Faith is the only real money. The only thing money measures is optimism about the future - both micro ("I am optimistic that you can repay this loan") macro ("I am optimistic this country's military spending and worker-hostile environment guarantees my investment will be protected"), corporate ("I am optimistic about the contents of this earnings call"), and specific ("I have more faith in this asset class than in other asset classes.")
Crashes are a manic-depressive devotional cycle. Collective optimism becomes stretched to delusional levels. Then it snaps, pessimism and debt paranoia take over, the central government has to make reassuring noises which reassure the right people, and the hype cycle can begin again.
Gold is a faith-token - valued because it's heavy and shiny and because there's a long tradition of valuing it when investors become pessimistic about more evanescent asset classes, not because of its relatively limited practical utility.
Fiat money is just faith-token money without a tangible base. The process by which it gains/loses trust is the same.
The tangible items that aren't primarily faith-based are land and housing, so they do well as reliable investments. But even they're not faith-free, because they will still lose value in an area if no one believes it has a future.
> Fiat money is just faith-token money without a tangible base.
There is no physical basis for the faith, but a persons interactions with society is a basis for faith in fiat money. If all our neighbors and family and leaders express faith in fiat money through daily actions, then that's a powerful reason to share the faith. Even more so when you realize that faith is the only thing needed to make the system work.
I agree that gold and fiat money are both faith-based, and I want to emphasize that I am not a gold-bug--almost all my assets are in revenue-producing real estate.
There is, however, a massive qualitative difference between gold and fiat: fiat has an adverse selection problem. The government that issues it can print as much of it as it wants, and it's more likely to do so precisely at the times when the country is in trouble.
Gold depends on faith, but failure of faith in gold isn't as correlated with failure in the rest of the economy.
> The tangible items that aren't primarily faith-based are land and housing, so they do well as reliable investments. But even they're not faith-free, because they will still lose value in an area if no one believes it has a future.
They depend on faith even more in that "owning" property only works when everyone agrees with the system of private property that granted you this ownership in the first place. This is usually backed by a government with some kind of armed police to maintain property rights by force if necessary. Without such a faith-based system -- or some other way of defending it by force -- your claim to any acres of land is not worth much.
Functionally, gold serves as a lack of faith in fiat currency - almost as a short. When you expect inflation in your local fiat currency, you start looking at gold as a way of preserving your value.
Yes, and don't forget faith in the government's ability to collect taxes. This helps to stabilize money's value, since it ensures that everyone who pays taxes needs their government's money, regardless of whatever other kinds of money they might use.
As a result, faith in money becomes tied to faith in the government's ability to keep functioning, and this can be thought of as a base.
> The tangible items that aren't primarily faith-based are land and housing, so they do well as reliable investments.
Why are you ignoring commodities? Wheat, iron, oil etc. are all commodities that are much more useful as a monetary base than land and housing because they are orders of magnitude more liquid (meaning you can acquire it and subsequently sell it while incurring a smaller loss).
The commodities you mentioned work better as a "currency" than "stored value" for an individual. For a physical object to work as a stored value, especially over longer periods, it's got to be durable and convenient to store and protect. Real estate/land satisfies all those as long as the surrounding political situation remains stable.
If the state turns rogue or falls apart then you are better off hoarding (or running away) with gold.
I don't remember the details, but someone asked a member of a rich European family how they had managed to preserve their wealth over centuries. The answer was "one third art, one third gold, one third land". Any of those can fail due to seizure, political instability, etc, but most of the time at least one will maintain value and remain under your control.
To me debt is far superior. Debt means you have a commitment from a human (directly or indirectly, if the debt is owed by an organization). Gold has no inherent value at all apart from some minor uses of relatively small amounts in the economy. Except by agreement, which debt also has.
An example for debt-based I once read somewhere was a kid writing an IOU for garden work. As long as the debt is not paid - i.e. the kid does the work and the IOU is destroyed - that piece of paper circulates through the neighborhood. It has real value (actual work). This example also illustrates what's wrong with calling for all debts to be repaid, which makes sense for the individual but not for the economy (like so many or maybe even most suggestions around money and power, where things that work very well for someone make no sense if applied to everybody, the difference between "works for anyone" and "works for everyone").
>Gold has no inherent value at all apart from some minor uses of relatively small amounts in the economy.
I've never understood this argument that gold has no inherent value or no use in economy.
First, lets acknowledge you couldn't even make your comment/post from any computer/smart phone on the market that doesn't use gold. That is gold is a great conductor of electricity, maybe not the best conductor, but when combine with its anti-corrosive properties it is the industry standard. Every single computer/smart phones is manufactured with gold, anyway you cut it, that isn't a small part of the economy.
