May 212012
 May 21, 2012  Posted by at 8:29 pm Finance

Last year, I wrote a series of articles addressing the theory of Freegold (Part I, Part II, Part III, Part IV, Part V), as it has been laid out by FOFOA on his website. This series was a comprensive attempt to debunk the theory by attacking its foundations, which range from Hegelian idealism to the (more concrete) marginal utility theory of value, and by replacing those foundations with what I believe to be more solid ones. Among these were Marx’s theory of capitalism, spanning his concepts of surplus value, rate of exploitation, over-production and realization of value, as well as the Fisher/Minksy theory of debt deflation (endogenous financial instability) and Dr. Steve Keen’s work, which ties many of these different economic strains together.

I realize now, though, that this was not the best way to go about attacking the theory for one simple reason – the concepts underlying the theory of Freegold are much too large to be addressed in any one series of articles, no matter how long they happen to be (and these articles were particularly long!). By trying to cram so many of my thoughts/critiques into this one series, I completely devalued the substance of what I was saying and made it very hard for readers to follow the logical progression of my argument. So, with that in mind, I’d like to take a much different tack over the course of this year.

Starting with a commentary in the next few days (perhaps tomorrow), I am going to hone in on a very specific concept incorporated into the theory of Freegold (herein referred to as “F-theory”) and present a specific critique of that concept. I usually have more than one critique of any given concept, but I will only present one at a time for the sake of brevity and clarity. These critiques will follow no particular order and will be sporadic – I will address a concept when I come across it or it is brought to my attention, I have some free time on my hands AND I feel like it should be addressed.

In addition, if I happen to come across a critique of Freegold/FOFOA concepts made by someone else (ones that I largely agree with), I will try to present those here as well (there aren’t many of those floating around, though). Some of you may be wondering – what’s the big deal with F-theory and why spend any time critiquing it at all?? In my mind, there are three primary reasons to do so:

1) FOFOA, the main advocate of F-theory right now, is a very astute student of economic/monetary history and makes very convincing arguments in favor of the theory. In fact, it is probably fair to say that I agree with 99% of things he writes about the setup of our current monetary system, but, nevertheless, I strongly disagree with his general worldview and most of his main conclusions about where we are headed.


2) FOFOA, in conjunction with F-theory, makes the most convincing case for near-term hyperinflation of the dollar that I have come across in the blogosphere, and I believe, like most people, that it is very important to discuss this issue and get a good sense of the most probable outcomes over the next 20 odd years.


3) F-theory presents a very interesting, unique and precise prediction for what comes after a financial/monetary meltdown, in terms of a new global economic paradigm. I am very DOUBTFUL that this prediction will turn out to be correct, for a variety of different reasons, and I hope to flesh out some of those reasons through these occasional commentaries.

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 (this disclaimer will be re-posted with each commentary).

Remember, these critiques will jump around and will be sporadically-timed. This is primarily because I do not want them to take up all of my writing time for weeks straight like my earlier series did – there are many other important aspects of our current predicaments that I would like to spend time writing about. That being said, F-theory has earned enough of my respect that I am willing to devote a recurring commentary series to it. Right now, I will leave you with a link to and excerpt from a great article by FOFOA that first got me interested in his writing, which will hopefully peek the interest of others who want to better understand both the theory and well thought out critiques of it.

Freegold in the Proper Perspective


Freegold, in my opinion, is not a competing monetary theory. Nor is it a competing financial system. It is much more than these subjects of frequent debate. In my world, Freegold is a way to view unfolding events as they happen. It is a view of the valley below, as seen from a high vantage. It is a cipher for understanding what we see. It is not a description of what should be. Instead, it is framework, different from almost everything else you are reading, in which you can interpret unfolding events in a different light.


FOA: I (we) expect none of you to consider anything said here as credible. Everything is given as I understand it. If you came with a notion that I am someone who sees the future; grab the children and run far away. For these Thoughts, and my ongoing commentary, are meant to impact exactly as the “gentleman” said they would. People hear them, and whether believed or not, the words leave a mark. A mental mark on the trail, if you will. And later, after the world turns, our little “stacks of rocks” will be easier to understand next time you are passing this way. In fact, your ability to find your own way will forever be enhanced for having seen this path in a different light.

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    Last year, I wrote a series of articles addressing the theory of Freegold (Part I, Part II, Part III, Part IV, Part V), as it has been laid out by FOF
    [See the full post at: Freegold: Perspectives and Critiques]


    Very nice introduction to the series. A linguistic/typo correction: it’s ‘pique’ rather than ‘peek.’


    The centerpiece of Freeegold theory states that gold will trade side by side with an unbacked fiat currency. Individuals will be free, pun intended, to make purchases in bullion or fiat. When you ask the Freegold people if this fiat currency will be subject to legal tender laws they grudgingly admit that it will. That pretty much destroys most aspects of the theory right there.

