Tag: currency

  • Flight to cash in the Eurozone

    Each year we use less cash in daily transactions, but at the same time the amount of banknotes in circulation inside the Eurozone is increasing at a rapid rate. Last year, the total value of all banknotes in circulation reached €1,08 trillion, an increase of 6,5% compared to the year before. The total value of all banknotes in circulation in fact doubled in ten years, in increase that could only partially be explained by inflation and the entrance of new member states to the Eurozone.

    banknotes-total-eurozone

    More than €1 billion of banknotes inside the Eurozone

    More cash in circulation

    What explains the increasing demand for banknotes? It could be the result of a growing black market economy, in which goods and services are paid for in cash and cannot be traced afterwards. But in recent years, distrust towards banks and the extremely low interest rate could also explain the flight to cash. Persistent rumors of a possible tax on savings, the new ‘bail-in’ scheme for European banks and the fact that you earn almost no interest on bank deposits make it more attractive to keep savings in the form of cash. We can also imagine people wanting to get out of the financial system by holding cash and buying gold.

    Savings

    The ECB publishes the number of banknotes in circulation inside the Eurozone, so we collected the data since the introduction of the euro in 2002. The graphs show that there has been a substantial increase in the €500 denomination, which confirms our view that there has been in increasing number of savers taking money out of banks and holding physical banknotes instead. Banknotes of €500 are not suitable for daily transactions, because most stores simply do not accept them. The increase of the largest denomination suggests that savings are already moving out of the banking system in increasing amounts.

    banknotes-increase-eurozone

    The €500 banknotes appear to be in strong demand

    composition-banknotes-eurozone

    Almost 30% of all cash in circulation (in value) is a €500 note

  • Guest Post: What is the natural and desirable value of gold?

    This article by Mike Montagne responds to Larry Larkin’s truly excellent question regarding the usefulness and function of gold and silver coins in a Mathematically Perfected Economy (MPE) and how precious metals can coexist in this new monetary system. It was published in January 2009 on the MPE blog.

    Let’s go over it a different way, and further endeavor to resolve the bounds of the future of gold holdings, should we transition to mathematically perfected economy™. These are the finer points of the several related issues:

    Those coins are not at all impermissible items of trade, for they would be things of value themselves; but they are not mathematically perfected currency™; and, by nature, they cannot and would not serve the same objectives/purposes, or be issued on the same principles.

    That does not mean they cannot coexist; in fact they can.

    But we would be in error to think they could serve all the purposes of mathematically perfected currency™, or even that the value of the coins should be perceived in some permanent way in terms of value as to introduce any factor of stability whatever; and our misunderstandings on these counts (forgetting the limitations and faults of a gold standard) paves the way for forfeiting principles which are vital to sustaining all the industry we are capable of. Particularly then, the intellectual and further danger is that those misunderstandings pave a way of potentially reverting to some at least of the very faults which we now suffer. All they give you on the other hand is an expensive token of value, which in fact itself is not stable.

    To this latter fault/fact then, I would insist the denomination of the coin not be defined in units of currency, but instead in units of weight and purity/substance. But none of this in then end, is altogether adverse to the holder of gold:

