The Future of Physical Gold (Part I)

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ashvinp
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Link to full piece: The

Link to full piece:

The Future of Physical Gold (Part I - Dialectic Foundations)

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Executive Summary, Please

Ashvin

Can you please just give a summary in about one or two sentences that tells us, the lay person,what your prognosis on the value of gold is?

Sometimes I think you're more into writing beautiful descriptive passages on of each facet of the complex constructs you delight in crafting. Way above our heads.

Poet

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LOL

I don't think I've ever seen anyone try to use Quantum Mechanics as the analogy to explain anything!?  I went to school at Fermi Lab in Batavia, IL (our nation's only Particle Accellerator) so I'll put this in basic terms.

Gold like any other element is made up of all sorts of fluctuating bits and pieces at the Quantum Level, (the world of what makes up electrons and even smaller things like quarks.)  Even though Gold is made up of so many different things that can be formed and changed into other elements, it is most valuable to us (living in the macro world) when this matter is in the form of Gold.

The same goes for the dollar.  Our economy is made up of different industries, the politicians policies and budgets play a part too, our ideology and system of trade all effects the actual value of the dollar.  Right now the dollar is not backed up by anything, it fluctuates, it is inflated, it's future is uncertain.  So to sum up his point, the value of the dollar is fluctuating like quantum foam or waves in String Theory and can become anything... Once the dollar settles down, it will ultimately rest in it's final form, it's true value.  Until that happens, it is best to keep buying as much Gold as you can get your hands on because the dollar is as uncertain as which plane of the multiverse an electron happens to be at this exact moment.  LOL!

By the way, I love how the author completely destroys Karl Marx's Communist ideology in the process.  =)  Capitalism, true Capitalism as in the free market with no Government interference, is the only way things will settle down to their true form.

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Poet (sorry for the late

Poet (sorry for the late response),

The idea is that increased systemic complexity fundamentally changes and constrains the role and value of commodities, including those acting as money, within the system (similar to how quantum decoherence does the same for particles). Therefore, the future role of physical gold in any financial system should be analyzed in that more limited and dependent context (in contrast to Freegold, where gold will be a completely independent monetary reserve asset acting as a floating reference point for other debt-based fiat currencies). This Part I was just meant to be a theoretical foundation to be laid before proceeding on into more detailed arguments about the future monetary roles of physical gold.

Anyway, Part II just came up today, and I tried to make the argument more specific and clear in that... here is the link:

The Future of Physical Gold (Part II - The Evolution of Value)

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Ashvin Still Not Simple Enough For Laypersons To Understand

Ashvin

Both Part I and Part II are still not simple enough for the layperson to understand.

At this point it sounds like maybe some gold/silver is okay, but don't expect too much of it, but rather,  also be diversified into other goods to avoid potentially ruinous or disadvantaged trades of two kinds:

  1. You can more options to trade what surplus you have for goods and services you need but don't have, and
  2. You don't have to trade what little you have for difficult-to-acquire goods because you already have them.

Care to tell me if I'm wrong or provide suggestions? Thanks.

Poet

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Poet wrote: Ashvin Both Part
Poet wrote:

Ashvin

Both Part I and Part II are still not simple enough for the layperson to understand.

At this point it sounds like maybe some gold/silver is okay, but don't expect too much of it, but rather,  also be diversified into other goods to avoid potentially ruinous or disadvantaged trades of two kinds:

  1. You can more options to trade what surplus you have for goods and services you need but don't have, and
  2. You don't have to trade what little you have for difficult-to-acquire goods because you already have them.

Care to tell me if I'm wrong or provide suggestions? Thanks.

Poet

I'm not sure what you mean by layperson, Poet. They are certainly not geared towards people who have no patience for boring economic and/or philosophical theory, I'll give you that. However, that is the most crucial part of my argument... the theoretical foundation on which our industrial/financial capitalist system is based. It is a combination of complexity theory, Marx's class/commodity dialectics and Minsky's Financial Instability Hypothesis (to be discussed in Part III), as well as Dr. Steve Keen's analysis/expansion on these concepts.

I'm not sure if you are familiar with the theory of Freegold, but it posits a very unique role for physical gold in an upcoming global financial system. It is by far the most convincing argument I have read for HI in the short-term, but also has very serious flaws IMO. So that is mostly what my series is geared towards evaluating, as well as what I perceive to be the most likely roles for physical gold in the future (but have not gotten to that yet).

