Five Warning Signs The End Of Dollar Hegemony Is Near… Here’s What Happens Next


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Five Warning Signs The End Of Dollar Hegemony Is Near… Here’s What Happens Next

https://www.zerohedge.com/geopolitical/five-warning-signs-end-dollar-hegemony-near-heres-what-happens-next

Tyler Durden's Photoby Tyler DurdenSaturday, May 21, 2022 – 01:30 PM

Authored by Nick Giambruno via InternationalMan.com,

MD: This article is so typical of what we see coming out of ZeroHedge.com. These people actually believe what they write. As usual, we’ll dissect the article in place and expose the delusions. We’ve done it repeatedly before. The trouble is, they either will never get it…or the are an active part of the scam.

It’s no secret that China and Russia have been stashing away as much gold as possible for many years.

MD: And if they had a clue they wouldn’t be doing that. At the point where gold can have meaning in economics, the game is already over. There is only enough gold on the planet for each person to have less than 2 ounces…less than $4,000. If gold were actually the media of exchange, it would have to trade for a few orders of magnitude greater than that. And if it did, people would be digging up their own back yards looking for the stuff. It’s beyond stupid. Miners who actually know how to find and refine gold would become enormously wealthy, but could never create enough for the rest of us to use it in trade…i.e. as money.

China is the world’s largest producer and buyer of gold. Russia is number two. Most of that gold finds its way into the Russian and Chinese governments’ treasuries.

MD: Where it does absolutely nothing for the benefit of anyone.

Russia has over 2,300 tonnes—or nearly 74 million troy ounces—of gold, one of the largest stashes in the world. Nobody knows the exact amount of gold China has, but most observers believe it is even larger than Russia’s stash.

MD: Ok. Take that number. 74,000,000 ounces. Divide that by the 7 billion people on the planet. That comes to about 0.01 ounces per person on the planet. Times $4,000 per ounce you have $40. That’s 4 trips to McDonalds. Now what?

Russia and China’s gold gives them access to an apolitical neutral form of money with no counterparty risk.

MD: Counterparty risk? What does that have to do with anything. Money is an “in-process promise to complete a trade over time and space.” It is always, and only, created by traders like you and me. And it is always properly destroyed when we deliver as promised. In the mean time it circulates as the most common object of every simple barter exchange. It’s a record keeping problem…and a discipline problem if the trader fails to deliver as promised.

Remember, gold has been mankind’s most enduring form of money for over 2,500 years because of unique characteristics that make it suitable to store and exchange value.

MD: This stupid argument won’t even play in Peoria… let alone throughout the world.

Gold is durable, divisible, consistent, convenient, scarce, and most importantly, the “hardest” of all physical commodities.

MD: And here we have an open admission of ignorance about money. Durable isn’t an issue. An open record keeping system (e.g. ledger) is durable. Divisible? You can divide a number to any number of pieces you choose. If you buy a car by creating $70,000 in new money, that money can circulate as any denomination the marketplace requires. In the USA the smallest denomination is one cent…and most people won’t bend over to pick one up. Consistent? What does that mean? A promise is a promise. Delivery is delivery. What’s to be inconsistent? Convenient? What in the world is more convenient than a record keeping system? Create checks, currency, coins, … they’re just convenient place holders for what is recorded in the ledger. Scarce? This is the one that gets me most. The media of exchange should never be scarce. Quite the contrary, it should be in perpetual free supply. It should resist trade not at all. Hardest? As in harder than a Hershey bar? How ridiculous! And the one they left out…which is historically the biggest problem with any substitute for “real” money…it must be non-counterfeitable! And who is the biggest counterfeiter in “all” cases? Government!

In other words, gold is the one physical commodity that is the “hardest to produce” (relative to existing stockpiles) and, therefore, the most resistant to inflation. That’s what gives gold its superior monetary properties.

MD: Another open admission to stupidity. The money relation is: INFLATION = DEFAULT – INTEREST. Counterfeiting, the biggest cause of default not mitigated by interest collection, is the biggest source of inflation. It’s a very small fraction of traders who don’t deliver as promised. And when that happens, a “real money process” makes an immediate and equal interest collection of like amount. This guarantees that inflation will be perpetually zero.

Russia and China can use their gold to engage in international trade and perhaps back the currencies.

MD: Only as long as ignorance regarding real money prevails.

That’s why gold represents a genuine monetary alternative to the US dollar, and Russia and China have a lot of it.

MD: And of course there is no shortage of “stupid” people who think that matters. Real traders will “create” a “real money process” every time if not conflicted by the money-changers and the governments they institute. I’m now going to let him spew on as long he purveys the same ridiculous fiction. If he comes up with some new nonsense I’ll break back in.

Today it’s clear why China and Russia have had an insatiable demand for gold.

They’ve been waiting for the right moment to pull the rug from beneath the US dollar. And now is that moment…

This is a big problem for the US government, which reaps an unfathomable amount of power because the US dollar is the world’s premier reserve currency. It allows the US to print fake money out of thin air and export it to the rest of the world for real goods and services—a privileged racket no other country has.

Russia and China’s gold could form the foundation of a new monetary system outside of the control of the US. Such moves would be the final nail in the coffin of dollar dominance.

Five recent developments are a giant flashing red sign that something big could be imminent.

Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”

In the wake of Russia’s invasion of Ukraine, the US government has launched its most aggressive sanctions campaign ever.

Exceeding even Iran and North Korea, Russia is now the most sanctioned nation in the world.

As part of this, the US government seized the US dollar reserves of the Russian central bank—the accumulated savings of the nation.

MD: Oh I would so like to have Putin’s ear here. The best thing he could do is institute a “real money process” and use his gold to allay his doubters…he’d never have to touch any of it. In fact, I would like to see Elon Musk do it, rather that buy Twitter (that will bury him in criminal lawsuits should he succeed there).

It was a stunning illustration of the dollar’s political risk. The US government can seize another sovereign country’s dollar reserves at the flip of a switch.

MD: …until its counterfeiting is so obvious and egregious it deals itself out of the game all together.

The Wall Street Journal, in an article titled “If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock,” noted:

“Sanctions have shown that currency reserves accumulated by central banks can be taken away. With China taking note, this may reshape geopolitics, economic management and even the international role of the U.S. dollar.”

MD: Is anyone getting the dozen or so calls a day that I’m getting…from so-called investors who want to trade dollars for my real property? Why do that unless you know the dollars you hold are about to be worthless.

Russian President Putin said the US had defaulted on its obligations and that the dollar is no longer a reliable currency.

The incident has eroded trust in the US dollar as the global reserve currency and catalyzed significant countries to use alternatives in trade and their reserves.

China, India, Iran, and Turkey, among other countries, announced, or already are, doing business with Russia in their local currencies instead of the US dollar. These countries represent a market of over three billion people that no longer need to use the US dollar to trade with one another.

The US government has incentivized almost half of mankind to find alternatives to the dollar by attempting to isolate Russia.

MD: I vote for a competitive HUL (Hour of Unskilled Labor) based “real money process”. The HUL is valued today (i.e. trades for the same size hole in the ground) as it has for all time…recorded or otherwise.

Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities

Russia is the world’s largest exporter of natural gas, lumber, wheat, fertilizer, and palladium (a crucial component in cars).

It is the second-largest exporter of oil and aluminum and the third-largest exporter of nickel and coal.

Russia is a major producer and processor of uranium for nuclear power plants. Enriched uranium from Russia and its allies provides electricity to 20% of the homes in the US.

Aside from China, Russia produces more gold than any other country, accounting for more than 10% of global production.

These are just a handful of examples. There are many strategic commodities that Russia dominates.

In short, Russia is not just an oil and gas powerhouse but a commodity superpower.

After the US government seized Russia’s US dollar reserves, Moscow has little use for the US dollar. Moscow does not want to exchange its scarce and valuable commodities for politicized money that its rivals can take away on a whim. Would the US government ever tolerate a situation where the US Treasury held its reserves in rubles in Russia?

The head of the Russian Parliament recently called the US dollar a “candy wrapper” but not the candy itself. In other words, the dollar has the outward appearance of money but is not real money.

That’s why Russia is no longer accepting US dollars (or euros) in exchange for its energy. They are of no use to Russia. So instead, Moscow is demanding payment in rubles.

MD: Bingo. Game over for the Earth’s, and History’s, most egregious counterfeiter.

That’s an urgent problem for Europe, which cannot survive without Russian commodities. The Europeans have no alternative to Russian energy and have no choice but to comply.

European buyers must now first buy rubles with their euros and use them to pay for Russian gas, oil, and other exports.

This is a big reason why the ruble has recovered all of the value it lost in the initial days of the Ukraine invasion and then made further gains.

In addition to rubles, the top Russian energy official said Moscow would also accept gold or Bitcoin in return for its commodities.

“If they want to buy, let them pay either in hard currency—and this is gold for us… you can also trade Bitcoins.”

Here’s the bottom line. US dollars are no longer needed (or wanted) to buy Russian commodities.

Warning Sign #3: The Petrodollar System Flirts With Collapse

MD: I’m really skimming now. This guy is so far off the tracks there’s no hope of bringing him back. I think I’ll quit here.

Oil is by far the largest and most strategic commodity market.

For the last 50 years, virtually anyone who wanted to import oil needed US dollars to pay for it.

That’s because, in the early ’70s, the US made an agreement to protect Saudi Arabia in exchange for ensuring, among other things, all OPEC producers only accept US dollars for their oil.

Every country needs oil. And if foreign countries need US dollars to buy oil, they have a compelling reason to hold large dollar reserves.

This creates a huge artificial market for US dollars and forces foreigners to soak up many of the new currency units the Fed creates. Naturally, this gives a tremendous boost to the value of the dollar.

The system has helped create a deeper, more liquid market for the dollar and US Treasuries. It also allows the US government to keep interest rates artificially low, thereby financing enormous deficits it otherwise would be unable to.

In short, the petrodollar system has been the bedrock of the US financial system for the past 50 years.

But that’s all about to change… and soon.

After it invaded Ukraine, the US government kicked Russia out of the dollar system and seized hundreds of billions in dollar reserves of the Russian central bank.

Washington has threatened to do the same to China for years. These threats helped ensure that China cracked down on North Korea, didn’t invade Taiwan, and did other things the US wanted.

These threats against China may be a bluff, but if the US government carried them out—as it recently did against Russia—it would be like dropping a financial nuclear bomb on Beijing. Without access to dollars, China would struggle to import oil and engage in international trade. As a result, its economy would come to a grinding halt, an intolerable threat to the Chinese government.

China would rather not depend on an adversary like this. This is one of the main reasons it created an alternative to the petrodollar system.

After years of preparation, the Shanghai International Energy Exchange (INE) launched a crude oil futures contract denominated in Chinese yuan in 2017. Since then, any oil producer can sell its oil for something besides US dollars… in this case, the Chinese yuan.

There’s one big issue, though. Most oil producers don’t want to accumulate a large yuan reserve, and China knows this.

That’s why China has explicitly linked the crude futures contract with the ability to convert yuan into physical gold—without touching China’s official reserves—through gold exchanges in Shanghai (the world’s largest physical gold market) and Hong Kong.

PetroChina and Sinopec, two Chinese oil companies, provide liquidity to the yuan crude futures by being big buyers. So, if any oil producer wants to sell their oil in yuan (and gold indirectly), there will always be a bid.

After years of growth and working out the kinks, the INE yuan oil future contract is now ready for prime time.

And now that the US has banned Russia from the dollar system, there is an urgent need for a credible system capable of handling hundreds of billions worth of oil sales outside of the US dollar and financial system.

The Shanghai International Energy Exchange is that system.

Back to Saudi Arabia…

For nearly 50 years, the Saudis had always insisted anyone wanting their oil would need to pay with US dollars, upholding their end of the petrodollar system.

But that could all change soon…

Remember, China is already the world’s largest oil importer. Moreover, the amount of oil it imports continues to grow as it fuels an economy of over 1.4 billion people (more than 4x larger than the US).

China is Saudi Arabia’s top customer. Beijing buys over 25% of Saudi oil exports and wants to buy more.

The Chinese would rather not have to use the US dollar, the currency of their adversary, to buy an essential commodity.

In this context, The Wall Street Journal recently reported that the Chinese and the Saudis had entered into serious discussions to accept yuan as payment for Saudi oil exports instead of dollars.

The WSJ article claims the Saudis are angry at the US for not supporting it enough in its war against Yemen. They were further dismayed by the US withdrawal from Afghanistan and the nuclear negotiations with Iran.

In short, the Saudis don’t think the US is holding up its end of the deal. So they don’t feel like they need to hold up their part.

Even the WSJ admits such a move would be disastrous for the US dollar.

“The Saudi move could chip away at the supremacy of the US dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.”

Here’s the bottom line.

Saudi Arabia—the linchpin of the petrodollar system—is flirting in the open with China about selling its oil in yuan. One way or another—and probably soon—the Chinese will find a way to compel the Saudis to accept the yuan.

The sheer size of the Chinese market makes it impossible for Saudi Arabia—and other oil exporters—to ignore China’s demands to pay in yuan indefinitely. Moreover, using the INE to exchange oil for gold further sweetens the deal for oil exporters.

Sometime soon, there will be a lot of extra dollars floating around suddenly looking for a home now that they are not needed to purchase oil.

It signals an imminent and enormous change for anyone holding US dollars. It would be incredibly foolish to ignore this giant red warning sign.

Warning Sign #4: Out of Control Money Printing and Record Price Increases

In March of 2020, the chair of the Federal Reserve, Jerome Powell, exercised unfathomable power…

At the time, it was the height of the stock market crash amid the COVID hysteria. People were panicking as they watched the market plummet, and they turned to the Fed to do something.

In a matter of days, the Fed created more dollars out of thin air than it had for the US’s nearly 250-year existence. It was an unprecedented amount of money printing that amounted to more than $4 trillion and nearly doubled the US money supply in less than a year.

One trillion dollars is almost an unfathomable amount of money. The human mind has trouble wrapping itself around such figures. Let me try to put it into perspective.

One million seconds ago was about 11 days ago.

One billion seconds ago was 1988.

One trillion seconds ago was 30,000 BC.

For further perspective, the daily economic output of all 331 million people in the US is about $58 billion.

At the push of a button, the Fed was creating more dollars out of thin air than the economic output of the entire country.

The Fed’s actions during the Covid hysteria—which are ongoing—amounted to the biggest monetary explosion that has ever occurred in the US.

When the Fed initiated this program, it assured the American people its actions wouldn’t cause severe price increases. But unfortunately, it didn’t take long to prove that absurd assertion false.

As soon as rising prices became apparent, the mainstream media and Fed claimed that the inflation was only “transitory” and that there was nothing to be worried about.

Of course, they were dead wrong, and they knew it—they were gaslighting.

The truth is that inflation is out of control, and nothing can stop it.

Even according to the government’s own crooked CPI statistics, which understates reality, inflation is rising. That means the actual situation is much worse.

Recently the CPI hit a 40-year high and shows little sign of slowing down.

I wouldn’t be surprised to see the CPI exceed its previous highs in the early 1980s as the situation gets out of control.

After all, the money printing going on right now is orders of magnitude greater than it was then.

Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead

“It’s possible to have more than one reserve currency.”

These are the recent words of Jerome Powell, the Chairman of the Federal Reserve.

It’s a stunning admission from the one person who has the most control over the US dollar, the current world reserve currency.

It would be as ridiculous as Mike Tyson saying that it’s possible to have more than one heavyweight champion.

In other words, the jig is up.

Not even the Chairman of the Federal Reserve can go along with the farce of maintaining the dollar’s supremacy anymore… and neither should you.

Conclusion

It’s clear the US dollar’s days of unchallenged dominance are quickly ending—something even the Fed Chairman openly admits.

To recap, here are the five imminent, flashing red warning signs the end of dollar hegemony is near.

  • Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”
  • Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities
  • Warning Sign #3: The Petrodollar System Flirts With Collapse
  • Warning Sign #4: Out of Control Money Printing and Record Price Increases
  • Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead

If we take a step back and zoom out, the Big Picture is clear.

We are likely on the cusp of a historic shift… and what’s coming next could change everything.

*  *  *

The economic trajectory is troubling. Unfortunately, there’s little any individual can practically do to change the course of these trends in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation. That’s precisely why bestselling author Doug Casey and his colleagues just released an urgent new PDF report that explains what could come next and what you can do about it. Click here to download it now.511

Robobank: We Won’t Get Bretton Woods 3…


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Rabobank: We Won’t Get Bretton Woods 3 But What We Do Get Won’t Be Peaceful Or Painless

Tyler Durden's Photoby Tyler DurdenMonday, Apr 18, 2022 – 07:25 PM

By Michael Every of Rabobank

Bancor, Rancor, and Rancour

MD: Having a total and universal misunderstanding of what money is, we get myriad articles telling how money is being manipulated…or should be manipulated. From the title we expect this is just such an instance. We’ll look…and annotate in place.

What lies beneath

As usual, just over two weeks into the new quarter, and well in advance of the developed economies, GDP-giant China told us exactly what happened there in Q1. When I say ‘exactly’, I mean to the usual degree of decimal-place detail, but the same lack of any useful breakdown: and despite lockdowns so hard that China’s Weibo is allegedly censoring the first line of the Chinese national anthem (“Stand up! Those who refuse to be slaves”) after it was used to vent frustrations.

MD: What a bazaar opening salvo!

Somehow, the expectation was for a 0.7% q/q GDP print, 4.2% y/y, up from 4.0% in Q42021: we got a far stronger print to show Covid, and Chinese data, don’t matter – GDP rose 1.3% q/q and 4.8% y/y.

