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bbacq
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The bbacq room

I wanted to create a corner to drop my thoughts.  I can think of no better idea than to start with someone else's:

All legitimate interests are in harmony.
Bastiat c1850ish

You must either agree or disagree, and if you agree you must further seek social solutions through freedom and non-interference as the highest ideals.  If you disagree, you are a coercer, and both wrong, and evil. 

Sorry the truth is so stark, but we have had so much foolishness and unnecessary hardship by failing to confront this truth head-on that I feel it is long since time.

And it's a fine launching-point for a thread.  Clear dichotomy.  Few words, of common-knowledge definition.  Pithy.

 

Edited by admin on 11/08/2014 - 06:27
bbacq
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Law

Law should never specify what a government may do, only what it can't, and the list should be long.

Law should never specify what a person may do, only what he can't, and the list should be short.

On the subject of groups of people, law should be mute.

murphy
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hey

Nice idea for a fresh thread. You should definitely mention it around. Would be great for Ca. Law as well.

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Nice to see you active on board, bbacq

Will try to stop by from time to time, though I spend entirely too much time on the site as it is...

In case you have not seen it, a fine article on Thucydides on ZH (made all the better because it is primarily a long quote from his History).

There is a really, really good poem that unfortunately does not translate, but I will share it again nevertheless -- to me it reflects the Thucydides passage above perfectly.

Poetry, as a rule, unfortunately does not translate well -- or rather, it takes a great poet to translate it well, and few (if any) great poets who speak English also speak this guy's native tongue. He wrote a set of poems, among them some Eclogues mimicking Virgil's style, while being transported to, living in,  and finally dying along the route marched back from a forced labor camp during WWII. They were recovered from a notebook on his body in a mass grave in a ditch by the side of the road. It's illustrative and very prescient in any case -- written 68 years ago, in a FEMA camp of the day, so to speak. We are not yet at a point to where the world comes full circle, but the similarities are, indeed eerie:

FRAGMENT

I lived upon this earth in such an age
when man was so debased he sought to kill
for pleasure, not just to comply with orders,
his faith in falsehoods drove him to corruption,
his life was ruled by raving self-deceptions.

I lived upon this earth in such an age
that idolized the sly police informers,
whose heroes were the killers, spies, the thieves --
and the few who held their peace or only failed
to cheer were loathed like victims of the plague.

I lived upon this earth in such an age
when those who risked protest were wise to hide
and gnaw their fists in self-consuming shame --
the crazed folk grinned about their terrifying
doomed future, wild and drunk on blood and mire.

I lived upon this earth in such an age
when the mother of an infant was a curse,
when pregnant women were glad to abort,
the living envied the corpses in the graves
while on the table foamed their poisoned cup.

............................
............................

I lived upon this earth in such an age
when even the poet fell silent and waited in hope
for an ancient, terrible voice to rise again --
for no-one could utter a fitting curse of such horror
but the scholar of dreadful words, Isaiah the prophet.

__________________

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Ralphie
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Devil's Advocate

http://en.wikipedia.org/wiki/Puer_aeternus

Ralphie
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Devil's Advocate

http://en.wikipedia.org/wiki/Puer_aeternus

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@all...

@Ralphie: Words would help to understand what you are getting at.  Are you suggesting that Devil's Advocates are puer aeternae?  I might agree.

@JY896:  Wow.  It has never been more important to get that kind of thing out in the public eye.  What a waste of a war and of millions of lives, and and...

@Murphy: Thanks and I have had nice chats elsewhere here with La Law.

I think I feel another post brewing...

murphy
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bbacq wrote: @Murphy: Thanks

bbacq wrote:

@Murphy: Thanks and I have had nice chats elsewhere here with La Law.

I think I feel another post brewing...

Is that like a new turd movement?

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Truth is not a four-letter word

I use the word "truth" when I write.  I feel the need to elaborate.

The word has come to have negative connotations, a sad thing, and testament to society's sorry state.  What is a "truther" in modern diction?  A nut-case, right?  As soon as you read "the truth is that..." alarm bells go off, right?  Well, they should, because truth is a very precious thing, but it is important to not shoot messengers solely on their use of this word and persistent insistence of truth's existence*.

