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Friday, February 3, 2012

Glimpsing the Hereafter

Welcomeback,Ari!!Ifyoudon'tknowARISTOTLE,that'sprobablybecausehetookabriefhiatusof7yearsand3daysfrompostingcommentsaboutFreegold.Andthatwasafter6yearsofpostsandcommentsprior.Soneedlesstosay,I'mTHRILLEDtohavehimback!Ariwrotemeanemailtheotherdayincludingthis:"Inthemeanwhile,I'mhappytonotethatBillGrosshas(yetagain)steppeduptothechallengeofcarryingsomewaterforustoday.Beginsfolksyandendsgolden.Nowthat'swhatIcallhavingaworthywaterboy(!),,,hebeingmanagerofthelargestmutualfundontheplanet(i.e.,PIMCO's$242billionTotalReturnbondfund)."

Here'sthequotewithwhichBillGrossbeginshislatestandgreatest,LifeandDeathProposition:Wheredowegowhenwedie?WegobacktowherewecamefromAndwherewasthat?Idon’tknow,Ican’tremember



VirginiaWoolf,“TheHours” Withthislead-inhedrawsacomparisonbetweendeathandthehereafter,andthedeathofourfinancialsystembuiltuponthelendingofrealsavingstodebtorswithwhatcomesnext.Hegoesontoexplain,"Thetransitionfromalevering,asset-

inflatingseculareconomytoapostbubbledeleveringeramaybeasdifficultforonetoimagineasourdepartureintothehereafter."ButatleasthegivesitashotwithalittlehelpfromVirginia,endingwith,"Wheredoescreditgowhenitdies?Itgoesbacktowhereitcamefrom."Now,whileIcan'thelpyouverymuchwiththepearlygates,Icanindeedhelpyouimaginethemonetaryandfinancialhereafter.Itmatterlittletomeifyoubelievemeornot,becauseIstillthinkthereisvalueinsharingthisvisioneitherway.Someone(whoincidentallynamedhisbandThirdEyeBlind)onceremarked,"Idon'treallybelieveincrystalballs,butIrespondtotheneedforthem."AndsonowI'lldustoffmyownveryspecialcrystalballwithawinkandanodtoafewofyouwho

understandthisneed.IdorecommendreadingBill'sentirepieceashelaysitoutnicelyhowhittingthezero-levelfloorinUSDinterestratesisinevitablyleadingtoa"liquiditytrap"forearnedsavings.Itsoundstomeliketheinescapablegravitationalpullofablackholesingularitythat,perhaps,createssimilardifficultyintryingtoseethroughtotheotherside.BillGrossisinthebusinessofhelpingsaverslendtheirsavingstodebtorsthroughtheuseofbonds.Andhehasdoneverywellinthisbusiness,whichiswhyheisacutelytunedintotheimplicationsofzerointerest.Withzerointerest,youcan't

earnayieldoracapitalgainasyoucanwheninterestratesarehighandfalling.Andsothereisnoreasonforsaverstolendmoneytodebtorsforthelongertermsnecessaryinordertorunaneconomy.Infact,itisterriblyriskyforsaverstodosoinazerorateenvironment.TheNewNormalThereisno"fiatmanagement"solutionfortheproblemBilldescribes.Thesaverssimplycannotlendtheirsavingstodebtorsanymoreinawaythatisbeneficialtoboththeeconomyandthesavers.EventheKingofthebondshimselfissoundingthisalarm.Butthere'sanothertrendinthisnewnormalthatshouldbeevenmore

alarmingtosaversstillholdinglongerdateddebt.Wheneverandwhereverpushcomestoshove,thesaverswillbeandarebeingforcedtotakelosseswhilethesystemprotectsitselfonanominalbasis.Justlookhere:ObamatoUsePensionFundsofOrdinaryAmericanstoPayforBankMortgage"Settlement""[P]reviousleakshaveindicatedthatthebulkofthesupposedsettlementwouldcomenotinactualmoniespaidbythebanks(thecashportionhasbeenrumoredatunder$5