  • Does one celebrate the resilience of the economy?
    MD: How can one separate the economy from the manipulation of its money?
  • Does one ask how that was possible when March data saw retail sales -3.5% y/y, below consensus of -3.0%, down from 1.7%… and yet higher than expected at 3.3% y/y year-to-date (YTD) vs. a 6.7% print in February that already did not match what *any* retailer is seeing? When fixed asset investment, albeit above consensus, slowed to 9.3% from 12.2% y/y even as property investment was weaker than seen at just 0.7% from 3.7% y/y? And industrial production rose to 5.0% from 4.3% y/y – which must have been via net exports… despite port closures!
    MD: Does anyone ask why behavior of an economy should be sensitive to a calendar?
  • Does one ask why monetary policy was eased last week anyway, with the reserve requirement ratio cut 0.25% again? (That’s a move which will be as ineffectual for the real economy as all the previous cuts were: the only thing it perks up is enthusiasm from analysts who don’t understand how the real economy works.)
    MD: Does anyone ask why there should be such a thing as a “monetary policy”? Does anyone ask why anyone…or any small group…should have such a knob to manipulate?
  • Does one ask why China just announced details-free economic stimulus measures? (e.g., “Reform will be deepened to remove consumption constraints. Sound and steady development of consumption platforms will be advanced.” How so, when rumours are that we are soon to see bank deposit rates cuts to make room for lower lending rates, which follows the same financial-repression/demand-destruction path seen in the ‘new normal’ elsewhere?) Probably not.
    MD: When it is provable that everyone acts in their own self interest, why does not everyone’s self interest have equal weight? Why do we have banks screwing with lending rates when we know it is “traders”, not banks or the governments they institute, that create and destroy money?
  • Does one ask how local-government debt to build more infrastructure is ‘consumption’? (e.g., “consumption-related infrastructure development may be funded by local government special-purpose bonds, to leverage the catalytic role of investment in expanding consumption.”)
    MD: Why do we allow something claiming to be government…why do we allow it to control something like infrastructure development…but not manufacturing development? We shouldn’t even have government. What’s it good for?
  • Does one note an easily achievable stimulus floated is a de facto export subsidy? (e.g., “Export rebates will be better utilized as an inclusive and equitable policy tool that is consistent with international rules, and the business environment for foreign trade will be improved on multiple fronts.”) Yet if China thinks it can grow its way out of a structural crisis by flooding the world with more goods *again*, then it is in for a real shock.
    MD: Do traders need stimulus? What’s keeping traders from naturally making trades they can see clear to deliver on? Why do people allow a money-changer creation like government to even exist?

Making that point, Bloomberg warns: ‘Global Investors Flee China Fearing That Risks Eclipse Rewards’. All the more reason for a 1.3 % q/q print then(?) The article notes, “Russian sanctions raise concerns the same could happen to China… a growing list of risks is turning China into a potential quagmire for global investors. The central question is what could happen in a country willing to go to great lengths to achieve its leader’s goals.” This is hardly news to those who wanted to see it: but a South China Morning Post politics podcast this weekend in which one of their correspondents stated he had heard directly from an EU source that in recent discussions over Russian sanctions, US officials stated they are already gaming-out the same measures for China – and using language such as “when we sanction China”, not “if”.
MD: Sanctions are a siege tactic. And siege is an act of war. Who is conducting this warring aggression…and why? Why does an entity capable of mounting such an attack even exist? Who needs it?

Imperialism and realism: Bancor and Rancor

Meanwhile, in Ukraine, hopes of peace talks appear forlorn: Mariupol appears close to falling, as the city of 400,000 stands in ruins; and despite talking of risks of a Russian tactical nuke, President Zelenskiy defiantly states his country won’t give up the Donbas and can keep fighting for 10 years, if needed. If supported by the West, perhaps it can – and the EU’s Von der Leyen is pushing for Europe to accelerate arms shipments to Kyiv, talking about an oil boycott, again, and sanctioning Russia’s largest bank, Sberbank. Markets were thinking 10 days and none of the above when this all started.
MD: Why doesn’t this paragraph state it was Zelenskiy whose artillery caused the ruin of Mariupol?

On another front, as Finland and Sweden race towards NATO membership, Russia is moving forces towards the Baltic. Is this a bluff, as some felt it was over Ukraine? Or is Moscow going to engage in some form of limited confrontation with either or both Scandinavian states to ensure that if they enter NATO they do so already in a conflict with Russia?
MD: Why do these countries want NATO membership? What’s in it for them? What do they lose by ostracizing NATO? What if Russia’s movements are totally defensive…or protective of the innocent…which of course they are?

Taking things to a more meta level, last week I argued ‘Bretton Woods 3’ (BW3) — a new global FX and financial architecture– is a fancy name for militarized mercantilism; that the West used to be good at it; that it will be again, even if it means lots of neoliberal norms have to go; and anyone who thinks a BW3 emerges painlessly hasn’t read any history. Usefully, one of the key proponents of ‘anti-American imperialism’ just made the point for me in depth.
MD: If you argued for any kind of “global FX and financial architecture” you are stupid beyond belief. At the very least, you are clueless about what money is…where it comes from…and where it goes. Mercantilism is government imposed monopoly. Eliminating government is the solution.

(NB For these thinkers, American imperialism is the only imperialism: everything else is ‘realism’. That was underlined by humanist and coffee-table intellectual’s intellectual —and long-time believer that the auto-genocidal Khmer Rouge get a bad press— Noam Chomsky, who explained this weekend that Ukraine should surrender, because that’s ‘just the way the world is’.)
MD: There should be a vaccine against morons like Chomsky.

In an interview, Russian politician Sergey Glazyev talks about “the imminent disintegration of the USD-based global economic system, which provided the foundation of the US global dominance… the new economic system [unites] various strata of their societies around the goal of increasing common well-being in a way that is substantially stronger than the Anglo-Saxon and European alternatives. This is the main reason why Washington will not be able to win the global hybrid war that it started. This is also the main reason why the current dollar-centric global financial system will be superseded by a new one, based on a consensus of the countries who join the new world economic order.”
MD: The fact that such a thing as “the USD-based global economic system” even exists or should be tolerated is admission of zero understanding of money. They can change the money system all they want. Until they understand what money is…where it comes from…and where it goes, they’ll keep getting the same result. And of course they want that result. This leopard doesn’t change its spots.

So far, so gold-bug, crypto-nite, Chomskyite, Russian/Chinese nationalist, US billionaire hedge-fund manager, or general Down With This Sort of Thing. But we get details:
MD: Such nonsense!

“In the first phase of the transition, these countries fall back on using their national currencies and clearing mechanisms, backed by bilateral currency swaps. At this point, price formation is still mostly driven by prices at various exchanges, denominated in dollars.”
MD: Open admission of money manipulation. A “real money process” cannot be manipulated in any fashion whatever.

That’s what I have been flagging: things remain priced in USD and, for a few, at the margin, and inefficiently, USD are netted out via bilateral, geopolitical barter. However, “This phase is almost over.” That seems ambitious: it isn’t even a month old! Regardless, next comes “a shift to national currencies and gold,” and then:
MD: A problem that does not…and cannot exist with a “real money process”.

“The second stage of the transition will involve new pricing mechanisms that do not reference the USD. Price formation in national currencies involves substantial overheads, however, it will still be more attractive than pricing in ‘un-anchored’ and treacherous currencies like USD, GBP, EUR, and JPY. The only remaining global currency candidate –CNY– won’t be taking their place due to its inconvertibility and the restricted external access to the Chinese capital markets. The use of gold as the price reference is constrained by the inconvenience of its use for payments.”
MD: A “real money process” cares nothing about pricing mechanism. That’s up to supply/demand balance of objects being traded. All the “real money process” is concerned with is guaranteeing perpetual perfect supply/demand balance of the money itself.

So, as I pointed out, nothing really works; which, alongside final consumption being in the West, and lots of aircraft carriers, is a strong argument for the USD status quo, imperialist or not. But not to worry if you disagree, because after that:
MD: When “it’s broke”, it a good time to “fix it”. You don’t fix something by changing it’s name. This will get fixed when a “real money process” is available for traders to choose. Once that is done, all these broken processes will wilt on the vine. No trader in his right mind would ever use one.

“The third and the final stage on the new economic order transition will involve a creation of a new digital payment currency founded through an international agreement based on principles of transparency, fairness, goodwill, and efficiency.” Which the international community is of course famous for. “A currency like this can be issued by a pool of currency reserves of BRICS countries, which all interested countries will be able to join.”
MD: This is like religion…constantly trying to deal with knowledge that encroaches on its myths. They just create new myths…and change the wording of the old myths. It’s pretty disgusting.

Except India is questionable, and even Brazil might be shaky given where it sits geographically, near the source of all those aircraft carriers. And so we have Russia, China, and South Africa. That doesn’t even make a good acronym, let alone bloc.

“The weight of each currency in the basket could be proportional to the GDP of each country (based on purchasing power parity, for example), its share in international trade, as well as the population and territory size of participating countries.” So, it will be dominated by China; and so India is definitely out. “In addition, the basket could contain an index of prices of main exchange-traded commodities: gold and other precious metals, key industrial metals, hydrocarbons, grains, sugar, as well as water and other natural resources. To provide backing… relevant international resource reserves can be created in due course. This new currency would be used exclusively for cross-border payments and issued to the participating countries based on a pre-defined formula. Participating countries would instead use their national currencies for credit creation, in order to finance national investments and industry, as well as for sovereign wealth reserves. Capital account cross-border flows would remain governed by national currency regulations.”
MD: If the currencies in the basket were using a “real money process”, their weight would not be relevant. The exchange rate would be constant…and one to one…at all times. This is a problem created by, and moved around by, money changers and the governments they institute. If you turn back the history of these governments you always find “one individual” who got control of a military and directed it to his own ends…and then took charge of the territory it acquired. This typically spans no more than 10 or 20 years in the first instance. And if he’s successful in creating a religion in that period, that religion passes to his heirs…until the people being dominated pull back the curtain and expose the scam. In the case of Britain, the people are so stupid it spans a period going back beyond useful records. That, folks, is perfect stupidity.

So, he is talking about a new ‘gold standard’ based on everything from precious metals to base metals, to water, to one of the key ingredients for cakes, to the GDP of China, questionable data and all. Somehow these back a new global reserve currency which somebody will manage, and provide emergency liquidity in, despite *ALMOST EVERYONE IN THE NEW BLOC RUNNING TRADE SURPLUSES* – and most so with the West, who are not going to join. As such, this is not so much a proposed Bancor, as Keynes floated at the original Bretton Woods before the US insisted on the global role of the USD; nor a monstrous Rancor to devour Wall Street; it’s just plain rancour (“bitterness or resentfulness, especially when long standing”). Indeed, here is the coup de grace:
MD: Anyone talking about a standard that changes value with time, is talking nonsense. And gold is anything but constant in value. We can now create new gold at a fraction of earlier costs…except where a new discovery is found … and then you can just pick up nuggets off the ground creating fictitious wealth. Changes like that…or large quantities going down with a sinking ship…create great disruptions. And such disruptions are totally unnecessary…actually impossible…if a “real money process” is in effect.

Transition to the new world economic order will likely be accompanied by systematic refusal to honor obligations in USD, EUR, GBP, and JPY. In this respect, it will be no different from the example set by the countries issuing these currencies who thought it appropriate to steal foreign exchange reserves of Iraq, Iran, Venezuela, Afghanistan, and Russia to the tune of trillions of USD…. Even if they were to default on their obligations in those currencies, this would have no bearing on their credit rating in the new financial system. Nationalization of extraction industry, likewise, would not cause a disruption.”
MD: An open admission to traders that they are…and will continue to be…dictated to by the money-changers. How is it that the real producers in the world (i.e. the traders) can be so totally dominated by the absolute non-producing slugs of the world (i.e. the money changers)?

In other words, adopt the new world order and you get to default on all your FX debt and nationalise all your foreign-owned businesses! That is precisely what I also argued: bet on the new and bet on the default of the old. That is not going to be peaceful or painless – and it will be vigorously resisted.
MD: This “new world order” thing is just the new “war monger”. The latest weapons of these war mongers is immigration and virus creation and spread…and they are essentially the same thing.

You want to ensure that even vampire-squid on Wall Street and global-not-local US billionaire hedge-fund managers agree to dump neoliberalism for Western mercantilism and a bifurcated Cold War world of tariffs, capital controls, and naval blockades? Keep talking about mass nationalisations and organised debt defaults in the Eurodollar markets.52,222109
MD: These articles just continue to be less and less interesting…more and more stupidity revealing. Such is life…and then you die.

The commodity currency revolution

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The commodity currency revolution

MD: I tripped over the following YouTube propaganda and thought I should warn you about GoldMoney.com. Macleod gave a link to this article which I will now annotate.

MD: First, I’ll relate my story. Then I’ll annotate this article by Macleod. Neither Turk nor Macleod have a clue about what money is. It is obvious from this YouTube discussion and will likely be evident from this article as well. You can see other reactions to his nonsense by searching for “Macleod” or “GoldMoney” at the end of this article.

First, my story. Over 10 years ago I was buying gold because I was convinced the financial system was going down the toilet. GoldMoney.com had this value proposition: If I bought “gold grams” from them, they would store the gold in secure vaults around the world. They claimed to be governed by the Isle of Wight I think. At the time, gold and silver were going up quite aggressively against the dollar.

First, I dipped my toe in. I sent them about $1,000, let it sit in the account for a little while, then asked them to send me the $1,000 plus the appreciation back. They did it without a hitch. Next, I sent them quite a bit more money from my retirement fund. And I ran an experiment. I asked them to send me some gold. They did this…but there was a hitch. I had to pay “import duty” on the gold. The round trip “load” was 10% so I decided as long as gold was diving, I’d wait until it hit bottom to ask for my delivery. At least the import duty would be lower.

Anyone who has watched gold knows it has been a poorly performing asset. The cement blocks I’ve bought over that same period have done much better than my gold at GoldMoney.com. Every few months I would do my reconciliation of my account so I could update my own records.

All of a sudden I couldn’t get into my account. At the time I was busy with other things and procrastinated. But when I finally raised the issue with them they claimed their “regulator” needed additional information. I said “no problem”. Just close my account under our original terms and send me the gold.

They refused. But they said they would send me dollars to my bank account. I had to close my bank account some years earlier because my money proved not to be safe there. They said I had no recourse but to do as I was told. I went to the “WayBack.com” archive and gave them a link to our original agreement…which specifically said they weren’t regulated by any financial regulator…and that was part of their “value proposition”.

As of this writing the issue is still not resolved. They owe me a response in our dialog. I told them I was under no illusion that this matter would be resolved “legally” as the legal process is corrupt beyond hope.

Now…on to Macleod’s nonsense.

By Alasdair Macleod Goldmoney Insights April 07, 2022 We will look back at current events and realise that they marked the change from a dollar-based global economy underwritten by financial assets to commodity-backed currencies. We face a change from collateral being purely financial in nature to becoming commodity based. It is collateral that underwrites the whole financial system.

MD: Right now, as I noted, I’m looking back and seeing that Goldmoney is not to be trusted.

The ending of the financially based system is being hastened by geopolitical developments. The West is desperately trying to sanction Russia into economic submission, but is only succeeding in driving up energy, commodity, and food prices against itself. Central banks will have no option but to inflate their currencies to pay for it all. Russia is linking the ruble to commodity prices through a moving gold peg instead, and China has already demonstrated an understanding of the West’s inflationary game by having stockpiled commodities and essential grains for the last two years and allowed her currency to rise against the dollar.

MD: Note, with a “real” money process, geopolitics can play no role at all. Of course, Macleod is clueless about that.

China and Russia are not going down the path of the West’s inflating currencies. Instead, they are moving towards a sounder money strategy with the prospect of stable interest rates and prices while the West accelerates in the opposite direction.

MD: Notice he uses the term “stable” for interest rates and prices. We know that prices will do what they will do. It “is as it is” they say. But with a “real” money process, we know INTEREST is zero for responsible traders like you and me. And we know prices are not influenced by the money at all. Money is guaranteed to have perfect supply/demand balance throughout its life…and thus zero inflation and deflation.

The Credit Suisse analyst, Zoltan Pozsar, calls it Bretton Woods III. This article looks at how it is likely to play out, concluding that the dollar and Western currencies, not the rouble, will have the greatest difficulty dealing with the end of fifty years of economic financialisation.

MD: We know that any regulated money scheme will eventually blow up. If they can envision a Bretton Wood III, they can envision a XVIII…it’s like the Superbowl. And he needs to learn how to spell “ruble”. I wish he could help me with “dealing” with GoldMoney.com. Oh…and with a “real money process”, there is no such thing as financialisation…or backing for that matter.

Pure finance is being replaced with commodity finance

It hasn’t hit the main-stream media yet, which is still reporting yesterday’s battle. But in March, the US Administration passed a death sentence on its own hegemony in a last desperate throw of the dollar dice. Not only did it misread the Russian situation with respect to its economy, but America mistakenly believed in its own power by sanctioning Russia and Putin’s oligarchs.

MD: The USA has had its death sentence my whole life…nearly 80 years. When I started my career, about 1/4th of my income went to government…and about 1/4 of the citizens were dependent on government. By the end of my career 50 years later, both those ratios have increased at an exponential rate to over 3/4…and we know even they can’t go past 4/4ths.

It may have achieved a partial blockade on Russia’s export volumes, but compensation has come from higher unit prices, benefiting Russia, and costing the Western alliance.

The consequence is a final battle in the financial war which has been brewing for decades. You do not sanction the world’s most important source of energy exports and the marginal supplier of a wide range of commodities and raw materials, including grains and fertilisers, without damaging everyone but the intended target. Worse still, the intended target has in China an extremely powerful friend, with which Russia is a partner in the world’s largest economic bloc — the Shanghai Cooperation Organisation — commanding a developing market of over 40% of the world’s population. That is the future, not the past: the past is Western wokery, punitive taxation, economies dominated by the state and its bureaucracy, anti-capitalistic socialism, and magic money trees to help pay for it all.

