Golden Cognitive Dissonance

Simon Jack of the BBC asks a question that many of us have already answered:

Gold v paper money: Which should we trust more?

Fortunately, this gives way to some relatively fair coverage:

Detlev Schlichter is a former banker and the author of Paper Money Collapse and he says the current system is fatally flawed.

“The problem is that what we use as money can be created and produced by the privileged money producers – which are the central bank and the banking system.They can produce as much of this money as they like. And so the supply of this form of money is entirely elastic, it is entirely flexible.”

Detlev Schlichter believes this will, ultimately, lead to people losing faith in our current system of elastic money and turning to something that does not stretch – like gold.

The key point to add to this of course is that gold is not just insurance against dilution, it is more importantly insurance against counter-party risk:

Counter-party risk is the external risk investments face. The counter-party risk to fiat currency is that the counter-party — in this case the government — will fail to deliver a system where that fiat money will be acceptable as payment for goods and services. The counter-party risk to a bond or a derivative or a swap is that the counter-party  will default on their obligations.

Gold — at least the physical form — has negligible counter-party risk. It’s been recognised as valuable for thousands of years.

Counter-party risk is a symptom of dependency. And the global financial system is a paradigm of interdependency: inter-connected leverage, soaring gross derivatives exposure, abstract securitisations.

When everyone in the system owes shedloads of money to everyone else the failure of one can often snowball into the failure of the many.

Unfortunately, the BBC then embarks on an inane and pointless discussion on the merits of gold as an enforced monetary standard, a completely different topic to whether or not individuals should trust paper assets or hard money.

DeAnne Julius of Chatham House is quoted as saying:

If the amount of money in the system was limited by pegging it to gold it would limit economic growth, which is the last thing we need right now.

I think to put your faith in gold as the basis of a country’s monetary system would be extremely foolish.

This is not actually true — every single historical example of the gold standard has allowed for the expansion and contraction of the money supply as per the market’s desire for money — it can be mined, it can be recirculated, it can be credited, it can be imported, it can be devalued, or it can be supplemented with silver and other substances. The “problems” with gold only really began in the 1930s when central banks started imposing policies of forced contraction over extended periods — ignoring true market preferences.

The gold exchange standard period, which followed WW2, was a period of unprecedented and unparalleled expansion, productivity growth, technological innovation, and financial stability.

The Bank of England’s recent report on the gold standard periods concluded:

Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives.

The BBC concludes by quoting former Chancellor of the Exchequer Lord Lawson:

You can’t force a government to stay on gold, so therefore gold has no credibility.

Do you see the cognitive dissonance here? If we are to believe Lord Lawson, gold has no credibility, because governments have previously proven themselves untrue to their word. Surely the thing that has no credibility is not gold, but government promises? And that is the answer to the BBC’s initial question.

19 thoughts on “Golden Cognitive Dissonance

  1. The thing these guys keep ignoring by side-tracking all gold discussions into the “gold standard” is gold’s store of value function. People should SAVE their surplus in gold, not in debt based paper promises, Digital and paper fiat can perfectly well be used as the medium of exchange for society’s immediate and short-term needs, and the MoE does not need to be backed by gold to serve this function, but can be a purely symbolic item of account for the comparative values of goods and services. By saving outside the financial system, one does not hand over savings into an elastic or fractional reserve system that will use it as a base to leverage up and dilute the value of what one has saved. This is all extremely well explored and clearly explained at the FOFOA blog.

    • Freegold was to some degree an inevitable consequence of 1971. I don’t think that the majority will ever come to consider gold as a principal store of value (the majority, I think, will always gravitate toward land, real estate, and industrials), but institutional finance and central banks might.

      • Subscribe to the BIS policy announcements. Basle 3 requirements MAY include gold as Tier 1 zero risk rating capital. If this is the case then Gold is no longer Ring material.

  2. Trading paper for gold would be like having the armed bandit replace the .44 Magnun at your temple with a .38.

    Although gold is certainly a better form of “money,” it hardly addresses credit, which is pretty much the life-blood of the modern economic system.

    Regardless, people who choose to make their living taking a cut of the action without producing anything of value, will do whatever it takes, as this era so plainly reveals [for the nine millionth time.]

    • Holding gold absolutely addresses credit; the dangers of credit are all various forms of counter-party risk. Holding physical gold reduces your exposure to the web of interwoven obligations.

  3. I want to play devil’s advocate here and don’t necessarily agree with all I want to cover. But, how things are, are the facts of the world economic system now…

    Daily I read more and more of people waking up to the fact that people not governments own the world’s main money supplies. If you had a desirable way of sharing empowerment around that you could loan or rent out, how would you do it? The world monetary system is owned by people who loan it to us and to our governements.

    They made it to do this with it. They did not make it to loan it to us on our terms but on theirs. If you personally had created a commodity you designed to replace money, to potentially assist the poor, to create a flow of it around in a nation, if you want to, and to aid the people who have already misused your money supply, the goverments that abused its potential, what would be your morality, your liability toward such circumstances and people? You product, your life, your morality, your ambitions, your ideas, your goals, your corrections as you choose and when…??

    Would you be greedy for sharing it with your friends on your terms, not the wished or imagined terms of have nots or ‘financial experts’ that want more pie and are not sure how to gain it from you? Would you want to loan it to governments so they could use it everywhere to make their countries run as they experiment toward then? Would you bail out friends who misuse it worst or damage others with it most…?

    If making more of your product watered its value down, would you make more or restrict its supply so it became worth more? If vast imbalances in trading with your commodity happened because of national problems and too many people for the world to remain healthy and everybody to gain their share of resources and your product for everybody to empower themselves with it, what would you do to make your life happier then?