It sounds like you believe my articles are about how people should allocate their investments between gold and other assets, and that is definitely not the case. That depends on a lot of factors which are specific to an individual's circumstances, and so it would pointless for me to throw out general investment guidelines. I am merely saying that people should not expect the global financial system to survive for a long time, let alone stabilize after a relatively short-period of HI and be largely recapitalized by physical gold, which will have the purchasing power of close to $50,000/oz. (this is what Freegold argues). I am also saying that there could be a signficant period of dollar deflation before HI, and that should also inform your decisions to invest excess wealth into gold.

I really just want to give people what I believe to be the proper theoretical framework for understanding where global society is headed, and then let them evaluate it and allocate their excess wealth in that context (but I am leaving out energy/resource scarcity issues).

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Poet wrote: Ashvin Both Part
Poet wrote:

Ashvin

Both Part I and Part II are still not simple enough for the layperson to understand.

At this point it sounds like maybe some gold/silver is okay, but don't expect too much of it, but rather,  also be diversified into other goods to avoid potentially ruinous or disadvantaged trades of two kinds:

  1. You can more options to trade what surplus you have for goods and services you need but don't have, and
  2. You don't have to trade what little you have for difficult-to-acquire goods because you already have them.

Care to tell me if I'm wrong or provide suggestions? Thanks.

Poet

What with terms and concepts like use-value, labor power, and exchange-value the subject can be obtuse and very dry. Not Ashvin's article, which is quite good, but the subject matter in general. My eyes used to glaze over when I would read material with these terms, I did not really understand it and found it hard to relate these subjects to what I was seeing and experiencing in running business and just trying to manage my finances. But I persisted, and certainly in no small part to Steve Keen’s writings, referenced heavily in Ashvin's article. Keen has a easy and useful way of describing these concepts, and it wet my whistle for more.

Spurred by many posts on this forum and others like it, I saw a raging controversy on the subject of money, gold, and Austrian economics, and felt really unable to participate in any discussion, because the root principles evaded me. It was just one opinion against another, and as I was to find out, rather like arguing astrophysics without an understanding of gravity. Lots of hand waving and not much in the way of substance.  Just like most of the mainstream will never watch the Crash Course, most of the people who do will never take the knowledge base any further, and will participate in circular arguments ad nauseum about what money is-and why things happen the way they do.

To the few that do want to explore further, I found David Harvey to provide the best, most easy to understand explanation for visualizing these concepts, most likely because he is a graduate school professor at NYU who has been teaching the same class for almost 40 years. He has refined his teaching method over the years to a form where he can communicate most of the theories and concepts referenced on Ashvin's articles to the average graduate student. If you have an interest in delving more deeply into how these factors affect our business world and the political economy, Harvey has provided a video version of his entire semester course on Marx’s Capital, for free (naturally) and it is well worth the time if one has an interest in rising above the echo chamber/talk radio politics of our time. The course is not in any way political- not a word- but rather a serious and careful study of the factors that govern our economic lives today.

The video course is all of 36 some hours in total, way more than the average blogger can or will invest in time. So given the time constraints of most, here is a link to the final class session, a review, with a really great summary of all of the elements pulled together and explained by a one of the foremost scholars on the subject.  The final class (linked) takes just over an hour. Worth every minute.

And thanks to Ashvin for a good series of articles.

 

http://davidharvey.org/2008/09/capital-class-13/

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   Thanks for that link

 

 Thanks for that link darbi, simultaneously illuminating and frustrating...  I have a gut feeling the real problem is more foundational.... entelechy... *purpose*

 The purpose of capitalism ? The purpose of humanity ? The universe.. ?

 Discussing the mechanics of means while totally ignoring the ends .. always frustrates me.

  It's like watching people debate the merits of a sicilian defense..  -  in snakes and ladders.

 

 

 think about it further when I'm sober..

 anyway.. a (belated) happy towel day..  http://www.towelday.org/

+42.

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David Harvey's Video

Thanks for the link to that lecture, darkibash. I have always enjoyed Harvey's creative economic explanations (this short sketch is great - The Crises of Capitalism)

So I'm not very computer literate, and I was wondering if anyone could tell me how I can extract a specific segment from that video to put in my next article?

I'd like to do that in the beginning as a review of what I was saying in Part I and II, but I don't want to put the entire video in there and tell people to go to certain times. Is it possible to cut it up?

