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I read a great article from Imprimis, the free
publication put out by Hillsdale College in Michigan, titled The Floating Dollar
as a Threat to Property Rights. [1] The article started out with the
curious case of the incredible shrinking
kilo (a problem normally faced only by drug lords that employ users as
traffickers). Apparently this one particular metallic cylinder securely
housed at the International Bureau of Weights and Measures near Paris,
France, is the "reference kilo" for not only the global
metric system, but even the U.S. customary system in which 2.2 pounds equals
this particular kilo.
The problem is, it's shrinking! So far it has only
shrunk by 50 micrograms, about the weight of a fingerprint on Earth. [2] But
even so, this is a big problem for scientists that deal in exacting
calculations that require global standardization. The problem boils down to
the definition of a kilogram. The global standard definition of a kilo is this
particular cylinder! It was cast in platinum and iridium by Johnson
Matthey in 1879, adopted by the first general conference for weights and
measures in 1889, and has been the global reference point for the
measurements of mass ever since. But some scientists are now complaining that
with the exacting tolerances of today's high-tech world, the 21st century
kilo needs a new definition. Modern science needs a better reference point
for mass. [3]
This got me thinking about reference points, and how they have all—in
every single case; temperature, distance, force, pressure, time,
etc.—changed and evolved their definitions throughout history to best
fit the cutting-edge needs of the time. [4] This is a trend that always faces
the opposing forces of inertia—the resistance to change—and
progress—the need for change.
Another obvious trend in the evolution of reference points, when viewed in a
long-line historical context, is the expansion from local to national to
regional and finally to global standardization. This trend, especially, faces
the opposition of inertia as national reference points have become part of
the national identity of their people. The remnants can be seen everywhere.
For temperature we have Fahrenheit and Celsius. For mass we have avoirdupois
ounces, troy ounces and metric grams. The world is littered with national
currencies. And even foreign languages are a good example of our innate
resistance to global standardization.
This trend toward global reference points is a practical—not a
moral—evolution. It will continue whether we like it or not. It is an
artifact of the human Superorganism. [5] What ends
up happening most times is that nations will keep their old reference point
for identity purposes, but they will either adopt the best external reference
point as a secondary standard or they will affix (peg) to the definition of
the most widely used reference point, also known as the focal point. [6] We
see this in almost everything. English has become the global standard among
many foreign languages. The Imperial pound is pegged to the metric kilogram,
as noted above. And prior to 1971, the world's major national currencies were
all pegged to gold through the U.S. dollar, another national currency.
The main point here is that while our symbols of national (or regional)
identity will always be with us, the unfolding of future "new and
improved" reference points will always be global in scope. Just as time
moves in only one direction, it can be no other way. In other words, new
global standards will be layered on top of quaint and sentimental artifacts
of the past. [7]
But let me be clear about one thing before I move on. It is not sufficient to
simply move forward without knowledge of and respect for the path that
brought us to the present, which is what "the easy money camp"
likes to do. Nor is it advisable to run forward while looking backward,
expecting the past to reveal what may be directly in front of us, as we so
often see in "the hard money camp." [8] To properly prepare for the
future, we must know the past—know the Trail that we are on—while
not looking backward to find objects that lie ahead.
And now, onward…
The point of the Imprimis article was that the U.S.
dollar, not unlike the kilogram—being an important reference point for
value especially in the United States—has gone through a number of
definitions punctuated by abrupt, often painful, degradations. In the
beginning the U.S. dollar was defined as 371¼ grains of silver, with
the U.S. adopting the Spanish dollar's definition because of its widespread
use as a reference point for value. Later the dollar was redefined as 1/20th
of a troy ounce of gold, and then degraded to 1/35th. Then in 1971 the de
facto definition of a dollar was removed and the U.S. dollar began to
"float" (or more appropriately, "sink") as a reference point.
Throughout the various definitions above, the dollar was gradually adopted by
other nations until it became the de facto global reference point for value.
Or so we in America and the West think. In fact, gold was always the global
reference point and the U.S. dollar's definition—a definition that was
defended at the U.S. Treasury gold window by spewing gold—became a
means to the acquisition of the value reference point itself. If the dollar
had been that global reference point, the world would have been happy merely
accumulating dollars, and Nixon would have never had to close the gold
window.