    In other words, by nature, the implementation of a currency altogether derives from an immutable obligation to deliver value, the instantiation and whole need of which serves cases where a) for one reason or another there is insufficient circulation (which cases involve potentially [and probably] vast volumes of circulation which no substance such as gold can sustain); and where therefore, b) a person or persons thus assumes an obligation to pay for some further production or equity. What mathematically perfected economy™ accomplishes therefore, in effect (in regard to the relevant senses), is c) in restoring to the individual or such persons collectively, their right to issue their promises to pay, free of extrinsic manipulation, adulteration, or exploitation of those promises, or the natural opportunity to make good on them… is mathematically perfected currency™ d) alleviates any need to “borrow” effectively from others (such as a central bank, or any other such “lending” entity); which in turn means e) there is never any shortage of money f) to sustain industry and g) to give the entire circulation permanent value from the point of its introduction onward, by virtue of the perpetual 1:1:1 relationship between the remaining circulation, remaining obligation, and remaining value of *all* represented property maintained by the obligatory schedule of payment of mathematically perfected economy™. Gold, or any such relatively finite substance cannot accomplish these objectives, because the finite volume precludes maintaining the perpetual 1:1:1 relationship. But of course, gold has value, and you can make it into a coin. Because this is a raw resource/material of relatively finite/limited supply and potentially vast demand, what you’re doing when you make it into a coin however is 1) you’re fixing its value if you do so in the conventional sense, even while 2) the demand *or other needs for it* may rise or fall; and 3) this itself cannot and should not imply consistency, or suggest (without qualification) 4) that we fix some ostensible value in terms of nominal units of currency to the coin. It *is represented* rightly in other words (and according to the intents of its holder), only by declaring its weight and substance. All this then is actually the desire of most people who *want* to see gold coin issued. They do not want a preconceived value to be imposed upon it; in fact that itself conflicts with the “free market” principle they usually advocate in conjunction with gold. The two are mutually exclusive: that is, i) to pretend we can attach a fixed value to gold when its costs of acquisition/harvesting, demand, and advent of more important uses are further factors which will compete for gold (and even dictate better purposes for it, than very expensive coin)… all these things are in fact adverse to the other, usually desired purpose, ii) that gold coin realize its full potential value. To be clear, I do not advocate the latter in the exploitative sense. In my opinion, the value of the resource should generally be determined by the cost of harvesting it (which of course may rise and fall itself, with a general tendency to rise, because of scarcity and difficulty of harvesting [as opposed to artificial appreciation or escalation of cost]). In the end then, we don’t really accomplish anything with gold coin, especially if we remember to recognize the fact its actual costs naturally vacillate, and most probably, due to scarcity and ever more difficult harvesting… usually to the upside. Recognizing the very principles which most holders of gold are interested in then, serves the holder by preserving that value not by abstract/artificial restriction to a pre-conceived value, but by expressing the gold as what it is — so many ounces of such and such purity of substance (or so many ounces of gold in the resultant substance). This is the expression which actually preserves the value of the gold to its holder; and we can so evaluate how this value is affected further by the artificial failure of the present currency and further factors, as opposed to those same factors under mathematically perfected economy™ and its currency: When or if you occupy all this gold unnecessarily as coin, you furthermore deprive the real markets and usages for gold of the supply they require, which further obfuscates cost if exploitation is involved (demand is leveraged into artificially high prices). Remembering all this; and deciding to rid ourselves of exploitation (unearned profit in addition to the exploitation of a currency which can only multiply debt into collapse), we suffer no adverse effects of gold coin whatever. But this is to observe then that the value or actual cost of that coin in one day is greater usually than so many days before, owing at least to the natural tendency for costs of extraction to be greater. There should be no such thing then as a $20 coin; there can only right be an X oz, Y purity coin, of value rightly determined at any moment generally by the costs of harvesting. Further cost or purported value cannot be exalted to our advantage any more so than it would be to our actual advantage that someone buy all the lumber produced or all the rice or corn produced, to exploit availability for unearned profit by their control of availability. As an ostensible/purported form of money then, gold involves the extreme disadvantage of comprising an extremely expensive currency, with no benefit whatever; and with its greatest and most practical value being its natural value instead. Its value even on that plateau however is not stable, never has been, and never should be; and this is not even the desire of anyone usually holding gold, for if it were, their desire can only be preserved in mathematically perfected currency™.

    But, observing these principles, can we circulate gold coin of a given weight and purity?

