Author: StJohn Piano
Published: 2020-01-04
Datafeed Article 126
This article has been digitally signed by Edgecase Datafeed.
911 words - 132 lines - 4 pages

Mircea Popescu wrote an article called "Let's pretend..." [0], in which he explained why saving in gold is no longer a good move.

My summary / rendering / expansion of this article:

0) "Gold" as used in this article means "gold, or silver, or any other precious metal that has the properties of a hard currency".

1) Gold is physical.

2) Gold is valuable.

3) Being physical and valuable, gold has to be guarded.

4) Vast improvements in transport and communication technology have led to most countries containing only a single group ("the government") that can reliably organise violence. If there are multiple groups, these groups will fight until one defeats all the others. [1]

5) Only governments are able to shoot someone on sight, so only governments have the means to properly store gold.

6) All the sellers of gold and all the buyers of gold are governments. [2]

7) If only a government can protect gold, the gold will gradually flow to a few places (e.g. Fort Knox) that can be defended more easily / cheaply / efficiently.

8) Once a hard currency has largely concentrated in a few locations, under a few holders, it is replaced in practice by "certificates of ownership" i.e. another soft currency. Such a soft currency can be inflated in the same ways as any other soft currency: More certificates can be created, a holder can lend more certificates than they actually have (at some interest rate) to other holders (and these borrowed certificates are in a sense just as real as the original ones), derivative contracts can be created and traded, and it becomes very difficult to know the ratio of "soft gold" to original "hard gold". Access to the actual gold deposits is quite restricted due to the need for security, and it is therefore also difficult / time-consuming to distinguish between "real, hard gold" and its softer variant.

9) Normally, a hard currency (such as gold) would appreciate in value against soft currencies (such as the US dollar or the UK pound) at the relative rate of inflation of the soft currencies. However, this effect is greatly reduced if the hard currency is actually a softer "certificates of ownership" currency.

10) The gold standard used to be the primary means by which the aristocracy got rid of weak or stupid monarchy, and more generally the way in which an economically-more-efficient subordinate was able to displace a less-economically-sane superior, because the subordinate would gradually accumulate savings in gold that would allow it to better afford the necessary weapons [3] to do so, while the reverse would apply to the superior, who might need to borrow funds at punitive interest in order to fight. [4] Over time, social systems in Europe competed in a Darwinian manner, with the economically-better ones tending to win and propagate. [5]

11) Gold no longer has this positive economic effect. The economically-more-efficient subordinate's savings are inflated away before the subordinate is able to compete for the less-economically-sane superior's position.

12) Today, the main economic entities no longer compete in terms of gold (i.e. annual increase / decrease in global percentage of gold held by the country). The currencies in use are armies, missiles, nuclear weapons, factories, warehousing systems, news distribution systems, legal systems, etc. Inside these entities, no individual / group / system can use gold to unseat a less-economically-efficient but more-politically-powerful rival or superior. [6]

12) Political maneuvering has come to matter overwhelmingly more than economic sense, almost everyone is playing politics, very few people are playing "how to make this thing work better over the long term", and systems / companies / people have become less reliable / resilient / functional. Fundamentally, fixing problems properly has become much less profitable than winning political battles (large or small), and people tend to put effort into what is profitable.

13) Gold still works as a medium of saving, to some degree and in relatively small quantities, but not nearly as much as it used to. Political position is a more effective store of value than gold.

[start of footnotes]

Title: Let's pretend...
Author: Mircea Popescu
Date: 2014-08-14
Link: trilema.com/2014/lets-pretend

[return to main text]

Footnote from the source:

Once one gets a monopoly on violence, immediately that same one becomes the only repositor of gold as the underpinning of currency, because no one else can any longer properly hold it.

[return to main text]

It is very difficult, expensive, and dangerous to move or store large amounts of gold.

An individual may hold some gold, but will need to go to a government-approved shop to exchange it for fiat currency.

All large-scale purchase and storage of gold is done by governments or government-affiliated entities.

[return to main text]

Bribery, infrastructure, craftsmen, knights, mercenaries, siege equipment, etc.

[return to main text]

It's worth noting that the Dutch won their independence from Spain at about the same time as European bankers began to refuse to loan money to the Spanish crown.

[return to main text]

The Spanish plundered the gold from South America, but they then bought goods and services from the more economically efficient / developed / complex economies elsewhere in Europe (Antwerp, Amsterdam, the German states, Genoa), and the gold steadily flowed over to the societies that were more careful about their profit margins and efficiency.

[return to main text]

It's unsurprising that the Chinese are able to cope in this environment better than anyone else. Due to the peculiar geographic features of the Chinese mainland, political power there has historically tended to centralise into a single entity, in which the conditions were similar to those we are experiencing today.

[return to main text]

[end of footnotes]