billion)butincreditsgivenformortgagemodificationsforprincipalmodifications.Therearenumerousreasonswhythatstinks.Thebiggestisthatservicerswillbeabletocountmodifyingfirstmortgagesthatweresecuritized towardthetotal.Sinceoneofthecardinalrulesoffinanceistouseotherpeople’smoney ratherthanyourown,thisprovisionvirtuallyguaranteesthatinvestor-ownedmortgageswillbetheones

toberestructured.Whyisthisabadidea?ThebanksareNOTrequiredtowritedownthesecondmortgagesthattheyhaveontheirbooks.Thisreversesthecontractualhierarchythatjuniorlienholderstakelossesbeforeseniorlenders.Sothisdealamountstoatransferfrompensionfundsandotherfixedincomeinvestorstothebanks,attheAdministration’sinstigation." Pleaseallowmetotranslate.Ifyouoryourpensionfundboughtanykindoffixed-incomesecurities(alsoknownasbonds),youloanedsomeofyoursavingstodebtors.Privatedebtiscreatedbybanksexpandingtheirbalancesheets.Someofitremainsonthebankbalancesheetandsomeofitissoldtosaverslikeyou.Securitizedandsovereign/publicdebtisthe$IMFSproxyforgold.Butwhenthe

debtdefaults,thesaverstaketheloss.Thesystemwillbeprotectedatallcosts.Itmaymakeyouangry,butthat'sjustthewayitisandalwayshasbeen.Soitappearsthatthesystemwillwritedownthedebtheldbysaversbeforethatheldbythebanksinthiscase,toprotectthesystem.Whendebtdefaults,SAVINGSaredestroyedbecausedebtistheproxyforastoreofvalueinthe$IMFS.Whereverpossible,earnedsavingswillbeforcedtotakethelossesfirst.Butiftoomanylosseshappenatonce,theywillbesocializedtoprotectthesystem.Thesystemalwaysprotectsitself,firstbysacrificingthelowhangingfruit,thenbysacrificingthecurrencyitself.

I'msurethatbynowyouhavealllearnedthetwonewbuzz-terms,"theISDA"and"thecreditevent".Ifnotyoucanreadaboutthemhere.Basically,agroupconsistingofbankershasthejobofdecidingwhetherthebanksorthesaverswilltakethelossonGreekdebt.Thedeckisstackedagainstuswhereverweturn.I'mnotheretocastjudgmentonthissystemicinequitybetweenbanksandsavers.IhavelongfollowedinFOA's(andARI's)footstepsinpointingoutthatthisissimplythewayithasalwaysbeen.That'saprettygoodreasontonotsavewithinthesystem,wouldn'tyousay?Whenpushcomestoshove,thesystemwillprotectitselfandforcelossesontothesavers.Ultimately,inevitably,today'sdollarwilllosesomuchrealvaluethatitwillsavethebanksnominallywhileputtingallsystemic

lossesontoeveryoneholdingdollars,regardlessofthedefaultofdebtors.Here'saquotefromanarticlethatcaughtmyeyetheotherday:"It’stoughforriskaversesaversbutthatiswhatUSmonetarypolicyhasbeenabout— forcingthemtobuyrisk,andhigherreturns.Thatpolicyisworkingbuttrillionsofsavingsstillsitincashorbonds."



Saversarenotinvestors,tradersorspeculatorsThislittleconceptissomethingALLWesternersaregoingtorelearnonewayoranother.Markmywordsrighthereandnow.InTheStudebakerEffect Iwrote:

"Asaverisdifferentfromaninvestororatrader/speculator.Asaverisonewhoearnshiscapitaldoingwhateveritishedoes,andthenaimstopreservethatpurchasing poweruntilheneedsitlater.Investorsandtradersaimtoearnmorecapitalbyputtingtheiralready-earnedcapitalatriskinonewayoranother.Thistakesacertainamountofspecializationandfocus.Butthisdifferenceisabigtopicforanotherpost.Andanyway,itdoesn'tmattersomuchintermsofthegoldthesisfortoday.Todaythesystemisintransition,soyoucanthrowyourideasaboutthesedifferencesoutthewindow.Thereisnosafemediumforsimplepreservationofpurchasingpowerwhentheentiresystemshiftsfromtheoldnormaltothenewnormal.Whensystemsimplode,thesafestplacetobepaysoffbigtime!"