Thanks,

Ashvin

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"The-Marx-Mellon-Schumpeter-H

"The-Marx-Mellon-Schumpeter-Hoover-Hayek-axis"

Link

But when it comes to business-cycles--to recessions and depressions and downturns--we don't need to model 140 million workers, 10 million firms, and 20 million commodities: we only need to model two: (OK, four): currently-produced goods and services on the one hand, and (perhaps three types of) financial assets on the other. A business-cycle downturn comes when--for any of a number of possible reasons--there is an excess demand for financial assets and a corresponding deficient demand for currently-produced goods and services, which leads to rising inventories, falling sales, rising unemployment, falling incomes, and multiplies itself into general deficient demand for pretty much all currently-produced goods and services in the economy. The downturn comes to an end when incomes have fallen so far that households and businesses are so strapped that they cease trying to build up their stocks of financial assets, and the aggregate supply-aggregate demand balance comes to an end. The depressed state of the economy comes to an end when an excess supply of financial markets induces an excess demand for currently-produced goods and services that pushes inventories down, sales up, unemployment down, incomes up, and multiplies itself into general prosperity.

In the background the market system is trying as best as it can to find the best uses and production plans for 140 million workers, 10 million firms, and 20 million commodities given the state of aggregate demand. But that is not of the essence in understanding low capacity utilization and high unemployment. The aggregate demand shortfall is.

When you ask believers in "recalculation" what pattern of production and trade proved to be unsustainable in 2007, they answer: "building so many houses." When you ask believers why the market economy has been unable to sort out this problem in three years, they answer with nothing--silence. When you say that OK, there were $300 billion of excess houses at the start of 2007 but now construction has been so depressed for so long that there are $1 trillion fewer of houses than trend and why isn't the 2007 pattern of production and trade sustainable again, they answer once again with nothing--silence.

That annoys me.

It is possible to find in history economic catastrophes produced by the disruption of patterns of sustainable specialization and trade--the Bengal famine of 1942 comes immediately to mind. But there is literally no evidence at all that we have such a problem right now. Our problem right now is that demand is low because incomes are low, and incomes right now are low because demand is low, and demand is not rising because there is no excess supply of financial assets to goose people to spend more. If you want to argue that there is a disruption of patterns of sustainable specialization and trade, you need to point to such a disruption right now that is large enough to produce an 8% shortfall in spending. Nobody has. Nobody has because nobody can.

The other thing that annoys me is that this is presented as something new when it is actually something very old--and it is presented without acknowledgement of the arguments made against it in the 1930s and, indeed, in the 1840s when it was made before. Friedrich Hayek and Andrew Mellon claimed--and Mellon dragged Herbert Hoover along into policies of austerity, of tax increases and spending cuts during the Great Depression--that as a result of lax monetary policy in the 1920s the economy in 1930s had too much plant and equipment and too many workers employed making capital goods, and had to suffer from a "prolonged liquidation" in order to productively redeploy resources into the consumer goods industries where they really should be. Joseph Schumpeter cheered them on, claiming that without the boom-and-bust cycle the economy would die, for it was its "respiration." But if Hayek were correct we should see depressions both when the economy is switching resources from capital to consumer goods and when the economy is switching resources form consumer to capital goods, and we don't: while an economy making too little in the way of consumption goods is ripe for a downturn, an economy making too little in the way of capital goods is ripe for a boom.

And a century earlier Marx had the original story: because workers earned less than they produced, full employment could only be maintained if capitalists purchased the excess, but capitalists would do so only if they believed the boom would continue and they could keep making money by expanding their operations, but expanding operations meant that the gap between what workers produced and what they earned would grow, and so full employment required that capitalists not just anticipate that growth would continue but that growth would continue at an increasing rate--and somebody capitalists would lose their confidence that the rate of growth would keep increasing, and then would come the depression. The depression would continue, Marx thought, until the waste and destruction of the depression had gone on for long enough that capitalists concluded that the economy was once again short of capital, and that they could safely and profitably expand their operations again.

It was not an implausible theory--for 1848.

But it was a wrong theory.

And it is an especially wrong theory now: We have worked off our housing overhang. We have worked off our housing overhang fourfold. We are now $1 trillion short of houses in the United States. But where is our robust recovery?

Where indeed.

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darbikrash
darbikrash wrote:

"The-Marx-Mellon-Schumpeter-Hoover-Hayek-axis"

Link

The depression would continue, Marx thought, until the waste and destruction of the depression had gone on for long enough that capitalists concluded that the economy was once again short of capital, and that they could safely and profitably expand their operations again.

It was not an implausible theory--for 1848.

But it was a wrong theory.

And it is an especially wrong theory now: We have worked off our housing overhang. We have worked off our housing overhang fourfold. We are now $1 trillion short of houses in the United States. But where is our robust recovery?