I will never forget (one side of) a conversation that occurred in the sunny livingroom of our clapboard home in Toronto.  The professor of philosophy from next-to-next door, my father, and early-twenties-I were discussing truth.  I took a position I stand by today.  Truth exists.  They took the opposing position.  For the life of me I can't remember what they argued.  I have never had a very good memory per se, I can only remember what makes sense.  What I do know and remember is that I was in exasperation driven to assert then and there what truth was to this esteemed audience.

“Truth” I argued, exists but is not knowable to man.  We asymptotically approach Truth – capitalized there to distinguish it from what is knowable to man, ie the truth.  We began with a geo-centric model, went helio-centric, Newton nailed the math (we thought), Einstein improved on that, and we moved on to quantum, chaos, and information theories.  Each of these is like another halving of the gap between truth and Truth.  Like Zeno, we get closer, but we cannot ever reach our destination.

That there is Truth in mathematics I am absolutely certain, and to the extent that we can correctly apply mathematics through theory we learn truths about us and our environment and all the interactions possible.  But there is much mis-application of mathematics and science, especially in so called “soft sciences”.  Our trust in “experts” who rely on mathematics in these areas is oft misplaced.

Despite this, we have truly advanced much in our understanding. But the conclusions as one probes deeper and closer to Truth are troubling for those seeking certainty through its knowledge.  It seems ultimately that no matter how one approaches the problem, faith is required for Truth to exist and thus even be approachable.  To some, this is unsurprising, to others, it defeats the purpose of the quest.  This was elaborated upon in Godel, Escher, Bach: An Eternal Golden Braid.

Godel, in 193?, managed to prove, in a nice tight little proof full of lovely mathematical symbols - an irrefutable proof, if one accepts logic and reason - and only loosely worded here, that:

Any self-consistent axiomatic system contains truths that are unprovable.

In other words, even in mathematics, faith is required.  We don’t yet know which of the various mathematical assertions will forever remain unprovable, but we do know there are at least some of them, and that we don’t know which they all are.  The good news is that so far as we know, none of the important math, the stuff that we use to regularly figure out what is going on in our world, is suspect.  But we can still mis-apply even the math we understand well.

Physics is the study of how stuff behaves.  Modern physics has become very good at modeling reality, and so allowing us to understand it, with some key exceptions.  First, relativity tells us that there are many versions of “now”, and thus many versions of the truth at any given “time”.  Alternatively, we all become aware of our truth in a differently-angled slicing of space-time.

Then quantum tells us that we cannot know everything about anything.  We cannot know both position and momentum, the exact things we need to know accurately to refine our models, but there are some limits Planck bumped into.  We cannot know where the electron actually is, just the probability that if we look somewhere we will see it there.  Schrodinger’s cat, by the way, is in fact either alive or dead, by the way, and not alive-dead.  Nature is an excellent observer of herself, and scale matters.  We are just a little behind Her, sometimes.  This is also why gold bricks don’t jump through safe walls, but electrons do.  Nature is watching, and size matters.

Non-linear dynamics and its Siamese-twin chaos theory pose some more problems.  Complexity theory elaborates on that.  Information theory rides along side and seems to start explaining it all, if you ask me.  If you are still reading, I’ll consider that asking.

How to explain it all.  It appears that complex systems behave differently than simple systems.  You don’t need to imagine a strict line separating the two, but at one end we have things like the biosphere, the blogosphere, the global economy, a city, a tree, a bird, a river, a mountainside, a cloud, at the other a bicycle, an inkjet printer, a pair of scissors, rock, paper.  Whether we see something as simple or complex may depend on what scale we are using to observe.  A bicycle may seem simple at our level, but at the atomic level things are buzzing indeed.  Which is true, then, that the bicycle is simple, or complex?  Truth depends on the scale we are using when we ask a question.

Further, complex systems have the nasty property that you need to know everything, everything, about the system, in infinite detail, if you want to have a chance at predicting its behaviour for any length of time.  And we can’t.  So not only does math itself fail in providing certainty, when we try to apply it to anything interesting, we find that predictions always diverge from actual outcomes.  The Truth is elusive indeed.  Or is it?  Can our final scientific contender, information theory, be our savior, our booster-jets to advance us closer?  Perhaps. 

