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As of today, banks and certain nations, e.g., Russia and China, are net buyers of gold. Why? The paper money is fiat, i.e., a dollar is a dollar because the government says so, a 10 dollar bill is 10 dollars because the government says so, etc. That's it. Gold has intrinsic value, like land, resources and perhaps the skill sets of a person, not simply their labor. The main point about a currency, that which will sustain a currency, any currency, is Confidence. If confidence in the currency is lost and if there is no physical asset backing the currency, the currency can lose its value due to the loss of confidence. Confidence = Trust. Taxing the American people, or any people, is simply not enough, or adds no value, because the people who are taxed are using the same currency, which may not be trusted by other nations/banks. The other issue with paper currency is its supply. Inflation means to inflate, i.e., increase the money supply, which can cause price pressures on goods and services. Currency/money needs to be a store of value because it represents the time and energy of the person who earned it via physical labor and/or special skill. So, when the FED, or any Central bank, inflates its money supply, it devalues its money, which occurs over time, i.e., it steals wealth from the holders of money; not to mention all the debt we and the rest of the world owes. So the banks print more money, i.e., inflate and create more debt, in the hope stimulating the economy by creating more debt. Borrowing from the future.
When President Nixon took the US off the gold standard in August of 1971, the US officially defaulted on its obligations. It was promised that our dollar would be backed by gold and some countries called us on it and we took back our dollars and gave them gold. In short, we were losing too much gold because we were/and still are/printing too many dollars. So, he closed the gold "window". Now the value of our treasuries are devalued when we print too much money and then skew the measures of inflation so it doesn't look so bad. BTW, on the second island, what was their medium of exchange? Where did they get their resources from? How did they build and create wealth? Japan and Singapore, for example, essentially have no resources, like the first island, and how successful are their economies? Too many leaps in economic, financial, political and social logic to offer as a viable comparison.
Actually, in deference to the plane ditching example, I would not land ON the island with all those resources because the effort of landing/crashing would likely DESTROY those resources, leaving me just as SOL with regards to survival.
Sir, you a very good lecturer because I am learning a lot.Thanks.
I think now might be a good time to address another
question that is probably circulating in your head-- and
that is, what happened to the gold?
Remember when we started this reserve bank, all of these
national banks or whatever we want to call them, they had
gold as a reserve.
And then at some point, they said, well, why are we each
Why don't we just all concentrate our gold in one
And then that reserve bank can issue-- and it was the only
person that could issue-- it could issue bank notes that
could be tradeable into gold.
And then we said, over time, people just got used to the
notion of using the bank notes themselves as reserves.
And that's what the reserve ratios were all based on,
based on the bank notes themselves.
And we talked about that if the Fed or the reserve bank
wanted to increase the money supply, it could essentially
just print new notes and it would have offsetting notes,
outstanding liabilities, and then it could use those to
perform open market transactions and it
essentially allows it to grow the monetary base with the
economy or with the needs of different projects out there
so that those projects happen.
And in that whole discussion, you might have noticed that
this yellow stuff was just sitting here.
It had nothing to do with the economy.
It was just sitting there and if you really wanted to force
me to say what it was doing, well, it was giving a little
bit of confidence behind what this thing was, right?
It gives you a little bit of confidence.
Because at first, at least, when we said that it was
backed by the gold-- there was maybe a similar amount of gold
as there was there.
Maybe a little bit later, we said, this could be exchanged
for gold at some rate-- maybe $35 per ounce.
I think that's what it was when we were
last on the gold standard.
But if you think about it, it's a couple of
weird things here.
First of all, almost from the get-go when we did this, the
whole purpose of having this flexible money supply is so
you can grow and contract money with the needs of the
economy and we would, for the most part, have notes
outstanding because this was a fractional reserve system.
We would have notes outstanding more than the
actual amount of gold.
And this has been the case even when we
were on the gold standard.
You had more dollars than you actually had gold, but you had
to keep a little bit of gold there just in case people
wanted to call your bluff.
In case X percentage of people wanted their gold back.
So they would come back to the central bank and
say, give us our gold.
But the gold fundamentally-- it had no other function.
It wasn't in the economy.
It wasn't helping transactions happen.
It wasn't doing anything.
It was just sitting in Fort Knox or wherever it happens to
be sitting and to some degree, it's more of a pain than any
kind of real value because you have to keep up this notion
that these things, these dollar bills, could be
translated into gold, it kind of forced a reserve ratio
requirement on the central bank itself.
And that reserve ratio requirement-- if you think
about it, it's kind of arbitrary.
It's dependent on how much gold is found
in the world, right?
In order to increase the money supply with GDP because people
are inventing computers and railroads and cars and
highways are being built and we're all becoming more
efficient-- in order to keep the money supply up with that
extra economic activity, if we stay on the gold standard and
if we want to keep these ratios between the money and
gold, we'd have to grow our gold with the economy.
And that's kind of arbitrary.
Maybe we'd find a big bunch of gold or maybe we'd find no
gold-- and that really should have no bearing on our
technological progress and how hard we're working.
And it makes a lot of sense.
You could imagine in a world where all of a sudden, an
asteroid made of gold lands in the middle of the U.S., does
that all of a sudden-- because gold is less valuable, should
that make the dollar less cheap?
