The Gold Standard Journal 25

The Gold Standard The Gold Standard Institute
Issue #25 ● 15 January 2013 1

The Gold Standard
The journal of The Gold Standard Institute

Editor Philip Barton
Regular contributors Louis Boulanger
Rudy Fritsch
Keith Weiner
Occasional contributors Ronald Stoeferle
Sebastian Younan
Publius

The Gold Standard Institute

The purpose of the Institute is to promote an
unadulterated Gold Standard

www.goldstandardinstitute.net

President Philip Barton
President – Europe Thomas Bachheimer
President – USA Keith Weiner
President – Australia Sebastian Younan
Editor-in-Chief Rudy Fritsch
Webmaster Jason Keys

Membership Levels

Annual Member US$100 per year
Lifetime Member US$3,500
Gold Member US$15,000
Gold Knight US$350,000
Annual Corporate Member US$2,000
Contents
Editorial ........................................................................... 1
News ................................................................................. 2
On Journalists ................................................................. 2
Owning the Casino: A Harsh Choice for Investors . 3
The American Corner: Trillion Dollar Coins ............ 4
The Unadulterated Gold Standard Part IV:
Introduction to Real Bills .............................................. 5
Why is Gold Such a Highly Emotional Topic? ......... 7
Human Action or Human Folly? ................................. 8
Youth is Wasted on the Young .................................. 10

Editorial
I am an investor in a small business in Australia. We
received our monthly electricity bill yesterday:
$2,258. Down the bottom it notes that this includes
a new $250 charge for carbon tax – every month -
$3,000 a year!
When all my suppliers factor this increase into their
operating costs then all my other bills will also take
another hike. A government enquiry in the UK
established in 1812 that any new government tax or
regulatory burden would more than double by the
time that it reached the level of the consumer.
The results to date from the hyperactive ning-nongs
infesting our parliament? Try $29 for Spaghetti
Bolognese at a café; $21 for a pack of cigarettes;
$152 for a pair of shorts and a t-shirt. Yet the new
taxes and regulations pour forth from the politicians
- fiscal dimwits pushing Australia over the edge.
Whilst Australia is ahead of the pack in the sort of
political hubris that is busily devouring the world’s
accumulated wealth, it is by no means alone. In
Europe the Institute is talking with some real
political heavyweights. They know that there is a
major problem, but they are still not ready to bite the
bullet. They are still ‘hoping’. The political world is
paralysed; they know things cannot go on as they are,
but this is equally balanced by the certainty that they
cannot stop what they are doing without rupturing
public confidence in the system.
Where does it all end – or, more pertinently, when
does it all end? Not until confidence is shaken in the
medium of exchange. We still seem a long way off
that change of reality. No matter how bad things
are, no matter how badly things continue to
deteriorate, there will be no seismic shift until people
wake up to the fact that their medium of exchange is
a fraud. When that is understood then the jig is up.
Gold bonds are the answer – the only workable
answer that has been presented so far. This is what
the Institute will continue to work towards. Now I
will wander down past all the closed shops and have
my $4.20 cup of coffee before it becomes $4.50.
Philip Barton
The Gold Standard The Gold Standard Institute
Issue #25 ● 15 January 2013 2
News
Monetary Metals: The trillion dollar coin. See also
Tim Iacono who says the coin idea “draws attention
to how absurd the current monetary system has
become.”
≈≈≈
The Amendment Center: Gold and Silver Legal
Tender Law Introduced in Indiana
≈≈≈
Keith Weiner on Capital Account with Lauren Lyster
≈≈≈
BBC: Gold smuggling in Italy
≈≈≈
Mining Weekly: World’s first underwater mine in
trouble after PNG government pulls the plug by
arbitrarily terminating its contractual obligations.
≈≈≈
Bullion Street: Iran gold ‘imports’ from Turkey
≈≈≈
Yahoo News: Fake gold coming out of China
≈≈≈
MineWeb: Sukhoi Log – gold in the ground
≈≈≈
NineMSN: Tasteful New Year fashion statement
≈≈≈
Before Its News: Divisible gold
≈≈≈
Liberty Blitzkrieg: Proposed registration of gold and
silver sales in Illinois.
≈≈≈
Mining.com: Chinese acquisitions of overseas gold
miners continues.
“We all know what to do, we just don’t know how to get re-
elected after we’ve done it.”