It turns out that the dollar was always a poor reference point for value
because its definition could simply be changed or removed altogether for
political expedience, over and over, again and again. Yet some in the U.S.,
some with a patriotic yet myopic perspective, think that all we need to do is
redefine the dollar so that it can once again become the global benchmark of
value. Something it never was in the first place. And something it never will
be. (All the dollar ever did was adopt the
reputation of an external reference point and then fail to live up to it.
Over and over, again and again.)
Long in the past, before telephones and air travel, before computers and the
Internet, local and national reference points were far more important and
relevant than what was happening on the other side of the planet. But today,
and moving forward, it matters more how the many national currencies will
relate to each other, how they will exchange, on what reference point their
exchange will be judged, than what any individual locality or nation does to
change or manipulate its own currency. As I wrote above, the trend toward
global reference points is a practical—not a moral—evolution. It
will continue whether we like it or not. It is an artifact of the human Superorganism.
And this got me thinking about the concept of Purchasing Power Parity, or
PPP. With the advent of global air travel, I can take $10,000 out of my bank
in the morning, get on a plane, and get off in another country in the
evening, exchanging my $10,000 at the airport for the local currency. This
little exchange should not cost me anything in purchasing power, it should
essentially be free, or else I wouldn't do it. Or perhaps if I actually gained
purchasing power by flying somewhere, I would do it more often! But the fact
of the matter is that while the PPP concept works in principle, it doesn't
always work in practice. Especially given a variety of purchasing choices in
the marketplace, some of which are more native to one country than another.
The question comes down to the overvaluation or undervaluation of various
economic currencies. The way ants—and by ants I mean economists (see
footnote #5)—try to deal with this question is by using
"baskets" of goods or currencies. But the problem with baskets is
that i) they present too many moving parts, and ii) they present the option
(temptation) for political manipulation (e.g. CPI "basket" and SDR
"basket of currencies"). And for these two (obvious?) reasons,
baskets make poor reference points for value.
Just yesterday, Professor Michael Pettis wrote in Is Loan Growth in
China Slowing?:
"… a few
years ago people suggested that the RMB might be undervalued by 30%. Since
then the RMB has appreciated by 20-25%. And yet today people are still
arguing that the RMB may be undervalued by 30%. How is it possible that so
much appreciation has not seemed to affect the estimates of undervaluation?
"Before answering it is worth pointing out that there is no way that
anyone can determine precisely the amount of undervaluation of the RMB, or
any other currency, and so any estimate can be nothing more than that –
an estimate based on many moving parts. There are plausible
reasons for arguing that a currency is undervalued or overvalued, but there
is absolutely no way to determine with any precision by how much.
"This difficulty is compounded by the fact that many analysts are simply
getting the math wrong. So for example when people say the RMB is undervalued
by 30%, they often mean that the dollar is overvalued by 30%. These two
claims may sound like the same, but of course they aren’t. If the RMB
is undervalued by 30%, it means that the dollar is overvalued by 43%, not
30%. I have seen so much confusion on this issue that I pretty much give
up on trying to understand what people mean when they discuss
currency changes without seeing their actual numbers."
That's right! We need a single moving part! And by we,
I mean not just the ants, but the colony, the Superorganism.
The human Superorganism desires to streamline the
concept of PPP as much as possible, for its own benefit. And the way that is
done is by using a single global reference point. But as I wrote in Life
in the Ant Farm, we individuals are not nearly as smart as the Superorganism. Case in point—Reference Point: Big
Mac!
At any given point in time every currency has a certain purchasing power
inside its own legal tender zone, and then it has a different purchasing
power outside the zone. The Economist magazine has been publishing the Big Mac Index every year since 1986. The index is a
humorous way of looking at the purchasing power parities of various
currencies using the McDonald's Big Mac as the Reference Point.
Other variants of this index have used as the Reference Point, the Apple iPod, a cup of Starbucks
coffee, and even Ikea's Billy Bookshelf. The Economist describes its original, ground-breaking index
thusly:
The Big Mac index is based upon the
theory of purchasing-power parity (PPP), the notion that a dollar should buy
the same amount in all countries. Supporters of PPP argue that in the long
run, the exchange rate between two currencies should move towards the rate
that would equalise the prices of an identical
basket of goods and services in each country.
Our “basket” is a McDonald’s Big Mac, produced in 110
countries. The Big Mac PPP is the exchange rate that would leave hamburgers
costing the same in America as abroad. Comparing actual rates with PPPs
signals whether a currency is under-or overvalued.
