I thought this was interesting. Intro below, much more at:

http://forum.richdad.com/forums/tm.asp?m=4...tmode=1&smode=1

(fourth entry down)

Any thoughts?


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Rediscovering Gold in the 21st Century
Craig R. Smith
Substance Over Symbolism: The Folding, Spindling & Mutilating of America's Money System


Imagine for a moment that you have the ability to create any amount of money, without ever having to produce anything.

Is there anyone or anything you couldn't buy? Probably not.

Sound impossible? It should be, but it isn't. Just ask your local Federal Reserve banker - they do it every day.

The folding, spindling and mutilating of America's monetary system became legitimized in 1913, when the Federal Reserve was formed. Long ago bankers discovered a nasty little secret referred to as "fractional-reserve banking" which is fueled by credit and debt creation out of thin air.

The modern American monetary system is the result of an incestuous relationship between the federal government and the private banking cartel, deceptively called The Federal Reserve System (a.k.a. "The Fed").

But don't expect the mainstream press or prominent political figures to ever discuss this relationship publicly. Sadly, few Americans understand the process, or even challenge the Fed's attempt to manipulate the money system.

Sadly, it's true.

The only defense against it is gold.

We have had long discussions about this in the past, It is very intrigueing to say the least and a catalyst about which the monetary system evolves globally!!
This will be the downfall of the global economy without a doubt!!

I'm inclined to agree that it will be blamed for any eventual downfall.

But imagine if we still had to pay for everything in gold !! Bit mediaeval ! Would that mean that countries lucky enough to have mines would be super-rich, and those without condemned to eternal poverty ? We wouldn't even have a global economy if it was still tied to the possession of a pretty, shiny metal, IMHO

Gold, ah that shiny money, that will be your only escape, BTW we don't have a global economy, it is ficticious!!

Why? The only difference would be that you could take the pieces of paper in your wallet to the bank of England and demand gold coins in exchange.

Just as was possible until the 1930s (1970s in America).



Richer, but the annual mine production is a fraction of the total amount of gold. And they'd spend it to buy items from other countries, who'd then find themselves rich.



Only if they didn't produce anything that anyone else wanted.



So we didn't have a 'global economy' in the 70s? Certainly it wasn't as integrated as today, but a single global currency (i.e. gold) would surely make a 'global economy' _SIMPLER_?

Sounds to me like it might be worth getting a little more than 5% of savings turned into gold then. 50% would seem a bit more sensible. If the economy goes tits up your gold is going to have to go up 20X to get your money back if you only have 5% in gold. Wouldnt it be better to have an overpriced house if things get really bad? That way at least you would end up with something worth perhaps 1/4 of what you paid for it?

The problem with that is that gold is highly manipulated. You might convert 50% of your savings into gold and then the BoE sells off all its remaining stocks and suddenly you've lost 20% of your savings. Or the government confiscates it from the bullion banks and gives you worthless paper in return.

When the whole system is corrupt to the core, there's no 'safe' way out.



That depends. If it's paid off and the country continues to function, possibly... but if an economic collapse is followed by riots and general social disruption, it's much easier to run away with a load of gold coins than to run away with a house.

Also, if it's not paid off, and there aren't riots and social disruption, the bank manager may turn up on your doorstep demanding you pay the rest of the mortgage in gold .

Yeah, like I can live in my gold bar !!

Gold has no yield whatsoever, just capital appreciation. If things go well in the economy, you are knackered ! If you believe that the economy is that f**ked, then I suggest guns and fuel would be a better option.

Er no, we didn't. Gloabalisation as we call it now is a 90's phenomenon.

If you have gold, but no other form of power, then someone will simply take it from you. They cannot steal your skills.

Gold doesn't 'appreciate', it just is.

That's the whole point: you don't need 'capital appreciation' when you have a stable currency. Prices go _DOWN_, as they generally did for centuries before the introduction of fiat currencies... you get richer by simply sticking gold under your mattress, there's no need for a financial industry to suck up a large fraction of the economic activity in the country for just shifting bits of paper around.

The whole 'capital appreciation' thing is a huge scam which does little but funnel vast sums of money to the banks in a vain attempt to maintain the purchasing power of fiat currency. Why not just eliminate the fiat currency which causes the whole problem of rampant inflation in the first place?



So there was no global trade in the 70s?

Are you saying there was no financial industry before the 70's ? As I understood it, gold based economies still use paper money. Are you suggesting we return to a barter economy ?

I don't understand how economies work either, but I do know that I would rather live now than in the 30's, when the pound was gold based. Gold is a finite resource that is distributed by geological accidents. Human ingenuity is not. I just don't see any reason to tie one to the other. We are not Aztecs, thank goodness.

