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Economics

Some personal thoughts on surviving the monetary meltdown

Let us start by looking at the economy from 10,000 feet above: After 40 years of boozing on easy money and feasting on fantastical asset price inflations, the global monetary system is approaching catharsis, its arteries clogged and instant cardiac arrest a persistent threat. Most financial assets are expensive, and many appear to be little more than securitized promises with low probability of ever delivering payment in full. Around the globe, from Japan to the US, a policy of never-ending monetary stimulus consisting of zero interest rates and recurring rounds of ‘quantitative easing’ has been established aimed at numbing the market’s growing urge to liquidate. Via the printing press, the central banks, the lenders-of last resort, prop up banks and financial assets and simultaneously fatten the state, the borrower of last resort, which, despite excited editorials against the savage policy of ‘austerity,’ keeps going further into debt almost everywhere.

‘Muddling through’ is the name of the game today but in the end authorities will have two choices: stop printing money and allow the market to cleanse the system of its dislocations. This would involve defaults (including those of sovereigns) and some pretty nasty asset price corrections. Or, keep printing money and risk complete currency collapse. I think they should go for option one but I fear they will go for option two.

In this environment, how can people protect themselves and their property?

Disclaimer

Before I start sharing some of my own personal thoughts on this topic with you I should repeat my usual disclaimer: I provide economic analysis and opinion, food for thought. But I do not intend to give investment advice and certainly not any specific trade ideas. I provide a worldview, and an unconventional one at that. You alone remain responsible for your actions, and whatever you do, you do it at your own risk.

My three favourite assets

My three favourite assets are, in no particular order, gold, gold and gold. After that, there may be silver, and after a long gap of nothing there could be – if one really stretches the imagination – certain equities or commercial real estate.

Why gold?

We are, in my assessment, in the endgame of this, mankind’s latest and so far most ambitious, experiment with unconstrained fiat money. The present crisis is a paper money crisis. The gigantic imbalances that threaten to unravel the system momentarily are the direct consequences of years and decades of artificially cheap credit and easy money, and are simply unfathomable in a hard money system. Take away fiat money and central banks and our current problems would be inexplicable. (If you are still under the widespread but erroneous impression that the gold standard caused the Great Depression you may want to consider that the strictures of hard money were systematically disabled and the disciplinary power of a true gold standard increasingly weakened with the establishment of the Federal Reserve in 1913, and the introduction and spreading of lender-of-last resort central banking in the US financial system. In any case, we are now in the Greater Depression, and this one is entirely the responsibility of central banking and unlimited fiat money.)

Whenever paper money dies, eternal money – gold and silver – stage a comeback. We have already seen a major re-monetisation of gold over the past decade, as the metal again becomes the store of value of choice for many investors. This will continue in my view, and even accelerate.

Gold is money

A frequent allegation against gold is that its non-monetary applications are minor and do not justify the present price, and that gold doesn’t pay interest or dividends, quite the opposite, storing and insuring it incurs running expenses. Gold is an instrument with a negative cash yield.

None of these objections stand up to scrutiny. They are either wrong or irrelevant.

It is investment goods that are supposed to offer cash yields – interest income or dividends. But gold is not an investment good, it is a form of money. Gold is the oldest form of money still considered a monetary asset today, and the only truly global form of money (besides silver but silver is today still more of an industrial commodity than a financial one). Gold is – importantly – inelastic money. It cannot be created nor be destroyed by politicians and central bankers. It can, of course, be taxed and confiscated, and I come to that later.

The main alternative to gold is therefore not bonds, equities and commercial real estate but cash, i.e. state paper money. The person who ‘invests’ in gold is holding money. The cash in your wallet or under your mattress does not give you a cash return either. Neither does gold.

Sometimes I get asked, what if people suddenly stopped considering gold to be a monetary asset and a store of value? Would its price not drop steeply? – That is a fair point. But this applies to your paper money, too. In fact, it applies to paper money more so.

Every monetary asset – whether gold, paper tickets from the state, or electronic book-entries at your bank – receives its value (exchange value or purchasing power) from the trading public, and from nobody and nothing else, not from the state, nor from any non-monetary uses of the monetary asset, if it has any at all. If the public stops treating the item in question as money, or uses it less as money or only at a discount, it looses its monetary value. That is also always the case with state paper money. It is a sign of our hopelessly statist zeitgeist that many people believe that the state ‘assigns’ value to its paper money and somehow supports this value. This is not the case. The truth is that the paper tickets in your wallet have purchasing power (and thus have value beyond their paper content) for one reason and one reason only: the public accepts them as a medium of exchange, the public accepts them in exchange for goods and services. The public also determines what the exact purchasing power of those banknotes is at any moment in time and at any given place. The state does not even back its paper money with anything. If you take your paper tickets to the central bank, what do you get in return? – Change.