Two of the Economist's findings for 2010 were that the most expensive place to
buy a Big Mac (with U.S. dollars) was in Norway, where it cost US$7.20 (on
7/21/10 after exchanging your dollars into the local Kroner currency), and
the cheapest was in the Ukraine at US$1.84. Interpreting this data is where
it gets a little tricky.
Depending on your cognitive agility, there are any number
of mental contortions that you can do with this data while extracting
whatever value may be hiding in it. For example, you can imagine that Big
Macs are a currency and the local currencies are the object of desire. Or that U.S. dollars purchased with Big Macs transported to
foreign countries are the goal. You can pretend that Big Macs have the
properties of gold, like durability, divisibility and portability, and
imagine the arbitrage opportunity based on these charts, and how that
arbitrage would affect the currency exchange.
In fact, there is a bit of real value that can be extracted from this little
exercise that I'll get to in a moment. But first, the clearest lesson is that
Big Macs make a poor global reference point for value for many obvious
reasons.
What makes something a reference point is that everything else in its
category is measured against it. Like the
cylinder at the top of the page, all mass everywhere is ultimately measured
against this one cylinder. For the category of value, the value of anything
anywhere would be measured against the value of the reference point. And in
the case of value, this reference point should be a thing that can be owned
and valued by anyone anywhere, so that it acts properly as a baseline
reference point for the value of everything else. It should also, ideally, provide
the same utility to anyone anywhere.
The point is that it can't be something that is only found in Asia, or
something that is only made in the US. And it can't be a product like a Big
Mac that would not be valuable to vegetarians or food snobs. It needs to be
something that has the same utility to everyone, that utility being that it
is only something valuable to buy and store so that later you can redeem that
value in some other way. A reference point can be used in its unit of account
function even without the presence of the physical item. But the focal point
item for a value reference point needs to be something that CAN actually be
gotten and used exactly the same by anyone anywhere.
And as we continue on this train of thought, it becomes clear that the ideal
reference point for value is, in fact, the single focal point reserve asset
chosen by the human Superorganism. It also becomes
clear that today the U.S. dollar is filling this role, somewhat haphazardly,
and also under the opposing forces of inertia—the resistance to
change—and progress—the need for change. It could be said that we
in the West are providing the inertia while the rest of the world is pushing
for change. At least that's what I see happening.
Clearly, we in the West still measure the value of anything anywhere against
the dollar. Think about it for a second. Can you tell me the value of a condo
in Hong Kong? How about the value of a night in a five-star Singapore hotel?
And what's the value of a 50' yacht in Dubai? You'd likely quote me all three
in dollars, especially if you are a Westerner. As FOA pointed out, we assess
the relative values of any two things—like an apple versus a
banana—by mentally converting them into dollars.
And while our Western minds have been trained to use the dollar quite
efficiently in this way, there are a few technical problems with the dollar
being the reference point of value. Not unlike the kilo cylinder at the top
which is causing problems for some scientists, the dollar, too, is shrinking.
The main problem, which the Imprimis article points
to, is that the dollar is no longer defined as anything other than how the
market decides to value it on any given day. This could be called a floating
definition. So the article proposes that the needed fix is to redefine the
dollar. Perhaps we could redefine the dollar to be equal to one Big Mac! The
U.S. Treasury could then buy all McDonald's restaurants everywhere and defend
the dollar by globally spewing Big Macs for a buck. Can you think of any
problems with this plan?
Okay, let's imagine they redefined the dollar to be 1/5,000th of an ounce of
gold. Can you think of any problems with this? I can. What will be the
definition of gold? Does this sound like a silly question? Well, today
"gold" is trading at around $1,435 per ounce, and this price is
discovered through the dynamics of supply and demand in a market that
includes claim checks on unallocated pools of gold, shares of funds that are
physically non-divisible below 10,000 ounces, and promises of future delivery
of gold from a variety of sources including mines (gold that is still
underground), hedgefunds (gold that will have to be
sourced if demanded) and banks (gold which is fractionally reserved). These
markets all trade (fluctuate) in dollars. If the dollar is suddenly defined
as a piece of gold, what will happen to these markets?