Jean-Claude Juncker, Prime Minister of Luxembourg
(I doubt that they have any idea what to do, but it’s a
great quote)
On Journalists
“It was not these contributions that deprived
Viennese journalists of their independence; it was
their ignorance that fettered them; the great age of
Viennese economic journalism had long since passed
away. The excellent economists who had
collaborated with the press - among them Carl
Menger - had found no worthy successors.
All editors were ignorant and dull; they depended on
information from interested parties. Stock exchange
reporters received their information from the stock
exchange men who in such matters were spokesmen
for the big banks. When a government regulation
was passed or an important business transaction
took place, the journalists would rush to the
pertinent government official or to the businessman
concerned. The information the journalists received
from him was then presented to the public. The
government did not need to corrupt journalists; it
was enough to inform them.
Journalists feared nothing more than their being
informed a few days later than others in their
profession. To avoid such a penalty they were always
prepared to represent the government’s point of
view. Their economic ignorance then afforded the
advantage that they could plead the government case
without independent mental reservations.”
Ludwig von Mises – Notes and Recollections (lead
up to WW1).

The Gold Standard The Gold Standard Institute
Issue #25 ● 15 January 2013 3
Owning the Casino: A Harsh Choice
for Investors
When today’s savers seek to preserve wealth, they
labor under the weight of a distorted financial
system. Most either fail to understand the effects of
inflation and asset bubbles, or are unable to properly
measure and counteract them. Confused and
demoralized, people are methodically parted from
their purchasing power year after year.
Besides accumulating physical gold and silver, what
channels are open to those who do comprehend the
nature of the game? Is there still such a thing as
sensible diversification or an income stream that
doesn’t ultimately depend on stable interest rates?
Eight months ago I wrote an article discussing
Professor Antal Fekete’s 2005 insights on the
profitability of holding long-term US Treasury
bonds. I discussed the high returns being earned, and
the morality of gaming the fiat system for profit.
Another tactic is available, using index options. The
Professor discussed some of its concepts, as applied
to metals markets, in his 2006 piece “Bull in Bear’s
Skin”. But it has a more general application. As with
bond speculation, this opportunity would not exist
under a gold standard. Just as with rising bond
prices, it likely acts as a bribe to pacify those who
might otherwise take delivery of gold in significant
amounts.
For decades, option markets have allowed
speculators and hedgers to buy, for a comparatively
modest sum, a claim on potential profits from long
or short equity positions. To make money, buyers
must be correct in a trifecta-like bet on the direction,
magnitude and timing of moves in the underlying
security. Unsurprisingly, therefore, most options
expire worthless.
If the outlook for option buyers is bleak, is it smart
to take the other side of the trade? Yes, provided the
option seller can meet potentially large margin calls.
If this sounds like simple gambling, there is good
reason. Big wins addict option buyers, but as in Las
Vegas, playing long enough typically drains their
wallets. Option sellers own the casino.
A more useful analogy would be to owning a small,
specialized insurance company; one selling only
hurricane insurance. Periods of calm profitably while
peacefully collecting premium are peppered
randomly with losses of widely variable size. To
round out the analogy, these hurricanes hit in any
season.
Warren Buffett, owner of several soundly run
insurance companies, noted the advantage of
understanding and tolerating “lumpy” earnings. An
enterprise posting a decade of handsome profits
followed by a single year of heavy losses still
frightens off many ordinary investors in that
eleventh year.
Being prepared to weather heavy losses is a two-part
proposition: economic and psychological. First, the
option seller must have the additional cash or credit
available. Second, he must have the confidence to
use it.
Option buyers, by contrast, are often driven by fear.
Hedgers fear their previous judgment is wrong.
Speculators “fear” foregoing profits larger than their
capital can provide. To paraphrase George Clason’s
eloquent, deceptively simple work The Richest Man in
Babylon, speculators’ wealth flees when they try to
extract unreasonably high returns from it.
Are options sellers’ returns reasonable? As with most
capital allocation strategies, each participant’s
experience is different, depending on his entry point
and early success. Some have achieved annualized
returns of 10-15% over the last 7 years, even taking
into account dramatic margin calls (unrealized losses)
endured during extreme market volatility in 2008/09.
An option seller’s unrealized losses are unlike those
of normal long investors. Only when the underlying
security moves dramatically, period after period,
finally exhausting his capital or confidence and
forcing him to liquidate, must he crystallize his loss.
But if he is conservative and patient, time will likely
dilute the negative effects of any extreme market
volatility, as favorable probability steadily draws his
position toward a strong long-run return. By
comparison, a normal long investor cannot rely on
powerful mean reversion or automatic new profit
growth to erase paper losses in his position.