Or in another world where for whatever reason we can't find
any more gold, should that all of a sudden decrease our
ability to circulate money around?
And when it becomes-- and I said three videos ago that
these dollar bills aren't just the liabilities or the
obligations of this central bank.
They're actually obligations of the U.S. government.
So let me ask you a question.
Would you rather have something backed by gold or
backed by the U.S. government?
And I know many of you, your gut reaction is to say, gold.
Gold is real value.
The U.S. government-- what are they good for?
They're a bunch of crooks.
They lie, cheat, and steal.
They misallocate wealth all the time.
But think about it.
Gold really isn't wealth.
It can be used to represent wealth only because it's
pretty, only because at some period--
and it doesn't corrode.
At some period in the past, someone says, I'm willing to
plow your field if you give me that cool rock that you found.
That's the only value gold has.
It can't do work.
It can't be eaten.
It doesn't make us more motivated.
It doesn't make us happier.
It's not real wealth.
Now what about the U.S. government?
Well, it has the right, the authority, to tax.
I know taxes are bad words and I don't like them myself, but
it essentially-- can extract these rents from the U.S.
Tax the U.S. economy.
And U.S. economy-- that's real wealth.
That's labor, ideas, land, resources.
Everything that makes us tick.
Our labor, our goods and services, our ability to
educate ourselves, and innovate, and come up with
technology, and become more productive.
That's real wealth.
So if you really think about it-- I know I'm getting a
little abstract here, but I really want to hit this point
home because a lot of people, I think, are still under the
notion that somehow something is somehow tradeable for gold,
that it is of a sounder currency, while if it's an
obligation of a government with a very dynamic economy,
but not gold, it's somehow backed by less wealth, but I'd
argue that this is actually a more
profound amount of wealth.
I mean, we've had currencies in ancient history that were
backed by gold, but in a lot of cases,
you still had inflation.
When the Spanish currency in the 15th century was backed by
gold, but all of a sudden they discover that Central America
had a lot of gold and you had a ton of inflation and that
gold really didn't give any real wealth to the Spaniards
of the time.
It just made everything more expensive for them.
It did allow them to buy a little bit more from other
countries, but it really didn't create any innovation.
It didn't really make their pie that bigger, except they
did steal some pie pieces from other parts of the world-- but
we'll leave that aside for now.
But this is real wealth-- a currency backed by a whole
nation's ability to generate wealth, in some ways, is a lot
But gold was a stepping stone and it was necessary because
in order to get this whole thing started and in order for
people to really have trust in this currency, just the way
people are trained to think, you had to originally sell
them on gold, right?
So if you think about it, gold didn't play any role.
So in 1971, when Richard Nixon decides to go off of the gold
standard, if-- and this is a big if-- if you trust the
government's ability to manage the money supply effectively,
that they're not going to print so much money that we
have hyperinflation or they're not going to print so little
money that we end up with a deflationary spiral.
If you trust the government's ability to do that, it really
doesn't matter that we went off of the gold standard.
And it really just kind of gets rid of a little nuisance.
And if you actually look at the Federal Reserve's balance
sheet today, there still is some gold sitting on their
balance sheet because it is really not obvious what they
needed to do with it so they just kept it.
Anyway, we'll we'll talk a lot about this-- what is wealth
and what isn't wealth in the future.
One example I often tell people is-- let's say your
plane is going down-- you're the pilot of a plane and it's
it's going down.
It's burning and you see two islands in the horizon and you
have to ditch your plane on one of those islands.
So one of those islands it just has a big
pile of gold on it.
And then another island-- you can see with your telescope
from the plane, it has cows on it, it has-- I don't know--
all these random fruit trees on it with
these luscious fruits.
You see-- I don't know-- it has a big random pool of-- I
can't draw oil because oil is black on a blackboard.
It has a pool of oil.
It has another big nice lake of fresh water that's away
from the oil so it doesn't get contaminated.
And you can see from your telescope that it has a bunch
of hard working, innovative, smart people on it who can-- I
don't know-- do all sorts of interesting things.
They have roads and they have horses.
They have all sorts of stuff.
Which island would you ditch your plane on, assuming that
you'll never be able to get back to civilization?
Well, the obvious answer is you'd rather ditch your plane
on that island because that island has more wealth.
And so when we went off of the gold standard-- I know it
seems like this big horrible thing in the whole scheme of
the world-- and gold has become a lot more expensive.
It's no longer $35 an ounce.
It's whatever-- $700 or $800 an ounce now.
So you might think, there's been all this inflation.
It would've been great if we were on the gold standard.
But think about what's happened since 1971.
Other than some of this excess credit that was given out
maybe over the last 10 or 15 years-- other than these
bubbles, we've seen a tremendous amount of
innovation and we haven't seen hyperinflation and that's all
in the world of-- you can call it a fiat currency, a currency
that's not backed by any kind of hard asset.
It's backed by people's trust in the ability of the U.S.
economy to support debt to pay off the
value of this currency.
We'll talk more about that in the future.
I don't want to get too circular in my conversations.
But I'll see you in the next video.
I just wanted to touch on that point that we are now off the
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