Maybe they should just define the dollar as 1/500th of a share of GLD! Then
the U.S. Treasury could defend the definition by spewing GLD shares! Or they
could define the dollar as 1/500,000th of a COMEX contract! Or better yet,
they should just define the dollar as 1/5,000th of a Bullion Bank liability
for an ounce of gold. The Treasury could partner with JP Morgan and defend
the definition by spewing liabilities!
What we have here is not a problem with the definition of the dollar, the
quaint and sentimental reference point artifact of the past. What we have is
a problem with the definition of gold, the 21st century (and all others too)
reference point of value!
I said earlier that there was a bit of real value to be discovered by
thinking about the Big Mac index. And that discovery is that a Big Mac
hamburger actually has one characteristic or property that makes it a better
reference point for value than either the dollar or even the modern
definition of "gold." That property is physicality! Big Macs only
come in one variety, a discrete, physical hamburger. There are no Big Mac
futures or forward sales, no unallocated Big Mac pool accounts, and the only
way to deliver a Big Mac is to either make it on the spot or physically
transport it to where it is demanded. Can you imagine if they handed you a BB
(Big Mac Bank) liability at the drive-thru window?
I wrote above, "pretend that Big Macs have the properties of gold, like
durability, divisibility and portability, and imagine the arbitrage
opportunity based on these charts, and how that arbitrage would affect the
currency exchange." Such an arbitrage would ultimately flatten that
first chart, making a Big Mac cost the same number of dollars in any country
you traveled to. In fact, gold (under its modern definition) acts just this
way.
The definition of "gold" today, at least in financial circles, is
completely messed up. Why do you think I have to constantly say physical
gold? And not only that, I continuously have to
define what I mean by physical whenever I say it! It's ridiculous. Ask any
fund's manager how much they have in gold. He'll likely quote you a number
around 5-10% that includes mining stocks, paper promises and a host of other
precious metal stocks. Ask him about physical gold bullion,
specifically, and he'll quote you a much lower percentage that likely
includes only PHYS and GLD. Those are the financial definitions of
"gold" and "physical gold" today.
The problem is that the arbitrage that makes PPP work with gold today is too
easily and asymmetrically achieved, which ends up favoring some currencies
over others. What I mean is that hamburgers are actually a "harder
currency" today (harder=more difficult) than "gold" under the
common Western understanding of "gold investments." [9] Like I
said, to be delivered Big Macs must either be produced on the spot or
physically delivered from another place. Gold, on the other hand, can be sold
into demand with the click of a mouse that creates a new liability on the
balance sheet of JP Morgan or one of the other Bullion Banks. This is
asymmetric in that most Bullion Bank gold liabilities originate from London
and New York, and it is a definitional problem that makes it impossible for
the term "gold" to be used to define anything else, like the
dollar.
So before we can even consider the definition of the dollar, we must first
solve the problem with the definition of "gold." And once solved,
we may find the question of redefining the dollar to be a moot point. But
whether you believe me or not about it becoming moot, we must still face
first things first.
In order for a thing to perform as a reference point for value, when
market demand for that thing rises it must be met with the difficulty
of the physical, not satiated with the ease of promises. This is the main
reason currency makes a poor reference point for value. When demand for
currency rises it is hoarded which slows the economy. Value is the
output of the economy. It is the opposite of currency. When the demand
for currency is collapsing, the demand for value is rising, and vice versa.
This is why Central Banks came into being in the first place; to make sure
that rising currency demand does not hurt the economy. This is why the BOJ
injected trillions of yen after the earthquake; to protect vital economic
activity from the spiking demand for currency.
I know this is a difficult concept to swallow, but value and currency are
polar opposites, which is why, if gold is the reference point for
value—which it is—it cannot function properly and also be an
economic currency—or tied at a fixed parity (price) to currency in any
way! To view an economic currency built to function properly alongside
the reference point gold, look no further than the architecture of the euro.
[10] This is why the first ECB President stated clearly and publicly that the
euro "is the first currency that has… severed its link to
gold." [11]
I want to mention one more very significant advantage to physical gold being
the global reference point for value. In another recent article by Michael
Pettis, who I mentioned earlier, titled The dollar, the RMB
and the euro?, talking about the struggles ahead for the RMB, he writes:
"Although China
will struggle to bring its current account surplus down, there are only
two ways it can do so (remember that the current account surplus is
equal to savings less investment)."