    Surely. Absolutely. And with no damage but that such a circulation deprives us of other desirable and effective usages (which injury may be substantial). After all, it is only in observing these principles that gold finds its natural value; and these principles alone therefore preserve the value of gold which rightly reward its holders. The unfortunate thing then would be for its holders, wanting only the most they can possibly get (versus to preserve their wealth), to oppose actual solution of all the issues, only to hold out on their aspiration at our cost. They may and probably will on the other hand lose out if they pursue that goal without embracing the consequences, because a broken economy can hardly afford gold.

    What is the natural and desirable value of gold?

    We can probably estimate where the value of gold should go in today’s “dollar” (perception of the falsified dollar, the units of which we yet are subject to in the sense that they represent the parts of all cost which are dedicated to the value/cost of our production as distinct from whatever else is dedicated to serving artificial debt. stocks-coinsI happen to live in an area with substantial active or potentially active gold mining, sales of claims, and so forth. Much of all this is relatively dormant because of course the overall costs of mining don’t justify the rewards. With the upward trends and projections, there was a substantial resumption of mining activity until fuel prices hit their recent peak. This can be said or thought at least to indicate where the price of gold justifies its “production” (harvesting). On its basic terms of justifying costs of production then, I would expect the *actual value* of gold to hold in the relative senses which are important to its holders at present, except that “if” the economy crashes, its value will probably actually fall, and maybe quite significantly, because you can’t eat gold, and because it sustains little vital industry. It is ironic that gold holders are so often against rectifying the economy then (if the latter projections hold), as I would think they would realize on the other hand that yes, while gold may, during the initial parts of the fall, hold or increase its relative value against the escalating devaluation of the dollar, still, should we allow that escalating devaluation under multiplication of debt flower into full fledged collapse, gold will have little leverage to claim any stake in sustenance. Of course, I don’t offer these ideas as opinions, but as projections of the very same principles that many gold buffs are counting on. I only project from those same facts that investment in gold will only work to the advantage of its holders against the falling dollar, until the back of the system is utterly broken. We’re getting pretty close to that now.

    So what would I project on the other hand if the system is rescued by relatively immediate transition to mathematically perfected economy?

    This in fact is where I see the holder of gold to come out the best. Maintaining the current price, against reduction of all other costs seems to me to be the greatest coup possible for the gold bug. In other words, I see our only way out to be the prices of our homes for instance falling to costs of production, from which are eradicated all along the line of harvesting resources and rendering them into production, all the costs of interest and artificial multiplication of debt. This of course not only eliminates the cost of interest on the principal loan for the home (for instance), it eliminates all such upstream costs as well, reducing the potential costs of homes to indeed our costs of production (work); and, in turn, making the wages of our work far more valuable insofar as how far they go. Suppose then that the value of gold is sustained because miners determine to mine on the wage they can take, which is what remains after costs of operation/extraction are subtracted from the present value/price of gold? So let’s take this to be roughly $1,000/oz as further developing circumstances may soon determined. At present then, an ounce of gold pays perhaps a month or just more against a $100,000 home. If the costs of homes escalate by temporarily and artificially rescuing “the housing market,” the value of gold falls, and potentially dramatically, even ostensibly “holding” its current “price” (actual falling relative value). If on the other hand we transitioned to mathematically perfected economy™ at some near term point, that $1,000 oz of gold pays for a full year of the same home ? something perhaps 10x what it does now. ecuador-gold-coinSo the greatest realization of the desires of the gold bug too are most plausible of course in the realization of mathematically perfected economy™. This probability of greatest benefit again is just the potential or probable math, based on the bounds of where either direction are bound to go. In my opinion, weighing the plausibilities of the two potential courses, everything possible points to *by far* the greatest possible and probable advantage to the holder of gold to be realized by immediate adoption of mathematically perfected economy™. Persistence in the present, imposed system (subject to further corruption/manipulation of “the value” of gold), has little potential upscale. If for instance, the dreams of the gold bug are realized in $2,000/oz prices, we see the near term potential doubled. Even not seeing that *potential* upside under the present system, the value of gold is immediately multiplied 10 fold. If the upside under present conditions is realized/manifested under mathematically perfected economy™ on the further hand, you see a 20 fold relative improvement in your investment. So those are the basic bounds of how I see all this shaking out for the gold bug.

