Asset money vs Debt money

Historically, money has flip-flopped between being asset based and being debt based.

Asset based monetary systems, aka hard money, favor the net producer and saver, as the purchasing power of savings is preserved well in a hard (not easily inflated) money system.

Debt based monetary systems, aka soft money, like today's irredeemable fiat system, favors the net consumer - i.e, the "I'll have it now and pay you later (unless I default)" type of person.

Both hard and soft systems are barbarous relics that will go down in history as belonging to the monetary dark ages.

Unfortunately, we are still in the monetary dark ages.  The good news though is that the day of monetary enlightenment will soon be upon us.


This enlightened monetary system will have two halves - the debt half and the asset half - the soft half and the hard half - the yin and the yang - the debtor's fiat, and the saver's gold.

Welcome to Freegold.

Should Australia join the Euro?

Well, that may sound like a pretty silly question with all the Euro mess hoo-hah at the moment.  With riots in Greece and Spain, and "austerity" such a dirty word, why would any country want to join the Euro?  And to be clear, by joining the Euro, I mean completely dropping the AUD as legal tender, and making EUR legal tender in Australia.  Well, 17 countries have joined the Euro.  Why?  Surely, a nation must have a good reason to give up it's national currency, and all the political privileges that go with it.  Was it an experimental whim doomed to failure, or are their deeper rationales at play?

Why join a currency union?

On the surface, the primary reason to join a currency union is to facilitate better and more efficient trading relationships.  Trading contracts within a currency zone are simply simpler.  They do not need to consider, exchange rates, relative interest rates, hedging, etc.

Under the surface, a damn good reason to join a currency union is because your currency is about to collapse.  This reason alone will cause the Euro to grow over time.  It is the same reason that the UK will soon join the Euro, and somewhat related to why Greece will never leave the Euro.

Beyond political reasons, I cannot think of one reason why a country would not want to join a currency union.

Real money vs Casino chips

This is a story about a casino - a very busy casino. So successful was this casino, that most of its patrons never needed to leave. They ate at the casino's restaurants, and they slept in the casino's hotels. They even brought up their kids in the casino (they went to school there!).

Because they almost never left the casino, the patrons hardly ever used real money.  They paid their food and rent bills with the casino's "chips" (ie, the high tech plastic tokens used for gaming machines, poker tables, and all other casino services). Very convenient.

In fact, the tokens were so convenient that patron rarely cashed in their chips for real money.  So infrequent were the patron's trips to the cashier, that one day the casino decided to shut their cashier down altogether.

Well, the patrons realized that this meant that they would be trapped in the casino, as all their chips - and some patrons has amassed quite a hoard - could never be wagered or spent outside the casino.

So the patrons started heading for the exit, (which took some finding mind you - it was well hidden), as they thought that the casino would eventually go bust if it wouldn't redeem patron chips for real money, and if the casino did go bust, everyone's chips would become worthless.

Without patrons, the casino could not survive, so it had to do something to stop the exodus.  The casino played the only card that it could. It reset all the games and machines to pay out big. Some paid out as much as 20% each time you played.

It worked!  The exodus stopped, and the patrons returned to the gaming machines.  With the casino paying out so much, they wagered much more than before.

Over time, two things happened..

China sells oil in yuan

Recently, I spoke about symptoms and early warning signs of hyperinflation.

Well, the US dollar losing it's petrodollar status would be one of those...

Some quotes from: Dollar no longer primary oil currency as china begins to sell oil using yuan

For the first time since the 1970's, when Henry Kissenger forged a trade agreement with the Royal house of Saud to sell oil using only U.S. dollars, China announced its intention to bypass the dollar for global oil customers and began selling the commodity using their own currency.

Lindsey Williams: "The most significant day in the history of the American dollar, since its inception, happened on Thursday, Sept. 6. On that day, something took place that is going to affect your life, your family, your dinner table more than you can possibly imagine."

"On Thursday, Sept. 6... just a few days ago, China made the official announcement. China said on that day, our banking system is ready, all of our communication systems are ready, all of the transfer systems are ready, and as of that day, Thursday, Sept. 6, any nation in the world that wishes from this point on, to buy, sell, or trade crude oil, can do using the Chinese currency, not the American dollar.
...
This announcement by China is one of the most significant sea changes in the global economic and monetary systems
...
The ramifications of this new action are vast, and could very well be the catalyst that brings down the dollar as the global reserve currency, and change the entire landscape of how the world purchases energy.
...
"Crude oil is the standard currency of the world. Not the Yen, not the Pound, not the Dollar. More money is transferred around the world in crude oil than in any other product."
...
These duo actions by the two most powerful adversaries of the U.S. economy and empire, have now joined in to make a move to attack the primary economic stronghold that keeps America as the most powerful economic superpower. Once the majority of the world begins to bypass the dollar, and purchase oil in other currencies, then the full weight of our debt and diminished manufacturing structure will come crashing down on the American people.
...
The world changed last week, and there was nary a word spoken by Wall Street or by politicians who reveled in their own magnificence as this event took place during the party conventions. A major blow was done on Sept. 6 to the American empire, and to the power of the U.S. dollar as the world's reserve currency. And China, along with Russia, are now aiming to become the controllers of energy, and thus, controllers of a new petro-currency.

Interesting times indeed..

Outsmarting hyperinflation

Very few people understand inflation, and of those, only some expect a hyperinflationary scenario. Of this small crowd, some think that the best way to "win" from a hyperinflationary scenario is to buy a big expensive house with a large mortgage.  The idea is that your debt gets inflated away and you end up with a house, essentially for free.