In addition to being a good conductor gold has anti-microbial and anti-bacterial, and anti-corrosive properties. This gives gold inherent value, especially in antiquity, put your food/wine in a amphora made of gold and made of pottery and see which expires first. Finally, gold isn't made through natural processes on Earth, that we know of, it is made in Stars and so what we have on Earth is what we got, that limited supply, makes it inherently valuable as a medium of exchange. Sure we can also go back to using seashells as a medium of exchange, but the Earth will continue printing money. finally, the anti-corrosive and ease of smelting/crafting Gold also gives it a certain value.
Gold is a useful metal, yes. Its use as a money standard is arbitrary. A wiser commodity standard for currency would be a basket of non-scarce commodities that historically do not fluctuate much in price.
But commodity standards in general are not preferred by governments. You could even make an argument that forgoing fiat currency is a national security risk. Countries which use fiat money can conduct warfare more efficiently. And in peacetime they can conduct counter-cyclical monetary policy.
These key advantages make fiat the obvious choice for governments.
But it is not. Gold is finite which is important for a currency. Gold is one of the easier metals to work with/coin, which is important, at least historically. And Gold is non-corrosive, which again is important in coinage.
Sure these unique characteristics may not seem important now that most fiat is digital, but we are talking about a system of money going back thousands of years. It has withstood the test of time, not because its arbitrary, but because gold will last thousands of years, something no digital or paper/cotton based bank note can claim. Plus you can counterfeit all paper/cotton based bank notes, to date no one has successfully reproduced Gold.
> To me debt is far superior. Debt means you have a commitment from a human (directly or indirectly, if the debt is owed by an organization).
You're assuming that the debt is backed by labor and involves a commitment to perform some specific service. Such promises are generally considered unenforceable as the capacity for future labor is inalienable, at least in societies which don't permit slavery or indentured servitude. At best you may be able to claim some property in compensation if the service is not performed. How is an indirect claim on someone else's gold or other property "far superior" to actually possessing it yourself? Sure you save a bit on the cost of storage, but in exchange you add the potential for non-payment.
> An example for debt-based I once read somewhere was a kid writing an IOU for garden work. As long as the debt is not paid - i.e. the kid does the work and the IOU is destroyed - that piece of paper circulates through the neighborhood. It has real value (actual work).
And if the kid proves unable or unwilling to do the work, what becomes of the value of the IOU? Repayment is not the only event that can take an IOU out of circulation. Better to have a claim on, or better yet possession of, a valued and marketable commodity than a mere promise of future services from a specific human being who could die, become disabled, or simply choose to dispute or repudiate the terms of the IOU.
You are assuming absolutes. The universe does not have any guarantees.
I'm being relative. In relative terms debt-based currency is more than you get from something far more arbitrary, like gold. Of course, here the argument depends on how fixed and static you see the basis of the mass-psychology based "value" of gold.
If humans stop cooperating, the very basis of human society, you've got bigger issues than a currency standard. If they only stop valuing gold there is no problem at all really, except of course for those who relied on it somehow magically remaining "valuable" (based purely on psychological reasons).
I am not assuming any absolutes. Gold just currently happens to be a marketable commodity with a long history of stability—far more so than promises of labor. Obviously that could change. If you don't care for gold, substitute any other marketable commodity.
Gold could lose all value if everyone, including the owner, stopped demanding it, including for industrial use and jewelry. There is no precedent for such an event but it is indeed a possibility. A promise of labor, on the other hand, can lose all value if just one particular person chooses to renege on the agreement or is rendered unable to fulfill the IOU. That sort of thing happens all the time.
Jewellery. 2200 tons last year. Was popular 3000 years ago (https://en.wikipedia.org/wiki/Mask_of_Tutankhamun) and will probably be in 3000 more. Try getting the wife a plastic wedding ring if you think it has no value.
I daresay that's different from saying it's any good as money.
Unlike plastics and most other metals, Gold is easy to work with (i.e. non-brittle, low melting point, easy to mold/cast, it is conductive so its easy to plate other metals) and it is non-corrosive. Therefore, gold jewelry is historically a finer end product that can be made with less skill and the result lasts longer.
To a lesser degree of importance for jewelry, but still a prized property for wearable items, gold is antibacterial and anti-fungal.
Sure people may collectively decide the market price of gold, but people never collectively decided the properties of gold were valuable, those properties are inherently valued by people and Gold happens to have them.
Silver has these same qualities, hence why both Silver and Gold are historically used for jewelry in the first place. People didn't start making jewelry out of Gold and Silver because Gold and Silver was "valuable", rather Gold and Silver were used to make jewelry because of their ideal properties for jewelry, and its the properties of these metals that make gold/silver valuable.