    Whether we go straight to hyperinflation, or get deflation first, then hyperinflation, once the hyperinflation hits, no one will touch fiat, except in the outhouse.

    Another huge flaw in the theory is their view of how much buying power an ounce of gold will have. For one thing, silver will be money, just like gold, in the future. So that will greatly reduce gold’s buying power below the Freegold claims. Another factor they don’t consider is that much of the wealth in the world is not for sale, except at uneconomic prices. For example, all the houses that are owned free and clear, and have no mortgage. The millions of small businesses that are owned outright. How many owners want to sell at fair market value? Some certainly, but not all. Not half. Offer a premium to fair market value, but that is not how to determine gold’s buying power.

    If you read some quotes attributable to ‘Another’, it is quite curious that FOFOA seems to have the exact same writing style. No attempt at all to disguise it, lol.

    steve from virginia

    FOFOA is another garden-variety gold bug.

    Sez FOFOA: “In the end, physical gold will win out and prove to be the greatest wealth holding anyone has ever known.”

    This is nothing more than his personal opinion dressed up w/ some Carlos Castaneda-esque gibberish. Until he redefines ‘wealth’ beyond the reach of industrial convention he isn’t worth the time it takes to write about him.


    Previously on TAE, I pointed out a FOFOA post a while back that actually has the gall to say that gold will eventually reach “a permanently high plateau”. Those weren’t his exact words, but awfully close. And of course dangerously echoing the words of Irving Fisher re: stocks only three days before the 1929 stock market crash. I was surprised FOFOA would have chosen such language, even if he believes it!


    I believe that FOFOA, more than any other Austrian-oriented economic analyst or HI advocate out there (yes, that includes ALL the big name bloggers), deserves the time to be considered and critiqued. After reading many of his articles and also comments by himself and others F-theory advocates explaining their position, I think it would be very foolish to dismiss their views off-hand based on one or two statements that may sound radical or weird.

    It is true that he fails to consider peak oil or net energy issues in F-theory, so the theory is de facto incomplete. However, none of the most famous economists from the 19th century onwards considered those issues either, yet it would be foolish to dismiss all of their theories as unrealistic and unworthy of our time. They can still provide genuine insights into how our economic/financial/monetary systems work and how they may evolve from here – insights that could prove to be important in the lives of many people with excess wealth and tough decisions to make in an ever-shortening amount of time.

    Golden Oxen

    Sez FOFOA: “In the end, physical gold will win out and prove to
    be the greatest wealth holding anyone has ever known.”

    Yes, “Gold Will Win” It is the real money, evolved and freely chosen by mankind to be money. History says it, our US Constitution says it. All the mountains of gibberish from the intelligentsia are there to merely confuse and obfuscate the simple fact that their fiat paper is a fantasy, surviving only by forced legal tender laws of coercion, and endless lying and scholarly works of endless BS.


    ashvin post=3066 wrote: I believe that FOFOA, more than any other Austrian-oriented economic analyst or HI advocate out there (yes, that includes ALL the big name bloggers), deserves the time to be considered and critiqued.

    Absolutely! Yes. I know I’m very glad you’re doing this analysis actually. Despite the disparagement I had for FOFOA’s claim for a “permanently high plateau for gold”, I think he makes some incredibly persuasive arguments. I really look forward to your insights on this. Because frankly, while I have been persuaded by the deflationist case of TAE and others, I don’t discount other possibilities entirely. I want to understand them all better.


    As they frequently say at ZH;

    Gold Bitchez. Sorry but fiat is too close to fantasy for me, like scarlett j looked great in Avengers 3D but hey, dreaming if u think it’s real.

    steve from virginia

    A few days after Fisher issued his ‘permanently high plateau’ essay in 1929 the stock market crashed. Fisher, like many others working in finance was ruined.

    Instead of mourning, denying or doubling down, Fisher took the time to figure out what happened and why he was wrong. The result was his 1933 analysis of debt deflation. Basically, repayment of debts annihilates both the debt and the currency used for repayment, the money supply shrinks. This dynamic increases money worth which in turn amplifies the scarcity of circulating currency as well as the unit worth of debts. In real terms, both debts and money “swell”: repayment/deleveraging is a self-reinforcing cycle whereby the expanding burden of debts leads to general insolvency.

    This represents balance sheet mechanics and can be countered by restating debts so the money supply does not shrink: (Fisher) This means unlatching currency from fixed gold parity and reflation.

