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FOFOA
expressed a number of controversial viewpoints regarding money in his recent
article Focal
Point: Gold. Specifically, he makes the case gold is money but
not silver. He makes some other claims that are highly debatable to say the
least. Here are a few snips (emphasis mine) ....
Gold and only gold will fill the monetary store of
value role. Not gold and silver. Not precious metals. Just gold.
Money's most vital function in our modern world is lubricating commerce, or
more specifically, keeping the essential supply lines flowing – supply
lines that bring goods and services to where they are needed. Without it we
would be reduced to a barter economy, eternally facing the intractable
"double coincidence of wants." This is the problem whereby you must
coincidentally find someone that not only wants what you have to trade, but
also, coincidentally, has what you want in return. And in the modern world of
near-infinite division of labor, this would be a disaster.
So we need money, and lots of it. In fact, we need money in
unrestricted amounts! (I'll bet you are surprised to see me write
this!) Yes, I said it, we need unrestricted money in
order to fulfill this most vital function in our modern society –
lubrication! But here's the catch: we need the right money in order to
perform this seemingly impossible task.
Money is debt, by its very nature, whether it is gold, paper,
sea shells, tally sticks or lines drawn in the sand.(Another shocking
statement?) Yes, even gold used as money represents debt.
For this reason, the money used as a store of value must be something
completely separate and different from the medium of exchange. It must be so,
so that the store of value unit can expand in value while the medium of
exchange unit expands in quantity and/or velocity. You may be starting to
encounter my thrust. Expand… and expand. Unrestricted by artificial
constraints.
A fixed price of gold in your currency ensures the failure of your currency.
And it won't take 30 or 40 years this time. It'll happen fast. It wouldn't
matter if Ben decided to defend a price of $5,000 per ounce, $50,000 per
ounce or $5 million per ounce. It is the act of defending your currency
against gold that kills your currency.
To be honest, I really don't know if silver is overvalued or undervalued
today at $30/ounce. But if you are counting on the industrial fundamentals of
silver for your moonshot like the Zero Hedge
article is, or on a busted paper market like the "vigilantes," you
may be in for an unpleasant surprise. The same fundamental arguments that are
used today were also used back in 1982. In gold, at least, we know that
jewelry demand rises and falls opposite the price of gold. But then again,
gold is money, right? So, is silver still money?
One of the argument for silver that we hear often is that it is "the
poor man's gold." So I guess gold is "the rich man's gold."
Well, what is the main difference between rich men and poor men? Is it that
the rich have an excess of wealth beyond their daily expenses? In fact, the
really rich have "inter-generational wealth," that is, wealth that
lies very still through generations. The poor do not have this.
FOFOA Fallacy #1:
"So we need money, and lots of it. In fact, we need money in
unrestricted amounts!"
No we don't. Please consider a few re-ordered sentences from Murray Rothbard's classic text What
Has Government Done to Our Money?
Money
is a commodity used as a medium of exchange.
Like all commodities, it has an existing stock, it faces demands by people to
buy and hold it. Like all commodities, its “price” in terms of
other goods is determined by the interaction of its total supply, or stock,
and the total demand by people to buy and hold it. People “buy”
money by selling their goods and services for it, just as they
“sell” money when they buy goods and services.
Money is not an abstract unit of account. It is not a useless token only good
for exchanging. It is not a “claim on society”. It is not a
guarantee of a fixed price level. It is simply a commodity.
What Is The Proper
Supply Of Money?
Continuing from the book ...
Now
we may ask: what is the supply of money in society and how is that supply
used? In particular, we may raise the perennial question, how much money
“do we need”?
Must the money supply be regulated by some sort of “criterion,”
or can it be left alone to the free market?
All sorts of criteria have been put forward: that money should move in
accordance with population, with the “volume of trade,” with the
“amounts of goods produced,” so as to keep the “price
level” constant, etc.
But money differs from other commodities in one essential fact. And grasping
this difference furnishes a key to understanding monetary matters.