So when I can get a big fat gold ring for a quarter next to the bubble gum machines at the gas station, you think it will still be good for an engagement or to commemorate 25 years of service because it is so very non-brittle, conductive and easy to melt, mold and cast?
It would still probably be used for inexpensive jewellery but maybe not things where showing investment was important. That said with engagement rings most of the cost is the diamond not the gold. Also it will remain in limited supply unless we start mining asteroids.
Yes, people will still purchase the $.25 gold ring over the $.25 plastic ring. Do you ever look at two identically priced items and purposely purchase the one of lower quality?
It is easier for somebody to have more faith in gold than in someone's promise to pay back a debt (using work or a commodity). Especially in dealings between sovereign entities.
So you basically ignore my comment, where I said something about just that, and write an auto-triggered response, got it. Did I just write to some customer service hotline?
money is also "money owed" -- you don't know today that the money you have in your account will be able to buy the same amount of stuff tomorrow, it's also a completely faith-based system
I'd say about the same as what the inverted yield curves say (i.e. the rally on long term, high quality bonds). That the market expects growth to tighten:
Gold is not "the only real money", though. There is no such thing as "real money":
> Law thought that the important thing about money wasn’t its inherent value; he didn’t believe it had any. “Money is not the value for which goods are exchanged, but the value by which they are exchanged,” he wrote.
Isn't that stretching "social"? The money I hold is not tied to the yet unknown individual or group with with whom I will exchange it for goods or services, the person might not even be born yet.
The money one holds always has ties to the people surrounding its owner, no matter if those people are known, unknown, born or unborn (I honestly didn't understand the thing about the unborn people, as we as a society do lots of societal stuff for the people not yet born), and in that regards money is indeed one of the most social/societal things ever. As a matter of fact sociology itself as a science was partly born as a result of Georg Simmel's book called "The Philosophy of Money" [1], published more than 100 years ago.
> Probably considered Simmel's greatest work, Simmel saw money as a structuring agent that helps us understand the totality of life.
Well try to imagine there are no people around in 5 years, only you. Or that your country becomes North Korea. Or that the "yet unborn" generation, for some mysterious reason, completely rejects money. What good is your money.
> I'd say about the same as what the inverted yield curves say (i.e. the rally on long term, high quality bonds). That the market expects growth to tighten
You know what they say: Inverted yield curves have predicted 10 of the last 7 recessions.
The value of gold is inversely correlated with the trust in government bonds. The reason is clear when reading the article; gold is the only real money so the higher the chances of defaults on bonds, the more attractive it becomes to swap paper money for gold.
The current gold rally tells us that there is a lot of global political and economical uncertainty. Think of the Brexit, the Iran troubles and the global trade war. All these issues could cost big money for governments so it makes their bonds less attractive.
Good point! In a normal market situation you would expect the bond yields to increase when they become less attractive, but this is currently not the case.
Here is a hint why this happening: not all government bonds have such low yields: only some European countries and Japan have, the USA bond yield for instance is quite a bit higher.
The reason is that there is currently a huge buyer for European government bonds: the ECB. The ECB's "quantitative easening" that has been going on for the last years is artificially keeping the yields low.
>What does gold’s year-long rally this year tell us?
People need a place to park the vast sums of capital around the world, especially so with long-term government bonds paying nothing (or even having negative rates).
Would you rather stick $10,000 in gold paying nothing, or a Greek 10-year bond paying sub-2%?
If gold is 50mm a ton (wouldn't be of they had to liquidate that), rounding up, then they have at most 100 billion in Gold. Which sounds like a lot until you realize they have many trillions in USD reserves and debt.
China since 2016 has signed bilateral agreements with several oil-producing nations to receive payments in yuan backed by gold. This bypasses the need for the "petrodollar". This is the most likely reason for China's recent insatiable demand for gold.
I think outside of all the political talk about fiat currencies, gold, and other commodities are valued as diversification instruments just because they tend to move separately from stocks and bonds. There are environments when stocks and bonds both behave poorly.
If it breaks a certain threshold, then you can be certain it will be the global reserve currency again. People often forget how stable the world economy was under Bretton Woods.
This is a kind of revisionist argument that I read a lot. The Bretton Woods system only existed for about 30 years until it collapsed from a variety of pressures; it was unsustainable. Even during its short lifetime various suboptimal policy adjustments were required to maintain it.
I think it's a mistake to attribute the stability of the post-war world economy to the Bretton Woods system alone; there are numerous factors that coincided. Bretton Woods probably helped to some extent insofar as it allowed the US to rapidly exert a lot of influence, but we in the US still do that now without the Bretton Woods system.