We can use information theory in studying complex systems and in trying to refine truth.  It appears to be the case that when we let complex systems freely evolve, they achieve information-optimal states (“strange attractors” to the purists).  What do I mean?  Think about DNA.  Somehow it got here in a complex evolutionary path through which it was free to evolve.  Your DNA strands contain all the information required to make an entire you.  It will make you whether you are warm or cold, ill-fed or sated.  Information theory would appear to tell us that there is very likely no better representation of “you” that could be created.  If you were a JPEG image, and we had to save you on a packed hard drive, so we wanted to compress you, but wanted to lose no detail at all, none of your youness, we would wind up storing your DNA.  Ish.  Small issue of your entire life-to-date, but I hope you get the idea how complex systems left to freely evolve will evolve to achieve order, ie create information, and that the information that is so created is the best possible way to code it.

The evolution of freedom’s action through time in Nature creates self-organized information-optimal order.

This is true at all scales.  I didn’t phrase things that way to Pop and Philoph at the time, I hope you don’t mind my proceeding on from that day.  You did ask.

This is an incredibly important result.  It completely flies in the face of the second law of thermodynamics, but is in perfect alignment with much that we see around us.  The second law roughly states that randomness is going up.  Order is decreasing.  Yet if we look around we see highly ordered systems everywhere, at all scales.  Sub-atomic?  The quantum model is highly ordered.  Atomic?  Are you acquainted periodic table of the elements?  Order indeed.  Molecules?  They are so ordered, we still can’t figure out how they get it right, and how a protein “knows” just how to fold itself into its minimum-energy, most-ordered state.  Biological systems?  Well, trees, and birds and fish and mammals don’t look very dust-cloud-ish to me.  More order.  Society?  Knowledge?  Economies?  Yes, all ordered.  Did we plan all that, or did it happen and were we along for the ride, in the large?  Stars?  Planetary systems?  Galaxies?  And I am meant to believe I am looking at systems that are tending inevitably with the arrow of time towards disorder?  Really?  That is Truth?  I think not.

It must confound the astrophysicists and scientists who have not yet embraced all the Zen weirdness of later math and science that the second law appears true on some scales and not others.  I believe that those who are in search of “dark matter”, “the God particle”, and such are in for a surprise, and that they are not moving towards Truth.  John Moffat points out that we have searched for dark matter before, they called it Planet Vulcan, to explain the wobble in Mercury’s precession.  Einstein came along and proved we didn’t need more mass within the current model, what we needed was a slightly different model, one just a smidge closer to being Truth.  The search for Vulcan went poof pretty quickly, but at least it gave Spock a birthplace.

Moffat explains we could accommodate our observation of the apparent discrepancy in rotational velocities of far galaxies if there existed a force that unlike gravity increased with distance from the centre of mass (as opposed to gravity’s decreasing in a square-law relationship).  I posit that Moffat’s force is created from the order enclosed within a volume of space-time.  We don’t need dark matter to better understand Truth. It is order we need to understand better.  Vulcan doesn’t exist.

I write of all this because it bears on how we consider truth in the softer sciences and in our daily lives.  It also bears on the way we compute truth in our brains, that our minds might make use of it.

Our brains compute truth for us, as best they can, and they are amazing at it.  Consisting of billions of freely-interconnected neurons, massively entwined in a marvelously ordered yet self-organized mesh, our brains are each a complex system.  Our thoughts are the strange attractors through which the state of this system swirls.  Consciousness and our minds emerge from this self-ordered chaos, minds that are driven to seek truth, if everything is working right.  But the magical nature of our DNA can be twisted by improper nurture.

Plato two thousand years ago imagined people raised in a cave watching images dancing on the cave wall.  He imagined the images created by the shadows of shapes played in front of candles, but his scenario is remarkably prescient of today’s TV/entertainment culture.  The thought certainly crosses my mind sitting in my basement in front of the plasma.  The people, he argued, would perceive the images as truth, as reality.  Led outside, and shown the real objects and scenes being depicted, now in all their detail, splendor and glory, they would mostly deny this reality, and return to the cave.  Only the most questioning and open-minded would choose to stay.  I say those who believe they are outside now owe an obligation to those still in the cave to keep showing them the true light of our version of truth, which we hope is closer to Truth than theirs.

But as science tells us and as we can observe from Plato and our traffic-accident acquaintances, we all have our own notion of truth.  Does that mean there is no way for us to compute Truth?  Fortunately, no, there is a way.  But the problem is that at any level in the complexity-hierarchy, from sub-atomic quantum particles (waves? probability-density distribution functions?) right up through atoms and molecules and organisms and consciousness and beyond, it takes the self-emergent order at the next level up, swirling in the complexity created in a given level to “understand” that level, to find the order in that level and exploit it, to find a version of Truth at that level.  So what we need to do to guide us towards Truth is build free complex systems at our conscious level, and see what emerges.  If the “atoms” at the consciousness-level, ie our free will, are diverse and free to interact and self-organize, complexity and information theory suggest that order will emerge, and it will be optimal.  Truth can be thus found, not through the efforts of one conscious mind, but by us all collectively interconnected, each of us a neuron in a larger brain at the next layer up.  But there is a catch.  If we are not free to self-organize, we will not approach Truth.