The two ways he lists are 1) increase internal investment, a non-starter in
China right now, or 2) get the people to spend their money (consume) rather
than saving it—decrease savings. It's a shame that he can't see that
China is already doing this by encouraging its people to buy the physical
reference point of value itself. By buying physical gold, Chinese savings
don't raise the current account surplus, they LOWER it. It's still very real
savings, but it acts like consumption on the balance Pettis describes. More
correctly, his "accounting identity" should read, "current
account surplus is equal to non-gold monetary savings less investment."
Or stated another way, "paper savings = production – consumption
(including physical gold purchases)." And surprise-surprise, China is
apparently already ahead of the game.
By encouraging savings in gold, this raises demand for gold inside China and
uses up some of the dollars that would have otherwise been recycled back to
be borrowed and spent by the US Treasury. In other words, every ounce of gold
that flows into China today represents $1,430 that Bernanke will have to
print via QE rather than borrowing from China.
What it means
What this Reference Point Revolution (RPG/Freegold)
means for Western savers like you and me is that at some time this year or
next (see footnote #7) perceptions of value will likely be shattered:
"like a mirror in pieces on the floor, revealing another mirror standing
right behind it, providing another perspective… the perspective will be
of necessity, a rude awakening, so to speak… so much value is just
perception only, not reality, and that perceived value will go up in flames,
to reveal this perspective from which more accurate valuation will
spring… the mass of acting humans (aka economy) will better understand
money and savings, intuitively, through this perspective… gold will no
longer be talked about, treated, and therefore viewed as a commodity, it will
cross over to the other side of the fence… most won't care to really
understand in any detail, they will just know that it is reality and will
approve of its prospects… The value of gold will change as
people’s perception of its utility to them changes." [12]
"Can you imagine a gold price of AT LEAST $100,000 per ounce? How about
a real purchasing power increase, measured in today's dollar purchasing
power, to somewhere between $10,000 and $100,000? In the bell curve below we
can see that the most probable PP landing zone is between $25,000 per troy
ounce and $85,000 per troy ounce. Can you think of a better reason to invest
in physical gold coins right now? How about protection from hyperinflation?
$100,000 is the bare minimum in this case. The top is infinite! Imagine $12
trillion per troy ounce... the size of today's US national debt reduced to
one single gold coin you could buy tomorrow! Can you imagine it? It doesn't
really matter if you can't see it like I do, as long as you buy the coin. As JFK
liked to say, 'a rising tide lifts all boats', not just the ones that believe
in rising tides." [13]
"So how much of your perceived wealth have you
locked into a real, solid, "good as gold" wealth reserve? I
shouldn't have to say this because it is so obvious, but it is clearly better
to "cash out" of the paper game and "lock in" your
profits BEFORE the two biggest bubbles in history pop. That way you beat the
rush, so to speak." [14]
The demand necessary to perpetually sustain a revaluation of gold at, say,
$55,000 per ounce is already present in the gold market. One only has to
understand why Giants—people with enough money to actually move the
price of gold—do not find it in their best interest to use their money
to move the price of gold. "Gold is neither expensive nor cheap today.
It is theoretically free. It is a monetary conversion, like buying a Treasury
or a money market fund. To the Giants, do you think gold is a game of
"how big is my slice of the pie?" Or is it "how much is my
slice of the pie worth?" Is it better to have a 15% slice of a commodity
pie, or a .4% slice of the global wealth pie? Is it more likely that all the
gold in the world combined, when used as a wealth reserve, will be worth a
large percentage of everything? Or that it is worth only 30% of the known oil
reserves?" [15]
"But right now, for perhaps the first time in history, individuals can
join central bankers and the true Giants of the world by participating in the
ultimate hedge fund. One that, like modern hedge funds, focuses on the hedge
itself as the key investment with the most leverage, with the expectation of
life-changing returns. And the main differences between this and traditional
hedge funds are 1) much less risk, and 2) it is open to ALL individuals,
including you!" [16]
"Freegold is our destination with or without
the euro. Even on the outside chance that an SDR or a similar super-sovereign
currency is accepted as the new global reserve currency, it would have to
contain gold at Freegold valuations in order to be
viable, accepted and trusted, in the same vein as Randy's comment about an
EMF. So any way you cut it, the future comes to us with really high value
gold by today's standards." [17]
"Anyway, this is what Freegold is all about.
It is about deducing the inevitable implications of an unstoppable avalanche.