Paper monies come and go. In fact, throughout history every experiment with paper money has ended in failure, with over-issuance the predominant cause of death. Pound and dollar are the two oldest currencies around today but through most of their history they were linked to gold or silver, which restricted their issuance. Our system of hundreds of entirely unrestricted local fiat money monopolies dates back only to 1971, at least in its present form. In the 20th century alone, almost 30 hyperinflations of paper monies were recorded.

By contrast, gold has been money for 2,500 years at least. Should you be more concerned about the public not taking your gold any longer, or your paper money?

Gold is hard, apolitical, and global money, supported by an unparalleled history and tradition. That is the asset I want to own when our assorted finance PhDs in the central banks, the bureaucrats in the Treasuries and Ministries of Finance, and our sociopathic welfare politicians have manoeuvred the system to the edge of the abyss. Which is now.

Remember, paper money is always a political tool, gold is market money and apolitical. Paper monies come and go, gold is ‘eternal’ (as far as we can tell presently).

You have to be clear in your mind why you buy gold.

At every moment in time, all your possessions – all your wealth – can be split into three categories: consumption goods, investment goods, and money. For most of your possessions the category is pretty clear: The clothes you wear and the car you drive are consumption goods; your investment funds or your equity portfolios are investments; the banknotes in your drawer are money. For some things it is not so clear: An expensive painting might be an investment but if you hang it in your living room and enjoy looking at it, it is also a long-lasting consumption good. The house you live in could be both but in most cases it is more of a long-lasting consumption good than an investment: you use it up over time, albeit slowly, and you cannot easily liquidate it. You have to live somewhere.

The wealth you are not consuming in the here and now but want to maintain for the future can thus be held in the form of money or investment goods. Money gives you (usually) no return but has other advantages, namely that it allows you to maintain your purchasing power, at least if it is proper, hard money, and simultaneously retain complete flexibility. You are not committing yourself today to any investment good (or consumption good); you remain on the sidelines to wait how things turn out. But as you hold a monetary asset – a store of value and medium of exchange of (almost) universal acceptance – you can re-enter the markets quickly and easily. Somebody will always buy the gold from you in the future (which is far from certain in the case of most of your consumption and investment goods, and also in the case of that other form of money, state paper money).

Why gold now?

It seems that this is an opportune time to be on the sidelines, to be not engaged in the markets for equities, bonds and real estate, or to at least keep one’s exposure to these markets very low, since years and decades of unprecedented money growth have inflated and gravely corrupted the prices of standard investment goods. Sadly, these prices now rely increasingly on the kindness and efforts of manipulating bureaucrats to simply sit still and avoid a painful descent.

Central bankers state – openly and unashamedly – that they now consider it part of their mandate, if not the chief part of it, to keep asset prices at elevated levels and, if possible, even boost them further. Naturally, this will require ever more aggressive money printing and eternally super-low interest rates, and certainly argues against holding much paper money. Those who like to bet on the bureaucrats may claim that it makes sense to hold the very financial assets the prices of which central bankers are manipulating. As long as the central bankers are not ashamed of running the printing presses ever faster, they will simply get their way. Well, even under the rosiest of assumptions, this argument does not support investment in bonds. It could, in principle, be an argument for equities and real estate as ‘real assets’ of a sort but even in respect to these assets I consider it unsound, as I will explain later. Be that as it may, the beauty of gold is precisely that it allows you to remain on the sidelines and keep your powder dry. By holding gold you remove your wealth to a considerable degree from the rigged game of artificially inflated and openly manipulated financial markets. You commit internal capital flight from the fiat money system, and you simultaneously bet on the further debasement of paper money. The bet is this: The central bankers are trapped. The state, the banks, the pension funds, the insurance companies, the investment funds – they all would be in a right mess – or an even deeper mess than they already are – without cheap money from the central bank. Ergo, the policy of super-cheap money will have to continue until the bitter end.

There are a few more things to say about gold but before I do this let us talk about the worst asset.

Bonds – the worst asset class in my view

Bonds are ideal assets for you if you suffer from a financial death wish. Let me put it like this: After 40 years of almost relentless and of late accelerating money production we have too much debt. When you buy bonds you buy debt, and there is a lot of it to go around. And it is not even cheap. In most cases, it is ridiculously expensive, in particular when considering that most of it will never get repaid.