Now, I'm not going to profess to know how hyperinflation will turn out, but I would like to present a scenario for your consideration.

Let's look at the how those with a large mortgage will fair. Let's focus on the percentage of disposable income going to mortgage repayments, and how that will change during hyperinflation.

Support Socialism - Save in Fiat

Your country needs you!

Your government has commissioned an exorbitant number studies, at great expense, to prove, beyond any reasonable bureaucratic doubt, that socialism is the way forward for this once great nation.

You must volunteer to support socialism, before we force you to. Save in fiat today.  

 

It is only through the continued support of the fiat collecting savers that your government can continue to grow beyond the limits enabled by taxation alone.

The benefits of saving in fiat are: 1) Help prevent price inflation by not spending fiat. The importance of hoarding fiat cannot be understated, and even more so as price inflation becomes apparent. 2) Help prevent tax increases. By surreptitiously supporting your government, blatant tax increases need not be imposed. 

We are in the midst of a currency war. Other nations are no longer supporting your government's growing overspend by collecting our fiat - it is now up to you.

Ask not what your currency emitter can do for you, but what you can do for your currency emitter.

If you do not take up the challenge, there will be only one option, and that is not to cut spending to limits of our current income - that would be disastrous for this country. We have made promises to the underprivileged, the highly privileged, and all our friends in between, and we must keep our promises.  No, the only viable option would be to print those promises. Can you now see the importance of you not spending excess money?

It is your duty to be the last man standing at your post in this war. Abandoning your currency will be considered an act of treason. Saving in anything other than fiat will be considered desertion.

Your country needs you . Your currency needs you. Socialism needs you.

Exponential Inflation vs Hyperbolic Inflation

Chris Martenson has an interesting article entitled Our Money is Dying over at Peak Prosperity.  In it, he talks about the "inflationary spectrum", which consists of:

1. Non-inflationary price increases
2. Simple inflation
3. Loss of confidence in money
4. Hyperinflation, and finally
5. Currency destruction.  

See the article for a description of each.

Rather than seeing a single "inflationary spectrum", I instead see two quite distinct inflationary forces - one that is exponential, and one that is hyperbolic.  Let's briefly take a look at an exponential and hyperbolic functions (graphs):

The shapes, slopes, and positioning of the graphs come in many forms.  The key difference between exponential and hyperbolic, as explained by Wikipedia, is that:

• exponential growth grows to infinity as time goes to infinity (but is always finite for finite time),
• hyperbolic growth has a singularity in finite time (grows to infinity at a finite time).

Put another way, hyperbolic growth trajectories have a D-Day - a day of reckoning.

Now, relating this back to inflation, I have a crude (yet instructive) Inflation formula:

Super so far

Nearly 2 years ago, I setup my Self Managed Super Fund (SMSF), so today I thought I'd take some time to reflect on whether or not that was a good decision.  For US readers, I believe that Super(annuation) is similar in concept to your 401k, and the "Self Managed" part means that you manage it yourself, as the Trustee of the Fund.

When it comes to Super, people generally fall into one of two categories - those that give a shit, and those that don't.   Everyone starts off in the "those that don't" camp, until one of a number of things happen:

• You become self employed, at which time you (as a Company) start paying yourself (as an Employee) and must make the mandatory Super contributions (to yourself).
• You realise that you have a significant amount of money in your Super Fund.

At which point, you start to wonder why you're letting someone else manage your money, and you start to analyse your fund managers' [sic plural] performance, and their fees, and decide that you could do better yourself - even if you didn't do anything.

Welcome to stage II in life: Giving a shit about your Super.

KWN Turk Gold Charts

There is an article over in King World News called The Most Important and Extraordinary Chart for 2012. Here's the chart:

Turk argues that Gold Stocks are cheap relative Gold, based on the above chart.

I disagree, and here's why.

Optimal Investing Strategy

This blog is about my search for the ultimate investing strategy - the one that, in theory, I could put on auto-pilot, and watch my wealth grow.  My inklings at the start of this journey was that Value Investing in equities would prove to be the ultimate investing strategy, and along the journey I would learn an optimal algorithmic implementation that I could automate.

I still believe this to be the case, however, today, I do not see much value in equities. More so, the most undervalued asset at the moment, appears to be gold.

But, the point I want to make in this post is the gaming meta-strategy: 

• Find the game with the highest expectation value.
• Play it in the optimal way.

Peak-Oil Gold Price

Priced in gold, do oil producers want a high oil price or a low oil price?

The answer, I think, depends on how much oil the oil producers have left.  And just to clarify, when I refer to "oil producers", I'm not talking about individual companies, I'm talking about all oil producers, or, at least, the middle eastern collective of oil producers.

Initially, when the oil producers have lots of oil, they would want a very high price for their oil.

Counter intuitively though, when their oil  reserves start to run low, they would want a lower price for their oil.

World Currency Systems

The current world currency system is the US dollar.  This means that a) most global goods (including oil) are priced in US dollars, b) most international trades are transacted in US dollars, and c) many (people, banks, nations) save in US dollars. Not surprisingly, the primary beneficiary of this arrangement is the United States, as they get to export "dollars" in exchange for real goods and services.

So, why does the rest of the world put up with such a one-sided system? And, is there a better system?

It seems to me that countries like Australia put up with this system because they need the US for protection.  This essentially amounts to a protection racket being run by the US.  There are many countries in a similar situation to Australia.

Other countries support this system out of pure fear, and rightly so.  To date, the two countries that have tried to side-step the US dollar for international oil trade have been Iraq and Libya, and we know how that ended for them.