When the supply of any other good increases, this increase confers a social
benefit; it is a matter for general rejoicing. More consumer goods mean a
higher standard of living for the public; more capital goods mean sustained
and increased living standards in the future.
[Yet] an increase in money supply, unlike other goods, [does not] confer a
social benefit. The public at large is not made richer. Whereas new consumer
or capital goods add to standards of living, new money only raises
prices—i.e., dilutes its own purchasing power. The reason for this
puzzle is that money is only useful for its exchange value.
[Thus] we come to the startling truth that it doesn’t matter
what the supply of money is. Any supply will do as well as any other supply.
The free market will simply adjust by changing the purchasing power, or
effectiveness of the gold-unit [monetary-unit].
The online book is a
great read and I highly recommend reading it in entirety.
The key point above is that an increase in money supply confers
no overall economic benefit. Over time, money simply buys less and less
FOFOA Fallacy #2:
"Gold used as money represents debt."
The statement is preposterous unless one allows the lending out of more gold
than exists. That practice is clearly fraudulent.
From Rothbard:
Curiously,
many people have argued that it would be impossible for banks to make money
if they were to operate on this “100 percent reserve” basis (gold
always represented by its receipt). Yet, there is no real problem, any more
than for any warehouse. Almost all warehouses keep all the goods for their
owners (100 percent reserve) as a matter of course—in fact, it would be considered fraud or theft to do
otherwise. Their profits are earned from service charges to their customers.
The banks can charge for their services in the same way. If it is objected
that customers will not pay the high service charges, this means that the
banks’ services are not in very great demand, and the use of their
services will fall to the levels that consumers find worthwhile.
FOFOA Fallacy #3:
Gold and only gold will fill the monetary store of value role.
Not gold and silver. Not precious metals. Just gold.
Like FOFOA I believe gold is money. However, unlike FOFOA I think money is
whatever the free market says it is. The problem is,
we do not have a free market we only have government decree mandating the use
of dollars, Pounds, Yen, Renmimbi, Euros, and
Francs as money.
From Rothbard:
Coexisting
Moneys: It is very possible that the market, given free rein, might
eventually establish one single metal as money. But in recent centuries,
silver stubbornly remained to challenge gold. It is not necessary, however,
for the government to step in and save the market from its own folly in
maintaining two moneys.
Silver remained in circulation precisely because it was convenient (for small
change, for example). Silver and gold could easily circulate side by side,
and have done so in the past. The relative supplies of and demands for the
two metals will determine the exchange rate between the two, and this rate,
like any other price, will continually fluctuate in response to these
changing forces. At one time, for example, silver and gold ounces might
exchange at 16:1, another time at 15:1, etc. Which metal will serve as a unit
of account depends on the concrete circumstances of the market. If gold is
the money of account, then most transactions will be reckoned in gold ounces,
and silver ounces will exchange at a freely-fluctuating price in terms of the
gold.
Would
a free market settle on gold only right now, or gold and silver, or as some
dreamers think, energy?
Historically speaking, the market has already ruled out energy. The most
likely reason is energy lacks desirable properties in regards to
divisibility, storage, and transportability. Does anyone really want to go to
the supermarket and buy bread based in kilowatts? The idea sounds nonsensical
because it is nonsensical. That the free market has never deemed energy as
money in any practical application speaks for itself.
In contrast, and when available, the free market has always gravitated to
gold.
Why Gold?
Gold has a multitude of properties that make it suitable for money. Gold is
scarce, non-corrosive, easily divisible, easy portable, and it does not
degrade or rot away under any atmospheric conditions. Gold's scarcity and the
fact that its supply is unlikely to suffer sudden increases, makes it the
prime candidate to act as a medium of exchange. Historically, gold's use as
money is unparalleled in the free market.
Silver as Money?
Silver has many of the same properties as gold. Moreover, silver has had
long-term uses as money. In theory, the free market could conceivably decide
that silver is money or that both silver and gold are money.
