May 252012
 
 May 25, 2012  Posted by at 7:24 pm Finance

This is a critique of the theory of Freegold (F-theory), which is part of an ongoing series entitled, Freegold: Perspectives and Critiques (FPC).

A key concept underlying F-theory is that Freegold provides the world a way to abandon the debt-dollar global monetary system, after the latter has naturally run its course. It posits that the rest of the world will stop supporting the “peak exorbitant privilege” of the U.S., which it has achieved through the dollar’s reserve currency status, access to cheap oil and the constant necessity for other countries to support our public and trade deficits. F-theory predicts that these other countries will soon refuse to support our structural deficits, the dollar will hyperinflate, and that this event will make way for a new Euro-centric monetary paradigm with physical gold as THE reserve asset used by all countries within the Freegold system.

In this commentary critique, I would like to focus on the idea that the global oil trade, which currently supports the privileged status of the dollar, will soon be made to support the countries and currencies that make up the Freegold system instead. First, we should understand how the U.S. dollar became a proxy for oil after its international gold backing was stripped away by President Nixon in 1971, and why other countries have went along with this setup for so long. FOA gives a pretty good explanation of this dynamic on the “First walk” of his “Gold Trail” (emphasis mine):

“Few people can fully accept or consider that oil became the backing for world dollars after gold was removed in 71. But that is exactly what happened in theory and practice. Using some earlier writing, I’ll tie them into what we are saying today. I’m going to repost some of my comments

 

(between —- marks) from the USAGOLD forum archives. Starting with FOA (1/15/00; 14:58:12MDT – Msg ID:22961).

 

—- my friend, they were not using this concept as a real “commodity money play” in the “gold standard perception”. At that time we were buying local oil with “fiat dollars” (made so by the 1933 internal gold confiscation) and foreign oil with “gold dollars”. But, as you pointed out, dollar production was so far past it’s “gold backing” that it was obvious they (USA) were pegging dollar printing to oil prosperity, not gold reserves. Still, with London gold and oil mostly settled in dollars, the foreign dollar oil pricing fully well expected to cash in unneeded dollars for gold. As we can see, reality and present day events of that time were as “mismatched” as today! All of the dollars success was ultimately made possible because oil could (and was) priced so far below it’s “economic worth” to the world. At that time, even our Middle East friends had no idea just how useful oil would (and had) become to maintaining the world economic base.——–

 

Having read that (and keeping it in mind), I return to the implied questions of my “Foundation” post below. “Why in the world did foreign governments, especially Europeans, eventually go along with supporting a now fiat dollar reserve system after 71?”

 

 

The only problem was that if we continued this route, two things had to give: we would have to leave the gold standard because our money supply was exploding (relative to gold supply) and find a new source of oil because ours was running out.

 

 

In a somewhat convoluted way, by leaving the gold bond, it forced all world oil prices higher. Advancing the search for new (still cheap by value return standards) oil and paying for it using dollars backed by not only oil payment settlement in dollars but the continued purchase of supply “well under world use value”.

 

G-7 countries knew that initially they would have to sell some gold in a controlled burn that would allow gold to seek a higher level after the dollar / gold break. However, once oil producers understood that gold was going to be “managed” at reasonable levels, the continued pricing of oil in dollars and it’s flow was assured for some time. Allowing the exchange of dollars for gold on the world markets,,,, as needed and wanted.

 

This also appealed to major countries outside the US because it addressed the “second” problem I listed in the beginning. That being the geographic location of a currency’s real backing asset. With most of the world oil reserves located outside the US,,,,,, and the US slowly running out of it’s domestic reserves,,,,,,, using oil as a backing dynamic somewhat controlled the “free will” of the US. If indeed, the US backed away from managing a cheap gold market or ran it’s printing press too fast,,,,,, oil prices could be managed upward in a devaluation of the dollar. No, not the best of policy concepts for the world, but better than perceiving that the US “Fort Knox” gold was a control on money printing!”