This is especially true of the sovereign bonds of major governments, which are probably among the worst ‘assets’ on the planet, yet are bizarrely still considered ‘safe haven’ assets, a ridiculous concept to begin with. What are the prospects in the long run for government bonds? Remember that most sovereign states are now credit-addicts, desperately relying on low rates and cheap credit to fund their incurable spending habits, and increasingly leaning on their central banks to provide the daily fixes. If the central banks stop printing money and thus stop funding the governments, they go broke. If the central banks keep funding the governments they will have to keep printing money, and this will certainly lead to higher inflation at some point, and that point may even be soon.

As an investor you will ultimately lose money through default or through inflation, and if it is a hyperinflation there will be default at the end of the hyperinflation. For the bond investor the choice is between death by hanging and death by drowning.

If that sounds overly dramatic then ask yourself in what scenario you win or even get your money back. Only if the present policies lead to a slow and steady return to self-sustaining growth that is inflation-free and allows the central banks to slowly and painlessly remove accommodation and deflate their overgrown balance sheets, and if the political class then grows up and gets sensible, departs from its free-spending ways, gets the fiscal house in order, and starts paring back the debt.

Yeah, and pigs might fly!

That this scenario is evidently the basis of much strategizing by professional money managers does not say much about its soundness or even remote probability. It is simply the scenario in which the financial industry comes out unscathed, with its size, reputation and income-stream intact. It is also the one scenario in which you need little money – neither paper money nor gold – but can stay fully invested in equities, bonds and real estate, as the rosy outlook of seamless crisis resolution and onwards growth forever will ultimately justify today’s lofty valuations. This is the scenario the financial industry favours and has an overwhelming desire to believe in – as do all politicians, central bankers and assorted Keynesians and other interventionists. Good luck to all of them! I fear this is wishful thinking rationalized with poor economics.

Every day that the markets are open the US government borrows an additional $4billion, roughly. For 5 years running the country’s budget deficits were considerably in excess of $1 trillion. Britain is among the world’s most highly indebted societies if you combine private and public debt, and despite all the blather in the press about ‘austerity’, the public sector keeps going more into debt. Japan has long been a bug in search of a windshield.

Bond investors may counter that it is all about the timing. Until death arrives, you collect coupons. – Well, hardly. With yields for the bonds of major bankrupt nations now in the 1 to 2 percent range, if that much, there is, in my view, little point in sitting on a gigantic powder keg and hoping the fuse is long enough. When this one blows, the fallout will be substantial.

Why are bonds not selling off?

As David Stockman has pointed out, much of the US Treasury market is not owned but rented. The big primary dealers and many hedge funds hold government bonds as trading positions funded with cheap money from the Fed. That is the true reason for the Fed’s new communications policy. Ben Bernanke now goes so far as to promise to keep rates and therefore the trading community’s funding costs near zero, not only for the near-term, but even beyond the tenure of his own chairmanship at the Fed. The goal is to make sure that these leveraged renters of Treasury debt stay engaged and help funding the state.

Then there are the big bureaucratic asset management entities that have historically always provided a reliable home for government bonds: insurance companies, pension funds, sovereign wealth funds, foreign central banks. Built-in risk-aversion and intellectual inertia are here working in support of over-valued bond markets. Here, the big investment decisions are made by committees of professional fund managers who are often in charge of obscenely large amounts of money. To beat the market and achieve superior returns is an objective located somewhere between the hugely improbable and the completely impossible. They are destined to fail, and in this position of nerve-shredding uncertainty they all cling to the same straws: 1) do what everybody else does; 2) stick to what has worked in the past; 3) stick to the industry’s assumed wisdom, such as ‘never fight the Fed’; ‘government bonds are safe assets because the government can always pay’, and so forth. The last point has no basis in theory and history, and looks increasingly like a heroic assumption today, but that is the fund manager’s line and he is sticking with it.

That government bonds are a safe investment can, of course, not be left a matter of simple opinion but has to be enshrined in the laws of the land, and the state’s rapidly expanding finance constabulary is already working on it. Via legislation and regulation, the state is busily building itself a captive investor base for its own debt.

The state regulates the banks and has long been telling them that if they want to lend their money securely they should give it to the state. Everywhere, state-imposed capital requirements for banks can best be met by buying government bonds. The advantages are obvious: Spanish banks heavily increased their exposure to ‘safe’ Spanish government bonds over the past year, from about 13 percent of their balance sheets to 31 percent. And what is safe for the banks is certainly safe for insurance companies, pension funds and other ‘socially important’ pools of saving. ‘Capital controls’ is such a nasty term. Much nicer to call it ‘regulation’, and the masses have now been sufficiently indoctrinated with the idea that the financial crisis was caused by lack of ‘regulation’ so that the state can now safely and calmly tighten the screws.