  • Freegold: Why gold is not money

    Freegold: Why gold is not money

    Quite often we hear ‘gold bugs’ saying “gold is money”. Or that it should be money again, for example by linking the value of money to a certain amount of gold. These sentiments are characteristic for a time in which central banks provide almost unlimited amounts of liquidity to the banking system and in which banks are saved by taxpayers for billions of dollars. Yet gold bugs should understand that the monetary problems are not solved with a return to gold money.

    Gold Standard

    The idea of linking money to a fixed amount of gold has some prominent supporters. People like Ron Paul, Mike Maloney, Peter Schiff and many others are very popular among the goldbugs for their view on gold. Inspired by the Austrian school of economics they oppose the Keynesian view and plead for a return to ‘sound money’, that is money with intrinsic value. According to many gold bugs we could limit the power of the banks and governments with a return to money backed by the precious metal.

    By imposing a gold-exchange standard we could end the fractional reserve banking, forcing governments to live within their means. Expensive wars would be limited in scope and duration, because governments would not be able to finance it. A gold exchange standard would discipline both banks and governments, according to the proponents of a return to a gold-backed currency.

    Bretton Woods

    The failure of the Bretton Woods system proves that linking money to a specific amount of gold will end sooner or later. The Americans promised a dollar ‘as good as gold’ after the second World War, promising foreign countries to exchange dollars for gold at a fixed rate of $35/oz. The world started accepting  Treasuries from the United States government as a central bank reserve equal to gold. As long as those dollar reserves could be exchanged for physical yellow metal at a fixed rate, those dollar reserves would indeed be as valuable as the gold itself.

    However, the gold exchange standard of Bretton Woods did not impose a limit on credit expansion in the United States. The US could keep on living beyond their means, because other countries saw no other purpose for their dollars other than lending them back to the US. Exporting countries put dollar denominated debt on their balance sheet as backing for their own currency, like if it was a gold reserve. The US debt piled up in the rest of the world, while the dollar was still valued as if it were physical gold. It was a remarkable exorbitant privilege, which was threatened for the first time during the sixties.

    France, the Netherlands and other European countries started exchanging their dollar reserves (euro dollars) for gold at the US Treasury. Within a few years it was abundantly clear to everyone that the US couldn’t keep it’s promise to deliver gold at $35 per troy ounce. The dollar for gold exchange window had to be closed in 1971, to prevent the US running out of it’s remaining ~8100 tonnes of metal.

    Depleting US gold reserves during Bretton Woods

    Depleting US gold reserves during Bretton Woods (Source: Sunshineprofits)

    Freegold

    Linking gold to a currency is always doomed to fail. The expansion of the money supply through bank lending and government deficit spending puts pressure on a fixed gold price, a pressure which can only be released by either revaluing gold at a higher price (from $20,67 to $35 per troy ounce in 1934) or by selling gold (London Gold Pool during the sixties). There is no discipline in a gold standard which links gold to the currency, it is just a matter of time before we can all agree it has failed. How long such a gold standard can live depends on the price at which the gold is fixed, how much gold there is in the vault to back up the currency and how fast the supply of currency expands. The only certainty is that it will fail sooner of later.

    Sooner or later people will see the scam in such a gold standard and start demanding the undervalued physical gold in exchange for the vastly overvalued paper currency. This can happen on a national level, but also on a global scale as we saw in the late sixties.

    Gold is valuable

    Don’t be mistaken when I say gold is not money. It is a precious and valuable asset! The metal does not degrade, has a high liquidity and is recognized worldwide. The high stock to flow ratio means total supply of gold cannot be diluted in a short time frame. The idea that gold should be money is based on the past, when both gold and silver were used as a tradable good. Back then, goods were exchanged for goods and gold and silver were the most liquid ones available to the market. Because the value was only in the metal itself, private gold smiths could make coins with standardized weight and purity to improve the trade.

