Friday, February 1, 2013

Gold, the Dollar and Value

This from Freegold:

"Historically, the medium of exchange deflates against the store of value to reinstate real value to money. In a gold money system, this meant that either the physical gold rose in value, or the excess paper coupons in circulation to represent it must be destroyed, to return to a monetary value equilibrium. This process is the bank failures and loss of saver’s money. This "monetary value equilibrium" can be found as a balance in the ratio of value between the store of value and the medium of exchange monetary functions. Today though, the debt-based dollar is used in all three monetary functions, meaning that the store of value has a counterparty.

The counterparty holds dollars (and derivatives thereof) as collateral assets. How can the dollar deflate against itself? “Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt...” If the debt this present monetary system utilizes for all three monetary functions is allowed to default, which would be the natural course of events, it will quickly cascade into default on the sovereign nation level and complete systemic collapse. The only way to counter this is the printing of more (and more...) money by the Fed to buy all this debt, until ultimately it buys it all. When debt-based fiat is used concurrently for all three monetary functions, these are the only two options when the debt load finally becomes too large.

The dollar cannot deflate against itself. It can collapse in total default, or collapse in hyperinflation. Under the current arrangement with the dollar as the "only money”, these are the only two options to restore the monetary value equilibrium. What if, in a break with tradition, the current monetary function arrangement were altered? With the debt-based dollar performing all three monetary functions, we face a choice between two unpalatable options, both of which culminate in collapse.

Circumstances dictate a different medium be assigned the store of value function, to give the dollar something to deflate against. Voila! A third option, one which does not result in collapse. The only feasible store of value the market can select is the same one the market had always used, because it is the only medium meeting all the criteria that the store of value requires, with the top of the long list being... no counterparty, and the inability to create more at will. Physical Gold."

Gold in New Zealand dollars: $1982.370 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $37.50 per oz
Previous all-time high: $59.19 per oz (30 Apr, 2011)
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