I fear that to a large degree this is even welcomed by the asset management industry. In an unstable and increasingly uncertain world, being told what to buy lifts a great responsibility of one’s shoulders. Although individually many money managers complain about stifling restrictions and regulations, it is usually the case that any outsized boom industry, when faced with the end of its boom, happily embraces state involvement to avoid getting trimmed back by market forces too harshly. Rather than seeing the return of the ‘bond vigilantes’ who instilled fear and loathing in debtors in the 1970s and 1980s but who roamed the financial landscape of a different age, one in which grown-ups were still allowed to smoke in public, we will most likely be treated to the sad spectacle of timid money mangers being herded into officially sanctioned asset classes by the cocksure financial market police.

All of the above may help explain why expensive assets may keep getting more expensive but these are, in the end, mitigating factors only that will, at the most, postpone the endgame but not change it.

One popular way to rationalize investments in bonds is that they are deflation hedges. Whenever the forces of liquidation and cleansing get the upper hand, bonds do well. This may be the case in the short term but any extended period of deflationary correction must be poison for sovereign bonds in particular: tax receipts will drop, non-discretionary state spending will balloon, and credit risk will rise. The bond market’s pendulum of doom will simply swing from the risk of higher inflation to the risk of default.

Gold versus other ‘real assets’ (equities and real estate)

It is often argued that equities and real estate are also good inflation hedges, and I know many people who prefer them to gold. I see the rationale but disagree with the conclusion. Gold may no longer be cheap because what I explain here has been a powerful force behind gold for a decade. But I would argue that equities and real estate are in general much more overvalued as the current financial infrastructure is designed to channel new money into financial assets and real estate but not into gold, and our financial infrastructure has been operating on these principles for decades. How many people do you know who not only own gold but bought it on loan from their bank? Now ask yourself the same question with respect to real estate. –  Gold is the great ‘under-owned’ asset. Its share in global portfolios is miniscule. It plays hardly any role in institutional asset management.

It is true that during deflationary phases when the inflationary impetus from central banks slackens a bit and the urge of the markets to liquidate comes to the fore again, gold often sells off in sympathy with equities. But I believe that any risk of a more extended period of deflationary correction poses a much bigger problem for equities, and by extension real estate, than for gold.

Additionally, ask yourself how equities and real estate will fare in an inflationary crisis or a currency catastrophe. Which companies will make money, pay dividends or even survive? Which tenants, whether residential or commercial, will keep paying the rent? I am not saying that all these equities and all the real estate will become worthless – far from me to forecast a ‘Mad Max’-style end of civilisation. It is indeed to be expected that certain equities and select pieces of real estate will turn out to be decent instruments for carrying wealth through the valley of tears, and for coming out at the other end with one’s prosperity intact. But which ones? It strikes me that the variance of outcomes is much greater in these hugely heterogeneous, highly inflated and widely held sectors than anything that can come from holding the eternal money and homogenous commodity gold. If you consider any major economic crisis, whether inflationary or deflationary, gold beats equities and real estate in my book. (Equities and real estate are superior to bonds and paper money, however, and this is why I listed them above as potential holdings.)

Additionally, there is one aspect of real estate investing that is, in my opinion, frequently overlooked or underappreciated, and that is this one: Your property is like a marriage agreement with the local taxman, as my friend Tristan Geschex keeps reminding me. The War On Wealth is intensifying, as are the fiscal problems of most states. Both go hand in hand. Real estate is low-hanging fruit for the state, and taxation on it will most certainly increase. What market value and rent-income your property will manage to sustain through the vagaries of the crisis will most probably be subjected to confiscatory taxation from a bankrupt state. The ownership of gold could potentially also be restricted or heavily taxed. This is certainly a risk. But as I said, gold is still the under-owned asset, and there is still a chance that you can find arrangements for your gold holdings that lessen the tax implications. When the winds of change alter the political landscape in your country of residence and bring the War On Wealth to a cinema near you, you may still – if you are quick and lucky – pack your things, take your gold and move somewhere else (as long as they let you), maybe even obtain a different citizenship (as long as they let you), but owning property means having nailed your wealth to the ground and having signed up for whatever the local purveyors of snake-oil (politicians) manage to sell your fellow voters.

