Wednesday, July 22, 2009

Bondage or Freegold?

"When confronted with a situation that appears fragmented or impossible, step back, close your eyes, and envision perfection where you saw brokenness." - Alan Cohen "To visualize is to see what is not there, what is not real -- a dream. To visualize is, in fact, to make visual lies. Visual lies, however, have a way of coming true." - Peter McWilliams "What the mind can conceive and believe it can achieve." - Napoleon Hill Spend Currency, Save Gold It is the concept of becoming a Super-Producer (producing more than you consume) that creates the need for savings. We all do this over the course of our lives if we plan to live a long time. It is a wellknown fact that old people have a difficult time producing. There comes a time when we must retire on our Super-Producer fruits of yesteryear. John Locke made the point in 1690 that metal money gives men something lasting to keep, that will not spoil, and does not infringe on anyone else's daily lives. Today, while in our producing years, we transfer our excess value into bonds. That is, someone else's bondage to us. A SPECIFIC SOMEONE! We hold as wealth reserve a contract that says someone SPECIFIC will provide for us later when we can no longer provide for ourselves. These contracts are reputed to be better than gold! But are they?

This system on its surface is clearly a Ponzi scheme, requiring an ever-growing future army of laborers lured into debt in order to service the Super-Producers of yesteryear. But there are bigger problems than just the pyramid structure of the system. Rather than staying balanced, the globe has divided into hemispheres where one side is producing more and the other is consuming more. The producing side is accumulating enormous amounts of contracts holding the consuming side in bondage well into the future. So it would seem that future generations in the West would be supporting an aging East (net-net) at some point in time. The problem is that the trend is now visible to all. The West is shrinking while the East is growing, both in population and economically. Futurecrash is clear to anyone with eyes! So I ask again, are these contracts really better than gold? If we hold gold as a wealth reserve instead of A SPECIFIC ENTITY'S bondage, we have exchanged SPECIFICITY for DIVERSITY. We now hold a claim on the future services of ANYONE IN THE WORLD who is willing to work for us (for gold)!! We eliminate the risk that our PERSONAL, SPECIFIC SERVANT may fail to perform for us in our time of need. In the opaque world of paper investments we must CHOOSE which entity we want to service us in the future. Perhaps we choose a Vanguard Mutual Fund. Or a global company like General Electric. But how do we know they will perform for us when we need them. With gold we have eliminated the risk of choosing the wrong entity. Instead, we have our own small share of a future claim on the entire workforce of the planet! This simple difference between holding debt and holding gold is getting a lot of publicity right now, not through the media, but through the window of reality! The journey through China There was an interesting article in (I think) early '08 when the dollar was tumbling fast. It was about Chinese merchants dumping US dollars on their local banks as fast as they came in. In China, it was illegal to exchange dollars for yuan anywhere except the banks. And the banks were overwhelmed by the demand for renminbi. The PBOC was printing currency as fast as possible to keep up with the demand, but it was not fast enough. Long lines were forming at the local banks and some merchants were being turned away at the close of business, doomed to hold their depreciating US dollars for one more day. I think it is helpful to consider the journey of a dollar in today's system. If I am an importer of goods into the US, I simply pay foreigners with my home currency. But if I happen to be an importer elsewhere, there is a good chance I will have to first buy US dollars before I can pay for my shipment. If I am an exporter in China, I am prepared to receive both yuan and US dollars. But for my operating expenses I need only yuan. So I must go to the bank often to turn in my dollars. My local Chinese bank then gives the dollars to the PBOC who prints new renminbi ("people's currency" in Chinese, denominated in "yuan and jiao" like "dollars and cents").

Sitting at the core of the Chinese economy of 1.3 billion Super-Producers, the PBOC ends up with an astounding amount of US dollars which it pays for with its printing press. This yuan inflation (printing) is a burden on the Chinese economy which must be offset by the central bank's investment of the accumulated US dollars in future usable wealth reserves. Today, US Treasury debt is the primary option for such large hoards of greenbacks. No other entity offers as large of a future "debt service" as the US government. So the PBOC ships the accumulated dollars back to Washington DC who spends them back into the US economy. In exchange, China receives a contract stating that future US taxpayers will labor in service to China. The problem is that our debt has grown so large that we are now servicing it Ponzi-style and with the printing press.

So the Chinese printing press (yuan) is backed by the US Fed printing press (dollars) which is backed by Chinese REAL labor (and goods) which is backed by the Chinese printing press (yuan) which is backed by the US Fed printing press... and on and on and on.... Jumping back to the Chinese merchant who needs yuan to pay his operating expenses, we must remember that he is also a Super-Producer, producing more than he consumes. So he has an inflow of EXTRA yuan to store for future retirement. His three choices are keep the paper yuan (not a good idea with inflation), buy a specific entity's future bondage, or buy a share of the entire future global workforce (gold). This third option has only recently been made available to Chinese citizens. If our merchant chooses gold, he settles the world's debt to him for the time being, a debt which he can reactivate later by selling his gold in exchange for whatever paper medium is best at that future time for obtaining the goods and services he needs at that time. It is helpful also to follow the path of the renminbi he exchanges for gold. His gold dealer will redeploy the majority of that renminbi in search of replacement gold, because that is his business. That is his operating cost. This path leads ultimately to either the public's gold, the CB gold, or new gold from the mines. This path of yuan seeking gold bids for the best value from each of these three sources. This yuan is now a heat-seeking missile aimed directly at Freegold. Multiply this effect over the entire globe and imagine the force of trillions of heat-seeking missiles all seeking the same thing! What do you think would be the result?