And it is about fiat currency finally finding its natural equilibrium with a
parallel physical gold wealth reserve. And trust me, fractional paper gold
promises won't work in this new world, so equilibrium will likely be
somewhere north of $50,000 per ounce (and that's from just the functional
change, don't even ask me about the inflation-adjusted price)." [18]
"Take it for whatever it's worth, which, of
course, only you can decide for yourself. The $IMFS is failing. Please don't
let the fears, envy or baseless doubts of others obscure this reality. You
can choose to participate in the recapitalization of world finance or you can
be a victim of it when the lights go out. The choice is right in front of you.
So decide what you'd rather be: a participant in the rebuild, or a victim of
the collapse. Amazingly you still have this choice available as I type these
words." [19]
"As ANOTHER and FOA taught us, a time of systemic transition is
completely wrong for trading on technicals.
Instead, it is the PERFECT time to consolidate on fundamentals, then sit back
and wait. The reward, as ANOTHER put it, will be
enough for one's lifetime. And what is gold? Oh yeah, it's the ultimate
wealth consolidator." [20]
And now, for all you FOFOA noobs, I will close, as
I so often do, with another mind-blowing excerpt from FOA's Gold Trail. [21]
My friends and I are Physical Gold
Advocates. We own physical outright and do so employing the same reasoning
mankind used in owning gold throughout most of history. However, there is a
major difference between our perceptions of this historic reasoning and the
current Western perceptions so many of you are attuned to. Our's is not a mission to unseat the current academic
culture concerning money teachings; rather it is to present the historic and
present day views of the majority of gold owners around the world. Those of
simple thought and not of Western education. Plain people that, in bits and pieces,
own and use the majority of above ground gold.
Most contemporary Western thought is centered around
gold being money. That is; gold inherently has a money use or money function;
built into it as part of the original creation. This thought presents a picture
of ancient man grasping a nugget of gold, found on the ground, and
understanding immediately that this is a defined "medium of
exchange"; money to buy something with. This simple picture and analysis
mostly grew in concept during the banking renaissance of the middle ages and
is used to bastardize the gold story to this day. Even the term
"money", as it is used in modern Bible interpretations, is
convoluted to fit our current understandings.
Much in the same way we watch social understandings of music, literature,
culture and dress evolve to fit current lifestyles, so too did gold have a
money concept applied to it as it underwent its own evolution in the minds of
political men. This is indeed the long running, background story of our Gold
Trail; an evolution, not of gold itself, but of our own perceptions of this
wealth of ages. A evolving message of gold that is
destined to change world commerce as it has never changed before.
Onward my friends
In ancient times there was no concept of money as we know it today. Let me
emphasize; "as we perceive money today". Back then, anywhere and
everywhere, all things known to people were in physical form. All trade and
commerce was physical and direct; barter was how all trade was done.
If one brought a cart to market, loaded with 20 bowls and 20 gold nuggets, he
used those physical items to trade for other valued goods. The bowls and gold
had different tradable value; as did every other thing at the market. Indeed,
gold brought more in trade than bowls. Also true; if a barrel of olive oil
was in short supply, it might bring even more in trade than all the gold in
the market square.
The understanding we reach for here is that nothing at the market place was
seen as a defined money value. All goods were seen simply as tradable, barterable items. Gold included. Truly, in time, some
items found favor for their unique divisible value, greater worth and ease of
transport. Gems, gold, silver and copper among others, all fit this
description. These items especially, and more so gold, became the most
tradable, barterable goods and began to exclusively
fill that function.
But the main question is: was there money in that market place? Sure, but it
was not in physical form. Money, back then and today, was a remembered value
in the minds of men. Cumbersome it may have been, but even back then
primitive man had an awesome brain and could retain the memory values of
thousands of trades. In every case, able to recall the approximate per item
value of each thing traded. That value, on the brain, was the money concept
we use today.
Eventually gold climbed to the top of in the most tradable good category. Was
gold a medium of exchange? Yes, but to their own
degree, so were the bowls. Was gold a store of value? Yes, but to a degree,
so were dinner plates. Was gold divisible into equal lesser parts to define
lesser barter units? Yes, but to a degree one could make and trade smaller
drinking cups and lesser vessels of oil. Perhaps gold became the most favored
tradable good because the shear number of goods for
good traded made a better imprint on ones memory;
the worth of a chunk of gold in trade became the value money unit stored in
the brain.