The economy is a complex system created at the conscious layer, where one mind/body pair is like an atom, or like one neuron in a complex brain.  We have observed that trade produces benefits for us above that which we alone could provide.  In fact, we have, willingly or not, already abandoned knowledge of Truth in economics to the self emergent order of the markets because we can no longer answer the simplest of economic questions: “How does one make a pencil?”  We can notice that when we try to coerce this complex system, as in command economies, or even with simple tweaks like price controls we decrease its benefit to us and/or its efficiency.  Left free and allowed to trade in sound currency, the complex system we call “the economy” computes truth.  It learns better and better ways to accomplish all the tasks demanded of it, and new ones as they come up.  Distort it, and things can only get worse than its free state.  Sort of.

We need to talk about what we mean by freedom.  The trouble with complex systems above the organic is that physics doesn’t seem to immediately apply.  If it does, it has some pretty long lags and time-constants.  Physics sure took a while to take down the Roman Empire, for instance.  Because we have free will, we are not bound by physical law as is say an electron or a rock, thus natural feedback mechanisms, essential for stability in complex systems, may not naturally exist at our level.  We have observed the result of the lack of disincentives to excess – a lack of feedback - in our financial affairs.  Newton’s action-creates-reaction has been notably absent for our bankers.  Because we have free will, we can do wrong if the neural-system isn’t working right. 

We thus need to self-organize ourselves up some laws that will help ensure the systems we develop at the conscious layer are resilient to this mode of failure.  Thus, despite being quite Libertarian by nature, I might seemingly contradict myself in believing it is true that sound and tight banking regulation is a good thing.  But you see, the layers below us had their laws made for them.  We have to invent ours, or have faith that the ones that arrive on tablets or scrolls are both necessary and sufficient to ensure stable emergent order occurs.  We should look to the examples in physical law as we consciously make our law, else we will not compute truth in our social systems and thus be rendered incapable of meting justice.  Frankly, I think the Amish probably have it about right, but the model is a little tough to scale.

The “law of the internet”, and its embracing of freedom is what made it so successful that now a whole new layer of complex systems are forming on top of it, complex systems that include our minds as atoms/neurons.  It was long ago, not long after my discussion of truth that I realized how truly glorious the internet was.  There was no world-wide-web, just a bunch of machines that talked, some phoned each other, and files slid around amongst them.  But it was clear that out of it could blossom a machine that might compute Truth, and save mankind from himself.

I say blossom, because organic interconnection of our minds and free will are required for truth to emerge from the ‘net.  If we try to engineer truth on the net, say, by paying people to advocate a position that is not their own, or by invading upon its self-emergent order, we do so at our peril.  The internet is a precious flower, the best thing Man ever created, better than the wheel or the printing press.  It is true that we owe to all future generations an obligation to keep it alive and thriving for their use and benefit.

I am still, a quarter-century after first shivering in awe and delight at the idea, thrilled and extremely optimistic about our prospects, now that we have the Internet.  The truth brought by Gutenberg brought enormous positive change for man, and the Internet will do better for us yet.  Provided.  Provided we keep each of us contributing our version of truth, listening to others and theirs, and then modifying ours, just as a neuron would.  If the ‘net is allow to compute truth, the rest will follow.  Don’t let anything stop it in this quest.

The preceding was the truth, not the whole Truth, nothing but the truth, so help me God.

bbacq
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@Murphy: indigestion

Buurp.  Pfft.  Ploomp.  There.  Turds of truth.

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Asterisks...

I failed to explain my asterisked note in what used to be the penultimate post, above.

*Sorry for the tongue-twister, I am a rhyme-junkie

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Boy, ain't it the truth.

No sooner do I post something here about truth in the public sphere becoming a negative thing than "ErikT" over at:

http://www.chrismartenson.com/blog/harvey-organ-get-physical-gold-silver/73933?page=35#comments

writes of me: "I just don't get why you and so many gold bugs like you feel compelled to this behavior [of doggedly trying to enhance understanding]. I think my True Believer hypothesis is the most likely explanation, but it still baffles me to understand your motives."