Of course, the conundrum is that gold just "is" - that it has no intrinsic value whatsoever (not even an income stream)

Which is why it became reference item. Rare, inert, very few practical uses (unlike, say, silver, copper or platinum).

So everyone deciding to use gold as a currency is just as much "fiat" as paper money (i.e. we are all still subscribing to the notion that gold, or x amount in an internet bank account, has "value")

Always amuses me that goldbugs quote price of gold in dollars. Surely should be other way round, that you price dollars in gold? (if you believe that gold is currency, not the dollar/ pound/ yen)

Globalisation is far far older than we think. E.g. there were 8,000 Japanese living and working in Bangkok in in 1620's. Java is full of ruins showing thriving links with China and India. Bhuddism spread from India to Japan, Christianity from ME to India and Ireland, Arabic numerals everywhere, etc.

Just as much "fiat" as paper? If you could make gold out of lead then a convertible currency may be akin to a fiat currency but as you say gold is rare, inert and has very few practical uses - so it really doesn't equate to paper, does it? That is the intrinsic value of gold - it doesn't grow on trees. Sure digging gold out of the ground so you can store it back underground somewhere else protected by armed guards and then credit it with lots of value doesn't make a whole lot of sense, but creating money out of thin air by printing paper notes doesn't make a whole lot of sense either. Without some checks and balances fiat paper really is an experiment in faith and past experience shows that fiat currencies tend to get abused. At least with converible currencies its pretty obvious when they are being debased and the books are being cooked. Currently we seem to be experiencing a huge asset bubble fueled by debt and a corresponding huge increase in the supply of fiat dollars. What are the checks and balances in this system? I guess the future will show as most every economist seems to have a different opinion, but by all accounts the current trajectory is unsustainable.

I dont think that gold is a panacea and convertible currencies necessarily a great thing - in fact they seem to have caused economic recessions/depressions in the 19th century - but having a reserve currency that is lorded over by a fed that takes the politically expedient path of inflate, inflate, inflate doesn't sound like such a good idea either. Would it have been possible for the money supply to have been inflated so much if the reserve banks hadn't started with such large amounts of gold in their safes? By dishoarding their gold they really have made it impossible to use gold as a reasonable measuring stick. Remember it was only a few short decades ago that the US$ was convertible.

CSK - true, it doesn't grow on trees. But in that case, why not land as currency? Last time I checked they weren't making any more of it, apart from Dubai & Holland.

Having a currency "backed by gold" is fiat because it only works if people believe gold is worth something. You could back the currency with rare stamps, land, or a promise (by a bank/ government/ company) - it all comes down to illusion/ faith and choosing some common reference.

E.g in HK the currency isn't even issued by the central bank, but by banks (HSBC mostly) I trust HSBC more than most governments, so I'm cool with it. The company I work for issued it's own currency for a while in the 1800's, and wasn't even a bank (is a trading house)

There are advantages/ disadvantages to a fixed money supply (which gold almost is - but note velocity of money can still vary) But I still maintain that gold is as arbitary and faith based a choice of currency as the promise (say) of the Bank of Japan. If you don't believe the Bank of Japan, you are able to not hold yen, and (say) hold GE short term paper instead.

And remember, much of the creation of debt would occur with or without a gold standard. If I own an office building, and issue securitised bonds against it, I have created debt without any central bank. The amount of bonds I can sell depends on peoples' perception of the value of the building

I don't think you can class Gold as "fiat" money, you cannot create it or duplicate it, When people lose trust in paper money they usually turn to gold.

Not from what I have seen. Indonesia during the crisis in 1998, they turned mostly to other currencies (esp USD, but also Singapore dollar). Yes, some turned to buying gold and birdsnest, but that was as a proxy for USD (people bought jewellry and birdsnest as no dollar notes left to buy, hand carried it to Singapore or HK, sold it for dollars (Singapore/ HK/ US)) Birdsnest costs around 1500 USD a kilo, so you can carry a fair amount of value.

At no point did I hear of people using gold as a medium of exchange in its own right, (e.g. I will sell you this car for 33 ounces of gold). This was in a situation of riots on the streets, a pogrom against Chinese, 500% devaluation of rupiah, and banks going bankrupt. It was an interesting time!

Luckily my parents in law had coffee plantations at the time, and the coffee could be sold for export & hard currency, so they weathered the storm

You are talking about a blip in the economy, I am talking about full scale worthless paper around the globe that no-one wants due to it's declining value!! you can't print more gold.