The Gold Standard The Gold Standard Institute
Issue #25 ● 15 January 2013 4
At present, selling options against a major US stock
index earns premiums representing an annualized
return on capital of more than 50% (before potential
losses). As explained above, whether his capital
grows fast enough to meet future margin calls
depends more on the individual involved than on
rate of return in profitable periods. Using this
strategy means accepting that harsh alternative, but
today’s investment landscape offers no other kind.
Do options sales divert capital from physical gold
purchases? Yes. But if one has already decided to
purchase long bonds, even on a partially levered
basis, stock index options can be sold using the
bonds as collateral.
This is also a neat diversification, intuitively
negatively correlated. A stock market panic causes
bonds to rise, a reasonably stable stock index lets
option selling continue profitably, and a prolonged,
sharply up-trending market is rare. And one’s capital
is doing double-duty, without any interest charges:
combined annualized returns to such investors since
2005 have exceeded 20%.
Throw in some blend of gold and silver as a core
holding, and one has as defensive a portfolio as these
speculative times allow. At least as long as you still
consider a good offense to be the best defense.
Option selling requires some active management, but
its essentials are relatively straightforward. How to
maximize the strategy’s returns, including controlling
the theoretically unlimited losses, is a topic for a
separate article. As we know, however, such risk has
not stopped option markets’ growth, and investment
advisors now specialize in option selling.
But for the fiat system’s pernicious effects, the
possibility of option premium collection as a source
of steady return would not exist. As despairing
investors increasingly transform into speculators,
option premiums naturally grow as demand for
leverage explodes. Most purchasers likely either
don’t know or don’t care about their true odds of
success, creating a good income for the sellers.
Such is life under our present monetary system.
Only the sharpest investors keep increasing their
wealth and purchasing power.
Publius
The American Corner: Trillion Dollar
Coins
A potentially dangerous turn of events may be
occurring in the US. Just as the politics between the
European Central Bank and the national central
banks is a unique wrinkle to the irredeemable
currency regime in Europe, the US has its own
unique political problems. One of them is that there
is a “debt ceiling” in the law. The government’s debt
may not exceed this ceiling, though Congress can
raise the limit if they choose. This has occurred
many times in the past.
Now the Republicans control the House of
Representatives but the Democrats control the
Senate and, of course, the presidency. To make
matters worse, when the Democrats swept into
office with President Obama in 2008, they took
control of both houses of the legislature with strong
majorities. In many cases (e.g. health care) they
almost completely excluded the Republicans from
the process. The Republicans are still smarting from
this and may harbor some desire for “revenge”.
Both parties—and their voters—want the current
spending trajectory to continue. But the issue is
scoring political points and scoring “pork” for their
respective cronies.
Now there is a dilemma. Debt continues to rise
exponentially. It had been doubling around every 8
years. But in mid-December, the debt reached
double its level from February 2006—a doubling in
less than 7 years. Without severe cutbacks in
spending or confiscatory taxation, the deficit cannot
be reduced. The debt ceiling must be raised, and this
means the Republicans are at least partially in
control. Or must it?
In the US, radical leftist policy is often tested using a
loosely affiliated “expert”. In this case, there was an
open discussion on various leftist blogs starting
about one year ago. If there was a principled or
articulate objection, then the left could drop the
trillion dollar coin on the floor without incurring any
political damage. Apparently they did not think the
response was strong, because now some of the “big
guns” like Paul Krugman have come out in favor of
it.
The Gold Standard The Gold Standard Institute
Issue #25 ● 15 January 2013 5
So what is the trillion-dollar coin? It is a way that
the left believes can let them work around the debt
ceiling by simply having the US Mint (which is part
of the Treasury Department, whose Secretary is
appointed by the President) stamp out a coin made
of platinum with a legal tender value of one trillion
dollars. This is extreme seigniorage.
It is also a change in the monetary regime. If it flies
(it’s too early to predict) then the US government
will go from borrowing the money they need to
outright printing it. And that’s what this is. To turn
$1500 worth of platinum into one trillion dollars is
an act of Money Printing, capital M capital P. I have
been a strong proponent of the deflation thesis. If
they transition to outright Money Printing, that
could quickly lead to currency collapse. I wrote a
longer piece on the ramifications beyond the obvious
ones, here.

Keith Weiner
President of the Gold Standard Institute USA
The Unadulterated Gold Standard
Part IV: Introduction to Real Bills
In Part I, we looked at the period prior to and during
the time of what we now call the Classical Gold
Standard. It should be underscored that it worked
pretty darned well. Under this standard, the United
States produced more wealth at a faster pace than
any other country before, or since. There were
problems; such as laws to fix prices, and regulations
to force banks to buy government bonds, but they
were not an essential property of the gold standard.