Yeah, right.  Truth is a bad thing Erik... avoid at all costs...

I suppose now I am a "gold bug".  Ah, it's all too funny.

Raoul Dusentier
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Well, truth is a dangerous

Well, truth is a dangerous thing in a "world" that relies on lies and deception for its continued existence.

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Musing on currency...

It's been a while since I have posted anything at TFmetals, but not cuz I don't love y'all.  So I'll start with some lovin':  Happy New Year!  

I wrote an article on money and currency for a Canadian financial magazine that was published in October, but to which I retain the redistribution rights, so I will share it here.  There were some editorial requirements that made it turn out as it did - I would have written something slightly different for this audience, but FWIW, here is the article in full.

-----------------------------------------------------------------------------------------------------------

Money and Currency 101: what you don’t learn at school!

Money and currency are right now less predictable, more complex, more chaotic, and paradoxically therefore more needing to be understood than at any other time in human history.  To understand the complex situation we have now, we need first to go back to basics to understand it all.  What is “money”, really, and why do we have another word for it, “currency”?

Funny money

The funny thing about money is that it is just an idea, the idea of “the centre of value” for all goods in an economy.  Consider a super-simple moneyless market economy that trades in just 4 goods, labeled A through D, as shown in Figure 1 (far below).  Here we need just 6 barter-exchange rates to trade everything, noted by lines between the letters (no-one trades A for A, etc – duplicates and inverse ratios are unnecessary and not shown).  Line A-C might represent how many ducks per plasma wide-screen TV, B-C how many geese.  We observe that as the number of goods increases, the number of relationships increases much faster: for 26 goods we need to know 325 different exchange rates (Figure 2).  But by simply placing a reference point in the middle, let’s call it “money”, we only need 26, as shown in Figure 3.  To find the fair barter exchange ratio between two goods, we just multiply their money-ratios (“prices”) together.  Now, to make it real, and practical, let’s take one of those goods, G, say, and place it in the middle.  Now we can understand our entire market with only 25 prices in Gs (Figure 4), plus we have something real we can trade with and use as physical money, namely the good G.  This thing (or things) we place in the middle we call currency.

The money-idea and the real currency G solves for us another nasty problem that barter presents.  What if I have ducks, and want a plasma wide-screen TV, but the plasma-screen merchant is picky, and needs geese but not ducks?  We need something to be money for us, or trade is simply too complicated.  Using currency, our plasma-merchant can buy his own geese – I don’t need to find them for him.  Money is a very powerful idea, and currency’s value comes from the simplification it offers.

Complex Situations

But even after money, through currency, has simplified things, markets and trade still get complex, so let’s  delve into complexity and chaos theory to understand the fate of our fowl.  Much as relativity theory rocked the physics world, and quite literally the real world, complexity theory is now rocking all scientific disciplines, including economics.  The theory points to two key outcomes. 

The first is that complex systems obey power-law rules, not the “normal” Gaussian distribution that we came to know and hate in our statistics and risk-analysis courses.  The big difference here is that power-law based systems have outcomes with “fat tails” that give rise to “black swans”: there are bigger chances of wild outcomes.  Further, chaotic power-law systems exhibit a property known as bifurcation, where the system can suddenly change its behaviour by moving from one set of steady states (a “strange attractor” in complexity-speak) violently to another set.  The occurrence of these shifts is not necessarily predictable or time-able, though we get hints.

Secondly, and more interesting yet is the emergent order in complex chaotic systems.  The best way to understand this in terms of economics is to read “I, Pencil”, written in 1958 by Leonard E. Read.  It also applies to currencies in some cases.  What Mr. Pencil has to say (and not just about pencils, but all goods, including currency-goods) is that we can’t know why, exactly, we arrived at pencils as our solution to writing efficiently, nor can we know how to build a pencil, as that can only be done by the market-at-large.  The information with which to build the modern pencil emerged inside the market, not within us, and each of us can only understand a little bit of it, never all.  You can’t write it down, or explain it.  A complex system like a market can “choose” to make pencils and “learn” how to make them better.  It can “decide” to make them differently, has, and does.  It can do the same thing with currencies.  Our ecosystems have done all this for millennia, and the ecosystem is very good at making trees, birds, all kinds of things.  At the system level, there are not many differences between ecosystems and markets.