The unmentioned history here, though, is that the U.S. has routinely used direct coercion/force over the last few decades to maintain its control over the oil trade and the dollar-oil nexus, which also happened to work out well for the energy-hungry Europeans. This use of extreme force started well before the post-9/11 exploits in the Middle East, as evidenced by covert intelligence/military operations throughout the Middle East and Latin America. Puppet governments in these regions were installed and re-installed throughout this period like clockwork.

After 9/11, however, the scope and scale of this coercion has only grown larger to reach epic proportions. Make no mistake – what we are talking about here with the dollar-oil nexus is the most important policy consideration for all of the elite policymakers in the U.S. and Western Europe, who together represent the $IMFS. The military might of the U.S. has been used in anticipation of the “problem” FOA was writing about in 2000 – that the oil reserves backing the debt-dollar would be located outside of U.S. jurisdiction and potentially used as a HUGE check on its influence.

F-theory advocates would have us believe that this dollar-oil nexus will be stripped away rather peacefully, as the interests of ME/Asian countries lead them to advocate for a new reserve system. They severely under-estimate the momentum, dedication and brutality of current U.S. foreign policy, though, and they severely OVER-estimate the power of markets to overwhelm those policies and dictate outcomes. A time will come when U.S. control over the oil trade cannot be sustained any longer – most likely when the direct energy costs of doing so become higher than the energy returns – but that time is not yet here. If you don’t believe me, then perhaps you need to take a closer look at this graphic from the National Post:

(click on image for larger graphic, or follow link above)

 

 

DISCLAIMER: I am not an EXPERT on the writings of Another, his friend (FOA) or HIS friend (FOFOA), or on the theory of Freegold. Just like I am not an expert on the writings of any other economic theorist out there or their theories in general. There are a lot of economic works that I have not had the pleasure to read and a lot of ideas I have not considered in-depth, including those contained within the body of work that comprises F-theory. None of my descriptions of F-theory should automatically be taken as 100% accurate, and I welcome any and all challenges to my representations.

Home Forums FPC: The Dollar-Oil Nexus

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  • #8519

    ashvin
    Participant

    This is a critique of the theory of Freegold (F-theory), which is part of an ongoing series entitled, Freegold: Perspectives and Critiques (FPC). A ke
    [See the full post at: FPC: The Dollar-Oil Nexus]

    #3557

    The Big Ass Military is what sustains the Dollar-Oil Proxy, and not until said BAM is fully confronted and shown to be a Paper Tiger will Gold or any other currency leapfrog the Dollar.

    What will show this to be true? When true Cruise Missile Warfare begins. Cheap and plentiful Cruise Missiles can take out Carrier Groups, Troop Transport ships and VLCC Super Tankers, as well as fixed targets like Refineries, Pipelines and Oil Rigs. They are all Sitting Ducks. Like the Maginot Line in an era of Tank Warfare, the older Naval technology is just too vulnerable to chep unmanned missiles flying at supersonic speeds. It will send all the hardware to the bottom of Davey Jones Locker in no time at all.

    Meanwhile, the House of Saud will keep selling Oil for Dollars, because they have a great Big Gun Duct Taped to their Heads. The Gun of the Big Ass Military.

    RE
    https://www.doomsteaddiner.com

    #3559

    william
    Participant

    The viciousness of the US empire is being pitted against the size of China. Further at some point the whole world will realize the US is the world trade currency because they are a dictator to the world. Not a gold standard, not oil dollar, but the threat of violence.

    This time its different. The US is going to engage an someone with just as many toys and an interest in proving a point.

    The demographics of the US is not good. Populations of older people are not that willing to send their grandkids to war.

    see https://www.youtube.com/watch?v=VRf7JariuqI&feature=share

    As for a dollar I can see some advantage to pegging the currency solidly against something finite like gold. Much of the time politicians buy votes making promises that are beyond the ability of the economy. The real thing that I can see working is the type of Libertarian Socialism that started the internet, Linux and the open source community.

    Since capitalism is the redistribution of wealth, and we are not going to have lots of that in the future, capitalism will become less relative to our needs. If we join into collective associations that freely donate we have a chance.

    We have been at the trough for some time now and its been a great party but we might want to move on. If we continue to live in the plastic drive thru instant gratification lives we will find ourselves to be disposable in the future.