In Part II, we went through the era of heavy-handed
intrusion by governments all over the world, central
planning by central banks, and some of the
destructive consequences of their actions including
the destabilized interest rate, foreign exchange rates,
the Triffin dilemma with an irredeemable paper
reserve currency, and the inevitable gold default by
the US government which occurred in 1971.
In Part III we looked at the key features of the gold
standard, emphasized the distinction between money
(gold) and credit (everything else), and looked at
bonds and the banking system including fractional
reserves.
In this Part IV, we consider another kind of credit:
the Real Bill. We must acknowledge that this topic is
controversial because of the belief that Real Bills are
inflationary. This author proposes that inflation
should not be defined as an increase in the money
supply per se, but of counterfeit credit (see here).
Let’s start by looking at the function served by the
Real Bill: clearing. This is an age-old problem and a
modern one as well. The early Medieval Fairs were
large gatherings of merchants. Each would come
with goods from his local area to trade for goods
from other lands. None carried gold to make the
purchases for two reasons. First, they didn’t have
enough gold to buy the local goods plus the gross
price of the foreign goods. Second, carrying gold
was risky and dangerous.
The merchants could have attempted some sort of
direct barter. But they would encounter the very
problem that led to the discovery and use of money
originally. It is called the “coincidence of wants”.
One merchant may have had furs to sell and wants
to buy silks. But the silk merchant does not want
furs. He wants spices. The spice merchant may not
want silks or furs, and so on. It would waste
everyone’s time to run around and put together a
three-way deal, much less a four-way or a 7-way deal
so that every merchant got the goods he wanted to
bring to his home market. They developed a system
of “chits” to enable them to clear their various and
complex trades. In the end, all merchants had to
settle up only the net difference in gold or silver.
Clearing is necessary when merchants deal in large
gross amounts with small net differences.
The same challenge occurs in the supply chain of
consumer goods. Each business along the way adds
some value to the product and passes it to the next
business. For example the farmer starts the chain by
selling wheat. The miller turns wheat into flour and
sells it to the baker. The baker turns flour into bread
and sells it to the consumer. These businesses run
on thin margins, and this is a good thing for
everyone (though the baker, the miller and the
farmer might disagree!) The question is: on thin
margins, how are they to pay for the gross price of
their ingredients before selling their products?
The Gold Standard The Gold Standard Institute
Issue #25 ● 15 January 2013 6
This is an intractable problem and it only gets worse
if they attempt to grow their businesses. Further, it
would be impossible to add a new business into the
supply chain. For example, a processor to bleach the
flour might be a separate company. And then it may
turn out that when the bakery grows and grows, that
it is more efficient to operate a small number of very
large regional bakeries and then the distributor enters
the supply chain to buy the bread from the baker
and sell it to another new entrant in the chain, the
grocer.
With each new entrant into each supply chain, the
supply of gold coins would have to grow
proportionally. This is not possible. Fortunately, it
is not necessary. If there were a means of clearing
the market, then only the net differences would have
to be settled in gold. If consumers buy 10,000 grams
of gold worth of bread from the grocer, the grocer
could keep his 5% profit of 500g and pass 9,500g to
the distributor. The
distributor would keep his
2% profit of 190g and pay
9310g to the baker. The
baker would keep his 10%,
931g and pay 8379 to the
flour bleacher, and so on
up the chain.
The obvious challenge is
that the payments move in
the opposite direction compared to the goods.
Whereas the wheat is eventually turned into bread as
it moves from the farmer to the consumer, the gold
moves from consumer to farmer. The Real Bill is
the clearing mechanism that makes this possible.
Without the Real Bill, the enterprises in the supply
chain would have to borrow using conventional
loans and bonds, which is less efficient and more
expensive. Or else the division of labor along with
highly optimized specialty businesses would not be
possible.
As we discussed in Part III of this series, everyone
benefits if it is possible to efficiently exchange wealth
in the form of savings for income in the form of
interest on a bond. The saver’s money can work for
him his whole life, and he can live on the interest in
retirement without fear of outliving his money. The
entrepreneur can start or grow a new business
without having to spend his career saving a fraction
of his wages, working a job in which he is
underemployed. Everyone else gets the use of the
entrepreneur’s new products, and thereby improve
their lives.
The same analogy applies to the efficient clearing of
the supply chain for every kind of consumer good.