Thatsecondparagraphdenotesthedifferencebetweenstasisandpunctuationinmonetaryevolution.Todayweareapproachingaperiodofpunctuation,butinthehereafterstasiswewillallunderstandthatsaversarenotinvestors,tradersorspeculators.Ihaverefinedmybestadviceforbuyinggoldoverthelastfewyears.Hereitis,quotedfromarecentemailresponseIwrotetosomeoneaskingifhisparents,serioussavers,woulddowelltotakeonasmuchdebtaspossibleinorderto"save"morephysicalgold:

"Firstly,letmesaythatIneverrecommendanyonetakingondebttobuygold.Thatiswhatspeculatorsdoandsaversaregenerallynotequippedwiththenecessarytoolsittakestobeasuccessfulspeculator.Therearetoomanypotentialpitfallsforsaverstodosomethinglikethat.Ingeneral,myadviceistogetoutofdebtandputatleast5%ofyoursavingsintophysicalgoldcoinsorbarsinyourpossession(oratleastunder yourimmediatecontrol).Ibelievethat5%isano-brainer.Youdon’treallyneedtounderstandmuchaboutgoldtogoin5%.ButIwouldn’tdoitinanykindofpapergoldorevenpaperproductsclaimingfullphysicalbacking.Papergoldisforeaseintrading,notforsaving.Isaydoitinphysicaland5%willatleastkeepyouwholecomehellorhighwater.

Beyondthat,Isaybuyonlyasmuchgoldasyourunderstandingallows.Formanywhohavereadmyblogforyears,understandinghasledthemtobe90%to100%in physicalgold.I,myself,amveryclosetothat.AndIknowafewthathavebeen100%allinsincethelate90s,with$millionsinphysicalgold.Butyoudon’tdothatunless youhavecompleteunderstandingofwhatyouaredoingandwhy.Onlybuya percentageofgoldequaltoyourunderstanding.5%isano-brainerandanythinglessthan5%isrecklesspigheadednesswithwhat'shappeningtoday.That’smybestadvice."



Yousee,asaverisstilljustasaver,eventoday,evenwhenweareinthepunctuationphase.Andthat'snotaput-down.Thegreatestgiantsintheworldaresavers.WhenwelookatwhatitistobeaCapitalist,itiscompletelyseparatefromtheactofsaving.TheprimarydefinitionofaCapitalistisonewhohascapitalinvestedin

business.Thereisadifferencebetweenpreservingpurchasingpowerandtryingtoincreaseyourpurchasingpowerbynavigatingyourwaythroughrisk.Asthequoteabovecorrectlydescribessavers,theyare"riskaverse".That'stheverydefinitionofasaver.Anydeviationfromfullrisk-aversionandasaverbecomessomethingelse;aninvestor,atraderoraspeculator.Mypointisthattheheaderforthissectionisadeepconcept,atimelesstruth,alittlebitofwisdomfromtheages.Saversarenotinvestors,tradersorspeculators.Andsincethispostisaboutglimpsingthehereafter,givemeafewminuteswhileI

consultmycrystalball.Here'ssomemusicwhileyouwait… AfterTheTransitionOneofthethingsIhavefoundthatpeoplehaveahardtimegraspingisthatALLsaverswillwanttobeingoldafterthetransition,eventhoughitwon'tdeliverANYrealgainslikewe'vehadoverthepastdecade.Thisisadifficultconcepttowrapone'sheadaround.Peopleseemtothinkthattheyareingoldonlyforthebig30-baggerrevaluationandthenthey'llwanttofindsomethingelseinwhichtoputtheir

littledollarsoldierstoworkearningayield.EitherthatortheyimaginethatFreegoldwillbeanenvironmentofperpetualrealgainsforgoldholders.Itwillnot.Freegoldwillbesimplepurchasingpowerpreservation,andyou'llloveit!Nogain,butalsonoriskandnoloss.That'swhatsaversneedandwant.Andmostofusaresaverswhetherweadmititornot.Thisisareallybigideaweneedtocontemplateifwedon'twanttoberunoverintheend.Anyfinancialadvisorintoday's$IMFScanexplainthereasoningbehindinvestinginfixedincomesecuritiesalsoknownasbonds.Theyareforrisk-averseinvestorslookingforaconstantandsecurenominalreturnontheirinvestment.Intheory,the