Seeing all of this in our modern basic applications of "money
concept", almost every physical item that naturally existed or was
produced then also held, to a lesser degree, gold's value in market barter.
But most of us would have a hard time remembering a bowls value and thinking
of a bowl as money. The reason this is such a stretch for the modern
imagination is because bowls, like physical gold, never contained or were
used in our "concept of money". Back then, as also today, all
physical items are simple barterable, tradable
goods; not of the money concept itself. Their remembered tradable value was
the money.
Money, or better said "the money concept", and all physical goods
occupy two distinct positions in our universe of commerce and trade. They
have an arms length relationship with each other,
but reside on different sides of the fence and in different portions of the
brain.
For example: say I take a bowl to the mint and place an official government
money stamp on the underside. The bowl now is stamped at $1.00. Then I take
one tiny piece of gold to the mint; one 290th of an ounce or at today's
market a dollar's worth. They stamp that gold as $1.00. Which physical item
would be money? Answer; neither.
Using ancient historic reasoning and the logic of a simple life; the bowl
could be taken to the market square and bartered for another good. Perhaps a
dinner plate. In that barter trade, we would most likely reach an
understanding; that the "bowl for plate trade" imprinted our memory
with what a digital, numeric dollar concept is worth. Again, the 1.00 unit
was only stamped on the bottom for reference. While the dollar concept is
only a rateable unit number to compare value to;
like saying a painting is rated from one to ten when judging appearance.
We could do the exact same thing without 1/ 290th ounce piece of gold as with
the bowl above. In the process we again would walk away with the knowledge of
what a $1.00 unit of money value was worth in trade. The physical gold itself
was not the money in trade; the value of the barter itself created the actual
money value relationship. Again, the most important aspect for us to grasp
here is this:
----- The use of physical gold in trade is not the use of money in trade. We
do not spend or trade a money unit, like the dollar, to define the value of
gold and goods: we barter both goods and gold to define the worth of that
trade as a remembered association to the dollar money unit. That remembered
worth, that value, is not an actual physical thing. A
dollar bill nor an ounce of legal tender gold represent money in physical
form. Money is a remembered value relationship we assign to any usable money
unit. The worth of a money unit is an endless mental computation of countless
barter trades done around the world. Money is a remembered value, a concept, that we use to judge physical trading value.
-----
Onward
Naturally, for gold to advance as the leading tradable good it had to have a
numerical unit for us to associate tradable value with. We needed a unit
function to store our mental money value in. In much the same way we use a
simple paper dollar today to represent a remembered value only. Dollars have
no value at all except for our associating remembered trading value with
them. A barrel of oil is worth $22.00, not because the twenty two bills have
value equal to that barrel of oil: rather we remember that a barrel of oil
will trade for the same amount of natural gas that also relates to those same
22 units. Money is an associated value in our heads. It's not a physical
item.
The first numerical money was not paper. Nor was it gold or silver; it was a
relation of tradable value to weight. A one ounce unit that we could
associate the trading value to. It was in the middle ages that bankers first
started thinking that gold itself was a "fixed" money unit. Just
because its weight was fixed.
In reality, a one ounce weight of gold was remembered as tradable for
thousands of different value items at the market place. The barter value of gold nor the gold itself was our money, it was the
tradable value of a weight unit of gold that we could associate with that
barter value. We do the very same thing today with our paper money; how many
dollar prices can you remember when you think a minute?
This political process of fixing money value with the singular weight of gold
locked gold into a never ending money vs gold value
battle that has ruined more economies, governments and societies than
anything. This is where the very first "Hard Money Socialist"
began. Truly, to this day they think their ideas are the saving grace of the
money world. It isn't now and never was then.
When investors today speak of using gold coin as their money during a full
blown banking breakdown, what are they really speaking of?
In essence, they would be bartering and trading real goods for real goods.
The mention of spending gold money is a complete misconception in Western
minds. Many would bring their memories of past buying with them and that is
where the trading values would begin. Still, it would take millions of trades
before the "market place" could associate a real trading value to
the various weight units of gold. It took mankind hundreds of years to
balance the circulation of gold against its barterable
value. Only then could a unit weight value become a known money concept. In
that process, in ancient times, gold had a far higher "lifestyle"
value than it has seen in a thousand years. This value, in the hands of
private owners, is where gold is going next.