Serious Currency

So we can’t know exactly why, but for some reason, quite early on and for several thousand years - most of our civilized life in fact - man’s markets have chosen precious metals as their preferred currency.  There are certainly exceptions, for instance in Canada we have had axe-heads, beaver-pelts, wampum, chopped-up autographed playing cards[1], as well as so many competing metal coinages circulating at the same time that we had our own set of exchange-rates, the Halifax Ratings of 1758.  But in terms of all these goods-based currencies, gold and silver have always been preferred because their attributes serve the money-function so well. 

Currency must be relatively scarce (stuff that is plentiful has little economic value), durable, divisible, portable, easily authenticated, and the metals possess all these attributes.  Gold, silver, and copper are also terrifically valuable for their ductility, malleability, and as the best conductors of heat and electricity, thus only part of their value is currency-value.  Had gold and silver not been rendered “expensive” because of their extreme utility to the market as currency, rest assured their use in all sorts of applications would be guaranteed.  In fact, it is possible that the market long ago “understood” this, and selected these metals precisely because of their limited-supply and ubiquitous potential application.  We can never know, but I don’t consider it coincidental that all our monetary metals come from the same column in the periodic table of the elements.  To my sisters who ask “Why gold?” I could only reply “Why tree?”  They are the same question.  Same answer, too: “because it works.”

What is currently currency?

Paradoxically, perhaps, that we now have paper currency is due to the gold-bankers.  In the 17th century British and Dutch merchants grew tired of lugging around bags of coins (and getting mugged), so a market developed for safe gold-storage, for which transferrable receipts were issued and these entered circulation in payment for goods.  Not long after, that very first clever banker, who, upon noticing that not everyone showed up for their gold at the same time, issued just one extra receipt in the form of a loan, created fractional-reserve gold-backed banking, and it lasted a long time.  The paper receipts morphed into bills and notes, banks came and went again if they ran the reserve too low, but in general, notes were redeemable on demand in gold for many, many decades. 

In fact, most of the 200-year industrial revolution, an era of unprecedented innovation, prosperity and financial stability occurred under a gold-standard monetary regime.  But what benefits innovators, individuals and industry does not necessarily equally reward bankers and bureaucrats.

So things changed – I would argue for the worse – in the early 1900s when central banking took the world by storm, and the industrial revolution was ground to a halt.  Until then, things had been a bit chaotic, it is true, but it does turn out that chaos is a part of nature.  Most money-historians point to a meeting of bankers and dignitaries at Jekyll Island in 1908 as the turning point, after which central-banking legislation was enacted in many countries, in the US in 1913, Canada in 1914. 

The theory was that to ensure bank stability – there had been runs and failures, mind you! – what was needed was a “lender of last resort” to whom a fractional-reserve gold-backed  bank with a sound balance sheet but a temporary liquidity-crunch could appeal so that the bank’s outright failure might be averted.  Unfortunately, chaotic systems don’t much like being controlled, and they bite back, as they did in 1929, and through the 1930s, and again now.

International Trade and Currency

Before moving on to the next step in the evolution of our money – and it truly is evolution, though selection is not quite natural – we need to talk about trade.  In times when only precious metals were used to settled international trade, there was no need for currency exchange rates, per se, as one would simply compare weights of pure metals.  But paper currency, redeemable into gold only locally in a country or region, changes the picture.  There are some things that must balance when currency-regimes trade.  The net flow must be zero.  If goods go one way, currency has to move the other.  If a country tries to create a currency other than gold, and then buy more stuff than it makes using it, those dollars, say, are going to eventually come home as foreigners can’t spend them locally, nor convert them to gold.  And when they return, the exchange rate drops.  Long term, it is a zero-sum game, and US dollars have been flowing out for decades now. 

Reserves of gold, in the old days, or trading-partner fiat-currency in our times, are held in reserve by central banks so that goods entering the country can be paid for, and international accounts settled, so then further trade can occur. Until the 1930s, this tended to occur bilaterally, but gradually the Bank of International Settlements, formed in 1930 to deal with Germany’s WW I reparations, assumed the role of the single overarching global central bank.  It still is (though it is suspiciously absent from media coverage!).