    If you were always in potential competition with highly desirable gold and silver and the multitude of other ways people generate to bypass your product, how would you change your product potentials toward making more of it available more desirably and profitably for you anyway?

    If you could invent ways of stamping out the fires of greed and desire toward more of those other goodies, instead of your system where would morality lie? If the people using your product never understood your intention to satisfy all for your greatest most satisfying gain too, how would you modify your system at this point in time…?

    Yes, the big bad bankers are real. Yes, they own ALL the money we borrow to use as we do. Yes, it is their product and thus they have every right to modify its imagined value and availability at will. It is their product and right. They are not an organisation for the constant mutual satifaction of all people. They are there to make to most from their product in every comfortable way they can and still keep it the ideal medium we continue to want to use long term. If we use their product ineptly or immorally who is to blame when they change the rules on us?

    If you put your faith and future into money and its options, you can never own the right to change its value or availability, can you? It is not yours. You are allowed to use it and will suffer any consequence its owners intend or suffer too, won’t you? Internationally, great stresses are now unavoidable in any monetary system. How those stresses play out will always affect all who rely on that system of empowerment because it never can be owned and controlled entirely to your wishes.

    Of course, if you foresee diminishing value in your stored empowerment potential, or in your efforts toward claiming and storing more of it toward a happier future, there will always remain other options toward more stable or enhanced empowerment opportunities where availability of valued commodities like gold and silver are stressed by demand beyond resource potentials and you can actually own your pieces of it.

    The more painful those international money stresses become, the more gold and silver are taken up by the community, the more they must become more useful stores of your empowerment. Whichever ways banking systems swing with their money and how they choose to permit us to store or use it, metals we personally own and store will always become rarer, will always be in demand as they have always been. Historically money suffers crashes in its value for very many not always controllable reasons. At these times of racial or personal stress precious metals always come to the fore as the best stores of personal future empowerment and wealth.

    If we want to become independant from the chaos of the problems of the banker owned money and their attempts to control and proliferate their wealth and the pains generated around it we need a mentality shift. It is simple enough to encompass once we understand that money invested in desirable metal that is easily cashed in anywhere as needed and will become less available as our lives progress, is the greatest savings insurance we can habitually move through life toward. We don’t need to worry about daily volatility in pricing.

    We don’t need to worry about buying low and selling high or who is controlling and changing the game next. We just need to accumulate at the most constant comfortable rate we can convert our bank owned empowerment potentials toward solid safely stored precious metals. Each banking system, each currency will fail eventually. Each will suffer great stress and fluctuation in value. The more of this form of currency you can use to accumulate and store and use later as its value rises the happier and wealthier your world must become.

    So please, yes, we all need to learn about the tribulations of using borrowed currency owned by banks not governments. We all need to learn how to steadily step beyond being a slave to it by living in debt using it. But, let’s try and also move toward a more mature outlook on it all. Add to your precious metal accumulation as comfortably fast as you can as a daily and weekly and annual intention. Do it as a saving habit that will always help during worst times and will also accumulate toward better good times earlier and without perpetual problems caused by others diluting supply.

    Somebody else’s money under your bed or in your bank account has no long term internationally agreed value. Put that money in the bank and they immediately loan it on. It is not necessarily there when you want it in future. Desire itself sets the value of precious metals, desire and undersupply that will never catch up with world desire to gain from it and own more of it.

    • Ron, the problem is that although money works in some regards [exchange medium (primarily), store of value (at times)], it fails miserably at it allowing the individual to maintain control of their labor-value [the essence of independence].

      It is your labor-value that all institutions covet, as they put the best and brightest to work figuring out newer and more inventive ways of stealing from you.

      Try as they do, nobody has come up with a more effective way to steal your labor-value then was the creation of money, the abstraction that allowed your precious work to be magically transformed into a physical substance, one subject to manipulation in a thousand ways.

      Money doesn’t work because it allows the lowest [morally] among us to steal from the rest, good people who just want to be left alone to care for themselves and their families.

      • Australia has trillions of mineral reseres and a low population, hence why our dollar is above parity with the US dollar. Because it is polymer plastic it is more durable than paper and impossible to forge.

        Forget the gold standard, the AUD standard is backed by real wealth, political stability and our housing market is full recourse, so our banking system is sound too.

        We need fiat money to fluctuate with production expansion.

        The irony is our money makes money by printing currency for other countries. Double the benefits!

        • Australia is the lucky country and even if the mining boom stops, the wealth is still in the ground. I am lobbying to get a National Mining and Engineering school up and running so we can still earn foreign income when the dirt is dug up. a lot of engineers with PRACTICAL experience to train foreign students from undeveloped recource nations.

          And with low crime, healthy air and food and a multicultural easy going culture every rich family wants to move here. This supports our currency and property market. Go long AUD . it is backed by gold iron ore uranium fresh food freedom safety and health.

          Just be careful of snakes when walking in he bush!

        • 5.6%, madness. Australia is rocking. A friend of mine drives a truck at a mine there and makes six figures. 2 points however: plastic isn’t much harder to print, only to forge and Australian bankers aren’t of any higher moral caliber than the rest of the worlds (save Japan, where they commit suicide) so I would be at least a bit cautious there. Also, Australia is still stoned off the commodities boom, which is wearing off…

          Regardless, the argument that “you can’t force a government to stay on gold, so therefore gold has no credibility” is like saying you can’t force a kid to eat broccoli, so broccoli isn’t good for you.

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  9. I’ve noticed that kids never pretend they’re digging for paper notes in the sand.
    And I think it’s very telling that the phrase “gold standard” survives to mean “The supreme example of something against which others are judged or measured.”

    Once it dawns on you that the “money” that you slave for is nothing more than ink on paper that someone else can print at will, you’re never quite the same.

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