MD: Maybe we should remember that only the USA congress can declare war. Sanctions are a siege tactic…and a siege is an act of war. Congress just declares war on inanimate things like “drugs”…they don’t want the competition. I wish they could declare war on “stupidity”…but of course that would be shooting themselves in the foot. For a long time I have realized that Britain and Israel were our worst enemies. But government is now eclipsing them.

Despite this enormous hole in the sanctions net, the West has given itself no political option but to attempt to tighten sanctions even more. But Russia’s response is devastating for the western financial system. In two simple announcements, tying the rouble to gold for domestic credit institutions and insisting that payments for energy will only be accepted in roubles, it is calling an end to the fiat dollar era that has ruled the world from the suspension of Bretton Woods in 1971 to today.

MD: And again remember the latency. In 1971 when the USA formally renegged on their guarantee of $35/ounce for gold (after confiscating all their citizens gold at $28/ounce)…in 1971, the real price of gold was over $70/ounce. France demanded a debt payment in gold and the jig was up. But it had obviously been up for some time at that point.

Just over five decades ago, the dollar took over the role for itself as the global reserve asset from gold. After the seventies, which was a decade of currency, interest rate, and financial asset volatility, we all settled down into a world of increasing financialisation. London’s big bang in the early 1980s paved the way for regulated derivatives and the 1990s saw the rise of hedge funds and dotcoms. That was followed by an explosion in over-the-counter unregulated derivatives into the hundreds of trillions and securitisations which hit the speed-bump of the Lehman failure. Since then, the expansion of global credit for purely financial activities has been remarkable creating a financial asset bubble to rival anything seen in the history of financial excesses. And together with statistical suppression of the effect on consumer prices the switch of economic resources from Main Street to Wall Street has hidden the inflationary evidence of credit expansion from the public’s gaze.

MD: We should remember, in 1964 we could buy a gallon of gas for a quarter dollar…which was 90% silver. In 1965 they quit minting silver into the coins…but the 1965 quarters still traded for a gallon of gas. This proved beyond all doubt that the silver had nothing to do with the trade. It implicitly demonstrated that money “represented” an in-process promise to complete a trade over time and space. And coins and currency were just tokens representing that promise. Why doesn’t Macleod make note of that?

All that is coming to an end with a new commoditisation — what respected flows analyst Zoltan Pozsar at Credit Suisse calls Bretton Woods III. In his enumeration the first was suspended by President Nixon in 1971, and the second ran from then until now when the dollar has ruled indisputably. That brings us to Bretton Woods III.

MD: And as I noted, even if you believe Macleods nonsense about commoditisation, don’t resort to Goldmoney.com for your commodity. They can’t be trusted.

Russia’s insistence that importers of its energy pay in roubles and not in dollars or euros is a significant development, a direct challenge to the dollar’s role. There are no options for Russia’s “unfriendlies”, Russia’s description for the alliance united against it. The EU, which is the largest importer of Russian natural gas, either bites the bullet or scrambles for insufficient alternatives. The option is to buy natural gas and oil at reasonable rouble prices or drive prices up in euros and still not get enough to keep their economies going and the citizens warm and mobile. Either way, it seems Russia wins, and one way the EU loses.

MD: What’s good for the goose is good for the gander. We played that card with the middle eastern nomads in the 1930s. They must accept only dollars for their oil. Write all you want Macleod. Theirs no end to their ability to rig any game.

As to Pozsar’s belief that we are on the verge of Bretton Woods III, one can see the logic of his argument. The highly inflated financial bubble marks the end of an era, fifty years in the making. Negative interest rates in the EU and Japan are not just an anomaly, but the last throw of the dice for the yen and the euro. The ECB and the Bank of Japan have bond portfolios which have wiped out their equity, and then some. All Western central banks which have indulged in QE have the same problem. Contrastingly, the Russian central bank and the Peoples Bank of China have not conducted any QE and have clean balance sheets. Rising interest rates in Western currencies are made more certain and their height even greater by Russia’s aggressive response to Western sanctions. It hastens the bankruptcy of the entire Western banking system and by bursting the highly inflated financial bubble will leave little more than hollowed-out economies.

MD: Wouldn’t it be neat if this Bretton Woods III thing actually fixed the problem once and for all by instituting a “real money process”? There would be no such thing as a central bank…anywhere on the planet. In fact, banks would probably cease to exist as well. And of course Goldmoney.com wouldn’t exist either.

Putin has taken as his model the 1973 Nixon/Kissinger agreement with the Saudis to only accept US dollars in payment for oil, and to use its dominant role in OPEC to force other members to follow suit. As the World’s largest energy exporter Russia now says she will only accept roubles, repeating for the rouble the petrodollar strategy. And even Saudi Arabia is now bending with the wind and accepting China’s renminbi for its oil, calling symbolic time on the Nixon/Kissinger petrodollar agreement.

The West, by which we mean America, the EU, Britain, Japan, South Korea, and a few others have set themselves up to be the fall guys. That statement barely describes the strategic stupidity — an Ignoble Award is closer to the truth. By phasing out fossil fuels before they could be replaced entirely with green energy sources, an enormous shortfall in energy supplies has arisen. With an almost religious zeal, Germany has been cutting out nuclear generation. And even as recently as last month it still ruled out extending the lifespan of its nuclear facilities. The entire G7 membership were not only unprepared for Russia turning the tables on its members, but so far, they have yet to come up with an adequate response.

MD: Earth to Macleod…oil doesn’t come from fossils. It abiotic. And further, planet Earth loves CO2. It basks in CO2. The global warming nonsense is just that…nonsense!

Russia has effectively commoditised its currency, particularly for energy, gold, and food. It is following China down a similar path. In doing so it has undermined the dollar’s hegemony, perhaps fatally. As the driving force behind currency values, commodities will be the collateral replacing financial assets. It is interesting to observe the strength in the Mexican peso against the dollar (up 9.7% since November 2021) and the Brazilian real (up 21% over a year) And even the South African rand has risen by 11% in the last five months. That these flaky currencies are rising tells us that resource backing for currencies has its attractions beyond the rouble and renminbi.

But having turned their backs on gold, the Americans and their Western epigones lack an adequate response. If anything, they are likely to continue the fight for dollar hegemony rather than accept reality. And the more America struggles to assert its authority, the greater the likelihood of a split in the Western partnership. Europe needs Russian energy desperately, and America does not. Europe cannot afford to support American policy unconditionally.

That, of course, is Russia’s bet.

MD: Imagine if Russia and China adopted a “real money process” and quit counterfeiting money. Then the whole world would have to follow suit. And governments couldn’t create money to wage wars. They couldn’t counterfeit money to buy citizen’s support. They would be less than 1/10th the size they are now.

Russia’s point of view

For the second time in eight years, Russia has seen its currency undermined by Western action over Ukraine. Having experienced it in 2014, this time the Russian central bank was better prepared. It had diversified out of dollars adding official gold reserves. The commercial banking system was overhauled, and the Governor of the RCB, Elvira Nabiullina, by following classical monetary policies instead of the Keynesianism of her Western contempories, has contained the fall-out from the war in Ukraine. As Figure 1 shows, the rouble halved against the dollar in a knee-jerk reaction before recovering to pre-war levels.

MD: Imagine the chart below if Russia (and the USA) had instituted a “real ” money process. That chart would be a straight horizontal line at 100. It wouldn’t wiggle at all. Now how could that be bad?


The link to commodities is gold, and the RCB announced that until end-June it stands ready to buy gold from Russian banks at 5,000 roubles per gramme. The stated purpose was to allow banks to lend against mine production, given that Russian-sourced gold is included in the sanctions. But the move has encouraged speculation that the rouble is going on a quasi- gold standard; never mind that a gold standard works the other way round with users of the currency able to exchange it for gold.

MD: With a real money process you have none of that nonsense.

Besides being with silver the international legal definition of money (the rest being currency and credit), gold is a good proxy for commodities, as shown in Figure 2 below.[i] Priced in goldgrams, crude oil today is 30% below where it was in the 1950, long before Nixon suspended the Bretton Woods Agreement. Meanwhile, measured in depreciating fiat currencies the price has soared and been extremely volatile along the way.

MD: Macleod doesn’t seem to realize that the changing supply/demand for gold and the changing supply/demand for oil…and for virtually all commodities will always dictate price. But with a real money process, a perpetually perfect balance of supply and demand for money is “guaranteed” and thus plays no role in pricing at all. It doesn’t need to be as complicated as these dolts are making it folks.


MD: It’s interesting that the curve above for goldgrams is a constant “zero”. That’s what your gold is worth to you if you bought it from Goldmoney.com…absolutely zero. They say “the regulators made us steal it from you”.

It is a similar story for other commodity prices, whereby maximum stability is to be found in prices measured in goldgrams. Taking up Pozsar’s point about currencies being increasingly linked to commodities in Bretton Woods III, it appears that Russia intends to use gold as proxy for commodities to stabilise the rouble. Instead of a fixed gold exchange rate, the RCB has wisely left itself the option to periodically revise the price it will pay for gold after 1 July.

MD: Is it just coincidence that “Pozsar” looks a lot like “Ponzi”? And earth to Pozsar, money is always and only linked to one thing…a responsible traders promise to complete a trade over time and space. The only reason we have all the nonsense that this article pontificates about is because moneychangers (and the governments they institute) counterfeit money at will. Stop that and bingo…problem solved.

Table 1 shows how the RCB’s current fixed rouble gold exchange rate translates into US dollars.


MD: Need to add cement blocks to the above chart. They did better than gold.

While non-Russian credit institutions do not have access to the facility, it appears that there is nothing to stop a Russian bank buying gold in another centre, such as Dubai, to sell to the Russian central bank for roubles. All that is needed is for the dollar/rouble rate to be favourable for the arbitrage and the ability to settle in a non-sanctioned currency, such as renminbi, or to have access to Eurodollars which it can exchange for Euroroubles (see below) from a bank outside the “unfriendlies” jurisdictions.

The dollar/rouble rate can now easily be controlled by the RCB, because how demand for roubles in short supply is handled becomes a matter of policy. Gazprom’s payment arm (Gazprombank) is currently excused the West’s sanctions and EU gas and oil payments will be channelled through it.

MD: With a real money process governing all nations money, exchange rates between the various currencies would be constant. In time they would all adopt the HUL (hour of unskilled labor) as the unit of measure. Since that never changes in value…i.e. always trades for the same size hole in the ground…exchange rates would be perpetually 1.0000 for all nation’s money. There would be no need for nations.

Broadly, there are four ways in which a Western consumer can acquire roubles:

  • By buying roubles on the foreign exchanges.
  • By depositing euros, dollars, or sterling with Gazprombank and have them do the conversion as agents.
  • By Gazprombank increasing its balance sheet to provide credit, but collateral which is not sanctioned would be required.
  • By foreign banks creating rouble credits which can be paid to Gazprombank against delivery of energy supplies.

MD: Be careful. That’s like Goldmoney.com saying a way to acquire gold is by sending money to them. But when you ask for your gold they say net not, nay, nope, nix, n’t;

The last of these four is certainly possible, because that is the basis of Eurodollars, which circulate outside New York’s monetary system and have become central to international liquidity. To understand the creation of Eurodollars, and therefore the possibility of a developing Eurorouble market we must delve into the world of credit creation.

MD: Macleod. Everyone here are MoneyDelusions knows that the Euro is pure nonsense…like all government managed (distorted and misguided) money…like putting lipstick on a pig.

There are two ways in which foreigners can hold dollar balances. The way commonly understood is through the correspondent banking system. Your bank, say in Europe, will run deposit accounts with their correspondent banks in New York (JPMorgan, Citi etc.). So, if you make a deposit in dollars, the credit to your account will reconcile with the change in your bank’s correspondent account in New York.

MD: But if the USA government claims you owe them money, they grab it right out of your bank. Your bank does nothing to defend you. And you “won’t” get your money back. You will die first. And of course the government is faceless…so there’s nobody for you to kill in return. They call it civilization.

Now let us assume that you approach your European bank for a dollar loan. If the loan is agreed, it appears as a dollar asset on your bank’s balance sheet, which through double-entry bookkeeping is matched by a dollar liability in favour of you, the borrower. It cannot be otherwise and is the basis of all bank credit creation. But note that in the creation of these balances the American banking system is not involved in any way, which is how and why Eurodollars circulate, being fungible with but separate in origin from dollars in the US.

MD: In a real money process, there is really no reason for loans. Only deadbeat traders (i.e. those who default on their promises need ever resort to loans.

By the same method, we could see the birth and rapid expansion of a Eurorouble market. All that’s required is for a bank to create a loan in roubles, matched under double-entry bookkeeping with a deposit which can be used for payments. It doesn’t matter which currency the bank runs its balance sheet in, only that it has balance sheet space, access to rouble liquidity and is a credible counterparty.

MD: The solution doesn’t lie in creating new government entities to do the counterfeiting. The solution is to take the money process out of the hands of “all” governments. Let it rest with the traders like you and I.

This suggests that Eurozone and Japanese banks can only have limited participation because they are already very highly leveraged. The banks best able to run Eurorouble balances are the Americans and Chinese because they have more conservative asset to equity ratios. Furthermore, the large Chinese banks are majority state-owned, and already have business and currency interests with Russia giving them a head start with respect to rouble liquidity.

MD: Remember when we did it to the Japanese in the late 30’s. We restricted their trade. And we enticed (forced) them to attack us (yes…our government was fully aware of Pearl Harbor and the war it would enable them to start.)

We have noticed that the large American banks are not shy of dealing with the Chinese despite the politics, so presumably would like the opportunity to participate in Euroroubles. But only this week, the US Government prohibited them from paying holders of Russia’s sovereign debt more than $600 million. So, we should assume the US banks cannot participate which leaves the field open to the Chinese mega-banks. And any attempt to increase sanctions on Russia, perhaps by adding Gazprombank to the sanctioned list, achieves nothing, definitely cuts out American banks from the action, and enhances the financial integration between Russia and China. The gulf between commodity-backed currencies and yesteryear’s financial fiat simply widens.

MD: And Goldmoney.com will claim some government is prohibiting them from delivering your gold to you. See how easy that works?

For now, further sanctions are a matter for speculation. But Gazprombank with the assistance of the Russian central bank will have a key role in providing the international market for roubles with wholesale liquidity, at least until the market acquires depth in liquidity. In return, Gazprombank can act as a recycler of dollars and euros gained through trade surpluses without them entering the official reserves. Dollars, euros yen and sterling are the unfriendlies’ currencies, so the only retentions are likely to be renminbi and gold.

In this manner we might expect roubles, gold and commodities to tend to rise in tandem. We can see the process by which, as Zoltan Pozsar put it, Bretton Woods III, a global currency regime based on commodities, can take over from Bretton Woods II, which has been characterised by the financialisation of currencies. And it’s not just Russia and her roubles. It’s a direction of travel shared by China.

MD: This is like your wife always claiming to have a yeast infection. Pretty soon you find a way around that.

The economic effects of a strong currency backed by commodities defy monetary and economic beliefs prevalent in the West. But the consequences that flow from a stronger currency are desirable: falling interest rates, wealth remaining in the private sector and an escape route from the inevitable failure of Western currencies and their capital markets. The arguments in favour of decoupling from the dollar-dominated monetary system have suddenly become compelling.

MD: When does the obvious cease to be a belief?

The consequences for the West

Most Western commentary is gung-ho for further sanctions against Russia. Relatively few independent commentators have pointed out that by sanctioning Russia and freezing her foreign exchange reserves, America is destroying her own hegemony. The benefits of gold reserves have also been pointedly made to those that have them. Furthermore, central banks leaving their gold reserves vaulted at Western central banks exposes them to sanctions, should a nation fall foul of America. Doubtless, the issue is being discussed around the world and some requests for repatriation of bullion are bound to follow.

There is also the problem of gold leases and swaps, vital for providing liquidity in bullion markets, but leads to false counting of reserves. This is because under the IMF’s accounting procedures, leased and swapped gold balances are recorded as if they were still under a central bank’s ownership and control, despite bullion being transferred to another party in unallocated accounts.[ii]

MD: Actually there is no end to the money-changers creativity in cheating you. Deal them out of the game. Institute a real money process. There’s really no use in reading this nonsense further. I’m tired…and throwing in the towel. Just one parting comment: Do business at Goldmoney. com at your own risk A word to the wise is sufficient.

No one knows the extent of swaps and leases, but it is likely to be significant, given the evidence of gold price interventions over the last fifty years. Countries which have been happy to earn fees and interest to cover storage costs and turn gold bullion storage into a profitable activity (measured in fiat) are at the margin now likely to not renew swap and lease agreements and demand reallocation of bullion into earmarked accounts, which would drain liquidity from bullion markets. A rising gold price will then be bound to ensue.

Ever since the suspension of Bretton Woods in 1971, the US Government has tried to suppress gold relative to the dollar, encouraging the growth of gold derivatives to absorb demand. That gold has moved from $35 to $1920 today demonstrates the futility of these policies. But emotionally at least, the US establishment is still virulently anti-gold.

As Figure 2 above clearly shows, the link between commodity prices and gold has endured through it all. It is this factor that completely escapes popular analysis with every commodity analyst assuming in their calculations a constant objective value for the dollar and other currencies, with price subjectivity confined to the commodity alone. The use of charts and other methods of forecasting commodity prices assume as an iron rule that price changes in transactions come only from fluctuations in commodity values.

The truth behind prices measured in unbacked currencies is demonstrated by the cost of oil priced in gold having declined about 30% since the 1960s. That is reasonable given new extraction technologies and is consistent with prices tending to ease over time under a gold standard. It is only in fiat currencies that prices have soared. Clearly, gold is considerably more objective for transaction purposes than fiat currencies, which are definitely not.

Therefore, if, as the chart in the tweet below suggests, the dollar price of oil doubles from here, it will only be because at the margin people prefer oil to dollars — not because they want oil beyond their immediate needs, but because they want dollars less.


