Wednesday, May 25, 2011

Fiat Money is a Debt Instrument; Gold and Silver are not.

"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." - Anonymous 

How does all this debt thing work? Is it so complex, as to confuse, that we all just give up? Head in the sand type thing.

Here is how I see it working.

When money (credit) is issued, there is a corresponding debt (debit) on the other side. It is the law of physics really. Positives have a negative. Energy emitted in one form gets translated to another, which has an equalling effect.

So if a Bank issues new money (and they can legally issue about 90% of new money based on your deposit), then this is credit. The loan they issue on the other side is debt for you.

Look at it this way. The paper in your hand, that says $1 or 1 rupee or 5 euros, is a debt instrument which is owed to someone else. When that person on the 'other side' of your paper money wants their money back, you have to pay up or default.

On a default, the holder or lender now owns your asset outright.

So what if a country defaults. Well, that's where it could get sticky. This is the stuff of wars. Often you might find that Dictators (a Hitler or a Napolean) suddenly appear and promise all sorts of things because the citizens are desperate to get out of the situations they are in. They don't want to hand over their assets.

Gold however, is out there in a box on it's own. Once you own it in physical form, you are the owner and there is no creditor on the 'other side'. What makes gold perfect in this sense, is that it is also money. It is the ultimate medium of exchange.

Gold in New Zealand dollars: $1914.29 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $45.90 per oz
Previous all time high: $48.58
per oz

Articles of interest:

What Happens when Greece Defaults?

See article here
The Telegraph


The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001

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