safestbondswilldeliveranominalreturnequaltothepurchasingpoweryourprincipleinvestmentlosestoinflationovertime.So,intheory,thesafestbondsaresupposedtodowhatgoldwillinfact doinFreegold,perfectlypreserveyourpurchasingpowerovertime.Howcangoldperfectthepreservationofpurchasingpoweryouask?It'squitesimplereally.Itwillcomefromaglobalshiftinperceptionastotheveryreferencepointforpurchasingpower.Whatisthebenchmarkforpurchasingpowertoday?



TheBigMac?Ha!Thinkaboutthatoneandgetbacktome.Inthemeantime,checkoutmypostReferencePointRevolution!Sointoday'ssystem,securitizeddebtisthewayvarioustranchesofdebtorsbidsavingsawayfromthesavers.Andoverthethreeorfourdecadesinwhichthishas

beenthenorm,astrangeconcepthasgrownintonearlyuniversalacceptance.Thatistheideathatsavershaveamoralobligationtosocietytolendtheirsavingstothedebtors,andthatbyhoardinggoldinstead,youaresomehowdeprivingsocietyofyourvitalnet-production.Anabsolutelyridiculous,bass-ackwardnotion!CharlieMungersaiditthisway:"Oh,Idon'thavetheslightestinterestingold.Ilikeunderstandingwhatworksandwhatdoesn'tinhumansystems.Tome,that'snotoptional.That'samoralobligation.Ifyou'recapableofunderstandingtheworld,youhaveamoralobligationtobecomerational.AndIdon'tseehowyoubecomerationalhoardinggold.Evenifitworks,

you'reajerk." ToCharlieIrespondedwiththis:"SoMungerandtheDingbatarewrongwrongwrong!You'reajerkifyousavein paper,enablingthedestructionofWesternCivilization.RationalpeopleeverywherehaveamoralobligationtobuyONLYphysicalgoldwiththeirsavings.Ifyou'recapableofunderstandingtheREALworld,youhaveamoralobligationtobecomerational. AndIdon'tseehowyoubecomerationalinvestinginCharlieMunger'spaper.Evenifitworks,you'reajerk,justlikeol'Chuck."

ImagineIproduced50millioniPhonesforthemarketplace.Andthroughthatnet-productionIwasabletosave$10billion.IfIbuygoldwithmy$10billionratherthanlendingit,amIdeprivingtheeconomyofmyiPhones?Ofcoursenot!HaveIdeprivedtheeconomyofmyaccumulatedpurchasingpower?Nope.Isimplygaveittoanothersaverwhowasreadytoendhisconsumptiondeferment.And,amazingly,thecreditmoneysystemstillallowsthedebtorstoborrowpurchasingpowertobuymyiPhones.Butthebestpartisthathoardinggolddoesnotdeprivetheeconomyofanything.YoucanreadmoreaboutmyresponsetoCharlieM.inmypostAWinnerTakestheGold.BeforeandAfter

Mylong-timereadersareawarethat,beginningwithAllPaperisSTILLashortpositionongoldinMarchof'09,Ihavebeenrefiningaconceptualmodelofthe$IMFSstasisandpunctuationperiodsbasedontheinvertedpyramiddevelopedbythedeflationisteconomistJohnExterinthe1970s.Exterputgoldatthebottomoftheliquiditypyramid,justbelowthedollar.Hesaidthatgoldwasthemostliquidasset.Andintheend,heenvisagedarushdownthe



pyramidtoliquidityinwhichwewouldseethedollarandgoldrisetogetherforatime.AsGaryNorthwrotein2009,"Sofar,histheoryhasyettobetested.Wehavenotseenarisingdollarandarisingpriceofgold."ButIwillnotethatANOTHERwrotesomethingin1997thatseemstobackExter's

view:Date:WedNov05199720:33 ANOTHER(THOUGHTS!)ID#60253:Thepriceofthemetalincurrencytermswillbemadeforalltoseeasitmovesquicklyupwardforaveryshortperiodoftime(30days).Afterthatonlyblackmarkettradersandthirdworldnooneswillunderstanditsprice!Whenisthisgoingtohappen?Ihavenoidea.Isthereanythingtolookforthatwilltelluswhenthe problemshavestarted? AtfirsttheUS$andgoldwillgouptogetheragainstallotherassets!