China recognised these dynamics following the Fed’s monetary policies of March 2020, when it reduced its funds rate to the zero bound and instituted QE at $120bn every month. The signal concerning the dollar’s future debasement was clear, and China began to stockpile oil, commodities, and food — just to get rid of dollars. This contributed to the rise in dollar commodity prices, which commenced from that moment, despite falling demand due to covid and supply chain problems. The effect of dollar debasement is reflected in Figure 3, which is of a popular commodity tracking ETF.

A better understanding would be to regard the increase in the value of this commodity basket not as a near doubling since March 2020, but as a near halving of the dollar’s purchasing power with respect to it.

Furthermore, the Chinese have been prescient enough to accumulate stocks of grains. The result is that 20% of the world’s population has access to 70% of the word’s maize stocks, 60% of rice, 50% of wheat and 35% of soybeans. The other 80% of the world’s population will almost certainly face acute shortages this year as exports of grain and fertiliser from Ukraine/Russia effectively cease.

China’s actions show that she has to a degree already tied her currency to commodities, recognising the dollar would lose purchasing power. And this is partially reflected in the yuan’s exchange rate against the US dollar, which since May 2020 has gained over 11%.

Implications for the dollar, euro and yen

In this article the close relationship between gold, oil, and wider commodities has been shown. It appears that Russia has found a way of tying her currency not to the dollar, but to commodities through gold, and that China has effectively been doing the same thing for two years without the gold link. The logic is to escape the consequences of currency and credit expansion for the dollar and other Western currencies as their purchasing power is undermined. And the use of a gold peg is an interesting development in this context.

We should bear in mind that according to the US Treasury TIC system foreigners own $33.24 trillion of financial securities and short-term assets including bank deposits. That is in addition to a few trillion, perhaps, in Eurodollars not recorded in the TIC statistics. These funds are only there in such quantities because of the financialisation of Western currencies, a situation we now expect to end. A change in the world’s currency order towards Pozsar’s Bretton Woods III can be expected to a substantial impact on these funds.

To prevent foreign selling of the $6.97 trillion of short-term securities and cash, interest rates would have to be raised not just to tackle rising consumer prices (a Keynesian misunderstanding about the economic role of interest rates, disproved by Gibson’s paradox[iii]) but to protect the currency on the foreign exchanges, particularly relative to the rouble and the yuan. Unfortunately, sufficiently high interest rates to encourage short-term money and deposits to stay would destabilise the values of the foreign owned $26.27 trillion in long-term securities — bonds and equities.

As the manager of US dollar interest rates, the dilemma for the Fed is made more acute by sanctions against Russia exposing the weakness of the dollar’s position. The fall in its purchasing power is magnified by soaring dollar prices for commodities, and the rise in consumer prices will be greater and sooner as a result. It is becoming possible to argue convincingly that interest rates for one-year dollar deposits should soon be in double figures, rather than the three per cent or so argued by monetary policy hawks. Whatever the numbers turn out to be, the consequences are bound to be catastrophic for financial assets and for the future of financially oriented currencies where financial assets are the principal form of collateral.

It appears that Bretton Woods II is indeed over. That being the case, America will find it virtually impossible to retain the international capital flows which have allowed it to finance the twin deficits — the budget and trade gaps. And as securities’ values fall with rising interest rates, unless the US Government takes a very sharp knife to its spending at a time of stagnating or falling economic activity, the Fed will have to step up with enhanced QE.

The excuse that QE stimulates the economy will have been worn out and exposed for what it is: the debasement of the currency as a means of hidden taxation. And the foreign capital that manages to escape from a dollar crisis is likely to seek a home elsewhere. But the other two major currencies in the dollar’s camp, the euro and yen, start from an even worse position. These are shown in Figure 4. With their purchasing power visibly collapsing the ECB and the Bank of Japan still have negative interest rates, seemingly trapped under the zero bound. Policy makers find themselves torn between the Scylla of consumer price inflation and the Charybdis of declining economic activity. A further problem is that these central banks have become substantial investors in government and other bonds (the BOJ even has equity ETFs on board) and rising bond yields are playing havoc with their balance sheets, wiping out their equity requiring a systemic recapitalisation.


Not only are the ECB and BOJ technically bankrupt without massive capital injections, but their commercial banking networks are hugely overleveraged with their global systemically important banks — their G-SIBs — having assets relative to equity averaging over twenty times. And unlike the Brazilian real, the Mexican peso and even the South African rand, the yen and the euro are sliding against the dollar.

The response from the BOJ is one of desperately hanging on to current policies. It is rigging the market by capping the yield on the 10-year JGB at 0.25%, which is where it is now.

These currency developments are indicative of great upheavals and an approaching crisis. Financial bubbles are undoubtedly about to burst sinking fiat financial values and all that sail with them. Government bonds will be yesterday’s story because neither China nor Russia, whose currencies can be expected to survive the transition from financial to commodity orientation, run large budget deficits. That, indeed, will be part of their strength.

The financial war, so long predicted and described in my essays for Goldmoney, appears to be reaching its climax. At the end it has boiled down to who understands money and currencies best. Led by America, the West has ignored the legal definition of money, substituting fiat dollars for it instead. Monetary policy lost its anchor in realism, drifting on a sea of crackpot inflationary beliefs instead.

But Russia and China have not made the same mistake. China played along with the Keynesian game while it suited them. Consequently, while Russia may be struggling militarily, unless a miracle occurs the West seems bound to lose the financial war and we are, indeed, transiting into Pozsar’s Bretton Woods III.

[i] Chart kindly provided by James Turk from his recent book, Money and Liberty (pub. Wood Lane Books)

[ii] See Treatment of Reserves and Fund Accounts — Balance of Payments Division IMF Statistics Department.

[iii] Gibson’s paradox showed that the price correlation with interest rates was with the general price level, not with the rate of price changes. Because Keynes and others failed to explain it, modern economists ignore this relationship with respect to monetary policies. See https://www.goldmoney.com/research/goldmoney-insights/gibson-s-paradox

The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

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MoE As a Unique Type of Economic Good

  • David Lawant David Lawant this is my bio More posts by David Lawant.

MD: This blog named MoneyDelusion.com (note singular, not plural like this one) I tripped over. It was created in 2020. MoneyDelusions.com (note plural…was created three years earlier in 2017). This David Lawant is likely a Mises Monk. He’s posted three articles to his blog…one each day for three days…and then nothing. I wonder what he thinks he’s up to. Let’s see if he knows anything about money. If he does he’ll be the first Mises Monk I’ve found who does…and wouldn’t that be exciting!

David Lawant

28 Oct 2020 • 7 min read

MoE As a Unique Type of Economic Good

A Medium of exchange (MoE) is an economic good that is used in exchange for other goods. Money is nothing more than a special case of media of exchange that happens to be universally accepted through a process that has already been well described elsewhere. Under this definition Bitcoin is not money because it’s not commonly accepted (yet), but it certainly is a MoE. For this text you can read these two concepts as synonyms, as everything here about money can be generalized to media of exchange without any loss in meaning.

MD: Right off the bat it looks like he doesn’t get it. A “medium” is the environment (control) within which “media” exists. It’s a minor point…unless his confusion goes deeper. Nope: Second sentence his thinks “money” is a special case of “media”. This is wrong. Money “is” the media. Different “cases” would be like ledger entries, demand deposits, coins, currency, etc. And what is this “universally accepted process described elsewhere”? Now he swerves into correctness…Bitcoin “is” not money…but it looks like it’s “acceptance” that is not mature enough…and thus will eventually be money. He’s wrong. It’s not created correctly. That’s what keeps it from ever being money. That’s what makes it just being stuff of simple barter exchange like gold and silver. And read that last sentence again. He is “money deluded”…that’s for sure.

Media of exchange are not a payment system, as Pierre Rochard correctly and insistently emphasizes. Although a payment system might be a nice-to-have feature to transfer a MoE form one hand to another, it is important to understand that these are completely orthogonal concepts. The channel through which a good is exchanged is not important for the economic analysis of a MoE. What matters is that the good is primarily used to be exchanged for other goods. Ludwig von Mises traced this confusion to a juridical view of money:

…the principal, although not exclusive, motive of the law for concerning itself with money is the problem of payment. When it seeks to answer the question ‘What is money?’ it is in order to determine how monetary liabilities can be discharged. For the jurist, money is a medium of payment. The economist, to whom the problem of money presents a different aspect, may not adopt this point of view if he does not wish at the very outset to prejudice his prospects of contributing to the advancement of economic theory.

MD: See…I told you he was a Mises Monk…and his brain is thoroughly contaminated. We here know that money is “an in-process promise to complete a trade over time and space.” It is always, and only, created by traders like you and me. It may never circulate as an object of simple barter exchange…but virtually always does. And when it does, it trades like any other object that two traders are willing to exchange. But its process is what makes it special. Real money has zero intrinsic value. But when properly protected from counterfeiting, it is the most efficient and most trusted of any object of simple barter exchange. This is because its value never changes over time and space. This is because there is no interest load associated with using it. And it is because the “process (e.g. medium) guarantees this to be so. It cannot operate any other way.

Some Bitcoiners question whether it makes sense to stress so much the MoE aspect of money if it is only a stage in the evolutionary process brilliantly depicted by Nick Szabo (collectible, store of value, medium of exchange, and unit of account). The point, as Szabo points out, is that something special happens when an economic good becomes a medium of exchange.

MD: Here you see a very common attribute of the Mises Monks…that is worship of other Mises Monks. They’re truly a mutual admiration society. It is a religion…and misguided like all religions. But the key thing to note here: An economic good does not “become” a medium of exchange (or even properly a “media” of exchange). Money is not an economic good…it is a “promise”. And “real” money is a promise that is guaranteed to be kept. It’s designed into the process. The sidebar explains it in very simple terms.

Categorization of Economic Goods

One of the most basic distinctions in economics is the one between consumption and production goods, usually called by Austrian economists as first-order and higher-order (second-order, third-order, etc…) goods. We can get away for now with the following simplified definition: first-order (consumption) goods satisfy direct human needs and higher-order (production) goods are used to produce lower-order goods.

MD: Money has no interest in what it is being traded for or how it will be used…or why it is being traded. Why should it? Why do they make this complicated? If I trade money for a hammer, do I care if it’s used to pound nails or to blacksmith wrought iron…or just to hang on the wall? If this article tells us why “he” cares we’ll correct him at that instant.

There’s nothing intrinsic about whether a good is first or higher order. For example: I can consume a certain amount of water to satisfy my thirst (i.e., water as a first-order good) or alternatively I can provide this same amount of water to cattle which I will ultimately consume as food (i.e., water as a second-order good and cattle as a first-order good).

First- and higher-order economic goods, albeit ultimately connected to a fundamental theory of value, are different enough to be treated separately in many instances. As Jesus Huerta de Soto puts it: “this classification and terminology were conceived by Carl Menger, whose theory on economic goods of different order is one of the most important logical consequences of his subjectivist conception of economics”.

Peter Paul Rubens’ representation of an altcoiner trying to spin up a monetary system (c. 1614–1616)

MD: More praise for fellow Mises Monks. Look how far we are into this article and he still has said nothing that has to do with money. He’s just tried to act like an intellectual. We know that as “double talk”. And watch out for creation of a new “..ist”…in this instance “subjectivist”. Does the world really need any more “ists”?

We have thus defined that media of exchange are goods that have no real “utility” aside from being exchanged for other goods, which in turn have real “utility” of their own. So how do we classify media of exchange? Are they first-order (consumption) or higher-order (production) economic goods? Is there anything especial about media of exchange that warrants a special analysis of them?

MD: When you realize that it’s the entire trading universe that is the “medium” of exchange, you don’t have to classify anything. In trading, those who prefer to trade for gold know its value. If they trade in silver, they know its value. What is different about “real” money is “its value never changes.” This can’t be said for any other object of simple barter exchange.

MD: The preferred unit for money is the HUL (Hour of Unskilled Labor). For all time in the past it has traded for the same size hole in the ground. And in a “real” money process, it will trade for the same size hole in the future. It is the traders who decide in their personal trades how many HULs is being traded.

MD: And this is a great simplification over the complicated process he alludes to. In his process you have to know the changing value of every good and service …in your mind. But when it comes to “real money” as one of the exchanged objects, you always know its value. When you were in high school (i.e. unskilled labor) you knew exactly what people were willing to pay for it. With the improperly managed dollar, people were willing to pay me $1.50 for a HUL. Today they are willing to pay $8.00. Why? Because the improper “dollar process” has allowed counterfeiting. They have allowed the supply/demand balance to change over time…and it is with supply continually outstripping demand through government counterfeiting (i.e. making promises they never keep)…counterfeiting “inflates” the supply. It’s just that simple.

Media of Exchange Are a Sui Generis Type of Economic Good

The number of economists who don’t have good answers to these questions is astounding. Most simply classify media of exchange as a higher-order good by exclusion. They don’t have direct “utility”, so they cannot be first-order economic goods.

MD: Here we see the pot calling the kettle black. I’m going to just let him spew on here. To put what he writes in context, he thinks gold is money. He thinks money “always” has intrinsic value. Gold thus gets its value by digging dirt and refining it. But dirt in your back yard isn’t going to give you any gold…no matter how much you refine it. And you can argue until you’re blue in the face that you put as much work into your backyard dirt as the gold professional put into his. He got gold…you didn’t. He got something to trade for his HULs…you didn’t. But when you know money is a promise, and you know “real” money comes from a process that “guarantees promises”, you don’t need to screw around with things like gold. I’ll let you read on yourself for a while. These guys make me tired..

Austrian economists think this approach is simplistic and inconsistent. They defend a three-fold categorization of economic goods: first-order (consumption) goods, higher-order (production) goods and media of exchange. This is a key proposition in Ludwig von Mises’ indispensable Theory of Money and Credit. He even criticizes his master Eugen von Böhm-Bawerk and defends the position of Karl Knies, economist of the rival German historical school, in this respect:

Production goods derive their value from that of their products. Not so money; for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money. The laws which govern the value of money are different from those which govern the value of production goods and from those which govern the value of consumption goods.

The peculiarity of media of exchange, and by extent of money, as economic goods is clearly exposed by a simple conundrum. We know intuitively that every economic good can command a price because it has “utility”. If the “utility” of a MoE is to have purchasing power (i.e., a price), how to we get out of this circular reference to understand how money has value? Mises derived his famous regression theorem to solve this apparent circularity by introducing the time element, but this is outside the scope of this text. What matters for us is that media of exchange are unique because their “utility” and purchasing power coincide. As Murray Rothbard puts it:

Without a price, or an objective exchange-value, any other good would be snapped up as a welcome free gift; but money, without a price, would not be used at all, since its entire use consists in its command of other goods on the market. The sole use of money is to be exchanged for goods, and if it had no price and therefore no exchange-value, it could not be exchanged and would no longer be used.

MD: Here is a good time to comment on this thing they call “price”. It’s how much of the stuff you have and are willing to trade for how much of the stuff your trading partner has and is willing to trade. If the “stuff” is real money, you both know exactly what is being traded…one hour of unskilled labor…and it’s guaranteed. You can convert that to dollars, marks, franks, ounces of gold, or pork bellies. It’s up to you to decide on that conversion. But one thing you don’t have to do with “real” money. You don’t have to decide what a HUL is worth. You always know, because at one point in your life your were one…an hour of unskilled labor. So if you’re using “real” money, your trade just got less risky by a factor of two (i.e. one of the objects being traded is “guaranteed” not to change over time and space). Let’s let him blab on further for a while..

This special relationship between “utility” and price for media of exchange makes its analysis unique and leads to conclusions that might seem counter-intuitive compared to the analysis of typical commodities. As Mises points out: the real problem of the value of money only begins where it leaves off in the case of commodity-values. Rothbard agrees with Mises on this point:

In the case of consumers’ goods, we do not go behind their subjective utilities on people’s value scales to investigate why they were preferred; economics must stop once the ranking has been made. In the case of money, however, we are confronted with a different problem. For the utility of money (setting aside the nonmonetary use of the money commodity) depends solely on its prospective use as the general medium of exchange. Hence the subjective utility of money is dependent on the objective exchange-value of money, and we must pursue our analysis of the demand for money further than would otherwise be required.

MD: This is a lot like hearing someone quote bible verses isn’t it.

This is the first stepping stone to intellectually justify why immutability and censorship resistance are such important concepts for media of exchange. As we will see in future texts, it will lead to the Austrian view that, contrary to other types of economic goods, increasing the supply of a MoE will only benefit some at the expense of others. On the other hand, reductions in the supply of a MoE do not make society worse off. The purchasing power that is hoarded is transmitted to others in the exact same proportion.

MD: So what do you think it will take for these “intellectuals” to grasp the concept of perpetual supply/demand balance…guaranteed? They’re beating a dead red herring…to mix a metaphor.

B2C, B2B and… B2MoE?

The singularities of different types goods are not just an abstraction — the business and investing communities also understand this well. The contrasts any executive or investor sees between business-to-consumer (B2C) and business-to-business (B2B) companies are too obvious to state here. Financial professionals are also familiar with the division between retail and wholesale banking. It is very to easy to understand that these are fundamentally different businesses that have unique challenges.

One of the reasons why Bitcoin is so novel is that companies and investors have never dealt directly with media of exchange before, but only with services built on top of an established MoE. These services are just typical consumer or production goods, not media of exchange. Trying to fit the standard toolkit to such a unique type of economic good without first considering its idiosyncrasies might lead to expensive mistakes.

Bitcoiners, possibly due to their Austro-Hungarian DNA traces, understand these concepts fully. Still, it is important to be mindful of them and make them explicit, especially as more new people start to get involved with Bitcoin. Most arguments against Bitcoin can be traced down to a misunderstanding of how media of exchange actually work. Traditional economists are generally not better positioned to understand this either, as monetary economics has been reduced to reading FOMC tea leaves and computing econometric analyses.