This is especially true as new entrants come in to the
chain and make the process more efficient (i.e. less
expensive to the consumer). And it is also necessary
for seasonal demand, such as prior to Christmas.
Clearly, there is an increase in the production of all
kinds of consumer goods around September or
October. Everything from chocolates to wrapping
paper must be produced in larger quantities than at
other times of the year. Without a clearing
mechanism, without the Real Bill, the manufacturers
would be forced to limit production based on their
gold on hand. There
would be shortages.
In practice, the Real Bill is
nothing more than the
invoice of the wholesaler
on the retailer. In our
example, the distributor
delivers bread to the grocer
and presents him with a
bill. The grocer signs it,
agreeing to pay 9500g of
gold in 90 days (probably less for bread). It is an
important criterion that Real Bills must be paid in
less than 90 days, for a number of reasons. First, the
Real Bill is for consumer goods with known demand.
If the good does not sell through in 90 days, that
indicates a problem has occurred or someone has
misestimated the demand. The sooner this is
realized, the better.
Second, 90 days represents the change of the season
in most countries. What had been in demand last
season may not be in demand in the next.
Third, the Real Bill is a short-term credit instrument
that is not debt. At the Medieval Fair, there was no
borrowing and no lending. The same is true for the
Real Bill. The wholesaler does not lend money to
the retailer. He delivers the goods and accepts that
he will be paid when the goods sell through to the
consumer. The retailer agrees to pay for the goods
The Gold Standard The Gold Standard Institute
Issue #25 ● 15 January 2013 7
when they sell through, but he does not borrow
money.
Finally, if a business transaction requires longer-term
credit, then it is appropriate to borrow money via a
loan or a bond. The Real Bill is not suitable for the
risk or the duration. Longer-term credit means that
it is not simply being used to clear a transaction, but
that there is some element of speculation, storage,
and uncertainty.
What has happened in different times and in
different countries is that Real Bills circulate.
Spontaneously. No law is required to force anyone
to accept them. No banking system is necessary to
make them liquid. Real Bills “circulate on their own
wings and under their own steam” in the words of
Antal Fekete
1
. The Real Bill is the highest quality
earning asset, and the highest quality asset aside from
gold itself (incidentally, this is why Real Bills don’t
work under irredeemable paper—it would be a
contradiction for a Real Bill to mature into a lower-
quality paper instrument).
Opponents of Real Bills have a dilemma. They can
either oppose them by means of enacting a coercive
law, or they can allow them because they will spring
into existence and circulate in a free market under
the gold standard. We can hope that the principle of
freedom and free markets leads everyone to the
latter.
It is not the job of government to outlaw everything
that experts in every field believe will lead to
calamity. And those experts should be cautious
before prejudging free actors in a free market and
presuming that they will hurt themselves if left alone.
In Part V, we will take a deeper look at the Real Bills
market, including the arbitrages and the players…
Keith Weiner
Dr. Keith Weiner is the president of the Gold Standard Institute USA,
and CEO of Monetary Metals. Keith is a leading authority in the areas of
gold, money, and credit and has made important contributions to the
development of trading techniques founded upon the analysis of bid-ask
spreads. Keith is a sought after speaker and regularly writes on economics.
He is an Objectivist, and has his PhD from the New Austrian School of
Economics. He lives with his wife near Phoenix, Arizona.

1
http://www.gold-
eagle.com/gold_digest_08/fekete070811.html
Why is Gold Such a Highly Emotional
Topic?
Cognitive dissonance and normalcy bias as
possible explanation.

What are the reasons for the continued sceptical
attitude towards gold? Gold is having a hard time
ridding itself of the reputation of being a “barbarous
relic”; a reputation created in the 1980s and 1990s.
Demystification and relativisation as far as a number
of unshakable myths and misunderstandings go
(“buying physical gold is expensive”, “gold is highly
speculative and volatile”, “gold is dead capital” etc.)
are slow. With 20 years of bear market having
instilled many investors with a whole range of such
arguments, defamations, and convictions, a reversal
of opinion is accordingly drawn-out and tedious.
This process of reassessment appears to be based on
psychological reasons. It seems as if the behaviour
of many market participants with regard to the
current crisis is dominated by cognitive
dissonance and the “normalcy bias”.
According to Wikipedia, cognitive dissonance in
social psychology “is a discomfort caused by holding
conflicting cognitions (e.g., ideas, beliefs, values, emotional
reactions) simultaneously. In a state of dissonance, people may
feel surprise, dread, guilt, anger, or embarrassment. The theory
of cognitive dissonance in social psychology proposes that people
have a motivational drive to reduce dissonance by altering
existing cognitions, adding new ones to create a consistent belief
system, or alternatively by reducing the importance of any one
of the dissonant elements.”