Interesting,huh?8monthsafterthe"AllPaper"postIwroteGoldisWealthinwhichIbuildanuprightpyramidunderExter's,representingthephysicalplaneofgoodsandservices,andformingakindofhourglassshape:



10monthslater,inJustAnotherHyperinflationPost-Part3Iusedthismodeltoillustratetheflowofcapitalduringacurrencycollapse:



Andnow,whatI'dliketodoistotakeastabatmodelingwhatthismightlooklikeafterthetransitiontoFreegold.Allmodelingupuntilnowhasbeenbeforeandduringtransition.Butpresumablythingswilllookalittledifferenthereafter ,don'tyouthink?CostataandIhavebeendiscussingwheregoldshouldgointhe"after"modelforawhilenow.Shoulditbeinthemonetaryplaneorthephysicalplane?Shoulditbeparallelbutofftothesideofthecurrency,orwhat?Whilewehavenotcometoanagreementonthenittygrittydetailsofthe"aftermodel",I'dliketoputmygeneralthoughtsouttherebecauseIthinkthatyouwill

findthemuseful(andmycrystalballsayssotoo).Sohere'stheverybasicbeforeandafter.Ihaveputgoldupwherethefinancialsystemcollapsedintheold$IMFS.Butdon'tworry,I'mnotgoingtoleaveitthere:



Theplacementofgoldinthe"before"reallydoesn’tmatterforourpurposesrightnow.Itcouldbeineitherplaneorboth.Butinthe"after"ithasfilledandreplacedthearenaformerlyoccupiedbyderivatives,securitiesandpapertradingwealthingeneral(securitizeddebt).Sowhat’sthepurposeofthisexercise?Here’swhatI’mthinking.Everyoneusesthebottompyramid,bothdebtorsandsavers.Andeveryoneusesthecurrencyportionofthemonetarypyramid.Butonly thesaversutilizethetopportionofthemonetarypyramid.Thedebtorsarenolongerthecounterpartytothesaverssotheyhavenobusinessupthere.Theonlywaytogetupthereistoproducemorethanyouconsumesothatyouhavesomeexcesscapitalwithwhichtobuygold.Thenyouareasaver.Soitlookssomethinglikethis:



(Ifyou'dliketoseetheseinfullsize,rightclickontheimagesoyoucanopenitinanewtaborwindow)

__________________________________________________________SideNote:Yes,Idorealizethattherewillstillbeinvestors,tradersandspeculatorswillingtoriskcapitalinsearchofayield,eveninthehereafter.Butonceyoucometotermswithhowmuchofthatinvestingandtradingworldoftodayisactuallyfilledwith

saverswhothinkthat'stheonlywaytopreservepurchasingpower,you'llseejusthowtinybycomparisonitwillbeafterthetransition.__________________________________________________________WeALLexistinthephysicalplane.That’swhereweproduceandconsume.Currencyfacilitatestheflowofvalueinthephysicalplaneofproductionandconsumption.Someconsumeamountsequaltotheirproduction,someconsumemorethantheyproduce,andsomeconsumelessthantheyproduce.Onlythislastgroupventures



abovethecurrencyline.Therestallexistcomfortablybelowit.Currency’smainpurposeistolubricatethe flow ofvalue.Gold’smainpurposeistostoreorstock pilevalue.Stockandflow.Goldandcurrency.Currencywillalsostorevalueforperiodsoftime,butthatisnotitsmainpurpose.Ifcurrencyhappensto

behaveasatemporarystoreofvalue,that’sonlyasecondaryeffectcreatedbyitssuitabilitytoitsprimaryrole.Misessaidasmuch(whichisinmyHonestMoneypost):Mises:Moneyisamediumofexchange.Itisthemostmarketablegoodwhichpeopleacquirebecausetheywanttoofferitinlateractsofinterpersonalexchange.Moneyisthethingwhichservesasthegenerallyacceptedandcommonlyusedmediumofexchange.Thisisitsonlyfunction.Alltheotherfunctionswhichpeopleascribetomoneyaremerelyparticularaspectsofitsprimaryandsolefunction,thatofamediumofexchange.