The next time someone points a laughable obsession over the 21 million hard cap or satellite dishes, try to gauge his understanding of some basic monetary concepts like the ones discussed here. Then think again about what is actually laughable. The next time someone tries to shill another “blockchain” that optimizes for a number of features, or for any specific feature, at the expense of immutability and censorship resistance, try to understand whether this person has considered the fact that media of exchange work under different rules.

MD: Do you think he could be more clueless? I ask you, as a trader and given the choice of an inflating money, a deflating money, or a money guaranteed to have zero inflation or deflation, which would you choose? Now that you have chosen, would your trading partner make the same choice as you in this instance? For both trading partners to be on an equal footing as far as money is concerned, the money itself must “never” change value. Does the dollar have this attribute? The Zimbabwe or Weimer Germany money? How about gold? How about cement blocks? My cement blocks have held their value better than gold.

The positions of Bitcoin proponents are usually grounded on air-tight logic and sound economic theory that extends back for a long time. This is neither dogmatism nor tribalism. Contrary to what many believe, the Austrian School of Economics does not take individual freedom and property rights as an axiom, but it arrives at those ideals through rigorous deductive logic. It certainly is a longer route to appreciate the free market system, but it might be the only one that does not lead one astray over time.

PS: An upcoming text in this series will delve deeper into the concept of utility and will probably be a required companion to this text. For now, I’m working with the oversimplified concept of utility as the satisfaction of someone’s needs. For that reason, “utility” is used in quotes throughout this text.

In that sense, a more rigorous way to transmit the main message of this text is (to paraphrase Mises): “In the case of money, subjective use-value and subjective exchange-value coincide. Both are derived from objective exchange-value, for money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it”.

MD: As always, I couldn’t be more relieved to have reached the end of this article. And look at the help from his Mises Monk pals and scrutiny he got. Pretty scary isn’t it.

Acknowledgements

A draft of this text was improved on by invaluable feedback from Saifedean Ammous, Michael Goldstein, Shaine Kennedy, Stephan Livera, Acrual and Sosthéne. Stay toxic, friends!

References

Free Post Projection and Throwness Bitcoin’s 10x Advantage Over Gold Might Not Lie Where You ThinkI have been thinking for a while about why sound money survived for thousands of years but was quickly

  • David Lawant

David Lawant 29 Oct 2020 • 7 min read Free Post Institutions Versus Organizations Governance by Laws Without LegislationCarl Menger, the founder of the Austrian school of economics, is a remarkably popular economist in crypto twitter because Bitcoin builds on so many of his

  • David Lawant

David Lawant 27 Oct 2020 • 6 min read Money Delusion © 2022 HomeSignupTwitter Published with Ghost

The Fraud of Money as Debt

[MD] The provocative (and ill-informed) title of this article begs some annotation. At Money Delusions, it is obvious and provable to us that  not only is money debt, it always has been and it always will be. Money is a promise to complete a trade over time and space … and a promise is obviously a debt.

So let’s see what this moron Shorty Dawkins has to say on the subject.

When the Federal Reserve System was established in 1913, it transferred the power of the US Treasury vis-a-vis the creation of money, into the hands of the Federal Reserve. The Fed creates money out of thin air and loans it to the US Treasury in the form of interest bearing debt instruments. Thus, the money of the US is based on debt. With over $20 trillion in Federal debt, the interest paid on that debt in fiscal year 2018 is estimated to be $310 billion. That’s no small amount!

[MD] What was actually transferred was the propensity to counterfeit.  Neither the Treasury nor the Fed create money. Only traders create money. You can’t give a single example where money is created that a trader is not involved and did not initiate it … that is, unless it is created by counterfeiting. And regarding the interest paid: If the process is a “real” process, the interest paid is exactly equal to the defaults experienced. Why don’t we ever see these people quoting defaults experienced?

What if money were not created out of debt? Is that possible? Sure. If the powers of the Federal Reserve were taken back by the US Treasury, it would be possible to spend money into existence, rather than into existence as debt.

[MD] Can he say anything more stupid? “Spend money into existence?” And if not into debt, into “existence” as what? Kind of left something out didn’t you Shorty?

The Federal budget for 2018 is: Total expenditures‎: ‎$4.094 trillion. The total estimated revenue‎: ‎$3.654 trillion. This leaves a projected deficit‎ of ‎$440 billion. Since the deficit must, under the current Federal Reserve System, be borrowed from them, at interest. Thus the deficit grows and next year’s interest payment will increase.

[MD] If a “real” money process were in existence, the government creating this debt would only do it once … and then be excluded from the marketplace as a trader. Deadbeat traders are automatically excluded when their interest load (due to their propensity to default) comes to equal the trading promises they seek to have certified.

However, if the US Treasury were to create the money, it could simply spend it into existence to cover the deficit. No interest need be paid! As the previous debt interests of the Federal Reserve came due, they could be paid off by money created by the US Treasury in the same manner. Eventually, the entire debt could be paid off in this manner.

[MD] “No interest need be paid” is true only for responsible traders. Governments are not responsible traders. In fact they never deliver. They just roll over their trading promises … and that is default … and purposeful default is counterfeiting! I’ll bet Shorty has a perpetual motion machine he would like to show us as well.

Beware! This is not free money!

[MD] In a “real” money process, money is “always in free supply”. That’s not to say it is “free money”. Rather, it says money “never” restricts the trading intentions of responsible traders who create it. They “always” deliver on their promises.

It may sound like free money, but it isn’t. As more money is spent into creation, inflation takes its toll. The true definition of inflation is the increase of the money supply above the value of goods and services produced. When the money supply increases faster than the value of production, there is more money chasing fewer goods and prices rise, as the value of the money decreases. If too many dollars are created, the value of the dollar decreases. Under the Federal Reserve System the value of the dollar has decreased by 98%, meaning that something bought in 1913 for $1 would now cost $98, disregarding any increases in productivity of a particular product.

[MD] In a “real” money process, inflation takes no toll … it  is guaranteed to be perpetually zero. The true definition of inflation is the amount that supply of the money itself exceeds the demand for the money … and we know in a “real” money process, supply and demand for the money itself is perpetually in perfect balance.

The fraud of the Federal Reserve System is that it was sold as a means of preserving the value of the dollar and that it would prevent crashes in the economy. Both of these selling points have not proven accurate. There have been multiple crashes of the economy since the Fed was established, including the Great Depression.

Ideally, the US dollar should be backed by gold and silver, or some tangible item, but that discussion is for later. First things first. We must End the Fed.

[MD] Gold and silver and any other commodity cannot maintain perpetual perfect balance of supply and demand for themselves. So obviously they are useless as money. Thus, your later discussion can be suspended. You don’t know what your talking about Shorty … and that is easy to prove.

The Federal Reserve has never been good for the public. It has only been good for the big banks. They love it, because it makes them money. Who pays? We do. We are slaves to debt. Isn’t it time to eliminate the Fed and turn its powers over to the US Treasury, where it belongs?

[MD] Even the blind squirrel occasionally finds an acorn. Congratulations Shorty. Governments are created by the money changers … always have been, always will be … unless we can effect iterative secession and have it our way in our own space.

[MD] It brought some amusement. It was easy fodder for illustrating how stupid the gold bugs are.

Shorty Dawkins

I am a writer of novels, currently living in the woods of Montana. My 5 novels can be seen here: https://oathkeepers.org/my-5-books-shorty-dawkins/

[MD] Frightening. Hopefully that doesn’t lead to the natural conclusion that there are people reading your novels. Stupidity is already widespread enough don’t you think Shorty?

GoldMoney.com: Gold – Crossing the Rubicon

Gold – crossing the Rubicon

Gold is challenging the $1300 level for the third time this year. If it breaks upwards out of this consolidation phase convincingly, it could be an important event, signalling a dollar that will continue to weaken.

MD: Look at how silly this reads if you know what real money from a “proper” MOE process is. Referring to “real” money that sentence would read something like:

The HUL (Hour of Unskilled Labor and the unit of “all” real money) still trades for the same size hole in the ground that it did last month … and last year … and last century … and for all time.

The factors driving the dollar lower are several and disparate. The US economy is sluggish relative to the rest of the world, the rise of Asia from which America is excluded is unstoppable, geopolitics are shifting away from US global dominance, and the end is in sight for monopolistic payment for oil in US dollars.

MD: With a proper MOE process, the money cannot be driven higher or lower or anyplace else. It has nothing to do with the economy. If the traders don’t see clear to delivering on their trading promises over time and space, their money creation goes down. Otherwise, it stays the same or goes up. Either way, as far as real money is concerned, the economy is a non-issue. Real money is in perpetual free supply and is always where it needs to be when it needs to be there to immediately serve the demands of any state of the economy … i.e. what traders want to promise to do over time and space. There is “no” monetary policy,  geopolitics, state dominance, commodity influence or anything else to cause it to deviate from its appointed task … that task being to keep track on all certified in-process trading promises spanning time and space.

These subjects have been covered in some detail in my recent articles, which will be referred to for further clarification where appropriate. This article summarises these trends, and explains why the consequence appear certain to drive gold, priced in dollars, much higher.

MD: And he knows his writing is non-sense … because I have annotated it for him numerous times in this very way.


The importance of gold and reasons for its suppression

The post-war Bretton Woods Agreement confirmed the US dollar to be fixed to gold at $35 per ounce. All other national currencies were linked to gold through the dollar at the central bank level. Ordinary civilians, businesses and commercial banks were not permitted to exchange their currencies for gold through central banks, so this was simply a high-level arrangement designed to maintain control of gold priced in dollars.

MD: Gold attempted to become money by edict as described here. You can’t make something money by edict and expect it to work. It is just a stand-in for real money. Look how silly this is. The gold was what gave everyone confidence in the money … even when they were explicitly told they couldn’t exchange their money for gold … the very basis for that confidence. Who’s going to believe nonsense like that?

A few years after Bretton Woods, in 1949 and when the newly-fledged IMF began to collate statistics on national gold reserves, the US Treasury was recorded owning 21,828.25 tonnes of gold, 74.5% of all central bank reserves, and 43.6% of estimated above-ground gold stocks. However, over the years the proportions changed, and by 1960, US gold reserves had declined to 15,821.9 tonnes, 47% of central bank reserves, and 24.9% of above ground stocks.

MD: With real money, none of the nonsense in the above paragraph is ever called for. There are “no reserves”. Nobody cares where the money is. Traders making new promises spanning time and space create it in the amounts and at the place they need it … they get their promises certified … and then go about delivering on them. That means doing something to reacquire money in circulation and return it … upon which it is immediately destroyed. They don’t have to go hat in hand to someone who has “proof of work in hand” before they can make their promise.

Clearly, American control of gold had weakened considerably in the two decades following Bretton Woods. This weakening continued until the failure of the London gold pool, the arrangement dating from 1961 whereby the major American and European central banks collaborated to defend the $35 peg.

MD: Again notice. With “real” money from a “proper” MOE process, you don’t have this nonsense. You have a peg … a real one … one that never changes over time and is used as the obvious unit of measure … you have the HUL … the Hour of Unskilled Labor.

It has traded for the same size hole in the ground over all time … and we have all been one at sometime in our lives (usually in high school summer jobs). we never lose a reference to its “real” value. That is made possible and maintained through its perpetual “guarantee” of zero inflation.

That guaranteed behavior is implicit in the process and real under direct observation … it is the nature of every trade … i.e. perfect perpetual balance between the supply and demand for the money itself.

Gold has never gotten close to delivering that sub-minimal attribute of real money. In fact, it claims to be money via the opposite path … that it is “rare”.

The Americans had abused the gold discipline by financing foreign ventures, notably the Korean and Vietnam wars, not out of taxation, but by printing dollars for export, and it began to put pressure on the dollar. The London gold pool effectively spread the cost of maintaining the dollar peg among the Europeans. Unsurprisingly, France withdrew from the gold pool in June 1967, and the pool collapsed. By the end of that year, the US Treasury was down to 10,721.6 tonnes, 30% of total central bank gold reserves, and 15% of above-ground stocks.

MD: “Abused the gold discipline”. Now that is rich!!! And remember, the co-option of trader’s invention of money by the money changers now has “all” taxation going to paying tribute (interest) to those money changers. Governments are sustained totally by counterfeiting. It’s not “Americans” who abused the money … it’s the governments … which are demonstrably everything that is “non-American” in values and behavior.

And again notice, all the machinations he describes are of no interest to a “proper” MOE process at all … not at all!

Inevitably the decline continued, and by the time of the Nixon shock (August 1971 – the abandonment of the gold exchange commitment) it was clear the US Government had lost control of the market. She had only 9,069.7 tonnes left, representing 28.3% of central bank gold, and 11.9% of above ground stocks. Monetary policy switched from the fixed parity arrangements centred on gold through the medium of the dollar, to a propaganda effort aimed at removing gold from the monetary system altogether, replacing it with an unbacked dollar as the international reserve standard.

MD: “The Nixon Shock”. The French called them on their obvious bluff and lie. You don’t have money by edict. The most efficient and fair process allowed to be instituted will always prevail … and there can be any number of instances of it. Their operation is totally transparent. There is no concept of the “backing” of the money. The fact that “all” defaults are immediately recovered by interest collections of like amount is what guarantees perpetual zero inflation of the money … it’s what gives the money its integrity. There is no “standard” … international or otherwise (other than the obvious use of the HUL as an unvarying unit of measure). There are no “reserves” … international or otherwise.

The result was the purchasing power of the dollar and the other major currencies measured in gold has all but collapsed, as shown in the chart below.

MD: Duh … the only right value for inflation is zero. Real money from a “proper” MOE process guarantees it perpetually.

Currencies priced in gold

Between 1969 and today, the dollar’s purchasing power relative to gold declined by 97.3% (the blue line). By banning gold from having any monetary role, the US removed price stability from the dollar.

MD: Ramping up of government counterfeiting (and then lying about the obvious inflation that results) is what removes value from the dollar. Instability comes from the fits and starts of their counterfeiting. If they did it predictably, we would still have the 4% leak … but we could compensate for it with regular 4% price and wage increases. But with “real” money, none of those degrees of freedom even exist. It’s a much kinder and gentler environment for traders (like you and me).

More recently, since the great financial crisis the quantity of fiat money in the global currency system has expanded dramatically relative to the long-term average growth rate of money and bank credit. This is illustrated in our second chart, which records the growth in the total amount of fiat dollars in the US banking system.

MD: Note the presentation of the “fiat” qualifier for money. Knowing what “real” money is … i.e. a promise … you know that it is fiat. But they say it as a slur. Their alternative, gold, is obviously deflationary and strangles trade … but it’s not fiat. It’s not money at all. It represents a trade completed. How stupid they are!

Fiat money quantitiy

MD: Draw that curve for “real” money and it’s a perfectly straight horizontal line … a HUL is always a HUL and always trades for the same size hole in the ground. This is the pot calling the kettle black.

The fiat money quantity is the sum of true money supply and commercial bank reserves held at the central bank (the Fed). It is the measure of all deposits, including those of the commercial banks. Monetary inflation has expanded dramatically since the great financial crisis, illustrated by its acceleration above the long-term trend. The consequences for the dollar’s purchasing power in time will be to accelerate the dollar’s decline even more.

MD: The money quantity is the sum of “all in-process trades”. And it is always exactly what it needs to be. Supply of real money is perpetually in balance with demand for real money. What could be simpler. What could be more appropriate? That’s what it is right now in spite of the improper MOE process the Fed runs. Government counterfeiting is also a trading promise … which is DOA (Default on Arrival … they never deliver … they just roll their trading promises over). That would be ok if it was met by equal interest collections. But it is not. Those interest collections (taxes) go straight to the money changers. Thus, “all” governments are sustained by inflation. So are all finance practitioners.  With “real” money, Their cherished (1+i)^n formula (the time value of money) runs a constant 1.000 perpetually. They have no reason to exist.

The monetary expansion of the dollar has been echoed in the other major currencies, with negative consequences for global price inflation in the coming years. Meanwhile, gold’s inflation, at roughly 3,200 tonnes annually, is about 1.9% of above-ground stocks. The different rates of increase between above-ground gold stocks and the fiat money quantities of unbacked state-issued currencies is what ultimately drives the price of gold measured in those unbacked currencies. It is easy to see why a higher gold price, reaffirming gold’s role as sound money at a time of excessive fiat currency inflation, is viewed by the major monetary authorities as a potential threat to their currencies’ credibility.

MD: Notice they say “price” inflation. “Prices” have to do with the supply and demand of the object in question. Inflation has to do with supply/demand of the money itself … witch is properly and perpetually zero. They just don’t get it! And look at all this effort to keep track of gold … and calling it backing. Remember, there’s just one ounce per person on Earth (and I have well over my fair share). That’s just $2,000 per person. It’s lost in the noise of trading and saving levels. That’s the “backing” they’re in love with. You can’t make this stuff up!

There can be little doubt that without the propaganda war against gold led by the US monetary authorities, without the expansion of unbacked paper gold constituting artificial gold supply in the futures and forwards markets, and without the secret interventions of the US’s Exchange Stabilisation Fund, the gold price would be considerably higher, expressed in dollars.i

MD: With a “proper” MOE process competing with what we have now … and with “would-be-stand-ins” like gold, this article couldn’t exist. Gold would be priced in HULs and that would only change with the supply and demand for gold … the supply and demand for HULs being in guaranteed perpetual perfect balance. Thus the HULs required to buy gold would be related to miners, electronics manufacturers, dentists, and jewelers. GoldMoney.com would be out of business. So, who do you think needs to keep driving the propaganda? Follow the “fake” money. Imagine “real” money.