Trade was seriously disrupted by World War II, as were flows of gold and currency to settle the trade that did occur.  The solution presented to this and other trade and currency problems was the Bretton Woods agreement of 1944 in which it was decided that the US Dollar would replace gold for the settlement of international trade.  At the time it was redeemable for gold by foreign central banks, but not US citizens, who lost that right in 1933 when dollar redemption and private gold ownership were revoked and the dollar depreciated from $20.67/oz to $35/oz overnight.

This all worked until 1971, when the US, having printed too many dollars in support of Bretton Woods, and not wanting to ship all their national gold reserves abroad, suspended all redemption into gold.  The French were the last to get gold for their dollars at the set rate.  Support for the value of the US dollar was maintained thereafter through the artifice of enforcing oil transactions in US dollars, thus necessitating demand by all who, say, want to drive or stay warm.  The US dollar still clings to value as a global reserve, but tenuously.

Canada’s money now

I remember as a youth learning about money reading the words “Pay to the Bearer on Demand” on our Canadian bills, and noticing the words disappear in 1969, and seeking to understand what that meant.  I now understand.  Our money-concept currency-placeholder today, the “dollar” is created solely by act of fiat.  It is simply a promise by all Canadians to each other and to foreigners, imposed upon us by the government we elect, that we will accept the currency for our goods and services.  Further we are required to submit our taxes in this currency.  We expect others to honour it, but we can no longer demand of our banks that they produce a fixed amount of real money, ie gold or silver, when presented with bills.  This is a recent development.  I can remember it happening.

Debt-money

Our currency is now created by debt.  Our supply of currency is created initially by the Bank of Canada when it issues currency and buys with it Government of Canada debt.  Only a small fraction, perhaps 5% of Canada’s money is created this way.  The rest is created when we enter into debt with the banks.  When I get a loan, the bank creates two entries on its balance sheet, an asset – my debt, and a liability - the demand-deposit balance that lands in my account.  And money (strictly, currency) is thus created as the balance sheet expands.  Amazing, isn’t it?  Yet that truly is how our money supply is now created.  I will leave it as an exercise for the reader to figure out from whence comes the extra money needed to pay the interest on the money borrowed in a previous period.

Inflation and deflation: the truth

Inflation of our money supply now occurs when individuals, corporations, or governments borrow money in Canadian dollars.  It contracts when debts are re-paid or worse, when defaults occur.  It is an interesting comment on the degree to which we have come to blindly accept the current system that Canadians now almost universally associate inflation and increasing price levels with an advancing economy.  In fact, the opposite is true, all else equal.  As an economy grows it only does so if it can learn more efficient ways to get things done through specialization.  Specialization only occurs if it is less costly.  Less cost means lower price.  In a stable-currency economy, there is an inherent downward pressure on almost all prices.  Not just VCRs get cheaper.  The only reason prices keep going up in dollars now is that we keep incurring more debt.  Don’t forget your homework assignment above!

The, ahem, current international situation

Enough theory.  What is going on now?  This summary was not intended to scare you silly.  Canada fortunately has had some of the best banking (and thus currency) practices in the world.   But the facts are chilling when summarized:

·         Fiat currencies and central banking now dominate the globe.  This is unique in human history.  All previous fiat currencies have failed, most of them spectacularly so;

·         Money supplies (and debt levels everywhere) are enormous, and under enormous pressure in both inflationary and deflationary directions;

·         Many debtors, including individuals, cities, counties, states are essentially insolvent when the current value of future obligations are considered;

·         Governments everywhere are under intense pressure to issue debt and create money to bail out failing financial institutions;

·         Insolvencies and default are moving from private failures (Long Term Capital Management, Bear Stearns, Lehman Brother, MFGlobal off the top of my head) to sovereign failures (Iceland, Ireland, Greece, and onwards);

·         In addition to conventional debt, the opaque over-the-counter derivatives market has put orders of magnitude more leverage into the banking system, a very destabilizing influence;

·         In the US and internationally, the rule of law in finance is being largely overlooked, some might say it is in tatters;

·         The US dollar, as shaky as it is, is still the primary tool for international trade settlement;

·         The Euro, perhaps created to compete with the US dollar in that role, is either doomed or the governments within it are.  One cannot have common monetary and disjoint fiscal policies and trade balances amongst sovereign nations.  It can’t work, as there is no way for the complex system to balance itself;

·         The Bank of Canada has virtually no gold reserves;

·         Canada maintains a strategic reserve called the Exchange Fund Account of primarily US dollars, Euros and Yen to ensure the continuity of trade, with just 0.25% in gold.