Overthrow of Suharto (in power since 1966), 10,000 dead in rioting, widespread looting, 500% devaluation of the currency, the entire banking system essentially bankrupt. More than a blip!

People were driving to the airport, then selling their car for cash and a ticket out.

The fact that you can't print more gold is neither here nor there. In times of hyper-inflation anything that isn't paper money has that property - e.g. the price of whisky goes up as fast as the price of gold, but if you want whisky, still likely that you will need to transfer that gold to a currency, and then to whisky. Equally you could sell your whisky and buy gold

You can't trust governments in the final analysis anyway (my parents lost plenty in Uganda when Idi Amin decided to kick out all English & Asians, and before that my grandparents lost plenty in Shanghai due to WW2 - unlucky family eh?) Not sure that in either case a gold backed currency would have made the slightest difference to the losses

It would cause a balance of trade between soveriegn states. You could spend your gold into another countrie's economy (for product) until it physically ran out, you would then be forced to earn it back by selling product out and you could not create a deficit (negative gold). Home made goods would be more atractive than spending outside the nations economy, prefering to use the gold to purchase raw materials.

I still think the choice of gold is totally arbitrary.

Why gold ? Because it is soft and easily worked into pretty jewelry, and it is non-reactive, so it stays shiny, even when you bury it in the ground. Mediaeval thinking, IMHO.

I agree that the Fiat system looks very dodgy, but I think it is because it has been mismanaged. It is far more sophisticated than "getting rich by putting gold under the mattress". How is owning a very heavy mattress improving my standard of living ? Gold is inert and has no yield. It only makes sense if you are very pessimistic about the future, and even then, "guns and gas" look more attractive than me. People with guns and gas will soon mop up all the gold, should times get really bad. I have a young child, and so I feel obliged to choose optimism. Should I tell my child "the future lies in robbing jewelers", or in gaining skills to tackle the modern situation.

Oh I agree it is arbitrary. We could simply agree with other countrie's to run a balance of trade in currency, the gold isn't needed.

This used to happen with Roman Empire & China - but with silver (Chinese historically, at least until end 19th C, preferred silver to gold, and exchange rate gold/ silver in China was different to rest of the world)

Basically, Romans bought silk from China with silver, as there was nothing the Romans made the Chinese wanted... Led to an acute shortage of money in Rome, and various attempts to solve (debasing currency with lead, using copper) Arguably Europe was then short of bullion until conquest of S America

Between UK and USA in 19th C - yes, officially gold should have been shipped. But mostly, the central banks just shifted gold from one part of their warehouse to another, rather than actually move the stuff transatlantic, trusting the other bank to be honest... (i.e, if their was a deficit with US, BofE would designate chunk of gold as now belonging to US, and vice versa)

You mean like the Euro nations agreeing not to run excessive deficits? I think we've seen just how valuable such 'agreements' are.



Yes it is, because it's an objective enforcer of such 'agreements'. You don't have the gold, you don't get the exports.

The reason for using gold over other commodities is pretty simple: there's not much of it, it's hard to create, hard to forge, there's not much use for it other than money and jewelery, and hot chicks dig it. That's why it's maintained its value for most of the last thousands of years, while so many fiat currencies have collapsed (and the remainder lost most of their value over a few decades).



EVERY FIAT CURRENCY EVER CREATED HAS BEEN 'MISMANAGED'!!!! How can you honestly believe that if you give the government the ability to print money at will, they won't choose to do so? Every fiat currency that's lasted a few decades has lost most of its value for that very reason... governments just love to create new 'wealth' from nothing.

We had NOTHING like the current parasitic financial industry up to the 30s when, most countries used gold-backed money. There was no need to worry about 'pension funds' and 'stock market yields' when your money wasn't being routinely devalued by inflation. The current financial industry puts a massive drain on the economy solely in order to try to maintain the value of savings against the inflation that's an inevitable result of government-run fiat currency... 90% or more of the financial industry would vanish if we had hard money, it serves no sane purpose.



Where did I ever say any such thing? You'd have thought that my comments about turning in pieces of paper for gold would have been, like, good enough for you to understand what I was saying, if you'd bothered to read it.

No one should underestimate the importance of this. I'm completely serious, almost everything men do is designed to attract the best possible mate, the same is true for women. Men demonstrate there 'fitness' through power, which is expressed in physical form by houses, cars, gifts of gold etc. Man will always want to get the best women, women will always want to get the best man. We cannot escape our fundamental biological drivers no matter how 'civilised' we become.

You will always be able to swap gold for land, food, labour and if necessary soldiers because there will always be men who want the gold to impress that 'hot chick'.