However, gold remains centre-stage as a global hedge against the decline in purchasing power of fiat currencies. Besides rescuing the financial system from collapse nine years ago, the expansion of bank credit is inherently cyclical.ii The credit-cycle for China’s yuan appears to be moving into a new expansionary phase, reflected in a rising trend for nominal GDP. This will be put into context later in this article, but it is noticeable that on the back of China’s GDP growth, Japan, the EU and the UK are also enjoying export-led revivals.

MD: Actually, my six months of canned food and my free and clear land and improvements are a far better hedge than gold. Look at the Weimar debacle. Gold played no role at all. They did a reset. Everyone got screwed to various degrees. And they started over. It took about 3 years to ramp up and explode … it was reset in about 6 months and started all over again. But look at all the hand waving … “… new expansionary phase …”

The US does not share these benefits, partly because China and Russia, the founders of the Shanghai Cooperation Organisation (SCO), are deliberately freezing America and her money out, and partly because of America’s own tendency towards trade isolationism.iii It is therefore less certain that America is close to moving from the recovery stage of the dollar’s credit cycle into expansion. In the absence of other factors, the difference in interest rate outlooks this implies should be reflected in a declining dollar exchange rate against the other major currencies, a trend that has been under way since last January.

MD: A proper MOE process cannot be frozen out by anybody or anything. It is as good as a money process can be. Competitors can only copy it. They can only compete through greater and greater efficiency and fairness. There is no such thing as an “interest rate”, let alone an “interest rate outlook”.

Despite the massive expansion of fiat money over the last nine years, it is possible for governments to stabilise the future purchasing power for their currencies. It will require their fiat currencies to be tied convincingly to the characteristics of gold. It depends on the government concerned accepting that gold is superior money to its own currency, owning sufficient physical gold reserves to convince the markets, and the gold price being at a level where the arrangement sticks. There is no doubt that China, Russia, as well as the other SCO member states and their populations regard gold as a superior money to fiat currencies, partly because their fiat currencies do not have well-established records of objective exchange value.

MD: Right. You’re counterfeiting hand over fist and inflating the money … and you’re going to harness that by “convincingly tying your counterfeiting to characteristics of gold”. Amazing! And “owning sufficient physical gold reserves”? Like more than your 1oz fair share? What’s with these idiots!

In the US, Japan, the UK and through much of Europe, the populations have experienced a longer, generally more stable objective exchange value for their currencies. Under pressure from their governments to use only state-issued currency, they have lost the habit of regarding gold as money. The monetary authorities of these countries, with a few exceptions, also do not regard gold as having any monetary role at all, beyond paying lip-service to a vague concept it has value as an asset which is no one else’s liability.

MD: Lost the “habit” of “regarding gold as money”. I don’t know about you but I have never regarded gold as money. It hasn’t been money in my 70+ year lifetime … anywhere. Nor in my father’s 80+ year lifetime. And I saw it proved not to be money (in concept) when in 1964. Then I traded a quarter … with 90% silver … for a gallon of gasoline. And then the next year in 1965 when they made quarters with 0% silver … I did the same thing … one 0% silver quarter traded for a gallon of gasoline. Now come on! What does that tell you about the role that precious metals obviously plays in the eyes of traders like you and me? Zero … right? Right! With a “proper” MOE process, there are no “monetary authorities” … in this country or anywhere else … ever.

Therefore, understanding the role of gold and the protection it can offer fiat currencies is split into two geographic camps: the governments of Asia which are actively accumulating, or would like to accumulate additional reserves of monetary gold, and the governments of North America and Western Europe which see the gold price as irrelevant from the monetary point of view.

MD: I understand the nature and role of “real” money. I understand it is created and destroyed only by traders. I understand that gold plays no role whatever. How about “you” get some understanding of the obvious!


Gold reserves and gold secrets

We shall now briefly comment on the positions of the main monetary authorities on the global gold stage, their current gold policies, and how they are likely to change. These are the US, China, and the member nations of the SCO.

MD: Tips his hand right away. With a “proper” MOE process, there are “no” monetary authorities … on the global gold stage or anywhere else. There are no “policies”. There is just the process that all trading promises creating real money are certified and transparent; that deliveries on those promises are perpetually and openly monitored; that defaults are detected and mitigated by interest collections of like amount … transparently; and that no money exists before a trading promise is certified, nor after the trading promise is delivered and the money destroyed, for any trading promise … period!

United States

The US monetary authorities were behind the push to remove gold from the monetary system, when they terminated the Bretton Woods Agreement in 1971. They are somewhat schizophrenic on the issue, the US Treasury claiming it still owns 8,133 tonnes of gold, reflected in the Fed’s balance sheet at the last official price of $42.22 per ounce. Interestingly, when the previous Fed Chairman, Ben Bernanke, was questioned on the subject by Senator Ron Paul in 2011, it was clear he did not regard it as money, only a legacy asset. If this is true, the Fed should substitute the reference to gold in its balance sheet with an unsecured loan to the US Treasury, which if Ben Bernanke is right, has a greater monetary credential than gold. It would also end the embarrassing calls to audit the Fed.

MD: Knowing they have taken the wrong fork in the road, we’ll now just scan forward to see if they ever bring themselves back. Don’t hold your breath. If we see a glaring misconception … in the midst of this total misconception, I’ll call it to your attention.

The resistance to leaving go of gold rather proves that gold is still money. However, the monetary policies of the Fed since the great financial crisis are predicated in the belief that gold is not money. This dichotomy is also shared with the Bank of England, the Bank of Japan, and the European Central Bank.

They all say that the world has moved on from the days when gold was part of the monetary system, so they are ill-prepared to discard the Keynesian beliefs upon which their current monetary policy is based. Their advanced, welfare-state economies are simply too far down the road of the state theory of money to turn back. However, this exposes their currencies, and particularly the US dollar as the world’s reserve currency, to a substantial loss of purchasing power as the rapid monetary expansion of the last nine years works its way through to consumer prices. The election of President Trump promising to make America great again is turning out to be a failure. The removal only last week of Steve Bannon, his chief strategist, clears the way for the pre-Trump establishment to reassert itself. Gone is Bannon’s talk of a financial war against China and Russia, and doubtless, with a trio of the Generals Kelly, Mattis and McMaster now in control of the White House, it will be back to military options.

General Kelly, who was appointed to bring some order into the White House is doing this by removing dissenters from the mainstream. This was why Bannon had to go, and why President Trump himself will have to knuckle under and become as anodyne as President Obama. The mainstream is back and little has changed.

MD: Bannon had to be let go because Kelly knows gold is money? Wow!

Meanwhile, the US economy muddles along without clear signs of improving consumer demand. It seems increased trade tariffs against China remain on the agenda, in which case they will amount to a self-harming tax on American consumers. Furthermore, global economic growth and progress is being driven primarily by China, from which America is excluded. And as the interest rate differentials start to widen between a stagnating US economy and an expanding Asia that also benefits Japan, the EU and the UK, the dollar is likely to weaken considerably in the foreign exchanges, as well as in terms of the commodities a dollar will buy.

MD: Remember … tariffs are just a way for the governments instituted by the money changers to deliver tribute to those money changers. They steal it directly from the traders.

Some forecasters believe that the US economy is stalling and deflation beckons. This is a mistake. The conditions replicate an inflationary outlook, whereby prices start rising at an accelerating rate, driven by a falling purchasing power for the dollar. The dollar is likely to lose more purchasing power through the effects of the last nine years’ monetary expansion working through to consumer prices. Additionally, foreign nations and commodity suppliers doing business in Asia are likely to be sellers of dollars for other currencies as the world moves towards an Asia-centric global economy. For deflation to take hold, there must be a shortage of dollars, not the substantial excesses in existence today.

China

In partnership with Russia, China is ringmaster for all Asia. The Chinese economy is run with a beneficial mercantilist approach. The primary political objective is to plan an economic future for the benefit of its people. Instead of democratic responsibility, the leadership commands the economy strategically in the universal interest of its citizens, crushing all individual dissent.

MD: How is Chinese money created? Same bogus way the Fed does it, right? Through government counterfeiting, right? Institute a competitive “proper” MOE process and you put the Chinese manipulators on the ropes too … immediately

The Chinese state, having embraced important concepts of free markets, operates rather like the East India Company of old. Through a series of five-year plans, hundreds of millions of workers are being moved from less productive employment, redirected and retrained to more productive, higher technology and service occupations. The whole economy is in a planned transition. Low-skill jobs are being mechanised. Already, China is expanding into the rest of Asia, promising to move whole communities and countries out of relative poverty. The trans-shipment of goods across the Eurasian continent is expanding rapidly. The Chinese have also taken economic control over much of sub-Saharan Africa to secure the natural resources for the Grand Plan.iv

Most of this expansion is financed through bank credit, issued through the large state-owned banks. Unlike economic policy in the West’s welfare states, which is aimed at preserving legacy businesses, the positive redeployment of capital resources limits the build-up of malinvestments in China. Furthermore, the expansion of nominal GDP, which is the direct consequence of the expansion of bank credit, is accompanied by genuine economic progress, which is decreasingly the case in the West.v

MD: Financed through “bank credit”? That’s an open myth. Banks have no credit to give. They’re just the score keepers for the money changers. They are their retailers. Just store fronts. They are empty suits.

Consequently, China’s credit bubble is arguably less dangerous than those in the US, EU, UK, and even in Japan. However, credit bubble there is, and it is part of a global credit cycle that afflicts all fiat currencies. Undoubtedly, the Chinese authorities are aware of this danger, evidenced by their repeated actions to contain credit-fuelled speculation before it gets out of hand. [Crypto-currency enthusiasts, beware!]vi

So far, China has pursued a policy of managing the yuan’s exchange rate against the US dollar, and consequently records $3.08tr in foreign reserves, the vast bulk of it in dollars. At some point, China will need to abandon foreign exchange support of the dollar, because the dollar’s purchasing power measured in commodities is likely to continue its decline. This policy is making the raw materials China needs more expensive priced in yuan.

It is therefore becoming more sensible for China to dispose of her dollars and encourage the yuan to rise against it on the foreign exchanges. Admittedly, this will damage the profits of exporters to dollar-denominated markets, but should have the beneficial effect of redirecting capital and labour resources from these legacy businesses towards the new activities favoured by the five-year plan. Now that the process of refocusing the economy from manufacturing and exporting cheap goods towards a technology and service driven economy is well underway, China must be getting closer to ditching the dollar as the yuan’s reference currency. It is near the time for China to stop supporting the one currency she wants to do away with.

MD: With a “proper” MOE process, “all real” money, regardless of who certifies it exchanges at a constant rate with all other “real” money. And if they all adopt the HUL as the obvious unit of measure, that exchange rate between all moneys is 1.000. Supply and demand for goods themselves is what determines their price … everywhere … all the time. You change nothing by exchanging 1 dollar for 1 yuan for 1 HUL and back to one dollar.

All the indications from China’s gold policy are that the end-plan is to tie the yuan to gold. In 1983, China introduced regulations appointing the Peoples Bank with the role of acquiring gold on behalf of the state. Analysis of contemporary prices, Western central bank sales and leasing into a prolonged bear market, shows China could accumulate significant quantities of gold bullion. In the 1980s, China had capital inflows she wished to neutralise, followed by the trade surpluses that began to accumulate in the 1990s. Adding to her programme of acquisition of gold from abroad, China beefed up her gold mining capacity and her gold refining state monopoly. Today, she is the largest mine producer by far, and takes in gold doré from other countries to refine and keep.

MD: Tie the yuan to gold. That 1oz per person? Going to strap them down with that are you?

By 2002, she had accumulated enough bullion by then permit her own citizens to buy gold, and even advertised on television and other media to encourage them to do so. Deliveries into private ownership through the Shanghai Gold Exchange (controlled by the Peoples Bank) has totalled over 15,000 tonnes after 2002, though some of that will have been recycled as scrap. I have speculated that by 2002, the Chinese state could easily have accumulated over 20,000 tonnes before the Shanghai Gold Exchange was established, rather than the paltry figure of 1,843 tonnes in declared reserves today. Whatever the true figure, the Peoples Bank has purposefully been acquiring gold for thirty-four years, and by 2002 had built a strong and satisfactory position, clearing the way over the last fifteen years for her people to do the same.vii

MD: Permitted them to buy gold. Did any buy more than their 1oz share? That means some others couldn’t buy their 1oz share, right? Stupid is as stupid thinks.

China now has an iron grip on the physical gold market. The launch of the Hong Kong owned LME’s new gold contract is the latest move, building on China’s policy of using the Hong Kong and London connection for the development of her interests in international capital markets. The contract has been a success from day one. While the American banks push the price round on the Comex futures market, the real control over the market is now in Chinese hands.

MD: “Iron grip on gold market”. Well, dentists and jewelers and electronics manufactures … you know where you need to go to acquire your feed stock. And you traders creating money to effect trades over time and space … fear not … you’re not affected in the least. Just institute your “proper” MOE process and let those idiots do as they please … as long as they leave you alone.

China and her citizens are still accumulating gold. Basically, gold that goes into China does not come out. This contrasts with the US and the EU, where people are strongly discouraged from regarding gold as money or a store of value. For geopolitical purposes, it matters not who is right, but who has the power to be right. By ending the yuan’s exchange relationship with the dollar and transferring it to gold, global monetary hegemony would be transferred from America to China and her sphere of influence in one big step.

The Shanghai Cooperation Organisation

The SCO is driven by China in partnership with Russia. As well as a population of 3.3bn, it is the principal trade partner of Japan, the Koreas, and all the South-east Asian nations, adding a further 830 million people into the SCO’s sphere of influence. Dependents on the SCO for their exports of raw materials takes in nearly all sub-Saharan Africa, adding another billion. Europe, Australia and New Zealand are also drawn into the SCO’s circle of trade influence, a further 700 million. That totals over 5.8bn, leaving nations with a population total of about a billion either neutral or siding with America. Yet, it is the US dollar that settles the bulk of world trade.

There are strong indications that gold will be part of the settlement medium for the SCO’s future trade. Not only is China driving the SCO in partnership with Russia, which appears to be gold-friendly as well, but central bank demand for physical gold has mostly been from SCO member states and affiliates.

MD: Again … ground your thinking as you read all this nonsense. There is only 1oz per person on Earth … and everyone reading this has more than their 1oz fair share.

India, which lacks enough gold at the state level to support her membership, is using increasingly desperate measures to acquire gold from her own citizens. India’s economic renaissance, since the socialist Ghandi dynasty was ousted, has been on the back of Keynesian policies, so there is likely to be a strong intellectual resistance to gold in the monetary elite. Furthermore, senior appointees to the Reserve Bank have traditionally been on the advice of the Bank of England, which is anti-gold, and at the same time conscious that Indian gold demand on top of that of China is undermining control over the London bullion market. India’s gold policy as a member of the SCO is somewhat confused,

MD: “Membership” in what? The community of idiots? As Groucho Marks once said, “I wouldn’t be a member of any club that would have me as a member.”

The imbalances between gold ownership of the various SCO member states rule out a new super-currency, so it is likely to be the yuan that is predominantly used for Eurasian trade settlement, with other members pursuing a currency board approach for their own currencies.

MD: With a “proper” MOE process (i.e. real money) there are no imbalances … anywhere … any time. They really tip their hand when they make these idiotic statements.


Control over the oil market

The most significant post-war financial agreement achieved by America was with Saudi Arabia, whereby the Saudis agreed to only accept dollars in payment for oil in return for American protection. The agreement was adopted by all OPEC members, in return for the ability to fix oil prices as they pleased. This put the American banks firmly in control of the expansion of global credit, as well as the recycling of the currency surpluses arising from sales of oil to oil consuming nations, particularly benefiting the friends of America. That one decision, negotiated by Nixon and Kissinger, set up the dollar as the world’s reserve and trade currency after the end of the Bretton Woods agreement, and remains so to this day.

MD: A proper MOE process employs no agreement. It is just a transparent process traders (like you and me) use to effect our trades over time and space. If we don’t want to use it we don’t have to. The agreement is implicit in our use and the perpetual transparent view of its operation.

Today, Saudi Arabia is no longer the stable theocracy it was, and at current oil prices is running into financial difficulties. It plans to sell a five per cent stake in the national oil monopoly, Aramco, to raise $200bn to plug the gap in state finances. It can only do this by way of a public listing and offering if it can verify its stated oil reserves, which may prove difficult. If one was to guess an outcome for this dilemma, it would be that Saudi’s largest customer, China, could come to the rescue. And it would be expected that China would gain some influence over the disposition of Saudi’s oil sales.

MD: A proper MOE process (i.e. real money) cares nothing about religion … or superstitions of any kind.

It would be a typical Chinese strategy, repeating in the case of energy what China has already achieved in gaining control over the global economy. Other than America, whose consumption exceeds its supply by a significant margin, Russia is the largest global supplier (just), followed by Saudi Arabia. Between them they account for 22.4% of global supply. Other Asian suppliers in the SCO or allied to it gives a further 12%, making 34.4%. Coordinating these supplies gives China and her partners more production leverage on the global oil market than Saudi Arabia had in the 1970s.

MD: You do what I do when my consumption overwhelms my ability to supply? I increase supply or reduce consumption. Governments should try that.

Already, China is showing a preference to settling trade and energy deals in yuan, but to take this much further, it will need to offer gold convertibility to compete with the dollar. This appears to be being pursued in two steps, the first being oil suppliers given the opportunity to sell their oil for yuan, and to sell their yuan on the Shanghai futures exchange for gold, before the second step, a formal yuan convertibility, is eventually offered.

The yuan-gold contract already exists, the oil-yuan contract will shortly be introduced. The Shanghai International Energy Exchange is currently training potential users and carrying out systems tests prior to launch later this year. Obviously, these futures contracts in gold and oil may need to be initially supported by the state banks to enable them to build liquidity. But importantly, it will allow Iran, Russia and other Asian producers to avoid Western banking sanctions by selling oil for gold.viii

MD: With “real” money, the contract creating the money is strictly binding to the trader creating the money. He has what he traded for and his trading partner has the money he created … which he puts into circulation as he acquires things he needs. If the money creating trader defaults, those are mitigated immediately by interest collections … usually from other unreliable traders according to “their” propensity to default. Responsible traders “never” have an interest load.


