Applied Philosophy

God is dead

Fred

Fred is dead

God

—The Benny Hill Show, circa 1985

I remembered this joke when I heard the latest remarks by Warren Buffet about investing in gold. I clocked Buffet the first time I read his Wikipedia page way back in 2006, I realised then that he is a financial creature and not an economy investor (I described him as ‘odious’ in December 2008). The general public were quite taken with the sage but mistrust started when he stood up to defend the financial sector in 2008. Dislike came from seeing how much he was cosy with the Obama administration and China. Today a lot of people are turning away in disgust as he disparages gold buying.

The real problem is not Buffet but the gold enthusiasts who advertise gold as an investment: gold is not an investment. With friends like these gold is an easy target for a viper like Buffet. Gold is physical wealth that functions as money, it is not an investment. I would buy gold because I know that fiat money will lose all exchange value in the market sooner or later, but I would not buy it as an investment, because gold is not an investment (I said it three times now).

If gold is money then what are dollars? The dollar is a Federal Reserve Note, i.e. a zero-interest rate debt security that never mature, Treasury notes on the other hand pay interest and mature in less then a year. Some people who advocate gold say that there have been 10 years of growth, but in reality there has not been any growth. An ounce of gold ten years ago is still just an ounce, it did not germinate and produce a hundred ounces nor did it get pregnant and produce an ouncelet. What has happened in the last ten years is that the dollar lost value:

The Dollar Priced in Gold (Feb 98 - Jan 12)

(source The World Bank, Graph made with LibreOffice. Image created with GIMP)

This is the correct graph that reflects reality instead of illusions. You can not in invest in gold, but you can profit from a falling dollar to make real money. First you have to adjust the way you carry your accounts: all accounts have to be in gold instead of dollars and profit measured in gold and not dollars. Success means increasing the weight of gold owned and not the amount of dollars. A typical account book would look like this:

Example of accounting with Gold instead of Dollars

(Table made with LibreOffice. Image created with GIMP)

I personally would carry silver apart and other bullion with gold. I take into account the physical premium when converting dollars to gold so the price of dollars is set lower than the market rate. Receivables are any promise to deliver physical gold at a later date or on demand. I do not add a haircut on receivables to account for counter-party risk, but that can easily be done; it might be also useful to separate receivables according to risk. Other assets, stock or real estate, can be added in the same way. The bottom line is in gold, growth can only happen by increasing the bottom line.

Now we can do three different things: the first is to do nothing. This will result ultimately in a lower bottom line as the value of the Federal Reserve notes go to zero. The second option is to convert all dollars to gold, this will leave us without any legal tender and in case of an emergency we will have to buy dollars at a loss. The third option is to invest in dollars to increase the bottom line.

How do you invest in dollars? Easy all we have to do is to apply the old rule of buying low and selling high. We buy dollars when the price is low (translated: sell gold when the price is up) and sell them when the price is high (translated: buy gold when the price is down). You have to be nimble to take advantage of declines (gold price spikes) and spikes (gold price declines), but a careful trader without using margin can probably grow his gold every year.

Earning gold through the future markets is nearly impossible (a single contract is 100 oz. and taking delivery is very difficult). Having a retail shop is great, you would buy bullion by weight and sell it marked up; a shop requires independent means of living (so you would not eat your capital if people stop buying) and a culture of buying gem-less jewellery. Most people can increase their gold by earning dollars and buying bullion from the government mint (some private mints give good prices for bulk buying).

See also:

• Human Freedom Rests on Gold Redeemable Money (PDF) by Howard Buffet, congressman and father of Warren.
  
• The S&P 500 went DOWN 13% in 2010, the stock market measured in gold.
• Will the Fed ever Get Paid Back, why the dollar is going down.
• Will the Real Gold Standard Please Stand Up, relationship between silver and gold.
• The Difference between Past and Future Labour, why gold is money.
• High Treason in Zimbabwe, specifications for a new gold coin.