Note also that China recently offered its own bondage (backed by the printing press) as an option to help absorb some of this massive yuan monetary inflation, an offering that was basically rejected. No Reserve? Yin and yang! Let us now visualize what global trade would be like without a global reserve currency. Most people seem to believe that a global currency is necessary for global trade. That if the dollar were to lose reserve currency status because of mismanagement, it would have to be replaced with a One World Currency, or an SDR, or some other existing currency like the yuan, euro or dinar. But is this really true? Importers from many countries other than the United States must already use currency exchanges in order to transact business. It is only the privileged importers that are allowed to skip this step. In many cases, the trade is done in US dollars even if the US is not involved in the transaction! This is because of the wide availability and convertibility of US dollars. But if the importer, instead of purchasing US dollars, purchased the local currency of his exporting country, the whole process would be simplified by one step. All exporters would receive payment in their local currency and would avoid the need to visit the bank so often!

The only transactions which would be complicated by this change would be those originating in the zone of the reserve currency. There the importers would have to do the currency exchange from dollars to yuan INSTEAD of the Chinese exporter! This simplification of global trade would eliminate the journey the dollar makes back to the Washington DC spending machine. Each currency would only circulate between the public within its own zone, importers and exporters, the banks and the currency exchanges. And the exchange rate of all currencies would match the purchasing power parity (PPP) between countries based on the balance of trade! If the PPP got out of whack, then arbitrage would automatically step in to equal it out. How? Through the free trade of GOLD within each currency zone! You see, with no global reserve currency in play, no single currency zone will have the wherewithal to manage the price of gold. It will float FREELY against all currencies within their own zones! And the only entities that will NOT benefit from this transition are the US Federal Reserve and the US Treasury! Yes, all other "evil powers that be" will benefit along with J6P! This is why there will not be resistance once the dollar goes!

If one country exports more than it imports, a shortage of its currency will develop on the currency exchange. This will drive up the price of that currency, also driving up its purchasing power relative to gold which trades in all currency zones. If exchange rates resist this gold PPP then gold will become underpriced within that surplus zone and the arbitrageurs will swoop in and bid it back up! Thinking back to our Chinese merchant who buys gold with his extra yuan, under this new system, without a global reserve currency, his purchase of gold is one small piece of the global puzzle that both settles AND balances international trade! Ender says it well If you and I are allowed to buy gold with our currency, we have settled other's debts to us. On a personal level, acquiring gold allows you to settle other's debt to you. This act of settling others debt to me (as the case may be) does not destroy any currency nor relieve those that are still in debt to others of any burden. What it does offer is a means for me to buy a wealth reserve that stands on its own merit. Doing a little calculus, if you sum an infinite number of little gold buying transactions you end up with a means of settlement for economies as all the little gold bugs enter the market and buy wealth reserve with their surplus currency. The currency remains in circulation and gold moves into its settlement role. 'Nations' and 'States' worth of people may be seen as settling, but the Nation and State still have the same amount of currency in circulation. Independent of the nation state, those with surpluses that are currently held in currencies may find that the nation state is placed in a position to create MORE currency rather than less. That design in the system will always, over time, create a situation where more currency will be available to chase items that work as wealth reserve. Now, back to the Freegold concept. Because gold is a wealth reserve, it will work just as well for a person as it will a nation state. In the marketplace, if gold is plentiful, its 'price' will be low. Likewise, if it is scarce its price will be high. If a nation state marks its gold to market and thins the gold market, it may find a high 'price' for all the nuggets the nation holds on reserve. This implies that if the nation state does NOT SELL gold in the open public market, all us little gold bugs (advocates) will be the ones that offer up our gold (in exchange for currency) that helps settle the imbalances that occur in global/national/local trade. If 60 billion needs to be settled every month and only a few ounces are available, those few ounces may absorb the imbalance. In a Freegold system, the actual gold metal market determines the exchange rate of a currency. The nation state can liquidate/acquire less/more gold but the balance sheets will show the change allowing the businessman to determine where or not the currency is being managed respectably. In a Freegold system, the incentive is for the nation state to create an environment where the gold price is continually falling in that local currency. If so, people will want to hold that currency knowing that they will be able to buy MORE gold tomorrow (or in the future). It will setup an environment where the businessman will WANT TO invest in that economy knowing that when the payoff comes - years from now - they will be able to convert it into wealth reserve. Freegold is beneficial to everyone - except those that can print a currency out of thin air that can be used to buy goods anywhere in the world. You and I CANNOT print money. You and I can only go into

debt for currency today (Committing future work for currency today). That going in debt subjects us to the political ramifications of the management of the currency. That may be good or bad depending on how it's managed. Gold stands separate of this mis-management. And, as you may have already figured, the way the reserve-currency of the world has been managed, gold is extremely undervalued. We are going through the process of discovery - where those with paper riches figure out that it's really not real until it is settled. As the settlement process accelerates, so will the scarcity of gold. Stand for Gold settlement. It is the honorable thing to do. Sincerely, FOFOA (and Ender)