Geopolitics could set the timing

MD: A proper MOE process cares nothing about politics … geo or otherwise. It, by its very nature, is immune to political intervention.

The course of economic and monetary events in Asia was predetermined by the Chinese some time ago. We saw evidence of this in the UK, when China decided its international financial markets would be operated between Hong Kong and London, cutting out New York entirely and the dollar as much as possible. The Hong Kong Exchange bought the London Metal Exchange in 2012, and a year later London’s role was cemented when the then Chancellor of the Exchequer, George Osborne, visited China. This was followed by Britain becoming the first developed nation to join the Chinese-led Asia Infrastructure Investment Bank, much to the annoyance of the US.

The Obama administration had no effective response to China’s strategy, and continued to attack China’s partner, Russia, through proxy wars in Ukraine and Syria. The bid to take control of resource-rich Afghanistan failed. The election of President Trump brought with it uncertainly in US foreign policy, prompting a visit by President Xi to President Trump last April. There was no doubt that Xi decided he needed to assess Trump personally. He is likely to have come away with the view that Trump was unpredictable, and so it has proved.

MD: Well, if we had a “Money Delusions Exposure” administration we would have a response to China’s strategy. We would institute a proper MOE process. Their strategy would then have to be doing the same as we did. If they don’t they’re not competitive. They wilt on the vine.

We can only guess as to whether Xi’s visit has caused the Chinese to accelerate their planned move away from the dollar to their ultimate trade settlement and monetary plans. The threat of an American invasion of North Korea will be watched closely by Beijing in this context. The prospect of American troops on the Chinese border only 500 miles from Beijing will be prevented at all costs, so retaliation by an attack on the dollar would be the most effective response.

The removal of Steve Bannon last week and the control of the White House passing to three generals are important developments. In his last interview while still officially appointed, Bannon correctly analysed the geopolitics between China and the US. His analysis was very much on the lines presented in this article. However, his assessment was that the US needed to fight a trade and financial war against China, and forget anything military. In his words, “unless someone solves the part of the equation that shows me that 10 million people in Seoul don’t die in the first 30 minutes from conventional weapons, I don’t know what you are talking about, there’s no military solution here, they got us.”ix

Bannon’s mistake is to assume America still wields its traditional financial power, when it is clear to informed outsiders that this is no longer true. However, the generals now in charge of the White House are more likely to stoke up proxy wars, either because that is where their skills lie, or more cynically perhaps they are influenced by the arms manufacturers who are looking for defence contracts. They have taken no time in ratcheting up the American presence in Afghanistan and clearly have a desire to gain influence in Pakistan, both of which are on China’s eastern flank, where she is building commercial and infrastructural ties.

MD: It is still the case. As long as they can make the objects they use for force, they can prevail. Oh … also, they have to keep their subjects stupid enough to want to carry those objects of force to their targets … return from the mission is not of import. Those directing the force never lower themselves to actually delivering that force personally.

So, geopolitics are back on familiar ground. Trump is now neutralised and will increasingly look like a cowed Obama. Perhaps more troops will be sent to Syria. Perhaps more advisors will be sent to Ukraine. Perhaps more missiles will be installed in Poland, or the Baltic states. North Korea will rumble on, in a stalemate protected by its nuclear weapons. But increasingly, China’s interests are now served by taking the next step to disentangling herself from the dollar, and that will mean selling down her dollar reserves to stockpile the copper and the other industrial materials she needs. It will also mean lending dollars to trade counterparties, such as Saudi Arabia, to be repaid in yuan.


Conclusion

MD: How do you conclude something that is proven to be absolute nonsense in its opening paragraph? It should have concluded right there.

China and Russia’s geopolitical strategy has been evolving long enough for observers to understand it and the implications for the West. We can assume the strategic thinkers and intelligence agencies of all the major players have a reasonable grasp of the implications, including America, which is determined not to lose in this Great Game. That was the point behind Steve Bannon’s candid interview with Politico.

Bannon was deluded about the extent of America’s economic and financial power. He is now out. We are back to geopolitics being decided by the military. Meanwhile, China’s interests have almost certainly moved firmly towards dumping the dollar. This can only be done successfully by linking the yuan to the characteristics of physical gold, the market which China has effectively cornered.

If gold crosses the $1300 Rubicon, it may be taken as an early sign that China’s long-term plan of monetising her gold is progressing towards the next stage. The oil-for-yuan futures contract is due to be launched very shortly, allowing countries like Iran to buy gold freely, paid for by oil sales.

MD: If gold crosses the $1,300 Rubicon, it’s still a ways below the Rubicon I acquired more than my fair share at. I acquired it when I was still drinking the gold-bugs coolade. I thought the train was leaving the station. Hopefully when we get back to my Rubicon, there will still be idiots out there to take it off my hands. If a “proper” MOE process gets instituted, I am toast.

Alternatively, if China defers securing the yuan to gold, the dollar still looks like weakening against other currencies, reflecting a US economy isolated from the positive Asian story. The pace of the rise in the gold price might be slower, but the direction seems equally certain.

Eventually, gold will need to rise to a level where the Chinese are prepared to set a conversion rate. Expect China to use its control over physical gold markets to achieve it at a time of its own choosing. Leaving the $1300 price behind could well be the start of the move towards this objective.

MD: Eventually, traders (like you and me) will take the bull by the horns and institute a “proper” MOE process. And they won’t let the money changers and governments instituted by them get anywhere near that process. And then we’ll all live happily ever after … unless we’re money changers, government workers, government suppliers, government contractors, or otherwise dependent on the government. There is absolutely nothing preventing us from doing it … that is other than “us” ourselves. Unfortunately, with 3/4ths of the fruits of our labor going to governments and those dependent on them, we’ll probably just have to wait for the collapse … iterative secession … and then institute a proper MOE process in our own space. Them them go pound sand.


MD: Ah … footnotes. As George W. Bush noted (one of his near non-existent wise observations), I have just read a “scholarly article”.

i The Exchange Stabilisation Fund was created under the Gold Reserve Act 1934 as a fund within the US Treasury. Its specific purpose is to manage the gold price. Congress has no right to any information concerning the Fund’s activities, so they remain a closely guarded secret out of the public eye.

ii For a description of the credit cycle and the current state of play see: https://www.goldmoney.com/research/goldmoney-insights/follow-the-money

iii The SCO now includes China, Russia, India, Pakistan, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Among other future members are Turkey, Iran and Afghanistan. The estimated population of this economic unit when all future members have joined is 3.3bn, nearly half the world’s population.

iv More background on China’s grand plan is available here: https://www.goldmoney.com/research/goldmoney-insights/time-for-a-new-gold-standard-for-asia

v It is crucial to understand the difference between GDP and genuine economic progress. It is a common misconception in Western financial markets that China’s credit bubble is more dangerous than those in Western welfare states. All credit bubbles are dangerous, more so if they do not finance economic progress.

vi The commodity rehypothecation scandal in 2014, the stock market collapse in 2015, and commodity speculation last year are examples of bubbles popped by state intervention.

vii For the background to my assessment of gold bullion owned by the Chinese government, see: https://www.goldmoney.com/research/goldmoney-insights/china-s-gold-strategy

viii At current rates of Iran’s oil exports to China and at current gold prices their annual value is approximately 300 tonnes of gold.

ixSee http://www.politico.com/story/2017/08/17/steve-bannon-interview-american-prospect-241729

 


The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

 

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Deviant Investor: Total Eclipse of Sense

The Deviant Investor

A Non-Traditional Perspective

MD: Hmmm. “A Non-Traditional Perspective” … this from the guy who will not let my posts pass his moderation … because they are “unorthodox”. Go figure.

My creation of this website and blog at least partially resulted from his (and other goldbugs and Mises Monks) defensive maneuvers.

Let’s see what pearls of wisdom his non-traditional perspective brings us. We certainly won’t expect to be disappointed when he links his wisdom to an event that is mathematically predictable over the whole span of time we have had the math … and into the foreseeable future.

Total Eclipse of Sense

The eclipse of the sun occurs today. The silver moon covers the golden sun, plunging a small portion of the United States into darkness for a few minutes. Perhaps it is time to do a sanity check.

Investors Business Daily: “U.S. Has 3.5 Million More Registered Voters Than Live Adults

We blame the Russians but the election fraudsters are us.

Blame the Russians!

Zero Hedge: “Only in California…

“According to a statement from Western United Dairymen CEO, Anja Raudabaugh, California’s Air Resources Board wants to regulate animal methane emissions even though it admits there is no known method for achieving the type of reduction sought by SB 1383.”

(Legislation to regulate cow and sheep flatulence – how charming!)

MD: We need to regulate those people’s exhaling. After all, it is CO2 … that deadly greenhouse gas. It can be done by inhibiting their inhaling. Enter SB 1383A stage left.

A new proposal: SB-219 blasts a deeper hole into common sense regarding the use of pronouns, gender choice, gender identity, bathrooms, transgender and more. What will be considered “normal” in five years on the left coast?

MD: Hopefully it will be sovereignty. But that’s much too much to even dream for.

Now in California! Perhaps coming to your state soon?

MD: If we’re talking about secession, I sure hope so.

Thanks to the Federal Reserve policies, commercial fractional reserve banking and U.S. government spending, prices have risen for decades.

MD: Fractional reserve banking hasn’t cause that. That’s just enabled the money changers to leverage their self given privilege by 10x … making them become capitalists in just two years and allowing them to then take “their” money off the table … and in 30 years, multiply what they let ride by 12,000 times. No … the price changes caused by the unbalance between supply and demand for the money itself comes straight from the government … their continual rollovers which are defaults not met by interest collections of like amount. It’s called counterfeiting. All the taxes go to the money changers in the form of tribute (interest) they demand … for doing absolutely nothing! But then, they instituted the government didn’t they. What should we expect?

However we are assured there is almost no consumer price inflation.

MD: There can’t be if you’re going to have COLA’s in your pension formulas. That’s suicide when you can’t stop the counterfeiting. The only thing you can resort to is the “thumb on the scale” trick .. and that’s exactly what they’re doing. Based on my SS check year over year, inflation has been 0.27%. Based on the cost of my rib eye steaks, it’s been about 27%.

One of the mandates of the Fed is “stable prices.” Hmmmm!

MD: And of course we here at MD know that  a “proper” MOE process employees cares nothing about prices, employment, balance of trade, or anything else. It has no monetary policy. It has no reserves. It functions just like the over-speed governor on your lawnmower … through negative feedback correction (mitigated defaults immediately with interest collections of like amount). It is totally objective and can’t be manipulated at all.

Socialism:

Global warming: Do you think the politicians would have supported the global warming story if they could not tax greenhouse gases? The worry in the 1970s was global cooling. That story died because there is no way to tax the global cooling story or make a profit from it.

MD: No. That’s also why marijuana will soon become the national flower.

 

****************************************

 

The reality that is worth understanding:

Time for a sanity check. Gold or paper? Results or promises? Face reality or blame Russia?

Gary Christenson

MD: Actually, a pretty good effort this time by the clueless Gary Christenson.

Goldmoney: Shakespeare on Finance

MD: I am a Goldmoney sucker. Rather than go to the pawn shops and gold shops to get my gold, I went to Goldmoney. That was back in the day when I was sure the “train was finally leaving the station”.  Gold against the dollar was going up very quickly … as was silver.

To test the wisdom of what I had done, I tried to get physical gold from them. The process was slow and expensive. My turn-around costs exceeded 10% … and that’s not including the import duty I had to pay. So all but one ounce still rests with them. I really don’t ever expect to see it again. When we have a reset, there will be all kinds of reasons why I can’t get to that gold.

As it turns out, I was even stupider than I thought. Gold went down against the dollar … and is still down. Go figure.  So let’s see what wisdom Turk, the gold salesman, is putting out now. Here at MD we “know” gold is not money.

And look at the title: Here at MD we know there is no such thing as finance when you have access to a “proper” MOE process. This is because inflation is guaranteed to be perpetually zero … the time value of money is zero and it is in perpetual free supply to responsible traders. When (1+i)^n is perpetually 1.000, there is nothing for finance to do. They’re all out of work.

Shakespeare on Finance

We are told by Shakespeare: “Neither a borrower nor a lender be.” Is it good advice?

Like so many things in life, the answer is – it depends.

Individuals are different, and what is right for one person may not be suitable for another. What’s more, everyone’s circumstances are different, which may require different decisions that result in a myriad of outcomes.

Consider too what has happened to money in the four centuries that have passed since Shakespeare penned those immortal words. The Bard himself lived during a time of sound money, with commerce conducted using gold and silver coins.

MD: The obligatory “sound money” nonsense. We at MD can blow those arguments out of the water very simply by blasting their claimed attributes of money … one after the other.

But sound money ended in Britain and pretty much the rest of the world with the outbreak of war in 1914, though the last remnants survived until 1971.

MD: Gold as money never ever existed. If it ever got close, it was just as an expensive, inefficient, risky, trade restricting stand-in for money … that was always in the wrong place and in the wrong hands.

We now live in a world of fiat currency, where money-substitutes called dollars, pounds, euros and yen circulate rather than money itself. So what would Shakespeare be saying today?

MD: Boy does he need a good dose of reality. Fiat money “is” real money. The instances he enumerates are just from improper MOE processes. This is very familiar territory here at MD.

It’s an interesting question. Unfortunately The Bard is not around to answer it. But here’s how I see it.

MD: Actually, we should probably be looking for Francis Bacon. It’s not likely Shakespeare wrote a single line attributed to him. And I’m sure any of us who could have know him contemporaneously would find that obvious.

Let’s look at lending first. The interest rate one can earn on a savings account or other bank deposit is near zero. Even though the Bank of England and other central banks are talking about raising rates – and the Federal Reserve recently bumped up interest rates slightly – central bank policy across the globe is aimed at keeping interest rates low.

MD: Here at MD we recognize the term “lending” for what it is … a corruption of the traders invention and creation of money … by the money changers who co-opted the process. And the “proper” value of interest is zero … as is the proper value of inflation. Interest rates aren’t arbitrary. Interest is the immediate mitigation of defaults on money creating trading promises. These articles are always such painful reading. We here at MD see them for what they are: erudition founded on false premises. I’ll scan ahead now to see if there is anything in here even tangentially worth reading … and not purposeful self serving disinformation.

More importantly, interest rates on bank deposits are generally lower than the rising cost of living. What this means is that money put on deposit in a bank loses more purchasing power from inflation than it gains from the interest income earned on the deposit. It is in effect a tax on your wealth – your purchasing power. So Shakespeare’s advice could apply to making bank deposits, but borrowing is a trickier proposition.

Borrowing is always a two-edged sword. There are always risks when borrowing money, but there can be benefits too.

For example, it often makes sense to obtain a mortgage to purchase a house, given that having a shelter is a basic human need. But even here there is a risk. If mortgage payments are not paid on schedule, one risks losing their house, and perhaps even the equity they have built up in it.

MD: Only under an “improper” MOE process. In a “proper” MOE process, the only risk anyone takes is making a bad trade. All the risks you see enumerated here are money changer imposed risks … and they’re not risks … they’re purposeful predatory traps.

Borrowing for whatever purpose requires a lot of thought, but so does lending because it has risks too. These realities lead to an important question that tests Shakespeare’s admonition. Should one borrow or lend in today’s fiat currency world?

MD: What a stupid false choice! The real choice is: Should a trader trade over time and space today … or just in the here and now. The question only comes into play when you trade in the face of money changer predation and the manipulation by the governments they institute. They call it the “business cycle”. It is more properly their “farming operation.”

To help answer this question, I’ve created Lend & Borrow Trust Company Limited (“LBT”), and am pleased to say that Goldmoney is one of its investors. In fact, it is Goldmoney’s customers who I believe will understand the potential that LBT offers, as I explain in the following FAQs.

MD: Right out of the money changers playbook. I wonder what he would create if he had a clue what money really is. Frankly, having the where-with-all to create Goldmoney, he does have the where-with-all to institute a proper MOE process. But the problem is, there is no money to be made doing that. Unlike a Mutual Insurance Fund where money is made on investment income and otherwise premiums equal claims, with a “proper” MOE process, defaults equal interest collections … but there is no investment income … there is nothing to invest.

And this LBT is a little too close to LGBT for my comfort, thank you very much!

What is LBT?

LBT is an online peer-to-peer platform where lenders and borrowers interact to lend and borrow British pounds, Canadian dollars, euros, US dollars and Swiss francs. LBT is unique because it is the first P2P platform where all loans are secured by the borrower’s investment-grade gold and silver.

MD: I wonder if I could use this to get rid of my Goldmoney with no transaction cost.

What does LBT offer to lenders?

LBT provides an alternative to bank deposits. It enables lenders to earn interest income outside the banking system with five major national currencies. Through LBT’s online auctions, lenders:

  • may earn interest income at a rate above the inflation rate, and
  • are secured by the borrower’s gold/silver, which is sold to repay the lender if the borrower defaults.

MD: See how they must sustain the money changers “improper” MOE process to make a living. Do we really think people like Turk are our salvation? Do we really think the Harlem Globe Trotters and the Washington Generals are competing? … that they don’t report to the same management?

What does LBT offer to borrowers?

LBT enables borrowers to monetise their precious metals. Through LBT’s online auctions, borrowers:

    • may borrow at interest rates lower than available from banks,
    • use their investment-grade gold and silver bars as collateral to borrow, and
    • borrow in any of five currencies: GBP, USD, CAD, EUR and CHF.

MD: But can I do it without this fiction of borrowing. Can I just sell my “records of gold” for dollars and use it to pay off the money changers … who are overtly fleecing me right now at 8.25%?