    We are looking at taking an hour to make food again if we run out of our surplus spending cash. Items might have to last and fashion becomes irrelevant. The next generation is going to look at us strange when they hear about planned obsolescence. The future might not be that bad just different, more cooperative, less conflicted and a little less junk.

    #3561

    davefairtex
    Participant

    Agreed, I feel that military power projection capability has been a critical component to the USD remaining the reserve currency – as was British military power a key for the Pound prior to WW1.

    Military power is always ultimately based on economic power, but after the hardware is constructed, it can provide military utility for decades after the economic power that constructed it has peaked and has fallen off. We’re still using B52s first built in 1955.

    #3563

    steve from virginia
    Participant

    (Sigh …)

    Economic populism running amok …

    https://nowandfutures.com/d3/Wicksell_Hayek_Keynes_Friedman,_Minsky.pdf

    Read this and that:

    https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

    There are better arguments out there already …

    #3564

    ashvin
    Participant

    There are better arguments out there already …

    Minsky’s FIH was a key part of my critique in Part IV of my original series – Deflationary Canyons and Caves

    After being confronted with that critique, a few of the Freegold people implied that they agreed with most of what Keen/Minsky have to say, but thought the debt deflation theory was incomplete, in terms of how central authorities can make sure the Mother of All Deflations never really takes off.

    I disagree, but the point is that they are not unaware of these arguments.

    One thing is for certain – none of these people ever talk about the dollar-oil military nexus.

    #3567

    The US has used threats of violence and outright violent force since its inception to control and spread markets. “Market” non-intervention is an historical oxymoron. The dollar -Oil nexus is the US’s final conquest, which it is so deceptively and violently trying to maintain. When it goes down, so goes the capitalist world system.

    Electroinic frauds, backed up with mass destruction weapons, ARE the fundamentals of the real world’s current “economy.”

    “Economic” competition is just war by other means

    Reverse Engineer post=3175 wrote: Meanwhile, the House of Saud will keep selling Oil for Dollars, because they have a great Big Gun Duct Taped to their Heads. The Gun of the Big Ass Military.

    In other words, capitalist BAU.

    #3568

    steve from virginia
    Participant

    After being confronted with that critique, a few of the Freegold people implied that they agreed with most of what Keen/Minsky have to say, but thought the debt deflation theory was incomplete, in terms of how central authorities can make sure the Mother of All Deflations never really takes off.

    First of all, Fisher implies the (offhand) reflation strategy without going further. Leijonhufvud doesn’t offer any strategies at all! (Why should he?) However, (Free)gold folks’ awareness of nuanced (sensible) economic arguments never seems to emerge from their arguments. It seems to me that the monetary gold arguments were all made — and settled — by Wicksell and Bagehot a hundred and ten or so years ago.

    Part of the problem is the absence of conventional ‘solutions’. Our dilemma lies within the inter-temporal balance sheet beyond the reach of monetary policy.

    Almost no (as in zero) conventional economist makes reference to energy or resource inputs. Herman Daly equates money capital with resources (and Charlie Hall and Robert Costanza) but equilibrium economics is built around unlimited substitution. This is a dead end.

    A conceptual problem is that we are at the beginning of post-industrialism. Nobody can figure out what ‘Post Industrial Society’ is going to look like or how it will function. Some think virtual reality (Kurzweil), others think ‘hunter-gatherer’ (J. Hansen) and still others a steam-punk version of modern Detroit (Greer). Human extinction is not out of the question: how does modern industrial economics factor all of these different possibilities and others beside?

    Brand X economist: “Don’t blame me!”

    In this context, the gold-money argument presumes a specific post-modern industrial economic society that functions/trades a specific way … a society that has conveniently forgotten Bagehot (and have never bothered to look up Wicksell). This is argument in a vacuum: not a real argument at all.

    What does come next? Hard to say but the constant will be ‘less’.

    #3570

    steve from virginia post=3186 wrote:

    In this context, the gold-money argument presumes a specific post-modern industrial economic society that functions/trades a specific way … a society that has conveniently forgotten Bagehot (and have never bothered to look up Wicksell). This is argument in a vacuum: not a real argument at all.