Paper money versus gold

Under what scenario would paper money beat gold, i.e. would the paper-money-price of gold drop sharply? – The answer is clear, in my view: If the central banks stopped the printing press and stopped depressing interest rates artificially and fully accepted the consequences for other asset classes and the economy. If the central banks decided to defend the value of their paper money and credibly assigned a greater importance to this objective than to the now dominant ones, which are sustaining a mirage of solvency of banks and states, funding the governments, propping up asset prices, and creating short-term growth spurts.

The big gold bull market of the 1970s ended harshly in 1980, when then Fed-chairman Paul Volcker stopped the printing press, let interest rates shoot up, and looked on as the economy slipped into recession. The paper dollar enjoyed a revival and the gold price tanked.

My view is that this is exceedingly unlikely to happen today. The global financial system is considerably more leveraged than it was 32 years ago, and presently much more dependent on never-ending cheap money from the central bank. In 1980, the total debt of the US government was less than $1 trillion, today the annual budget deficits are bigger than that. The fallout from an end to free money would be huge, and most politicians would deem the consequences unacceptable. Today, there are also no other strategies available that could cushion the impact. In the early 1980s, then-president Reagan countered hard money with an easy fiscal policy, and simply let the budget deficit balloon throughout his tenure. Today, the bond market would quickly be in trouble without support from the central bank, and the government would soon face its very own Greece-moment.

But even if this were indeed to happen, I think that gold would still do better than equities and real estate, and certainly bonds, which would suffer hugely from rapidly rising default risk. The deflationary correction is also a huge threat to the over-stretched banking system, which means you may not want to hold your paper money in form of bank deposits. Again, gold seems to be a decent self-defence asset, even in this scenario.

How to own gold

Personally, I believe one should hold gold in physical form (bars and coins), not through ETFs, derivatives or gold accounts. If one wants to have it held within the banking system (not ideal but there could be reasons for it), one should insist on having it in allocated form, that is, clearly allocated to one’s name and identified by serial numbers. Or, have the gold delivered and keep it in a safety deposit at a bank. Alternatively, there are now a number of specialised asset managers or gold dealers around that offer storage facilities as well.

I think the risk of gold confiscation is small in most countries at present but things may change. The risk of taxation on gold or restrictions on gold ownership is somewhat higher. The safest places to hold gold are probably Switzerland (still) and Singapore at present but if you live in the wrong place or have the wrong passport, having your gold there may not protect you from the long arm of your government when it begins to show interest in your gold. It is no surprise that people who really care about their wealth, which are often people who are very wealthy, now consider changing residency and even changing citizenship as an important component of their estate planning. The last time the US government confiscated private gold, in April 1933, it only grabbed what was held within the territory of the United States, and many people probably kept their gold by simply burying it in the backyard. Believe me, the next time private property will be confiscated, the process will not be handled so amateurishly.

In any case, these are just my opinions. As I said, food for thought….

In the meantime, the debasement of paper money continues.

This article was previously published at DetlevSchlichter.com.

29 comments to Some personal thoughts on surviving the monetary meltdown

  • Calling it ‘paper money’ is a poor approximation of the fact. Especially since most of the so called gold circulating is in fact paper promises of gold.
    Mondern money is not paper that the the government printed as long as there are trees and ink, but interest bearing debt that banks create on computers. The paper part of modern money is probably the soundest part, since this part is, or nearly is, issued debt free by the government.
    Debt as money, unlike paper is essentially limited in supply, to what the borrower is likely to be able to repay. This can work even if the borrower can only pay the interest. But while interest rates are at zero, in theory the money never has to be repaid, and since it takes digital form, it can be issued faster and more infintely than paper.

    So when gold bugs talk to me about paper money I have to ask them if they are dumbing down their language, or if obsession with shiny metals dulls the intellectual faculties.

    Furthermore, I find goldbugs often muddying the waters between owning gold for investment / survival etc, and calling for gold to be monetised. The fact that these entirely unrelated notions are often called for by the same people in the same forum makes me very suspicious. Of course owning gold would be very profitable were it to be monetised, but that doesn’t make it a good idea for the rest of us!

    • Captain Skin

      You don’t seem to comprehend that fiat currency is not money. It is a promise to pay and is based on the trust of the public. When the trust evaporates, the paper is worthless.

      Money as defined by Aristotle has the following unique features:

      Durable
      Portable
      Divisable
      Fungible
      An instrinsic store of value

      The difference between fiat currency and gold (or silver) is that paper is not an intrinsic store of value. It can be infinitely produced. Precious metals on the other hand, have to be found, mined, extracted and smelted. It is this scarcity and the effort needed to extract it that gives gold its intrinsic value. It also does not have counterparty risk. Fiat currencies depend on the power of governments to coerce its citizens into using it. Gold answers to no-one, but is universally accepted as a medium of exchange for the last five thousand years.