How much can I lend?

There is no maximum, and the minimum is £5,000 or currency equivalent.

How much can I borrow?

You can borrow up to 65% of the value of your gold and silver that you pledge as collateral at loan commencement. LBT actively monitors this loan-to-value and makes a margin call if it rises to 75%, requiring the borrower to pledge more collateral and/or partially repay the loan to reduce it back to 65%. If the margin call is not met, LBT sells enough metal to meet the 65% benchmark.

Is LBT regulated?

Yes, LBT is based in the England and regulated by the Financial Conduct Authority to operate an electronic system in relation to lending. LBT does this through online auctions in which its customers participate.

MD: This is starting to look real humorous … like other religions. You’ve gotta love words like “authority” and “financial conduct”.

How are auctions started?

Online auctions are started by either the borrower or lender. Through these auctions lenders and borrowers compete with each other to seek an interest rate at which they are prepared to lend or borrow.

Can I borrow using my gold and silver in Goldmoney?

Yes, you choose how much and which metal or both you would like to pledge as collateral. At this time, only gold and silver stored in England and Hong Kong can be used.

How do I get started?

Click here to visit the LBT website and open an account.

Is there risk to lending or borrowing?

Yes, there is risk with everything in finance. Therefore, each individual needs to weigh the benefits LBT offers relative to the risks of lending and borrowing. If you are uncomfortable in making financial decisions, we recommend that you seek advice from a professional advisor. View LBT’s Risk Disclosure.

Did Shakespeare have any other financial advice?

There are many, and here’s my selection. “Money is a good soldier,” meaning it should be working for you because “Gold that’s put to use more gold begets”, provided of course it is done wisely.

MD: The trouble is “gold is not money” Turk! Would you refer to a “promise” as a soldier? Of course not! So why would you be comfortable referring to “money” as a soldier. Promises don’t “work for you”. You “work to deliver on them”. Big difference to the responsible trader. Not so much to the deadbeat.

 


This financial promotion has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by Lend & Borrow Trust Company Limited, which is authorised and regulated by the Financial Conduct Authority (“FCA”).


The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

MD: Anyone ever seen an instance of someone claiming “gold is money” and not finding them to be a gold salesman … or someone who has been deluded by a gold salesman?

Deviant Investor: Debt, Dollars, DOW, War, Silver and Shirts

MD: The Deviant Investor is a gold salesman. He will do whatever it takes to make a market for his gold. It is easy to find the delusions in his articles. In fact, he “knows” the truth … he just has too big a stake in the delusion to admit it. He won’t pass my comments through his moderation. That was one of my principal motivations for creating this site. It gives me a chance of mitigating the blocks “all” the Mises Monks throw up against me. If you’re dealing in the truth, you don’t have to block anything. The truth always prevails.

Let’s see what kind of delusions … and propaganda … this article contains. It’s always fun.

Debt, Dollars, DOW, War, Silver and Shirts

Yes, they are connected.

Dollars are created as debt. More dollars in circulation = more debt.

MD: He gets it right. Notice, he hasn’t said dollars are money. They obviously “are” money … but from an “improper” MOE process. They obviously do represent “in-process promises to complete trades over time and space”. And all of them created by government promises are counterfeit … and indistinguishable from all others in circulation. That’s why we have inflation … 4% per year compounding.

More debt means consumption is “pulled forward” from the future so consumption can occur now. This usually ends badly.

MD: Fallacy number 1: A trading promise spanning time and space says nothing about consumption. If I create money to build a house and engage a contractor, I cannot consume that house until the contractor completes it. The contract can be written so I give him a certain amount of money when the contract is agreed to; a certain amount along the way; a certain amount when he delivers the house; a certain amount sometime after that when I confirm he has met the terms of the contract in his delivery … none of which assumes consumption. And it hardly ever ends badly.

But he says consumption “can” occur now. That too does not end badly. Most people buy a house that already exists. They move in and make monthly payments. It is far and away the minority that default on this trading promise spanning time.

Commercial banks and central banks have created trillions of new dollars. Each new dollar devalues every other dollar currently in circulation, in savings, and in pension accounts. Prices rise!

MD: No bank of any kind has “ever” created money. In “all” case, it is a trader who creates the money. The banks have just reserved for themselves the privilege of certifying that money … and the privilege of collecting tribute on that certification … to the tune of 10x the amount of their “so-called” stake in the creation … which after two years is provably zero.

Wars are costly, kill people and produce little. Governments like wars because they create demand for production of war materials.

MD: Governments do not profit from production of war materials … only the money changers do. Governments are instituted by the money changers … not by the people. They “protect” the money changers privileges … first by laws … then by force. They also use this force to expand the money changers privileges … by empire-building wars. The money changers retain hold on the reins at all times All but two of the central banks in the world are controlled by a single family … the Rothschields.

Further, governments are sustained by inflation. “All” taxes collected go directly to the money changers in the form of tribute. Neither governments nor money changers can function without inflation. They need their cherished (1+i)^n to give them a value greater than the 1.00000 a proper MOE process guarantees. They call it the “time value of money”. And they get away with it.

More production means a higher GDP (even if the concept means little). Politicians point to higher GDP and claim it is good. More production creates employment. Everyone wins, unless the bomb fell on you. Unless the drone targeted you. Unless you live on a fixed income and prices continue to rise. Unless you are a soldier and were injured or killed.

MD: GDP is unmeasurable … as is inflation. A “proper” MOE process cares nothing about GDP … and it “guarantees” zero inflation of the exchange media itself … it doesn’t have to measure it.  It cares nothing about employment. It cares nothing about prices but the zero inflation guarantee assures any price changes are strictly associated with the supply/demand balance of the object of the exchange … not the supply/demand of the money itself … which is always perfect at 1.0000.

As dollars are devalued, prices rise for most goods and services. Yes, televisions are less expensive, but have you checked the price of beer, medical care, cigarettes, cars, Whisky, college tuition, food, and 101 other items we need?

MD: Irrelevant to a proper MOE process. Further, a proper MOE media would ideally be in units of HULs (Hours of Unskilled Labor). The value of a HUL has never changed. Today it trades for the same size hole in the ground as it ever did or ever will. And we have all been HULs at one point in our lives, so we can all identify with them and hold them in perpetual perspective. This certainly isn’t true of an ounce of anything.

As dollars are devalued, the price of silver rises. Each dollar buys a smaller piece of silver. Wars burn many dollars, many ounces of silver, and consume other commodities, which rise in price. Demand for silver increases, dollars buy less, and supply increases slowly, if at all. Prices for silver rise because of supply, demand, and devaluation.

MD: Which is a straw man red herring argument when it comes to a “proper” MOE process … and “real” money.

The DOW is higher because each dollar buys less. Central bank “printing” of many extra dollars supports the DOW. Wall Street hype helps also. Regardless of the hype, a good crash occurs every decade or so, and after the crash the stock market rises again. Most people buy high, watch it crash, and sell low. How many people will take profits near the top in this market? BUY SILVER!

MD: When you take measurements with a rubber band … that constantly stretches like our inflating money … or constantly contracts like gold and its foolish copier Bitcoin, you add a degree of freedom that just makes life difficult for traders. But we have always seen this variable added … because it enables the “controllers” to take their pound of flesh from the traders. DI wants that pound of flesh … and so do the money changers. But then again, DI is just a money changer. It just needs to stir the pot.

As prices rise, shirts cost more.

MD: Ok. For what follows, DI is going to describe what to it is “rocket science”. To we here at MD, we know it is just the obvious result of “improper” MOE process practices … and thus irrelevant to a “proper” MOE process. Read it and smirk. Scan down to my next comment if you don’t need a dose of this levity.

Debt, dollars, DOW, war, silver, and shirts are connected. They rise and will continue to rise, two steps higher and one lower, as long as we use debt based fiat dollars.

Examples:

Money supply and debt increase. Look at official national debt since 1913. Can you think of a single reason why it will reverse a century-long exponential trend (debt doubles every 8 to 9 years) and turn lower?

Wars will continue and prices will rise. The helmet for an F-35 will cost $400,000. The price for a World War II P-51 aircraft was $52,000.

Silver prices have increased for 90 years and will continue to increase.

The price for shirts is higher, much higher. Dollar devaluation increases prices.

This dress shirt is currently available from Nordstrom for $175.00

Debt, dollars, DOW, war, silver, and shirts are connected.

MD: Ok, I’ll break back in here. One thing I failed to note was another obvious attribute that a “proper” MOE process cares nothing about … that being the “money supply” … and that being the associated manipulation they call “monetary policy”. Everyone here already knows that nonsense for what it is … irrelevant nonsense. “All” money in circulation (created by traders … not supplied) represents “in-process trading promises”. It doesn’t exist before the trading promise is made nor after delivery is achieved as promised … unless there is defaulting and counterfeiting not mitigated immediately by interest collections of like amount. The “unless” results in INFLATION … and that’s what little Gary is describing. It need not exist. But if he has his way we will have DEFLATION (with his gold-is-money by edict nonsense). And that will strangle trade. You’re not going to part with any of your money today when tomorrow it will trade for much more stuff. Zero is obviously the only right value for inflation … and gold can never deliver that value, let alone perpetually guarantee it.

Option One:

Reduce Federal government expenditures, declare peace, balance the budget, let it crash … and DREAM ON!

MD: Institute a “competitive and proper MOE process” in competition with the current money changer instituted “improper” process … and watch money changers and governments wilt. No dreaming and no legislation required. The process is totally transparent so no regulation is required. The process is totally decentralized and can have any number of participants … just like Mutual Casualty Insurance Companies. The most competitive ones giving the best service to traders prevail.

Option Two:

More of the same. More debt, dollars in circulation, continuing wars, and higher silver prices. Shirts will cost $500 instead of $1.00 in 1934 and $175.00 today.

Option Two – so what?

Taxes increase as dollar devaluation continues. Can you afford higher taxes? Will your income rise enough to meet your increased expenses and higher taxes? Will Social Security and your pension pay you in mini-dollars, or micro-dollars? Can you live on pension payments denominated in micro-dollars?

MD: Did you ever stop to think that 3/4ths of the fruits of your labor already go to taxes … and that of the 1/4th that remains, most goes to money changer tribute and insurance companies.

You retain almost none of the fruits of your labor … right now! It goes like this: You start with things like 8% sales tax; then add federal tax … then state tax … then taxes and fees on things like gasoline and your phone and your beer and the lottery (if you’re stupid enough to play it) and everything else you touch. It is not a difficult exercise at all to see that you pay 50% in these “sort of” overt taxes.

But then look at every product and service you buy. The entity producing it is paying over 50% too … and they’re passing that on to you. So of the 50% you have left after paying your taxes, you’re buying products that have 50% taxes in their price. That takes you to 75% (i.e. 3/4ths).

And remember that 100% of these taxes go to the money changers in the form of tribute (they call it interest). “All” the services you think these taxes are buying are actually coming from INFLATION (a designed in leak which the money changers feign targeted at 2% and deliver at 4%).

That’s what “all” government lives off of … inflation. They make trading promises (create money) just like you and I. But they never deliver. They just roll them over. That is counterfeiting. And all money, defaults or counterfeits, that is not reclaimed by “legitimate interest collections” … not by money changer tribute … causes inflation by the operative relation: INFLATION = DEFAULT – INTEREST.

DI cannot dispute anything I have just presented … so they don’t even try. My comments don’t even make it through their moderation.

CONCLUSIONS:

 

  • Debt, dollars, DOW, war, silver, and shirts are connected.
  • Prices for food, housing, transportation, clothing and most other items will increase. Believe the “low” consumer price inflation myth at your own peril.
  • The future may look like the 1930s – where debt killed. Or, more likely, it will look like the 1970s – continual price increases, stagflation, weak economy, rapidly rising gold and silver prices, and increased global stress.
  • My bet is 1970s inflation and worse. Do you own due diligence but remember dollars will be devalued further and higher prices are inevitable.
  • Do you own enough silver?

MD: If you own any gold and silver and you’re not a jeweler or dentist or electronics manufacturer, you are a fool. And “I” admit to being a fool. I drank the coolade and bought quite a bit of the stuff before I realized the truth. I can’t sell it because it’s doesn’t even trade for the dollars I gave up for it … let alone the dollars I need to cover the inflation. Luckily, I also bought land in a low tax, low services county in Texas, which gives me a sustainable retirement.

What I really hope we achieve is “iterative secession”. But it’s not going to happen in my lifetime … and it’s not going to happen with people like Gary Christenson spreading confusion and delusion like this.

Gary Christenson

The Deviant Investor

Reply to RED

Reply to RED in discussion about a Bitcoin shop.

 

14 hours ago

R: I have been a bit busy, but finally have a little free time to respond.

Dissecting select statements and then sniping at them with what is often presumptuous and self serving rhetoric (as you did with the Bitcoin shop piece and other readers feedback is a “TACTIC”.

MD: Replying without even referencing the issue of focus is worse. That’s typically what I run into. You are correct. It is a TACTIC. I read an article through the frame of what I know. When I come across something that is in violation of what I know and can prove, even if all I see is a symptom, my TACTIC is appropriate for calling attention to it.

R: Apparently you believe that this type of “dialogue” places you in the critics seat or “instructor” role providing “instructive critique”; it does nothing of the kind, and rest assured you do not enjoy that relationship with me.

MD: “Apparently” is the operative word here. Its root is “appear” … and thus it must appear so … to you. I am in the critics seat. And I am an instructor if I can produce evidence that contradicts what I am reading and prove it. And that is true even if my profession is not “instructor”. The root of the word is “instruct” and it means “teach a subject or skill”. And that’s exactly what my comments do … in as unambiguous fashion as possible.

R: Allow me to demonstrate:

TM – Without even knowing what those theories are, I think it is foolish. You don’t fix an “improper” MOE process by resetting it. You don’t fix an “improper” MOE process by switching to another “improper’ process. And if you have a “proper” MOE process in operation it never requires “re-booting”………”

RD – How can you comment upon the efficacy of any theories if you do not read them. You speak of a “proper” MOE but you repeatedly fail to identify it. Your statement indicates that it is not necessary to learn anything about other theories as only your own are of importance.

MD: When I know what is true and can prove it, I don’t need to know what is theorized if the mention of the theory makes it obvious, it goes against what is provably true. Re. Failing to identify a “proper” MOE process: that takes me about 500 words. I have done it at least 4000 times over the 4+ years it has become obvious to me. I can’t begin every comment with those 500 words. If you want to know the “proper” MOE process, just ask (actually, you can now see it in the right panel). I am now using my MoneyDelusions site to annotate these articles. Contained in the right column is the definition of money and the proof. I do need to add the description of the process … but anyone understanding the definition and proof should be able to easily arrive at the process themselves … and quickly see the defects in other “theories”.

TM – [T] Who is “they”. With a “proper” MOE there are no gains! … period! Usually are reset means the create a new name for their money, you redeem the old money for the new money at 1,000,000 to 1 … and it all starts over again

……”

RD – Who to you think “they” are? It is the authors of the piece at the link. If you read the piece you would know this.

MD: Actually, it is not the authors of the piece … even in this instance. That’s why my method of annotating the actual article is my preferred mechanism. It was actually this article that motivated me to do it create the Money Delusions site. I had done it once before sometime back under a different umbrella … but after a while I was banished for breaking some rule … I was never told what. Money Delusions is now on my own host so I don’t have to deal with such nonsense. It’s not pretty yet … and may not ever be. But the points I make are indisputable.

TM – [T] “All” money is fiat … because all promises are fiat … they are made up by the person making the problem. And that’s not a bad thing … though fiat is “always” used as a slur…..”

RD – Of course the dollar and other currencies are Fiat money. The fact that I called the dollar Fiat currency should make it obvious to you that I am well aware all paper currency is Fiat. Bellicose statements are not required.

MD: What is obvious to me is you haven’t thought very deeply on the issue. Whether money is in the form of coin, currency, or simply ledger references is irrelevant. It “always” stands for an “in-process promise to complete a trade”. It is always … and only … created by traders getting their trading promises certified so they can span time and space.  And of course, “all” promises are “fiat” … so “all” money is “fiat”.

As with you, the use of the term “fiat” is to contrast it with “sound” through a slur. “Sound” implicitly means “having intrinsic value” … and the the Bitcoin nuts have to extend it … having reference to “work done”. But once money becomes sound … i.e. trades for something of intrinsic value, it ceases to be money. The trade completed. When you say gold is money, all you’re really saying is that it is an inefficient, expensive, clumsy stand-in for real money. Anyone who takes it as money must somehow exchange it in a future time and space with zero loss of value in the gold itself. And that’s impossible because the supply/demand balance for gold is far from stable. With “real” money it is “perfectly” stable … perpetually … everywhere!

You are correct: Bellicose statements are not required. They just kind of take on that tone after addressing the tone deaf for 4+ years … who, in the final analysis resort to religious arguments when they’re trapped by proof … or run away as soon as they become unhappy with the form.

R: Do you see what I mean? Your style of communication does nothing to advance the discussion let alone your own theories.

MD: My style of communication does more than your style of rebuttal. You haven’t addressed anything of substance which I have asserted. You have only addressed my form. That is “your” TACTIC. It is avoidance. Avoidance is far worse than abrasiveness.

R: I am quite busy and have little time to engage in this level of discourse, let alone time to even read the DB, and I am “done” with this communication thread.

MD: You’re not too busy to make false assertions. You are just too busy to support them and defend them. As usual … the line goes dead … not after rebuttal but after rejection. There are no gloves soft enough for engaging you people.

R: Respond if you must, and if it follows your prior “protocol”, rest assured that it will receive all of the consideration it deserves!

MD: Here’s an article from GoldMoney.com about crypto currency. They don’t get it either … and I prove them wrong. See it at:

Gold Money: Cryptocurrency – its status as money

It’s one of my many new instances of trying to get the “obvious” across to the deluded.