In Bacon on Usury I claimed that there were other ways to get financing than usury. In this post I show a way to finance the production of consumer goods. This method is suitable for fast moving goods, for example perishables, seasonal cloths, etcetera. I will show an example and then go into a more systemic discussion.

Real Bills Practical Example

Imagine there is a baker with a bakery ready to transform flour to tasty backed goods to satisfy public demand. The only problem is that he has no flour; a miller has flour ready for the market. The obstacle is that the baker has no money to pay for the flour. The solution is for the miller to sell flour to the backer on a delay payment scheme.

The backer will take possession of a $95 worth of flour on the first of the month and give the miller a bill drawn on the fifteenth for $100. The miller is giving up value but not receiving value back for it, thus the ancient law of barter is not satisfied. The miller, although giving up possession of the flour, is not giving up ownership of it. Until the bill is paid by the backer the flour is the property of the holder of the promissory bill, i.e. the miller.

The backer will bake bread and cakes and sell them to the public. To fulfil the ancient law of barter the public must give the backer real value, e.g. gold or silver coin, but that is a subject that has already been covered (see The Difference between Past and Future Labour). The backer’s total sales will be, for example, $120 (in any way higher than $100) due to the added value of his labour. He will pay the miller’s bill and maybe $10 for other costs and the last $10 is his income.

Let us say that after one week of selling the flour the miller’s son falls and breaks his leg, the miller now needs cash to pay the medical costs. The miller can not sell his mill just for a small amount of cash; he can sell some of the corn, but that is his working capital. The miller would want to sell flour, because that contains the added value of his labour, while the corn only contains the value of what the miller paid the corn merchant for it.

The miller still owns the flour he gave the backer and the bill is the proof of that ownership. The miller knows that the grocer sells $97.5 worth of goods for a $100 one-week delayed payment, so the miller sells the bill to the grocer for $97.5. This time the backer’s bill is not only a promissory note but also represent value, so the ancient law of barter is satisfied by the exchange. After a week the grocer submits the bill to the backer and collects a $100.

The result is that the backer received financing, the miller sold his goods and made a profit of $2.5 on his $95 in one week and the grocer made a profit of $2.5 on his $97.5 in one week (the difference follows from the fact that the miller discounted a bill of two weeks and the grocer discounted a bill of one week duration). The probability that the backer will fail to sell his goods is very small, there is very little that could happen in a fortnight to drastically change the market (natural disasters will devastate the whole market and loses will effect everyone).

The miller might have bought the corn from the corn merchant with the same method by discounting a bill drawn on a future date. In reality the whole path of consumer goods from raw materials to finished good can be financed by discounting bills, such that the amount paid by the final consumer settles all the bills.

Real Bills System Conditions

Let us start with a quote from Professor Fekete a champion of Real Bills:

All the government needs to do is to open the Mint to gold and to protect real bill trading against fraud. Funds raised through the bill market are public funds that must be protected against misuse just as other forms of public funds must. Let me mention just three types of misuse: (1) drawing more than one bill on the same consignment of merchandise; (2) drawing a new bill upon the expiry of the old on the same unsold merchandise; (3) financing stores of goods in the expectation of a rise in price by drawing bills.

Bills of exchange drawn on goods in most urgent demand and moving fast enough to the ultimate gold-paying consumer are capable of monetary circulation on their own wings and under their own steam, regardless whether or not banks are standing by, ready to monetize them. But if they are, legislation should prohibit banks from borrowing short in order to lend long. In practice this means that the banks would be prohibited from rolling over short term commercial credit at maturity. Commercial banks must also be prohibited from conspiring with the drawer of the bill. Withholding stocks from trade in expectation of a rise in price must be financed by an investment bank, never by a commercial bank. The two types of banks should be strictly separated by law. Commercial banks must also be prohibited from investing in brick and mortar. In practice this means that mortgages are “hands-off “.

Treasury bills are also “hands-off”, except on capital account. We know that people will want to eat and to keep themselves clad and shod tomorrow. That’s what makes bills the safest earning asset. We also know that people will pay their taxes only after they have eaten, clad and shod themselves. That’s why real bills as an earning asset are superior to Treasury bills.