It’sprobablybesttoreplaceMises'useoftheterm"money"with"currency"forthepurposeofmynewmodel.ItcomesdowntothewholesemanticissueofwhetherFreegoldisDE monetizinggoldasFOAsaid,orRE monetizingitasMoldbugsays.Potatopo-tah-toesemanticsIMO.FOA'sdemonetizingreallymeansde-currency-fying,orremovinganysortoflinkbetweengoldandcurrencythatwouldcauseadirectcorrelationbetweentheirprices.Moldbug'sremonetizingmeansgoldmovingfromacommoditizedroleintoawealthreserveorstoreofvaluerole,whichiscommonlythoughttobeoneofthethreefunctionsof"money"today(althoughMisesmightdisagreeasintheabovequote).Sothatwholegoldsectionofthetoppyramidislikeanexclusivecountryclubfor

savers,likethemen-onlyclubsofyesteryear,wherewesaversallsitaroundsmokingcigars,practicingsecrethandshakesandagreeingthatwe'llonlybuygoldwiththeexcessleftoverfromournet-productionanddeferredconsumption.Andiftherewasanactualclub,thesavingsmediumcouldtheoreticallybeanythingweagreedon,likebaseballcards.Butbecausethere’snotanactualclubnorasecrethandshake,werelyonthefocalpoint andnetworkeffect principlestoidentifyandoptimizethatsingularitem.Allgoldtransactionsareessentiallyfromsavertosaver.Thedebtorsneednotbeinvolvednorconcernthemselveswithourexclusiveclubinteractions.Whenasaverproducessomeexcessandleavesitontheproverbialtableattheeconomicfair,he

buysgoldfromanothersaver(eitherinsideoroutsideofhiszone)whohasdecidedtodishoardsomeofhisgoldinfavorofconsumption.Itisthechangingpurchasingpowerofgoldthatdetermineshowmuchgold(byweight)changeshands.(PleasereviewmypostTheDebtorsandtheSaversifyouareunclearaboutmynoveldemarcation.)Debtorsnet-consumeonaslidingscalerangingfromconsumingexactlyinproportiontotheirproductionondowntoconsumingasmuchastheycangetaway



withborrowing.Sonettingitout,allnet-exportsfromazonecomefromthesavers.Thedebtorsconsumetheirownproductionplussomeofthesavers'production,andifthere’sanythingleftoveritisexported.That’swhathappensinthe"surplusex-goldzone".Goldisflowingintothatzone.Sothedebtor'sactionsdohaveaninfluenceonthebalanceoftradeeventhoughtheydon’tcontributetoexports.

Butwhenthedebtorsareborrowingtoomuchcurrencyandconsumingtoomuchinthephysicalplane,thereisamechanisminFreegoldthatultimatelyslowsthemdown.Thatmechanismisthepurchasingpowerofthecurrency.Whenthedebtorsareconsumingtoomuchthey'llexperiencepriceinflationwhichwillforcethemtoconsumeless.Soitisthepurchasingpowerofthecurrencythatregulatesthedebtors.Butchangesinthepurchasingpowerofgoldwithintheexclusivesavers'clubisnotlinkedtothemechanismwhichlimitsthedebtors.Thepurchasingpowerofgoldcanberisingorfallingregardlessofwhethercurrencypricesareinflatingordeflatingbecausegoldislikeanisolatedcircuit.