At times, in select places, the free market has settled on copper, furs, or
even large stones as money, the latter on Yap Island. However, history shows
that such definitions of money are fleeting or extremely localized.
If the free market did decide on silver as money (or silver and gold as
money), the opinion of FOFOA (or anyone else) would be meaningless.
Assuming for a moment the free market did select silver and gold as money,
could a dual standard work at a fixed rate of exchange between silver and
gold?
Here I am 100% in agreement with FOFOA: Absolutely not. No
fixed valuation between gold and anything else is possible, not just gold and
silver.
Would the Free Market Select Both Silver and Gold as Money?
While theoretically possible, in today's world silver has one huge drawback
that gold does not have: Silver is used up. Gold is not.
Silver is widely use in industrial applications. For example, silver is used
in photography, mirrors, computer keyboards, musical instruments, numerous
medicinal purposes, watches, hearing aids, batteries, and a whole slew of
purposes most people are not aware of.
Silver has conductivity properties unlike any other metal.
Wikipedia has a nice list of Industrial Uses of
Silver as well as a discussion of its metallic properties.
Here are a three uses from that link, that most
people would never realize.
·
Silver is used to convert ethylene to ethylene
oxide, an important industrial reaction needed to make polyesters.
·
Because silver readily absorbs free neutrons, it is
commonly used to make control rods that regulate the fission chain reaction
in pressurized water nuclear reactors, generally in the form of an alloy
containing 80% silver, 15% indium, and 5% cadmium.
·
Silver is used to make solder and brazing alloys,
and as a thin layer on bearing surfaces can provide a significant increase in
galling resistance and reduce wear under heavy load, particularly against
steel.
In contrast to silver, nearly every ounce of gold ever mined is still in
workable existence, not discarded and buried in a dump.
Historically speaking, when silver was used as money, it did not have the
wide industrial uses it has today. Would that matter? It might, or it might
not.
Just the Math Maam
FOFOA commented on a statement I made in Still
More Hype Regarding Silver; Just the Math Maam
"As a deflationist who believes Gold is Money (see Misconceptions
about Gold for a discussion), I am long both silver and gold and have been
for years."
In that awkwardly phrased sentence, I commingled two distinct ideas.
1. Gold is Money
2. I am not short silver.
As noted above, the free market could theoretically accept silver as money,
although there are reasons that it might not. I simply wanted to refute
allegations about me being short silver, conspiring with banks, and other
such nonsense.
For the record, I am not short silver and I have never been short silver.
Perhaps at some point I might but I certainly have no plans to do so.
Email Exchange With James Turk
In regards to Just the Math Maam,
I received this email from James Turk.
Hi
Mish
I would never defend JPM either. And I see blaming JPM a bit like blaming wet
streets for rain. The bigger picture is of course US government intervention,
which is done to make the dollar look worthy of being the world's reserve
currency when we all know that it is not worthy of that esteemed position so
critical to the health of the global economy.
Anyway, I thought your article was good and well-reasoned - to a point. The
only part I would take exception with is the last paragraph. I agree that
price suppression benefits those of us getting rid of over-valued dollars and
buying under-valued gold and silver. But there is a bigger issue here.
Government intervention distorts the market process, one important result of
which is that the market gives bad signals (one reason, for example, why so
many houses were built on spec). These bad signals hurt the market process
because entrepreneurs end up putting accumulated capital in the wrong places
(malinvestment as the Austrian economists call it),
which destroys capital and therefore erodes the backbone of capitalism. I
would like to see government intervention in the market ended.
Regards
James
I agree with what James
Turk said above.
I should not have said "Assuming that JPMorgan could and did suppress
the price of something below its natural value, everyone should be happy, not
bitching about the opportunity to buy something of value at a cheap
price!"
I was attempting to be cute. Unfortunately, such statements condone unfair
treatment of producers, among other distortions. I was wrong and I have a
simple policy about such things. When you are wrong, admit it. It's not the
first and it won't be the last.