The latest science tells us that our money and markets form a complex system, that these systems can change state quickly, and that when they do, the plasma-screen salesman gets neither duck nor goose, but rather a black swan with a fat tail.  The science tells us that such a complex system cannot be “controlled” although it can self-organize to achieve stability if given the freedom to do so.  Even the pencil knows it.

Science is now at odds with the possibility that central banking provides stability.  We now know that central control paradigms on complex systems may have a short-term stabilizing effect, but that this can only be achieved at the expense of much greater (though perhaps less frequent) instability as the system shifts to a different strange attractor as it rejects the control offered.  There is only a certain amount of certainty in nature, and we cannot cheat.

A sign that a state-change in our financial system might be imminent is when things start to get very correlated, when everything either goes up, or it all goes down, everywhere, at the same time.  This was evident before fall 2008, and it is evident again now as the HSBC correlation index is at an all-time high[2].  In 2008 what were previously uncorrelated asset classes - stocks, bonds, commodities, real estate - all began to move in unison.  That is the sign that the market is changing its mind about its money.

What can you do about it personally?

What one chooses to do about all this depends on what one expects this now highly-unpredictable currency-system to do.  It is not impossible that fiat currencies yet persist for some time, that voters vote for austerity, governments develop fiscal prudence, citizens bear down, pay off personal debt, pay higher taxes, and accept reduced government benefits, and we then might have a period of deleveraging to slowly but very painfully unwind the world from our current position while maintaining our faith in fiat.  Currency would be the best asset to own in this slow deflationary scenario.  I don’t think it is likely.

It is more probable that the band-aid will be torn off quickly by the market, and the US dollar and the Euro will vie for the lead in the battle for the bottom.  While governments and bankers may try to manage a gentle de-leveraging, in examples from history the market has been savage.  Typically, the attempts to sustain a fiat status quo involve monetary inflation (and then the unintended hyperinflation) as the means to “solve” the debt crisis in the local currency.  If one were certain of the inflationary scenario, debt would be the best thing to have, provided one also possesses inflation-proof hard assets, and/or inflation-indexed income, so that one can meet interest payments.

Short-term predictions are even more difficult in this system, as crowd behaviour will lead to such paradoxical effects as rushes to US treasuries as a “safe haven” despite what seems an obvious inability for the US to do anything long term but inflate away their global obligations.  While the US remains our largest trading partner and we link our currencies through the reserve mechanism Canadians will to some extent get taken along for the US ride.

In my opinion, in a great de-leveraging the most sensible thing to do is to own some of the most real form of money you can, precious metals.  Individual miners or mining funds are an option, to own metal-in-the-ground, but as insurance against global financial calamity, watch out for sovereign risks.  Countries play gold close to the chest once trouble hits.  If you hold securities “in street name”, you are dependent on the solvency of your financial institution.  If you believe that the financial system will persist with derivative assets intact, one could buy GLD or SLV, but know that these will likely be early casualties of a state-change.  Better yet might be one of Sprott’s PSLV or PHYS, or CEF, or BMG, or other Canadian bullion funds.

The best currency-insurance you can get?  Physical metal, in your possession.  Premiums for physical metal over the “spot” or other “paper-metal” prices are only going up. 

The other important thing you could do is to write our politicians, tell them you now understand how our monetary system currently works (or not!), that you don’t like it, and that we need to get back to gold or another market-tested metal to restore financial faith.

And if they ask you “Why gold?”  ask them right back “Why tree?”



[1] Seriously.  In 1685, Jacque de Muelles, Intendant of Justice, Police, and Finance for New France found himself without funds to pay his soldiers.  After exhausting local sources of borrowed currency, he finally cut a deck of cards in pieces, initialed each piece, and paid his troops with them.  These entered circulation as currency.  Card-money was again issued in 1686 and 1690, circulated freely until 1714, and was finally redeemed and retired in 1717. From  A History of the Canadian Dollar, James Powell, Bank of Canada, 2005.  The full text can be found at: http://www.bankofcanada.ca/publications-research/books-and-monographs/history-canadian-dollar/

[2] https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=2Q70z09rbF&n=282506.PDF  NOTE to tfmetals readers: being a stickler for detail, I just checked this link.  Apparently HSBC took down the Risk-On/Risk-Off PDF article.  Seeing as I also had checked the link just before publication in October, they must have taken it down in the interim.  Perhaps my article generated some unwanted traffic?  Who knows...

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