    This was the first step to money based on mutual trust. Coins with standard weight and purity could be exchanged much easier than raw pieces of precious metal, because people trusted the goldsmith and didn’t need to assess every single piece of gold as thoroughly as they would with random pieces of gold and silver.

    However, the use of gold and silver coins in trade was still a form of barter. There was a direct exchange of goods (livestock, food, tools) and services for other goods (gold, silver).

    Money is credit

    As the time passed by, people started to figure out it was much easier to exchange promises instead of gold and silver coins. Banks emerged when goldsmiths handed out unbacked gold certificates to clients, pieces of paper which were not backed by gold in the goldsmith’s vault.

    This was the turning point in the history of money, because the money evolved from asset to liability. No longer was the value of money based on the value of the precious metal, but by the knowledge that the money would be accepted as a means of payment for other goods or services. Central banks and governments guarantee the acceptance of the currency. Money evolved from a barter tool to a bookkeeping system, in which the currency is used to facilitate the exchange of goods and services. Think of it as a large scoreboard.

    Money became a claim on the productivity in the real world economy, a claim which would be guaranteed by a central bank. That’s why there is a signature of the head of the central bank on every banknote. Money nowadays is nothing more or less than the representation of a social contract, as Wim Duisenberg put it in his acceptance speech in 2002. He said the following about money:

    “We engage in an exchange of goods and services everyday by using money as the means of exchange; and we offer our labour in exchange for money, which, in itself, has no value. We only do this because we believe that we will, in turn, be able to exchange that money for more goods or services. This fact tells us much about the confidence that we place in money itself. And it tells us much more about the confidence that we place in each other. Hence, money is, in essence, a social contract.

    FOFOA also describes money as an accounting system, symbolized by physical representations in the form of coins and notes that have almost no intrinsic value. This is what he said in one of his articles.

    Transactional currency is simply a notional, purely symbolic token medium of exchange, much more replaceable, resource-efficient and environmentally friendly than mining stupid metals for stupid coins.”

    Gold is not money

    Money is debt, created by the banks to fulfill the demand for debt in a society. The primary goal of this debt is to improve the flow of goods and services in the economy. Money in it’s current form is an excellent unit of account and medium of exchange. Euro’s, dollars and other fiat currencies are much easier for daily transactions than gold and silver coins.

    The yellow metal is much more useful as an antipode of debt, being the currency in circulation. Gold as a physical asset that compensates for the loss of value in fiat currencies. When you take this perspective, it might be no surprise for you that gold is the number one asset on the Eurosystem balancesheet. On the opposite side of the balance sheet, we find currency in circulation.

    ECB balance sheet

    ECB balance sheet

    The gold reserve is revalued quarterly to reflect the market value of gold. An increase in the price of gold increased the value of the gold reserve, as well as the revaluation account in the liabilities side of the balance sheet. When the price of the precious metal goes down, the same amount is deducted from the revaluation account. So the price of gold can move freely in this system. The undervaluation of gold in in fixed gold standard is solved, once we stop striving for a fixed price of the precious metal in currency terms.

    Gold as wealth reserve

    While fiat currency is the most convenient instrument for daily transactions as a unit of account and a medium of exchange, physical gold is the most useful store of value. The metal has all the desirable properties for those wanting to store purchasing power for future consumption. When buying gold, you exchange your fiat currency for a piece of useless gold metal. This is beneficial for all of us, because this transaction doesn’t involve interest. The alternative is to lend money, which requires a certain amount of interest. By exchanging excess currency for gold, one makes his currency available without interest attached to the transaction.

    The possession of gold is not only being promoted in China, but also in the Eurozone with the special tax exemption on gold. It is a recognition of gold as a wealth asset, available for those producing more than they consume. Savers can protect their wealth in gold (among other tangible assets), a metal which can appreciate in value without damaging the real economy.