised, you know how he gets his information.
Sincerely,
FOFOA
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