“People can foresee the future only when it
coincides with their own wishes, and the most
grossly obvious facts can be ignored when they
are unwelcome” George Orwell
Cognitive dissonance occurs for example when a
decision has been taken although the alternatives
were also attractive; when the decision taken turns
out to be the wrong one; or when one acts in
opposition to one’s beliefs without existing external
justification (benefit/reward or cost/punishment).
An especially strong dissonance is created when
the stable, positive concept of oneself is in
danger of being negatively affected, i.e. when
The Gold Standard The Gold Standard Institute
Issue #25 ● 15 January 2013 8
one receives information that makes one look
stupid, immoral, or irrational.
What must not happen, will not happen
The second crucial factor seems to be the so-called
normalcy bias. It refers to a mental state of distorted
perception, which people enter when facing a
disaster. It leads people to underestimate or
disregard the possibility of the occurrence of
disasters and their possible consequences along the
idea of “what must not happen, will not happen” and
“what has been that way, will remain that way”.
Information that refutes own expectations is
deliberately blanked out
Many times this causes a situation where people are
not adequately prepared for disasters, because it
exceeds one’s capabilities to imagine a situation that
has not happened before. In addition, people tend to
interpret warnings in the most favourable way,
succumbing to the phenomenon of selective
perception. This means that only a limited array of
things supporting one’s opinion are perceived, which
is also in line with the so-called confirmation bias. In
cognitive psychology, this concept describes the tendency to
search, select, and interpret information in such a way that it
confirms one’s own expectations. Therefore, any
information that refutes one’s own expectations is
deliberately blanked out. As a result, the person in
question suffers from self-delusion and self-
deception.
“We hear a lot about “worst case” projections, but they often
turn out to be not negative enough. I tell my father’s story of
the gambler who lost regularly. One day he heard about a race
with only one horse in it, so he bet the rent money. Halfway
around the track the horse jumped over the fence and ran
away. Invariably things can get worse than people expect.
Maybe “worst case” means “the worst we’ve seen in the past”.
But that doesn’t mean things can’t be worse in the future“
Howard Mark
So when will the adjustement to reality finally start?
We all know the saying by Herbert Stein “If something
can’t go on forever, it will stop”. Our current global fiat
monetary system celebrated its 40th birthday on
15 August 2011. It now seems as though the system
is struggling with a severe midlife crisis or even it’s
endgame. Until four decades ago, taking risk meant
discarding gold, but now the opposite seems to be
the case. We believe that we are seeing a gradual
reversal of that former attitude.
The idea of a currency without a fixed gold
pegging and cover would probably have been
unthinkable 100 years ago. Much as the idea of a
gold standard sounds today. Today even the notion
that only in 1971 every USD 35 was backed by one
ounce of gold sounds absurd. But I sincerely believe
that the return to a gold standard does not constitute
any significant economic or organisational problem.
Rather, it is a highly political and philosophical
question of principle that has to be answered.
Ronald Stoeferle
Ronald-Peter Stoeferle began writing his annual “In GOLD we
TRUST” report in 2006 and gained media attention when he
expected the price of gold to rise to USD 2,300/ounce when the
current price was only at USD 500. His six benchmark reports
drew international coverage on CNBC, Bloomberg, the Wall
Street Journal, Economist and the Financial Times. He was
awarded "2nd most accurate gold analyst" by Bloomberg in
2011. In 2013 Ronnie will become partner and managing
director at Incrementum Liechtenstein and will be managing 2
investment funds. He will continue to write his annual gold
report as a senior advisor for Erste Group.
Human Action or Human Folly?
It seems the ‘race to the bottom’ is picking up speed;
the ‘race to the bottom’ in value of fiat currencies,
that is. Conventional wisdom calls for a reduction of
the (relative) value of a currency, in order to ‘support
export industry’. The new government of Japan,
headed by Mr. Shinzo Abe, was elected on that very
‘platform’; the intention to deliberately devalue the
Japanese Yen, supposedly to ‘support’ Japanese
export industries.
Indeed, this theme is very common; all countries on
fiat currency… that is, all countries… are using
devaluation to ‘support their export industries’, and
their economies… indeed, conventional wisdom says
that Greece is in trouble because it has no currency it
can devalue, as it uses the Euro… and power to
devaluate the Euro is not in the hands of the Greek
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Issue #25 ● 15 January 2013 9
government, but in the hands of the EU and
Germany.