Where indeed.

I'm not familiar with this "recalculation" theory, so the author may very well justified in criticizing it, but he seems to be severely misinterpreting Marx's theory of cycles in capitalism, which is obviously much different from Hayek and the Austrian Business Cycle.

After all, Marx believed that each progressive crisis of capitalism became worse as the previous ones would build off of each other over time. In terms of profit rates and employment, that meant they were both structurally doomed to fall over time, until eventually the desperate workers of the world would unite to overthrow the system.

So it is clear that Marx would not think this current crisis could be "worked off" by bringing home values down to a level corresponding with the average trend in the past (which has not even been done yet due to massive intervention by governments and CBs)... but instead would probably say that this was the crisis to eventually end the entire system.

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I don’t think it’s so

I don’t think it’s so much of a critique of Marx as a critique of the Austrians and their inability to accept that free markets cannot fundamentally correct themselves without a.) unacceptable economic devastation or b.) outside intervention. (or both)

The recalculation theory is not really Marxian, it is more of a outcropping of Hayek’s principles and free market theory in general. And I believe the author is trying to illustrate the fallacy of this approach, leastwise how it cannot be explained or validated by the real estate crisis.

That said, a fair criticism of Marx could well be made as to why he never considered using the government to inject capital into moribund economies experiencing the classical liquidity crisis, which he refers to as a “profit squeeze” wherein capital is insufficiently motivated by returns to reinvest surplus value back into the business. His description of this phenomena is precipitated by a bias in favor of labor absorbing surplus value- at the expense of the capitalist. Therefore, if  labor gets the surplus value, the capitalist is discouraged from continuing to put money into the economy, instead withholding capital until returns become more attractive.

The effect is disastrous.

Keynes came along and showed that the struggle with labor was not the only driver to a liquidity crisis, he showed that demand destruction (as a result of low confidence, high unemployment  and declining wage models) could in fact accomplish the same thing, in direct conflict to the neoclassical economic theory of the day. His solution was to inject money into the economy via government intervention, thereby directly addressing the liquidity crisis.

Marx’s (justifiable) obsession with labor was perhaps the reason for not considering that other factors might motivate capitalists to withhold reinvestment. Maybe this was going to be left for subsequent volumes of “Capital”. I don’t think this in any way dilutes the power of Volume 1, although it is not the only inconsistency or error related to Labor Theory that has gotten Marx into trouble. Part of the brilliance of "Capital" is the presentation that capital is a process and not a thing, that it is constantly in motion, and that is takes very different forms at different places in the process, from labor value, to commodity, to money, etc. If the process stops for any reason, you will see in short order, the destruction  of capitalism as it must always remain in motion.

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darkibash, I completely

darkibash,

I completely agree with your points in the last post. Marx certainly over-emphasized the capitalist tendency towards declining rates of profits, which stemmed from his flawed notion that labor was the only source of value in production (the capitalist tendency towards higher capital to labor ratios meant diminishing profits).

That being said, I believe the dynamic class struggle between capitalists and labor still ends up being the root of the financial instability described by Fisher, Keynes and Minsky, as speculative finance is necessitated by the concentration of ever-more capital in the monetary circuit of the system, which precipitates high structural unemployment, financial dependency and Marx's "realization problem" for the capitalists.

I discussed that concept with more detail in Part III of my series, which can be found here - The Future of Physical Gold (Part III - The Final Realization)

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Laymans' version
ashvinp wrote:

 

That being said, I believe the dynamic class struggle between capitalists and labor still ends up being the root of the financial instability described by Fisher, Keynes and Minsky, as speculative finance is necessitated by the concentration of ever-more capital in the monetary circuit of the system, which precipitates high structural unemployment, financial dependency and Marx's "realization problem" for the capitalists.

I discussed that concept with more detail in Part III of my series, which can be found here - The Future of Physical Gold (Part III - The Final Realization)

 

Great series of articles Ashvin!

I think you bring a fresh perspective to the Marx/Keen/Harvey axis in coupling these theories to the discussion of gold. I had posted something congruent with these ideas on the ever popular subject of alternate currencies in another thread. Link

As said earlier, a lot of this talk can appear a little obtuse, (particularly my linked post) but from a layman’s perspective, I think it’s really simple?