In regards to government intervention in general, I could not possibly agree
more with what James Turk said. Both of us want to abolish the Fed and place
the world (not just the US), on a sound currency system.
In regards to what JPMorgan is doing specifically, in a separate exchange
James said "Unfortunately, neither of us have the hard
data to prove our point of view, so we can only agree to disagree until some
hard data emerges."
That is a fair position. There is room for error here, lots of room, on both
sides.
Currently there is a mountain of hype. I asked James if he thought efforts to
squeeze JPMorgan were misguided or counterproductive. James writes ...
It
is not counterproductive because the publicity is bringing attention to the
silver market, which is good. This attention is leading to more people
understanding the fundamentals of silver, which are very positive. Silver is
still good value, so more people are buying silver which is also good because
the silver they are purchasing will help protect them from the hyperinflation
of the dollar that I expect. In fact, I see rising commodity prices and the
recent collapse of T-bond prices over the last several weeks as important
writing on the wall that hyperinflation is not just possible, but rather, it
is rapidly approaching.
However, I agree that focusing on JPM is misguided if people do not recognize
who is the real culprit, which is the US government. It is the schemer behind
the curtain engineering the price manipulation through the ESF and other means
to preserve the unconstitutional fiat money system now prevailing.
To the question
"If JPMorgan is in fact under some sort of squeeze, would the exchanges
act to protect JPMorgan, whatever it took?"
He replied writing ....
Yes,
of course, the exchanges always favor the dealers because the dealers control
the exchanges. Just ask the Hunts. More recently, ask those people on the LME
who were long nickel when that exchange changed the rules, and there wasn't
even any allegations in that case of speculators trying to squeeze the nickel
shorts. The nickel longs were industrial users who bought nickel to hedge
their production requirements. In short, the exchanges always protect the
insiders. As the "insiders", they are also the controllers.
I asked James "Regardless
of what JPMorgan is or isn’t doing, isn’t the best approach be to quietly, accumulate metal without attempting to
sponsor mass viral actions?"
To that he replied ...
Yes,
of course. That is exactly what Warren Buffett did when he quietly accumulated
130 million ounces of silver from July 1997 until the announcement of his
purchases in February 1998. Nevertheless, his quiet accumulation drove silver
from $4.15 when he began buying to over $7 when he made his announcement, and
back then silver was relatively plentiful, not as good value as today and
very much out of favor.
So if someone tried to buy 130 million ounces of silver today, it would in my
view take at least as long as the 8 months it took Mr. Buffett and would
probably drive the price to over $100 per ounce. I therefore have to question
the reliability of SLV's supposed silver backing when I see it ostensibly
adding tens of millions of ounces in just a few weeks. It just doesn't seem
possible to me, particularly given prevailing market conditions where
physical metal is so tight and difficult to locate compared to as recently as
just two years ago.
Constructive Things You Can Do
I am still sticking with the belief indiscriminate complaining about silver
shorts via the internet is not going to accomplish much, even if it is true.
A much better use of time would be to do constructive things like sit down
with your legislative representative, give them the following books and
briefly explain what is going on.
·
The
Case Against The Fed by Murray Rothbard
·
What
Has Government Done To Our Money by Murray Rothbard
·
End
The Fed by Ron Paul
Those are Amazon links to order books to give to your representative. Here are free online versions.
·
What Has Government Done to Our Money?
·
The Case Against the Fed
Admittedly most won't get it, at least at first. Over time they will, if
enough people are willing to present the message properly.
Attitudes rule and attitudes are changing. You can help. If you want to do
something more productive than whining about silver shorts, buy those books,
schedule some time with your legislative representative, forget the hype
about hyperinflation at least for the discussion with your representative,
then calmly explain how the Fed has created these boom-bust cycles and why we
need to end the Fed.
Mish
GlobalEconomicAnalysis.blogspot.com
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Thoughts
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