      I think that the current amount of gold ever mined is approximately worth 10 trillion dollars. The total world debt including derivates is what, 100s of trillions of dollars?

      Further consider that the vast majority of that gold is already in the possession of people who will not part with it until it’s righfully back at the core of the next monetary system, which means that the available supplies of gold are small, and getting smaller.

      Divide that 10 trillion between the 100′s of trillions of paper instruments, and you get the real value of gold. In price it will be 10′s of thousands of dollars per ounce. In terms of surviving the forthcoming global monetary collapse, it will be priceless…

      • Didn’t aristotle also say (quoted at the beginning of ‘The lost science of money’ which I don’t have to hand) that gold should be used for settling long distance debts, and worthless money should be used in the local economy. So your point seems to rest on a selective appeal to authority, and a quibble with the definition of money. I do not believe you can design or discuss money without reference to its two main functions, store of value and medium of exchange. The gold bugs are usually wealthy people who think that money is a means for getting rich, which is a total distortion of the two functions above. In a sane economy, getting rich would be a group activity not a personal one, and it would be achieved not through manipulating money or speculation but through hard work.
        None of this should be offensive to Schlichter, I have accused him of nothing but abuse of of the word ‘paper’. However most gold bugs I encounter have a very limited view of money. For example, the main problem with the money system at the moment is not paper, digits or even debt, but banking fraud. However honest gold is, I dont’ expect it to rub off on the institutions managing it!

        • CaptainSkin

          Many things have been used as money over the centuries. Cows, beaver pelts, shells etc. But in a free market system, humanity always chooses gold and silver. I would contend that if free to choose after the upcoming crash, that people would go back to gold and silver. Paper money was originally the certificates issued by the goldsmiths for storage of people’s gold. These certificates were eventually exchanged in the market, which was eventually noted by the goldsmiths, and so they issued more certificates than there was gold to back them, thus inventing the fractional reserve banking system.

          I would favour Hayek’s method of having competing currencies, with local banks issuing their own currencies, but backed by a bi-metallic standard, and money being completely taken out of the hands of governments and central banks.

          I don’t believe that gold bugs are all wealthy. I would consider myself a gold bug, and I am not wealthy. I just consider gold to be monetary freedom, and the ultimate store of value over time, which does not depend on the government or the banking system, both of which will be eviscerated in the near future.

          In a sane economy with an inelastic money supply, the value of money would slowly appreciate over time, which would be beneficial to capital, as it is savings (real wealth) that drives investment and innovation in the economy, not government central planning and the debasement of hard earned capital.

          • Thanks Captain Skin. Have you heard of negative interest, or demurrage? Instead of money getting clogged up in savings this encourages spending. Its proponents point out that nothing else in nature increases exponentially for ever over time, and in that sense money is unnatural – when capital meant heads of cattle, then the herd would grow naturally but when capital means money and it grows through risk free interest, this is contrary to nature! And even the gold bugs point out that gold only buys the same as it did 2000 years ago.
            As to your assertion that, ‘in a free market system, humanity always chooses gold and silver’ I think this is dubious. I would agree that in situations of conflict where the government is dysfunctional, people resort to commodity money i.e. with inherent value instead of anything that involves trust in the issuer; but I think if you want to say more than that you have to carefully define ‘free market system’ with examples and counter examples, and of course ‘always’ needs only one counter example to falsify it. Once you have defined your terms, I suspect you’ll either end up with a tautology, or one or other school of historians on your back!
            I think once you say that money has to be on a bimetallic standard, you don’t have a free market any more. Fiat money issued by a viable authority can absolutely compete with commodity money not least because its creation gives great power to the authority, and its elasticity is very useful too. But the key in all systems, commodity and fiat, is the governance. If criminal behaviour in banking isn’t addressed, then it matters nought what backs the money. I’m sure Mr Schlichter and his ilk are absolutely correct, fiat money is collapsing, Central Banks are buying gold and we should be running for the exit too; but a gold standard isn’t going to change the power relationships or right any wrongs, its just a way for the big players to stay ahead of the game of stealing from the plebs.

        • Gary

          you refer to the Freegold system where the money is a store of value such as gold, and the currency is any other transactional token of exchange that is cleared for the store of value when the transaction is complete. The current system has the same token for both and as Triffin predicted, it is doomed.