Mark G - Given that governments in the past have shown their willingness to kill their citizens, I regard mismanagement of currency a rather minor shortcoming!

Govts have shown ability to lock people up without trial, confiscate all your property etc. etc. Of course they are a necessary evil.

As for financial sector - you would be surprised (I was) how old some of that stuff is. UK bond market dates back to 1694, and annuities (pensions) have an extremely long history. The railways/ canals in UK were financed by stock market - and yes, they did care very very much about yields! Read Jane Austen - her characters are often discussing financial matters. Or Vanity Fair, or Dickens "Our Mutual Friend".

Mutual funds were a Victorian invention - and the Dutch had a thriving options market in the 17th C. The Japanese in Osaka also had a pretty sophisticated financial market dating back 100's of years.

However, it was only for the rich/ middle classes. The bulk of the population lived hand to mouth, and tended to die before stopping work. I would say the expansion of financial sector is because we got richer, not because we got rid of gold standard

Not sure that gold has retained its value. Never seen a time series of gold going back that far - though maybe possible to extrapolate from the English time series on prices (that go back to about 1200 or so) Of course you run into hedonism problems - many goods weren't available back then - so we are probably stuck with looking at how many bushels of wheat a ounce of gold would have bought in 1205 vs 2005...

There was also the "great inflation" of 16th-17th C, when the massive influx of gold from S America into the bullion starved Europe caused a rerating (downwards) of the value of gold versus other goods & assets.

Mismanagement of currencies affects everyone, particularly the poor and elderly. Few governments have destroyed as many lives by murder as they have by rampant inflation.



A while ago I read an article looking at long-term performance of pension funds. They basically worked out that if you'd stuck $20 in a pension fund in the 1950s, that today you would, in real terms, get back about $20.

In other words, all those people working to 'invest' your money to get the best yields for fifty years achieved _absolutely nothing_ other than to maintain the value against inflation.

Why would we need those people if we had hard money and long-term price deflation, as we did for centuries before fiat currency was imposed?

Yes, but those governments have been pretty spectacular. Mao's China, Stalin's Russia, the Kaiser deciding to start WW1, Hitler's Germany, the Spanish rule in S America, the great Bengal famine under the British, the condoning of the slave trade, Pol Pot in Cambodia. Not to mention "legitimate" wars, which also have a nasty effect on poor & elderly.

Have you got an example of this utopia of centuries of hard money & price deflation? I can only really think of UK from 1815-1914. France in the same period had 2-3 revolutions, USA a civil war. Actually, maybe Sweden/Norway in the same period, but not up to speed with Scandinavian history

Don't underestimate the achievement of keeping 50 years of real value of savings constant and not destroyed. If you took any random period of 50 years in most places in the world, I don't think the chance of that would be that high...

EVERY fiat currency? What about the pound, the Swiss franc, Canadian dollar, NZ dollar, etc etc etc?



I'm not sure a woman attracted to you by your ability to provide gold bars would fit my definition of "the best possible mate". Where I'm from these women are known as "gold-diggers", for fairly obvious reasons.



Define 'best'.



That being the case, it's surprising how few people's salaries are paid in gold, isn't it?

They've... tada... wait for it... all lost most of their value over the last century.



Why do people keep pretending that I'm saying things I never said? Where did I claim that gold-based money created a utopia?

Oh, I didn't, did I? All I said was that it maintained the value of people's savings without requiring a bloated 'financial services' industry to do so.



Uh, hello? It's only an 'achievement' because it's fighting against the best desires of governments to destroy their currency through deliberate inflation.

It wouldn't be any 'achievement' with hard currency, because you'd just hide it under your mattress or in a hole in your garden. Why do you want to create an entire vast industry designed to fight against the ravages of inflation, when we could just use essentially inflation-proof money? What's the point?

How does the importance of oil to our (global) economy relate to our fiat currencies?

I genuinely don't know the answers to this, but are our currencies essentially now backed by 'black gold' instead of 'gold gold'? Or am I talking out of my bum?

When peak oil occurs do people expect currencies to go back on to a gold standard?

All this talk of Fiat money and buying gold. I just get worried that so many people are telling me to buy gold, they are only just outnumbered by those telling me to buy property.

I just wish it was easier to diversify and more legal.
I'd just buy those things that are always in demand and so always valuable:

Petrol, Drugs, Beer, Fags and toilet paper.

I think i'm going to buy £5,000 of toilet paper. I'm just concerned all this fiat money that loses it's value might damage there value, this paper's worthless what can I do with it....Hand it over here, I'm off to the loo.