It is obvious that devaluation eventually fails, as any
currency being devaluated against… like the Yen vs.
the USD… will lead to a counter devaluation; the
USD vs. the Yen… and so if the race to the bottom
continues, it must eventually lead to zero currency
value of all fiat currency. If you are on the road to
Hades, and you keep walking, guess where you end
up?
Nevertheless, this insanity continues, in the belief
that devaluation gives an edge… if only temporary…
to the country devaluating. Politicians never consider
the future, only the next election… and a temporary
devaluation is a typical ‘kick the can’ into the future
action so loved by politicians.
The real question is this; does devaluation actually do
what it promises to do, that is ‘support the economy’
by ‘supporting export industries’? This deserves a
closer look… and a look at the causes, not the
symptoms of loss of export competitiveness and
economic decline… and the true consequences of
devaluation.
Let’s do some simple numbers; simple like 2 + 2 = 4
and see where the truth is. Is truth found in
‘conventional wisdom’, or in the position taken by
New Austrian economists? The New Austrians’
position is simple; currency devaluation is like
soldiers heading into battle, but first throwing their
bullets and ammunition away, because its ‘too
heavy’!
In the modern world, all economies are intertwined;
a car manufactured in the US for example, is really
mostly assembled from components manufactured
off shore; components like the engine, gearbox,
accessories, etc… Not more than 20% to 30% of the
final value of a car ‘made in USA’ is created locally,
that is around 70% to 80% of the value is imported.
Some industries have more local value added; but
even something as apparently local as farming has
much value added from offshore sources; diesel fuel,
chemical fertilizers, capital equipment like tractors
and combines, etc.
For the sake of keeping the numbers easy, let’s
assume that 50% of all value is local, and the balance
is imports… and get on with it. Suppose that we
consider 100 Monetary Units (MU) of an export
product; these MU’s could be thousands of dollars,
millions of Euros… whatever, the results are the
same.
If 50% of 100 MU export is local value, then 50 MU
worth must be imported. So, the sale of 100 MU of
goods results in 50 MU of imports, and 50 MU of
local salaries and wages. Remember, all costs are
salaries and wages; the raw materials, whether ore for
mining, tress for lumber, grains or whatever are
freely given… all cost is in extraction, production,
transportation… and parasitism like taxes, regulatory
expenses, overhead, bureaucracy etc.
So, assume the export industry is becoming less
competitive… for whatever reason; less stuff gets
sold, less salaries are paid out… the economy is
shrinking. What to do? Well, the first idea is to
simply lower the selling price; this is the typical knee
jerk reaction to falling sales. Discount it, put it on
sale, give a special… this should restore sales and
competitiveness, no?
Suppose we discount by 10%; this should give
sales… or ‘competitiveness’ a kick. The problem is,
if we discount our exports by 10%, even if sales
return to previous levels, we will sell the same
quantity of stuff as before, but will only get paid 90
MU… and our costs to buy the 50% imports stays
the same, at 50 MU; we end up with local value
added of only 40MU… a 20% discount. Ouch.
Other things being equal, local wages and salaries
must decline by 10 MU… that is, by 20%. This is
very painful; labor unions, employees, worse yet
voters will be outraged… why, they may even vote
the rascals out… can’t have that now, can we?
Let’s try plan B; instead of discounting, let’s devalue.
If we devalue the local currency by 10%, our export
product will in effect be 10% cheaper, (for offshore
buyers) just like with the discount; our sales should
rise, just like before. So far, so good… but what are
the ‘unintended consequences’?
Why, first, the import component will now cost 60
NMU (New monetary unit) which has the same
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Issue #25 ● 15 January 2013 10
value as 50 old MU’s had. If we sell the same
product for 100 NMU (rather than 90 OMU), then
we need to spend 55 NMU (rather than 50 OMU)
for imports, and we only have 45 NMU (the
equivalent of 40.5 OMU) for local value added.
Wow; for the same sales as before, instead of getting
50 MU like before the evaluation, we only get to
keep 40.5 NMU; we are about as badly off as if we
simply discounted 10%. Under a 10% discount, our
local value added is 40 OMU… well, at least we are
0.5 ahead… or are we?
What if the locals buy offshore stuff, like say
Taiwanese TV’s with their ‘NMU currency’;
remember, all imports are now 10% more expensive,
as measured in old monetary units. In effect, the
local standard of living took a dive. Or, ‘inflation’
took an uptick.