    What does come next? Hard to say but the constant will be ‘less’.

    Well stated Steve.

    Overall, it is a conceptual problem. The tendency is to accept axiomatically that even though the Fiat will crash, Homo Sapiens will continue to hold the same things valued and pursue “trade” in more or less the same manner.

    This may however be one of those Roads that is a One Way Street, or even a Dead End One Way Street.

    On the assumption (hope) it is not DEOWS, where will we go from here? What happens once we reach the end of this road?

    It’s all speculation, because insofar as we know (unless Atlantis really had an industrial culture before) we are breaking new ground here. Nobody knows what a Post-Industrial world will look like. Though of course there is no shortage of speculative Imagery out there from Mad Max to the Children of Men.

    Personally, I think there will be a “Scavenger” period during which the flotsam and jetsam of the Age of Oil gets repurposed to keep stuff like the Railroads still operational for a while. I don’t see a great future for money during this period, though if Goobermints of some sort hold together you may have some for a while. You definitely cannot have functioning “Money” without functioning Goobermint. After that it’s just barter, even Gold Coins are just Barter Items. To make them “Money”, you need a Stamped Value placed on them so they are always worth the same thing inside a given trading system.

    Money requires a SHARED AGREEMENT system between all in the society on the relative values of things. When that breaks down, when some people no longer value a McMansion at all and others place preposterous Numerical Values on them, you have Mark to Make Believe which no longer makes any sense at all. That really is the problem here now, relative valuations based on the monetary system are not reflecting reality. In fact, McMansions are WORTHLESS, and so are the Carz. Helicopter Ben cannot MAKE a McMansion worth anything, he can only print Bills. Even if he gave you a Billion of those Bills, there still would be no reason to trade them for the McMansion.

    Our Value System is changing, MUST change because the Oil which powered this value system just isn’t there in quantity enough to keep the engine running, not on a Global basis anyhow. Now we have to figure out how to value everything we still do have in the ABSENCE of Oil. That is quite a challenge.

    RE
    https://www.doomsteaddiner.com

    #3572

    I excerpted and reposted Steve’s commentary and my own on the Diner Blog.

    https://www.doomsteaddiner.org/blog/2012/05/26/the-dollar-oil-nexus/

    Ashvin, WHEN are you guys gonna fix the Avatars? I could go and substitute, but I left the defaults for the purpose of fidelity to the original commentary.

    RE

    #3578

    ashvin
    Participant

    [quote=steve from virginia post=3186]

    It seems to me that the monetary gold arguments were all made — and settled — by Wicksell and Bagehot a hundred and ten or so years ago.

    In this context, the gold-money argument presumes a specific post-modern industrial economic society that functions/trades a specific way … a society that has conveniently forgotten Bagehot (and have never bothered to look up Wicksell). This is argument in a vacuum: not a real argument at all.

    What does come next? Hard to say but the constant will be ‘less’.

    Perhaps the monetary gold arguments were settled, but Freegold theory does not argue that gold will act as (transactional) money. Instead, it says that fiat currencies will continue to act as money and will not be fixed to any commodity, but gold will trade parallel to it as a store of value – only used by those who want to “save” their excess wealth.

    The specifics aren’t really necessary here, and I obviously agree that the theory runs into many problems when confronted with reality (such as its presumption of a functioning post-modern industrial economy at a global scale). My point in these comments, though, is that I try to be fair to the theory when I critique it – I want to portray it accurately and address very specific issues that it raises, usually based on quotations from A, FOA or FOFOA.

    I don’t really believe it’s satisfactory to reference a few economists from ANY era and say that they have settled the entire matter.

    #3579

    ashvin
    Participant

    Reverse Engineer post=3190 wrote: Ashvin, WHEN are you guys gonna fix the Avatars? I could go and substitute, but I left the defaults for the purpose of fidelity to the original commentary.
    RE

    Good question. I have been on our web guy about it for awhile now, but I think he has been busy dealing with the site access issues, among other things. I will remind him about it again soon.

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