If you are following closely, now, we can begin to see how easy it is for the
concepts of modern money to convolute our value and understanding of gold. It
is here that the thought of a free market in physical was formed. Using the
relationship of a free physical market in gold, we will be able to relate
gold values to millions to goods and services that are currency traded the
world over. Instead of having governments control gold's value to gauge
currency creation; world opinion will be free to associate the values of
barter gold against barter currency. In this will be born a free money
concept in the minds of men and governments. A better knowledge and
understanding of the value of all things.
[1] Hillsdale College is a small
liberal arts college with a student body of about 1,300. It does not accept
federal or state taxpayer subsidies for any of its operations. Imprimis is dedicated to promoting civil and religious
liberty by covering cultural, economic, political and educational issues of
enduring significance. The content is drawn from speeches delivered at
Hillsdale College events. Imprimis is one of the
most widely circulated opinion publications in the nation with over 1.9
million subscribers. That's a lot of readers for this type of monetary
article. And this article was the only content in the Feb. edition.
[2] A kilogram is a scientific measure of mass, not weight, because weight is
not universal while mass is. An ounce of gold on the moon, for example, would
only weigh as much as 5 grams on Earth.
[3] One of the leading alternatives for a 21st-century kilogram is a sphere
made out of a Silicon-28 isotope crystal, which would involve a single type
of atom and have a fixed mass. Another is to link the kilogram to a
fundamental unit of measurement in quantum physics, the Planck constant. This
redefinition would bring the kilogram into line with the six other base units
that make up the International System of Units (SI) – the metre, the second, the ampere, the kelvin, the mole and
the candela. None of these are now based on a physical reference object
– the metre is defined in terms of the speed
of light, for example, while the second is based on atomic clocks.
[4] An appropriate example is that before the metallic cylinder, a gram was
defined as "the absolute weight of a volume of pure water equal to the
cube of the hundredth part of a metre, and at the
temperature of melting ice."
[5] For an explanation of the term Superorganism,
please see my post Life in the Ant Farm.
[6] For an explanation of the term Focal Point, please see my post Focal Point: Gold.
[7] Punctuated Equilibrium is a good description of how monetary evolution
proceeds. Here's an example of what I mean. Notice the regularity of the
cycle. Your homework assignment is to uncover what the dates represent in the
monetary evolutionary cycle:
—Equilibrium—
1893-1897 **Punctuation**
—Equilibrium—
1930-1934 **Punctuation**
—Equilibrium—
1968-1971 **Punctuation**
—Equilibrium—
2008-____ **Punctuation**
—Equilibrium—
From the cyclical pattern above, it seems to me like ____ should be either
2011 or 2012. What do you think? Should we ask Marty?
For an explanation of the term Punctuated Equilibrium, please see my post Evolution.
[8] For an explanation of the terms "hard and easy money camps,"
please see my post The Debtors and the
Savers.
[9] "When we talk about gold money we often use the term "hard
money." And one misconception that pops into most people's mind is that
"hard" money means hard like a rock, or hard like a piece of metal
versus "soft" like a piece of paper that folds nicely into my
wallet. Or the ultimate soft, a digital electron that moves at the speed of
light.
"This may not seem like a big deal, but I think it is. What is actually
meant by "hard" money is that it is difficult, or hard to get. The
opposite of hard being easy, not soft. Hard money cannot be expanded easily
(without risk) because it has an anchor in the physical world."
From Just Another
Hyperinflation Post - Part 2
[10] For more on the euro's architecture, please see my post Reference Point:
Gold - Update #1
[11] The full line was, "It is the first currency that has not only
severed its link to gold, but also its link to the nation-state." See Acceptance speech by
Dr. Willem F. Duisenberg, President of the European Central Bank, Aachen, 9
May 2002
[12] Quoted from Julian's excellent comment.
[13] From Gold is Wealth
[14] From Gold: The Ultimate
Un-Bubble
[15] From Gold: The Ultimate
Wealth Reserve
[16] From Gold: The Ultimate
Hedge Fund
[17] From Synthesis
[18] From Equilibrium
[19] From How Can We Possibly
Calculate the Future Value of Gold?
[20] From Gold: The Ultimate
Wealth Consolidator
[21] Please see the top of the blog for to whom it is a tribute.
Sincerely,
FOFOA
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