08 July 2010

Debtors vs Creditors

Those interested in this issue, which I have covered in this and this post, will find FOFOA's latest post useful.

FOFOA agrees with Marx that "the history of all hitherto existing society is the history of class struggle" but says that he got the classes wrong:

The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. "The soft money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

What is the relevance of this to gold? FOFOA argues that:

... when the soft money guys are in power the transfer of wealth happens slowly and gradually, and wealth flows from the Savers to the Debtors. But when "soft money" collapses - and it ALWAYS collapses - there is a very RAPID transfer of wealth in the other direction, from the Debtors back to the Savers.

... By selling your debt-financed paper savings and buying physical gold today you are making the conscious CHOICE to join the camp of the true Savers.


  1. One thing I am unsure about going forward into a hard money / soft money switch is how the interplay between fiat debt and items of value will play out.

    Will debt escalate faster than gold rises?

    The other thought I have had is that we should actually be running both simultaneously. Gold cannot compete with fiat as currency; fiat cannot compete with gold as a store of wealth. So establish a system where currency is electronic fiat, and wealth is physical gold. Depreciate the currency against gold constantly and consistently so that people use them each for what they are intended for. Have hard and soft money simultaneously, see how that works.

  2. Interesting idea. I think the way it will evolve is that electronic claims to gold will operate as currency but will be discounted relative to true physical gold/proper custodianship given the fractional/lending out of the former.

  3. How it works in practice will depends on how dramatically things fall out. If / where it is a serious event that leads to significant disruptions to normal life, you will probably see a distinct move towards physical gold and physical fiat. If / where it does not, while what a note or dollar represents may change, peoples practices wont.

    As to what the replacement is? Something not tied to the existing system, that is already in use, with the capacity to scale up.

    Realistically, any number of the ideas floated could work; trying to set them up after the fact is going to be difficult. What I'm not seeing is a lot of discussion / action about setting something up that networks of people can get used to utilising now, but that will robustly survive a hard / soft inversion.

    I suppose when this sort of thin only happens every 4-5 generations.. everything gets figured out anew each time.

  4. Chris, Bron

    The ECB marks its gold asset reserves to market on a quarterly basis. This reserve has climbed from 15% to 60%+ of total reserves since the ECB was established in its current configuration.

    The Euro was designed to operate solely as a medium of exchange, not as a store of value. The head guys at the ECB have talked of this separation in numerous speeches over the years.

    "So establish a system where currency is electronic fiat, and wealth is physical gold."

    The system you are discussing is already in place.

  5. Correction. A colleague has pointed out an error in my earlier comment.

    "The 15% refers to the percentage of reserves each country had to pay TO the ECB. Of those reserves, 15% had to be gold. But that was more like a "membership fee". The members' TOTAL gold is counted as the "reserves" of the ECB. That total was 30% of total reserves in Jan. 1999 and today it is 65% per Randy's latest post."


  6. On a central banking level, I can see what you mean. On a personal level, not so much.