Saverschoosetohoardordishoard(producemoreorconsumemore)basedonthechangingpurchasingpowerofgold,notcurrency.Sothesavers'savingsiscirculatinginaclosedcircuitwhereitcanbeexperiencingthesameor oppositeeffectsasthecurrency.ItistrulyanescapeoptionlikeOBA'sMaglev.Sowecancutgoldoffofthepyramidstructureifwewantto,andwecanputitwhereverwewant.Wecanstickitbackinthephysicalplanesincegoldisphysical,justlikebaseballcards,orwecansetitofftotheside,orwecanjustignoreitandcutitoff,likethis:



Where’sgold?Whocares?Itisaclosed,isolatedcircuitforthesaversonly.Now(above)wearedealingwithonlythepartsthatinvolveeverybody .Anditisnosurprisethatthemonetaryplaneissorelativelysmall.Atleastitisnosurprisehere.Alittlecurrencygoesalongway.FromGold:TheUltimateWealthReserve(2009):Imagineanislandof100menwithamoneysupplyof1,000seashells.That's10seashellsforeachman.Butoverthecourseofayeareachmanontheislandworksandearnsanannualsalaryof100seashells.Sothetotaleconomicpoweroftheislandoverayearis10,000seashells.WecouldsaythattheGDPoftheislandis10,000ss.We

couldalsosaythatthedemandforseashellsis10,000overtheperiodofoneyearandthatdemandismetbyasupplyofonly1,000seashells.Nowimaginethatownershipofapieceofrealestateonthisislandcostsabout2year'ssalary,andthatthereareenoughpiecesoflandforeachmantoeitherownorrentone.Soeachpieceofpropertymightcostabout200ss.Theentireisland'sworthofresidentialrealestatewouldbeintheballparkof20,000seashells,twicetheGDP.Yetthemoneysupplystillremainsat1,000seashellsandthatlimitedsupplysomehow



meetsdemand.Thereasonthisworksisbecauseseashellsarethecurrency.Theycirculateandpass fromhandtohandoverashorttimeframe.Thisiscalledvelocityandithastheexactsameeffectonthevalueofasingleseashellasdoesthesizeofthemoneysupply.On

ourisland1,000seashellschangehands10timesperyearcreatinganislandGDPof10,000ss.Iftheychangedhands20timesayeartheGDPwouldbe20,000ss.Orifwedoubledthemoneysupplyto2,000seashellsthatchangedhands10timesperyearitwouldalsoyielda20,000ssGDP.Sovelocityandmoneysupplyofthecurrencyhaveexactlythesameeffect.Sowecanhaveaphysicalplanewhosetotalnetvalueismuchgreaterthanthetotalamountofcash.That’sbecause"Thepureconceptofmoneyisourshareduseofsomethingasareferencepointforexpressingtherelativevalueofallotherthings." (quotefromMoneyness,amust-readpostIMHO!)

Samegoesforgold.Allthegoldcanbeworthmanymultiplesofallthecurrency.Thereisnoneedforanycorrelation.Gold(insize)circulatesslowerthanhomes.Itcirculatesonagenerationaltimescale.Sothecurrencydenominatesthevalueofeverythingelsewithoutneedingtohaveanyquantitativecorrelationwithallthatstuff.Canyouimagineiftherehadtobe$500,000cashsittinginavaultsomewhereearmarkedspecificallyforyourhouseinorderforyourhousetobeworth$500,000?No,ofcoursenot!Yourhouseisworth$500,000becausethat'sitsvaluerelativetootherthingswithknownprices.Sonowlet'stalkaboutthedebtors.

Whattheyliketodoisindenturethemselvesforthefutureinordertoobtainpurchasingpowerinthepresent.Theycanonlyspendthatpurchasingpoweronceandthenit'sgone.Ithasgonefromthemtosomeonewhoearnedit.Sothenextpersonwhospendsthat"borrowedintoexistencecurrency"issomeonewhoalreadycontributedtotheeconomyandearnedit.Theborrowergetstospenditonceandthenhehastoworkitoffbycontributingtotheeconomyoveraperiodoftime.IntheprevioussectionItoldyouthatpriceinflationwillbetheautomaticgovernorofanyconsumptionbingesundertakenbythedebtorsinthehereafter.Butwhilepriceinflationwilllimitthedebtors'abilitytoperpetuallyconsume,itwillnotaffect

thepurchasingpowerstoredingoldbythesavers.Infact,mycrystalballinformsmethatitisthesaverslendingtheirexcessproductiondirectlytothedebtorsthatallowsfortheperpetualdeficitswestrugglewithtoday.Ithinkthatifwelookcloselyathowthedebtorsusethefiatmoneysystemwithandwithouttheassistanceofthesavers,itwillbecomeclearthatwewillallbebetteroffwithabifurcatedmonetarysystem.Anditwillcertainlybeclearthatthesavershavenobusinesstakingdebtorsonasthecounterpartytotheirsavings.