    • Mondern money is not paper that the the government printed as long as there are trees and ink, but interest bearing debt that banks create on computers. The paper part of modern money is probably the soundest part, since this part is, or nearly is, issued debt free by the government.

      But the debt parts and the paper parts are one and the same when it comes to determining purchasing power. The money in my checking account for my car loan and the money in my checking account from the $500 paper dollars I deposited yesterday are exactly the same in terms of my being able to use them to buy stuff.

      I don’t agree with your distinction.

      • There’s nothing ‘paper’ about modern money. Money of all kinds can take various forms. Even gold money can take paper form. Bank credit is not paper because in UK banks were forbidden from issuing their own paper money in 1844. Bank credit, which is 97% of money, lives only in bank accounts and is therefore digital in form. So I maintain that calling it paper money is not meaningful. In fact the paper component of the money is the most responsibly controlled part in theory, being subject to democratic accountability.

    • Robert Sadler Robert Sadler

      Mr Slater,

      Paper, believe it or not, is a scarce resource and thus limited in supply. Debt is not money, it is money that has been lent. You might call it a derivative of money. Can debts be traded? Sure, but then you leave yourself open to credit risk, default risk, credit event risk, etc. Would I want to be paid in debts? No I would rather have a hard money, like gold.

  • Paul Marks Paul Marks

    Mr Slater – Detlev Schlichter clearly said that PHYSICAL gold should be owned (not promises of gold).

    As for government fiat money that only exists only on computers (not even in the form of physical fiat notes) – such credit money is hardly more to be trusted than notes (if anything it is less to be trusted than notes).

    Detlev Schlichter has offered sound common-sense advice on how to preseve at least some wealth in the comming monetary and economic breakdown.

    You choose to respond to that advice with abuse – that is your choice to make.

    However, for the sake of your family (should you have one), I sincerely hope that your actions do not match your words.

    Let us hope that, in private, you are one of the “gold bugs” upon whom you direct your public abuse.

  • Captain Skin

    Great article yet again Mr Schlichter

  • Paul Marks Paul Marks

    The “store of value” point is important – often neglected by those who only see money as a “means of exchange”.

    And saying “economic value is subjective” does not save fiat money – as its value is based on government threats (tax damands, legal tender laws…) and that breaks down after a certain point…..

    And the utterly debauched financial system the government has created is heading towards that point.

  • john in cheshire

    Mr Schlichter, You say in your opinion one should not hold ETFs. Does that include Physical Gold ETFs because I have been purchasing them and Physical Silver ETFs as part of my tax-free ISA (Individual Savings Account) funds. The reason being that I am of the impression they are related to actual gold and silver, held by the ETF issuing company and can be redeemed for actual gold, should I choose to do so, even though it is not allocated. Am I being naive or is this a (relatively) safe, and inexpensive means of acquiring gold and silver?

    • Robert Sadler Robert Sadler

      Hi John,

      I think your best bet is to own physical gold in a location where you can get to it easily (such as your home). Coins are a great way to do this. With an ETF you do not own gold but rather a share in a debt security backed by gold. This is not the same thing, particulary if the country faced a currency collapse. You are taking credit risk that the ETF will actually redeem your gold. I would also check the prospectus to find out the precise manner and circumstances in which you can redeem in gold.

    • Captain Skin

      Hi John,

      This interview with Kyle Bass regarding the Comex Exchange and its ability to deliver gold and silver might be illuminating to you. The same would be true of the LBMA I would assume…

  • Doughtyman George Doughty

    Anyone who thinks “getting rich should be a group activity and not a personal one” is in big trouble. Perhaps he has a Phd from Harvard or MIT.

    • Anyone who thinks that its possible to get rich from their own work alone is deceiving themselves. Unless you start with raw nature and no tools, then you owe your wealth to all who went before and all who share in your endeavours! And what kind of wealth is it that your community does not share?

      • Robert Sadler Robert Sadler

        Mr Slater, with respect, you sound like a socialist, or at least like Obama.

        Wealth is won or lost by individuals. There is no “owing” to anyone else except the lenders (if any) who invested in your business.

        • > Wealth is won or lost by individuals.
          This is a value judgement, not a fact.
          It seems to acknowledge only the contribution of the entrepreneur, without acknowledging the contribution of labour, engineers, teachers, parents, doctors. Are these people making contributions or are they just cogs in the machine? Could we be overemphasising that single role in a system which is actually much more complex? As if an entrepreneur could create wealth in total isolation?

  • Paul Marks Paul Marks

    Many thanks Mr Slater – you have just discredited yourself.

    The support for fiat (government whim) money was one thing – but now you have come out with the Communist “you did not build that” stuff.