    Taking place right now is energy deflation which is similar to the debt variety. Reduction in the demand for petroleum has an excessive reducing effect on supply. This occurs regardless of whether the demand is voluntary or not: when demand slows, the ability to afford high-cost ‘new fuels’ slows faster in a self-amplifying vicious cycle. The reason is because the cheaper varieties of petroleum have been exhausted: users cannot ‘switch’ to them. As more companies and countries fail, their failure reduces further the ability to pay for the expensive forms of petroleum. As the too-expensive fuels are ‘shut in’ there are shortages which cause more failures which effects supply further. At some point there are the advertised ‘massive reserves’ just out of reach, that nobody can afford to buy.

    One country steals consumption allotments from other nations by refusing to lend to them or by waging disruptive semi-war. It’s a SUV-eats pickup truck world out there.

    At issue here is whether anyone (fool) will trade gold or some other perpetual resource for crude. At the end of the day, the trader doing so has neither gold nor petroleum, only smog and a bunch of used cars.

    The gold people insist on a ‘perfect system’ that is a facial contradiction: that gold will guarantee currency restraint at the same time it allows industrial wasters to live beyond their means. Life-beyond-means cannot occur if gold ‘does its job’ and effects currency restraint. For this reason monetary gold is always rejected! The purpose of debt-money is to finance waste profits. At the same time, gold restraint cannot finance conservation. What’s it good for?

    Keep in mind, what is underway right under everyone’s nose is energy conservation by other means. We are just at the beginning of this process which is certain to increase in effect as time passes.

    As with all deflations, there is no asset ‘hedge’ against it: gold and other assets are supported in price by (dollar) debt taken on to bid for- and buy it. As credit is stripped there is less to support prices.

    A related issue is the hold that debt has on society. If debt maintains its hold, all the gold in the universe won’t satisfy it (debt expands faster than gold is extracted). Therefore, gold must remain in the shadows outside the reach of creditors. If the hold of debt is broken, there is no advantage to holding gold over other assets (as debt sets the price of gold along with everything else).

    Because debt is useful — conservation must be financed — well, you can figure out the rest for yourselves.

    Ironic is that the loudest arguments for gold come from those who have so little of it.


    Golden Oxen post=3069 wrote: Sez FOFOA: “In the end, physical gold will win out and prove to
    be the greatest wealth holding anyone has ever known.”

    Yes, “Gold Will Win” It is the real money, evolved and freely chosen by mankind to be money. History says it, our US Constitution says it.

    Actually, the Constitution mentions both gold AND silver. But it is SILVER that is REAL money, and the dollar is defined as a specific weight of SILVER.

    The Freegold people think silver is going to zero or nearby. What arrogant fools.

    There is absolutely no way of knowing, at this point, if it will be gold, silver, or a bi-metal system in the future.

    Also FOFOA is adamant that there will be no gold confiscation. How does he KNOW that with 100% certainty, as he asserts. What a pompous idiot.


    steve from virginia – are you the author of Economic Undertow? If you’re one and the same, your articles are quite brilliant. Complex but utterly insightful.

    steve from virginia

    I have to plead guilty, one and the same.

    I appreciate the compliment, thanks.

    Golden Oxen

    pipefit Wrote: Thanks pipefit for pointing that out, a fact I knew, but I have the habit of meaning both when mentioning only one. Gold has always been the money of the Central Banks Governments to back and stabilize their currencies and give them intrinsic measurable value as well as a means for large transactions. Silver is the change, more available but still precious, cheaper and the vehicle for most pocket change and everyday purchases, existing alongside its more noble partner in a ratio that suits the transaction, choice, and means of the user. I would think a bi-metallic standard is a given due to the scarcity and always elevated price of gold. Anyone thinking silver is going directly to zero or close is either insane or has physical brain damage in my opinion. My thoughts on future inflation are such, I share John William’s view of an inevitable hyper inflation no more than a few years away, that I am beginning to think a tri-metallic standard is possible with copper replacing silver, silver replacing gold, and gold becoming so valuable and high priced that enormous transactions between corporations, governments, massive oil and agricultural deals become its more common type of usage in the future. A sort of mega money for real things where no paper or lesser metals are acceptable. Any ideas you have on the matter, or of course anyone involved in the discussion would be most appreciated.

    Bot Blogger

    Hey Triv,

    You’re obviously passionate and super intelligent, but I can tell you think more is more. Particularly when it comes to words.
    I’ve looked at your graphic before and quite frankly found it to be unreadable…because of all the words.

    Images don’t represent words. Words represent images, and feelings, and thoughts. Images convey thought instantly. Words must be translated. If you use a graphic do your best to remove the clutter that words bring.
    I’ve redone your graphic with most of the words removed and a few adjustments to the graphics. It’s attached.

    Gold, Fiat. It’s all fiat. Economics is the study of ponzi schemes. Period.

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