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THE
ROCKET SCHOOL OF ECONOMICS


Divorced from Reality
by Professor von Braun

February 14th, 2007

Has anyone noticed a deterioration in the quality of all reporting over the last few years, whether it be on politics, the Middle East or financial news? Critical analysis is basically absent or it is covered up or appears on some select non-mainstream website. Financial reporting in particular is now dominated by a handful of players such as CNBC, Fox news, the Wall Street Journal and Barrons.

Meanwhile the Goldilocks economy seems to be alive and well, the housing market is 'soft' but apparently a recovery is just around the corner, so they say. But is it?

Since August 15, 1971, the world's monetary system has been divorced from reality, ever since President Nixon closed the gold window. The reality I'm referring to is the one that allows one to settle one's account. If an account is not settled is it an account? If it's not an account what is it? A debt? Can one even have a set of accounts if they can't be settled? Can you allow debt to accrue ad infinitum?

Trade between nations has gone on for centuries. Essentially this was, and still is, a form of barter whereby something was swapped for something else and the difference in value, if any, was traditionally made up with gold. Gold was the element that settled the account if indeed it needed settling. That's the way things operated for literally thousands of years and periods of peaceful coexistence between countries coincidentally occurred when gold was the favored and often only means of settlement.

Early attempts at having a fiat money system ended badly, first in China and again in France. Why? Because the newly introduced unit of settlement became seen for what it was and eventually became unpopular and unacceptable by virtue of the fact that nobody wanted it.

What is a debt? Is it not an account that has not been settled? Now what happens if you take away the ability to settle an account? Essentially this is what President Nixon did when he closed the gold window. The US dollar remained as the "reserve" of the world's fiat banking system, prior to the Euro's appearance other central banks reported their reserves predominately in US dollars with some still holding gold, in particular France, Germany and Italy, while the UK gradually divested itself of its gold reserves, often in a very public manner.

Now the Webster's dictionary definition of a reserve is: 'to hold back or set aside for special or future use', or, 'funds held back from investment as in a bank, to meet regular demands.'

Is the US dollar truly a reserve? If it's not, then what is it that the other central banks are holding and have deemed "reserves"? Debts? Well, since the US dollar officially is not redeemable for anything at all (thanks to the official closure of the gold window) its acceptance is based upon the willingness of other central banks to hold it in ever increasing amounts, since they can't redeem it central banks have no choice but to accept more of these dubious instruments, ad infinitum, until a saturation point is reached.

How close are we to that point? Probably closer than most members of the financial reporting community believe. The US is now totally dependant on the rest of the world continuing to hold its non-redeemable unit of account as a reserve, while the US continues to increase the amount of debt it issues to keep the game going.

In some ways it's a comedy, albeit a not very funny one, in which several comedians are all pretending that something is something else. The comedians have all laid claim to the idea that they can produce money and that this "money" can be used as a substitute to complete what used to be a very necessary and important part of life, the settling of an account with a unit that was neutral and, more importantly, widely accepted and not subject to debasement by the ruling class. The Romans specialized in debasement, reducing over time the silver content of their principle unit of account by 98%, a factor that hastened their decline.

The comedy routine is now in full swing as the comedians try to out-do each other, while confusing the general public with flashing lights, sound bites, color coded stage sets and figures and, oh yes, lots of fancy numbers flowing across people's screens. The one thing missing is of course settlement. Nobody is balancing the books and the books cannot be balanced. Why? Because the official idea of the US dollar being the world's reserve currency -- convertible into gold, which at least allowed for other central banks to settle their accounts -- ended some 35 years ago.

With the housing market now stressed and the sub prime lenders starting to take it on the chin, has the final straw descended upon the camel's back? Or do the comedians have one or two more new routines up their sleeves?

They may, now that talk of IMF gold sales has reappeared. But should that eventuate, then what else is there? At what point does the rest of the world wake up to the fact that the mountain of debt, created by the US banking system, (which 35 years ago lost its original role as the provider of the world's banking system's reserve currency and substituted instead a debt instrument which fails to allow for settlement of any transaction), cannot be paid? What this implies is that all of these so called transactions are not transactions at all, since, for there to be a transaction, there needs to be an acceptable method of settlement.

The "official" means of settling these transactions was divorced from the transactions themselves when the gold window was closed. The relationship between the principal unit of account, the very basis upon which any accounting system needs in order to maintain its integrity, and the accounting system itself ended at that point.

Since August of 1971 gold quoted in US dollar terms has increased from $35 per ounce to its current level of $660, which suggests that "unofficially" it is still the favored principal unit of account and is likely to continue to remain as such.

Gold remains the central bankers' second-worst enemy, the first being of course themselves.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

Return to the The Gilded Opinion Index Page

The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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