    No one argues that someone creates a business in isolation (contrary to the collectivist ideology you were taught at school and university, voluntarism is NOT “atomistic individualism”) – they need customers, suppliers, as they get bigger they need employees (and on and on).

    But all these people, in civil society, are paid – they get money, or they pay for goods and services.

    There is no need for Central Planers like youself.

    By they way – please do not say “share” when you mean TAKE BY THE THREAT OF VIOLENCE.

    Mr Al Capone was not about “sharing” and neither is Mr Barack Obama.

    I again thank you Mr Slater.

    People who are against fiat money and Central Banking often say “if you want to centrally plan money – why not be fully totalitarian and plan the economy generally”.

    Normally supporters of government fiat money deny (hotly deny) that they are totalitarians (“you did not build that” types) – but you, my dear Mr Slater, just admitted it.

    See you on a battlefield somewhere.

    • Goodness, Mr Marks, You speak like a man whose ideology is under attack, not like a seeker of truth or justice.
      Just because I try to give credit where it due and speak against unquestioned injustices in your prevailing ideology, you attempt to insult me by plastering me with a label you find offensive and don’t bother to define. You fail to acknowledge even a grain of truth in my words nor do you attempt to address my point.
      This is not the standard of debate I suppose the Cobden centre seeks to foster, nor one I have time for
      However it is conistent with my experiences of gold bugs!

  • Paul Marks Paul Marks

    Mr Slater, first of all this has got nothing to with gold – or “gold bugs”, you extended the conversation to income and wealth in general.

    According to your ideology, Mr Slater, all income and wealth are rightfully owned by the collective. To you paying someone a free market wage (as an employee) is not enough – one must be made to “share the wealth”, under the “you did not build that” doctrine.

    That is a Communist doctrine (communism = egalitarianism and did long before Karl Marx was born)

    No “insult” meant – just a statement of fact

    You are a foe – (again not an insult – just a statement of fact), nothing to do with whether gold (or silver or givernment fiat notes) should be money or not.

    You are a foe because of your general “share the wealth”, “you did not build that” ideology.

    Discussion between us is pointless – as our objectives are fundementally opposed.

    You have no business here, any more than I would have any business going on to a socialist site.

    So I am asking you (and asking you politely) to leave.

    I repeat nothing to do with gold – let alone “gold bugs”.

    I would not be welcome on socialist sites – and I do not force myself onto the people there.

    You are not welcome in anti socialist places – for example I would not allow you into my home (at least not while I could still draw breath and hold weapon straight). That is not an “insult”, it is simply an honest treatment of you – as a foe.

    Please leave.

    • Mr Marks,
      By branding me a foe and asking me to leave rather than addressing my point you again show that you are anti-intellectual and preger to close off the conversation to a self-affirming clique.

      Egalitarianism is not a meaningful term. To suggest that everyone is equal is meaningless. I would like to see governments redressing some of the injustices that arise from land ownership and inherited wealth. I would not use force to take your metal. I would simply ensure that no-one was needy enough to except work on exploitative terms. I don’t need shiny things to be happy because I create real value every day through actual work which I exchange with trusted people to meet my needs.

  • Paul Marks Paul Marks

    Mr Slater – I “addressed your point” several times.

    In a free society people are paid for their services or they offer them for nothing (out of the goodness of their hearts).

    In a free society there are no “distributors” to “share the wealth” by force.

    Now go away.

    You are not wanted.

    Leave.

  • Mr Marks,
    You are becoming an object of hilarity. First on the basis of a preliminary sharing of ideology which you didn’t at all indicate you understood, you brand me a foe and and banish me from your house; then you take a unilateral decision on behalf of the general public here present that I am not welcome, finally you lecture me with some undefined Bushian notion about a ‘free society’;
    Tell me, in your free society would people be free to grow food without having first to pay off landlords? Would they be free to refuse to work in degrading conditions without starving? Would they be free to seek truth on public websites without being given antisocial labels and asked to leave?
    If you do not keep attempting to have the last word, it will be as if I were gone – it is only you that keeps me here!

  • Paul Marks Paul Marks

    I think I will stop feeding the troll.

    • I’m a troll now?
      Yet further evidence of your deploying primitive techniques to silence an opinion that questions your greedy claim on wealth you helped to create.
      Your notion of freedom was expressed only insofar as it enables you to retain your money. What freedoms would you extend to the poor, apart from the choice of slavery or death? Or perhaps the poor have only themselves to blame?

  • Paul Marks Paul Marks

    Feeding trolls is a mistake.

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