Itwouldcertainlybemassivelyinflationaryifwewentfromnodebttoallofasuddeneveryoneborrowingatthesametime.Butinreality,thereissomeoneworkingoffhispastdebtwheneveranewdebtorgoesintonewdebt.Ofcourseolddebtorsandnewonesdon’tpreciselyoffseteachother,butthat’sokay,becausegold

savingsfirstfloatagainstthecurrency,andthentheyalsofloatintheirisolatedcircuitofchoicesmadebysaversbasedonthechangingpurchasingpowerofgold(notitscurrencyprice,butitspurchasingpower).Sogoldhaskindofadoublefloat.Itfloatswiththeinflation/deflationofeverythingelse.Andthenitalsofloatsinaclosedcircuitconsistingonlyofsavers(andtheir"hoard/dishoard"choices),ofwhomthemajority(measuredbyvaluestored)areintergenerationalgiants.NowthatI'vehopefullyestablishedthatinthehereaftera)"alittlemoney(currency)goesalongway"andb)thesaversaresufficientlyprotectedagainstany

inflationarymayhemthedebtorsmaycause,let'szoominonthatsmall"monetaryplane"andthinkabouthowitworks.



InafuturepostIplantodelveintothevitalanddelicaterelationshipandbalancebetweenbasemoneyandbankcreditmoneyandhowitaffectsthevalueofour moneyintermsofitsabilitytolubricatecommerce.Butfornow,Ihaveacoupleofquestionsforyoutoponder.

Inthinkingaboutthemoneysupply(cashandcreditinclusive)thatisactuallyintheeconomy,wouldyoucountcashthatisstackedupinsideanATMaspartofthatsupply?Here'sahint:ThatcashisnotintheeconomyuntilsomeonewithdrawsitfromtheATM.Ifyoucountitwhileit'sstillinsidetheATMthenyouaredoublecountingthatmoney.Isitapositivesignforthefuturewhenthereare$Trillionsinsavingssittingincashandnearcashequivalents?Allthatmoneymustmeanweareloaded,right?Itmustmeanourcashdollarisstrongwhichimpliesthemarketthinksitwillbethatwayinthefuture,right?If$Trillionsaregood,wouldn't$Quadrillions,$Quintillionsor

$Sextillionsbethatmuchbetter?Andwiththisthoughtinmind,doesarisingamountofsavingscrowdingintocashandnear-cashequivalentsrepresentapositiveornegativeviewofthefuture?Thosesuper-lowratesattheshortendoftheyieldcurverepresentreallybigmoney,toobigforFDICprotection,thatjustwantstosaveitself.Itisbigmoneythat,likeBillGrosssays,isfarmoreconcernedaboutthereturnof money(purchasingpowerpreservation)thanthereturnonmoney(yield).ThatshortendisanawfullycrowdedplaceinthelandofZIRPforeverandmonetaryevolution,especiallywhenyouconsiderthetimefactor.(H/TOBA)

Ofcourse,whatIhavedescribedaboveisasimplemodel.Therealitywillbeabitmorecomplex.Forinstance,goldwillhavesomecompetitionalthoughitwillbetinyincomparisontotoday.Somegovernmentdebtwilllikelycompeteforyoursavings.ButtheUSgovernment,forexample,willhavetocompetejustliketheGreeksdotoday.Andwewillstillhaveamuchmorelimitedmenuofinvestmentsandtradingopportunitiestolureyouintoputtingyourhard-earnedsavingsatrisk.LikeIsaidatthetop,Ican'thelpyoumuchwithwhatitwilllooklikeafteryoudie.Mycrystalballain'tthatkindofcrystalball.ButIcantellyouthatsomewhere,someway,somedaywewillallfindout.Fortunatelythough,mycrystalballdoesworkforthemonetaryandfinancialfuture.Itpaintsanice,clearpicture,butontimingit's

stillalittlehazy.Butonethingitdoesmakeperfectlyclearisthatit'sjustaquestionoftime.Sincerely,FOFOA