Being serious I can't see the global system collapsing as we can always produce enough to feed/clothe and house everyone. If it turns really bad we'll just get deflation and a 20 year depression, kondieff winter type scenerio.

Do you mean Kondratieff winter? I don't know very much about that - does it really predict a 20 year depression starting about now?

If it happens it will surely be the first Kondratieff winter (depression) under the fiat system. It is argued that the fiat system tends to exagerate the business cycle, this would imply that if the Kondratieff theory is correct we could be due the mother of all busts.



What is technically feasible and what actually happens are two very different things. There have been numerous famines for example, and I can't even think of one that was caused by an absolute lack of food as opposed to distribution issues.

Besides, there are limits to how much we can produce. Issues of water/energy scarcity, salination, soil depletion etc are taking their toll on agriculture in many regions. If agricultural subsidies are scrapped, production of many agricultural commodities in the developed world will not be feasible. At the very least this will increase our exposure to currency and oil price fluctionations; in a Kondratieff winter, who knows?

Mark G - true, you said

"we had hard money and long-term price deflation, as we did for centuries before fiat currency was imposed?"

I just can only think of one period of almost a century that this was true (1815-1914) in one country (the UK) Maybe Japan during the Tokugawa period (they had a currency based, ISTR, on the standard amount of rice a person needed a year)

Where/ when else?

It is an acheivement because it is rare. If 2-3% real return was so easy, the entire world would be millionaires by now. But destruction of capital happens with disturbing frequency - the nice thing about modern financial markets is that you can now hedge away the risk of all eggs in one basket, relatively cheaply.

Looking at my parents, and their parents financial history.

One set of grandparents lost everything (including pension savings, as the university my grandfather worked at was taken over by the Communists, and they didn't feel obliged to pay) in Shanghai. Had to start again anew in 1947

Other set of grandparents - cobblers shop was bankrupted by mismanagement while grandfather was at war. Came back to pretty much nothing.

My parents, in similar situation (given 72 hours to leave Uganda, got out with only suitcases) only lost physical possessions. Evil financial markets meant most of their savings were not able to be grabbed by the Ugandan govt (as they were in offshore funds) Note any gold in this case would have been lost - my mother lost her jewellry at the airport - but they did let her keep wedding ring

Fail to see how gold currencies would have helped any of them against the idiocy of governments. Both grandfathers died young due to privations/ injuries sustained in WW2. Which was started by jackass govts. At least faced by a jackass govt in Uganda, my parents were able to have diversified away the risk of working there, by not having their savings there.

In the 1930's there was basically no way for a middle class person working privately to spread risks - now there is a plethora of well diversified funds to invest in

Basically you can make money in a recession but not in a depression (like a kondieff winter). Note that Japan has had a very long recession verging on a depression.

Recession = Growth falls, unemployment rises, companies go bust, interest rates go down. Particulary consumer confidence falls. At the bottom everyone has paid off a lot of debt, companies that survive are lean and managing to make a profit in the bad times, everything to do with investment is cheap.

So at the bottom you buy. Check stock markets or property over a 30 year period. It falls in a recession but then picks up again. So you sell at the top, wait with the cash for 2-5 years and then bu up everything cheap at the bottom. It's a great way to make money. Big big returns.

Depression/Kondieff winter = Exactly same as a recession except investors and consumers also lose confidence. The markets go down, and down, and down. there is no bounce back. Even when things start to recover it's very very slow.

Best to think of it this way.... Everything loses money property, shares, gold, oil, everything.

A couple of pointers for a Kondieff situation that might sounds true:

The financial industry is massive, large numbers of people are involved in making money from money. the richest jobs and most skilled people manipulate money rather than produce anything. - Think about the city, what do these people who get paid so much actually produce?

A full blown credit boom. Credit is cheap, plentiful and can be gained even by those who preivously would be viewed as too risky. Lenders ignore risk instead competing to lend more money to yet more people. - I can lend 10x my annual salary if I wished just by going round all the lenders, I can get 10 years worth of future earnings today.

A Kondieff winter would be very very bad. It would bring suffering, famine, poverty and almost certainly war (whether economic or military).

As for Fiat money heightening the effect, don't worry. The trillions that has been lent out will need to be repaid. It would be impossible to inflate our way out so we end up with deflation. So your cash (if your a STR) is safe but you'll have nothing to invest it in (expect 0% interest rates) and not feel safe spending it either (You'll be too worried about the future)

Andrew - thank you for the explanation.

When the property bubble bursts, the confidence of investors and consumers will be hard hit. Perhaps we should anticipate a possible deflationary meltdown.

OR WORSE!!