You’re quite right, at the center is the struggle between labor and big business, which I define as multi-nationals. This struggle sets up a natural and quite healthy tension between the two opposing forces. When this healthy tension is displaced, to either direction of bias, bad things happen. The convergence over the last three decades of the neo-liberal agenda, and the capture of the mainstream media by conservative business interests has resulted in the disruption of this tension away from the side of labor. Propelled by the momentum of the burgeoning success in minimizing organized labor, business and conservative interests teamed together to usher in an ongoing era of deregulation and complimentary legislative climate that promoted favorable tax incentives for big business. These incentives were leveraged to follow with near perfect parallelism along with Marx’s prediction of capital heading to markets with unlimited low cost labor surplus. It is an irony lost on many that the perfect climate for capitalisms’ magnum opus was to be under the color of a totalitarian Communist regime- embodied by mainland China.

This massive labor and job migration left entire communities of remaining US workers cannibalized of a sustainable tax base to provide even basic services for the commons, and at the same time a growing and rapidly aging population began to manifest on a society with ever increasing complexity, virtually guaranteeing larger entitlement expenditures on a per capita basis.

This diffuse and disjointed labor base was confronted with several classical Marxist predictions, a profound loss of collective bargaining power as the threat of job outsourcing to China and Mexico stymied any meaningful protests for re-organization. This resulted in lower wages for those lucky enough to retain jobs, and Marx’s predictions about consolidation of capital are demonstrated in the aggregation of “big box” stores designed to lower the sustenance costs for low and middle class labor, furthering enriching the capitalist class- as predicted chapter and verse.

Lower sustenance costs means yet lower wages are now possible, and bracketed by the threat of job offshoring on the one hand, and lower wages for the still employed, the death spiral continues in a feverent race to the bottom. This in turn causes the evaporation of most discretionary income of the middle class, which for the first decade of the 21st century was supplanted by the appearance of easy and ubiquitous credit.

With the cratering of the credit market, the emperor can be seen to have no clothes, and here is where it gets real interesting. With a collapsed income, the vast majority of Americans can no longer afford the products of consumerism that capital has morphed into, having exhausted by sheer competitive overhang the more productive and meaningful products and services, the average capitalist is now presiding over a string of yogurt parlors and useless Ipod apps, analogous to unwashed children selling Chiclets gum at the Mexico border crossing. Useless trinkets for bored and perennially over fed consumers, now suddenly out of discretionary income, and no hope on the horizon for either credit or a sustainable wage income to change things.

A demand destruction on a scale that I doubt even Marx envisioned.

The bourgeoisie has simply engorged itself so completely and so effectively on the middle and lower class, there is no money left for the poor fools to purchase the trinkets and trivia that the bourgeoisie needs to maintain their lifestyle, in effect tuning their gated estates into miniature Easter Islands, replete with carved stone masks and bad artwork.

So this leaves us with another problem, what do the wealthy do with all the money? It used to be a budding capitalist could re-invest and maintain an income stream though investment, real estate purchases, or entering the rentier class to sustain cash flow, all the while ignoring, contrary to free market mythology, risky entrepreneurial ventures and instead focusing precious man-hours on reducing tax liability and preservation of capital strategies. It pays better and has much lower risk.

The problem is that there is a very, very large pool of well funded high net worth individuals competing for a rapidly shrinking pool of opportunity feeding from a middle class with vaporizing income streams. There are not simply enough attractive investment opportunities to go around, a face the music moment in a system that requires perpetual compound growth to function. This is why Kenysian efforts do not work, this is why the real estate crisis does not square with the free market theories.

Capital abides no limits. It must expand its markets to prevent the destruction of demand. It must seek larger and larger labor markets, with lower and lower labor costs, as the coercive laws of competition wreak their havoc. Capital consolidates, aggregating smaller, less powerful firms unable to achieve the international reach necessary to grow into offshore markets, purchased for pennies on the dollar as the multi-nationals observe and track strangling midlevel businesses with a predator’s gaze as they asphyxiate on a contracting domestic market- leaving consumers with even fewer choices.

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darkibash, I am glad you are

darkibash,

I am glad you are enjoying the articles, and you're right that they can appear pretty intimidating when presented in a somewhat technical manner. Personally, I tend to maybe over-compensate by explaining every little technical detail of Marx's theory, which then paradoxically makes it even harder to follow for some. I probably should at least include some more "layperson" examples of how the dynamics play out... which I aim to do in the final part with regards to gold.

I really like the way you summarized the dialectical argument and "realization problem" in your post, and I would like to quote you in the beginning of my next one as a way of briefly recapping the arguments from Parts I-III (with due credit, of course), if that's alright with you?

Thanks again for reading.

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