—The Hungarian Connection by Antal E. Fekete [my emphasis]

The first step is opening the Mint, because Real Bills do not function with fiat money, discounted bills have to be settled with bullion coin. Professor Fekete states the following three misuses:

1. “drawing more than one bill on the same consignment of merchandise;”
   Once a bill is drawn on merchandise the holder of the bill is the real owner of the merchandise, drawing another bill on the same merchandise amounts to fraud.
2. “drawing a new bill upon the expiry of the old on the same unsold merchandise;”
   A discounted bill promises to pay coin at a certain date, rolling the bill breaks the implicit trust needed for the system to function.
3. “financing stores of goods in the expectation of a rise in price by drawing bills.”
   Only the bill of goods on the line of production that ends with the paying consumer can be discounted.

All three must be prohibited by law and severely punished, up to the death penalty. Although a single violation is a small crime, the system of Real Bills is based on trust and each violation undermines the trust and consequently the economy.

I would add the following condition: Ownership remains with the holder of the bill, the merchandise is given on trust. In case of failure to sell or destruction of merchandise the bill’s holder takes back the merchandise or absorbs the loses.

Compared to people like Friedman and Krugman Professor Fekete is an intellectual giant, but no one is perfect. Professor Fekete errs when he fails to distinguish that Real Bills are not usury (if the above conditions are satisfied) and thus falls into the trap of thinking that usury is anything but extremely harmful and must be prohibited at all times and under all circumstances. He thinks that it is enough to have usury “strictly separated” from the real economy, financed by real bills, to avoid the damage of usury.

When France and German enacted fiat currency laws in 1909 (see Professor Fekete’s article Forgotten Anniversary) the people did not riot, they did not object, no one minded. The people had been using fiat currency for a whole generation, since the 1870′s, the laws only codified the reality. The Federal Reserve act of 1913 strictly prohibited the Fed from buying anything other than Real Bills, now the Fed holds a trillion dollars worth of treasury debt; the law itself was changed during the depression in accordance with the reality.

The economy is the health of society, there can be no compromise when it comes to it. Societies are not like secure citizens, living in a safe society, they are more like animals living in a jungle, any weakness and the predators (sickness, rivals, etcetera) will jump on them.

Usury is the most dangerous sickness that strikes a society, usury is like cancer cells, it metastasises and consumes the whole body if it is not removed. Cancer is so dangerous that a doctor will either open the patient and cut it out just like a butcher filleting a carcase; or douse the patient with toxic cocktail of chemicals; or as a final solution radiates the patient with the same radiation released by nuclear bombs. Doctors take all these extreme measures to save a single life, while the damage of usury could destroy society and cause widespread devastation.

See also:

• Sovereign Credit is State Usury
• High Treason in Zimbabwe
• Real Bills: an Emergent Market Phenomenon by Bill Koures.

Click to view

I am really tired of writing articles that no one read; I had promised an article about the Gold Standard, the above diagram was prepared months ago.If you want to read the article that should have accompined accompanied the above picture leave a comment below and in a week’s time I will write a paragraph for each IP address (so no cheating!).

Click to view

from 24hgold.com

The use of gold and silver coin has no inherent weakness. It is the concept of legal tender that is flawed and unjust. By fixing the rate of exchange between gold and silver, and declaring what constituted legal tender, the powers that be seriously intervened within what was supposed to be a free market. Any chance to function as a free market was gravely impaired. The system was doomed to fail from the start, as the seed of its own destruction lay within – waiting to blossom. Alexander Hamilton was the architect of its design; and he did not knowingly make mistakes. He was very capable and as accomplished as they come.

It is one thing to fix or set the standard of a monetary system. This the Coinage Act of 1792 did when it set the standard as a weight of silver: 371.25 grains of pure silver. This is sound monetary policy.