By golly, if this is the case, why do we devalue? Is it
possible that our ‘leaders’ don’t give a rat’s ass about
how much the real economy suffers… or about the
standard of living of citizens, as long as they can
keep their power, their perks, and their legal
immunities?
Of course, this is the bottom line… devaluation is a
sneaky way to hide a loss of productivity, to hide a
drop in standard of living… and to find ready
scapegoats to blame the ‘inflation’ on; greedy
capitalists, speculators, the usual suspects.
New Austrians understand this situation clearly; that
is why we consider devaluation to be sheer
insanity… and the equivalent of throwing away your
bullets before the battle. After all, if devaluation
actually did some good, then Zimbabwe should be
the most competitive, highest standard of living
country in the world… and not the total economic
disaster it in reality is.
If devaluation is not the way, what is? Simple;
increase productivity, and achieve real
competitiveness. Cut ‘overhead’ by cutting the
parasites… and accumulate real capital. Real capital
means more efficient machinery, more efficient
infrastructure, inexpensive energy and a more
productive, better educated work force.
Germany has some of the highest hourly wages in
the world, yet their unit labor costs are the lowest…
because of high capital investment. This is the way it
must be, this is the law of economics; savings must
come before investment. Debt does not replace real
capital; in fact, excessive debt simply leads to capital
erosion, and if carried farther, to capital destruction.
Fiat currency is indeed subject to devaluation… and
thus capital destruction… but Gold and Silver are
not; hence the term ‘honest money’. This is why the
world must put Gold and Silver to use as honest
money. With the fraudulent practice of devaluation
eliminated, capital destruction can be replaced by
capital accumulation, and the ongoing drop in
standards of living reversed.
Rudy J. Fritsch
Editor in Chief
Youth is Wasted on the Young
A common remark by many seniors is that: youth is
wasted on the young. Implicit in the expression is
that a great deal of mistakes can and are made by
young people which, with the benefit of hindsight,
need not to have been made at all. The expression
denotes missed opportunity, wasteful endeavours
and squandered resources. More often than not
these realisations can only be recognised through
experience which is an attribute exclusively earned
through time. Being an entity of volitional
consciousness man has no automatic knowledge
which acts to guide one through life. He or she must
discover what the correct course of action is and
pursue such goals accordingly.
Fortunately man has the faculty of reason which
enables him to discover knowledge quickly and store
it away for future reference. Upon requirement man
can access such knowledge and continue building
upon it: integrating evermore knowledge on a wider
and wider basis, ab incunabulis ad infinitum. In a
more practical sense, man is not required to reinvent
the wheel every day. The concept is grasped,
recognised, appreciated and integrated into one’s
understanding of the surrounding environment and
drawn upon as necessary.
Although a point of contention would be how one
defines “youth”, the principle of generated
The Gold Standard The Gold Standard Institute
Issue #25 ● 15 January 2013 11
experience still stands irrespective of one’s own
definition. It would be fair to suggest that someone
born in the 1920’s would be viewed as an
experienced individual, wise and seasoned. What
about an entity conceived in 1694?
The Bank of England (BoE) is that entity and its
experience seems unquestionable. As the world’s
second oldest central bank, the BoE has influenced
and greatly shaped the modern economic apparatus.
The BoE witnessed the industrial revolution and
presided over the classical gold standard which saw
the world advance tremendously in all fields. The
BoE has observed the paper experiments of John
Law in France as well as the hyperinflationary
Weimar Republic. If there was ever an entity which
has experienced it all, the BoE holds that title.
Yet what has astounded many well informed
observers is its infant like obliviousness currently on
display. For an institution as old as it is, one must
question the BoE’s honesty. Recently the Queen and
the Duke of Edinburgh visited the gold vaults at the
BoE. Touring the vaults the Queen enquired about
the origins of the financial crisis. The response,
offered by their guide, elaborately explained
mortgage backed securities and sub-prime loans
inferring that such a crisis is similar to that of an
earthquake: being rare and unpredictable.
What was peculiar with this explanation was that
surrounding them were hundreds of tonnes of gold
yet the word ‘gold’ and its relationship to the
financial crisis were absent. For an institution which
at one time oversaw 25% of the world’s trade whilst
utilising gold as the monetary unit of account, this
explanation seemed most bizarre. It is well
documented that whilst employing gold, England
experienced the greatest level of economic
development, second only to that of the United
States. Excluding the moral argument which justifies
a free market in money (which undoubtedly would
lead to gold and silver), what practical argument is
there to ignore gold?
Youth may be wasted on the young, yet it appears
that experience is being wasted at the BoE.
Sebastian Younan
President – The Gold Standard Institute Australia