To fix the exchange rate between gold and silver at 15 to 1 is an entirely different matter. This would have been better left undone. Let the free market decide upon the exchange rate between gold and silver, not a statute or legal tender law, which is nothing more than forced obedience – the King’s prerogative. This was all Hamilton’s doing.

—The Constitution On Legal Tender and Lawful Money (pdf) by Douglas V. Gnazzo [my emphasis]

In Beware the Boom! I wrote the following

The gold standard with a floating gold-silver ratio is the true standard. Fixing the ratio of silver to gold turns it into a derivative of gold. This feature of the British gold standard was a flaw that caused its ultimate demise and replacement by pure fiat currencies. A floating ratio means that the money supply can expand and shrink with the economy automatically without the need of an external regulator. A central bank will always be behind the curve and either shrink or expand the money supply more than needed, creating structural problems in the system; these will ultimately bring the system down.

I have been planning to write an extensive post on this subject (I even prepared a graphical item!) but time constraints prevented me from doing so. I will try to post some press-clippings until I have enough time to do the research and write the long-awaited post about the real gold standard.

In ancient times people had to perform labour to extract from nature the substances they needed to survive, thus direct labour resulted in direct satisfaction.

Later barter developed where people would perform labour and extract from nature more than they needed, afterwards they would exchange their surplus with a different substance extracted by someone else. Thus in this situation past labour was exchanged for past labour.

Later indirect barter through a monetary commodity developed. Now the two people bartering did not have to meet and exchange their goods in one operation, instead surplus goods are exchanged for a monetary commodity, which in turn is exchanged for needed goods. The monetary commodity, like all commodities, represented past labour and it was also the most liquid thus guaranteeing that the second exchange operation will be completed.

Later (much later) gold and silver emerged as the final monetary commodities. The direction of development went towards mined products from the moment they became abundant to fulfil the role of money. The first mined commodity to play that role was salt, which did not need refining.

A British Guinea

A piece of minted gold contain the following labour: labour to discover the gold, labour to mine the gold ore, labour to refine the gold, labour to mint the gold, labour to secure the gold through this process. When one gives up his surplus product for a piece of gold he is exchanging past labour with past labour in monetary form. The new form has many advantages: it does wear out or perish, it is much denser making it easer to store and transport and most importantly it is liquid.

“Gold is the indispensable regulator of debt in society. … Well, we have just tried [bureaucratic regulation of the level of debt] and found that whenever irredeemable promises are to be liquidated by issuing more irredeemable promises, debt proliferates beyond any limit.
…
People wake up and realize that they are surrendering real goods and real services in exchange for irredeemable promises.”

-The Anti-Gold Gospel According to Kaletsky by Antal E. Fekete

Now we live in an age where all the developments of the last ten thousand years are being thrown away and replaced by new un-tested gimmicks. We throw away monetary commodities and replace them with fiat currency, but do we really know what we are getting ourselves into?

As I tried to show in The Printing Press is a Harsh Mistress one unit of fiat currency is equivalent to one unit of public debt on the central bank balance sheet. If one accepts a fiat currency then he will not be accepting past labour but instead the promise that future labour will generate enough public income (through tax, excise, et cetera) to service the public debt. Thus selling goods for fiat currency becomes an exchange of past labour for future labour.

Imagine a farmer exchanging his surplus wheat for the hunter’s surplus winter catch. The farmer fulfils his obligation at harvest but has to wait six months for his share. What would happen if the winter’s catch were too low? This is why meat is smoked or cured and exchanged at harvest time. The farmer gets last year’s catch instead of next year’s catch.

The problem with future labour is not only unforeseen circumstances but more importantly is that before generating a surplus enough has to be generated to pay the workers, but since they too are paid with fiat currency this will only increase the amount of future promises. This cycle means that the quantity of money has to increase exponentially at a rate outpacing the economy. As more money is created its exchange value drops, the dollar has lost about 97.7% of its value (gold from $20.67/oz. to $900/oz.) since becoming a fiat currency.

A US Gold Dollar

There is no need to add the phrase “In God We Trust” to coins with intrinsic value because if you have them then your prayers have already been answered by the Almighty.