Is Gold Becoming Another Regular Old Commodity?

One of my more controversial views in finance is that gold will one day be viewed as a mere commodity and not a form of money.   My reasoning for this view is simple – I think the era of money as a physical item is long behind us and that the future of money rests with electronic forms of money that serve primarily as a record of account and medium of exchange.  That means the need for physical gold as a form of money will likely cease to exist or at least be reduced substantially in the future.

As for gold at present, well, my views are simple:

  • Gold is definitely a form of money because it is viewed by many as a medium of exchange.
  • Gold is not a very good form of money because it is not a widely accepted medium of exchange.
  • Gold is primarily a commodity, but the idea of gold as “money” still remains.
  • The price of gold has what I refer to as a “faith put” embedded in it because it is often hoarded as a form of money.

But an interesting thing has happened to gold in the last 30 months.  It has started to act a lot like a regular old commodity.  In fact, its “faith put” seems to have been removed to some degree.  If we look at the CRB Index and the price of gold there’s actually been a rather high correlation:



It all makes me wonder if gold isn’t starting to be viewed for what it is – a mere commodity?  Of course, I am biased and in the minority of people who hold this view (central banks and governments don’t even agree with me!), but I do wonder if this is the beginning of a secular trend or merely a case of me cherry picking some recent action?


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Frederick

    Your scope of thinking never ceases to amaze me. How do you write articles on such diverse topics every single day?

    RE: gold – I believe the rise of Bitcoin has really hurt demand for gold. So in a sense, I think Bitcoin is already proving you right.

  • D

    By definition, there will be some correlation between CRB and gold since gold is one of the components of the commodity index. The degree of correlation is cyclical–just use the tool on etfreplay with GLD and DBC. Rolling 60 day correlation oscillates from 0 to .75. There is no trend either way.

    I don’t know how to answer whether gold is a form of money or not. I see gold as an insurance policy just in case our current system falls apart as almost all major civilizations throughout history has allowed gold to be exchanged relatively easily for goods and services and thus is the greatest store of value in that regard. If there was zero risk of societal calamity, gold as an investment has no value (not counting jewelry/industrial use/aesthetics).

  • Not an Economist

    “It all makes me wonder if gold isn’t starting to be viewed for what it is – a mere commodity?”

    Let the fireworks begin….

  • Cullen Roche

    Let’s just say I’ve spent way too much time thinking about lots of these things…

    And yes, I agree on Bitcoin.

  • GLG34

    Gold is only 6% of the CRB index. I wouldn’t put much weight in that “correlation”.

  • Tom Brown

    “Gold is definitely a form of money because it is viewed by many as a medium of exchange.”

    That’s what makes econ hard. It doesn’t matter how people perceive the Earth to be: flat or spherical… their perceptions make no difference to the truth of the matter. With econ, what people believe to be true affects the “truth” of the situation.

  • Cullen Roche

    And economists use different definitions for lots of different things. I don’t know if the definition of “money” is consistent across any two schools of econ….

  • tabrussell

    I think the theory has merit for some countries that are developed and/or lack a recent/major history of currency crises (like the US, Japan, Canada, England, and some of mainland Europe). However, I think it breaks down, or at least isn’t as far along, when it comes to some countries that are developing and/or have a history of currency crises (China, India, Russia, and Germany come to mind).

    I also agree with Frederick on Bitcoin and other crypto currencies taking some of the shine off gold as an alternate currency.

  • J Thomas

    D says gold is a hedge against the fall of civilization.

    Frederick says that bitcoin is to some extent replacing gold.

    I think they are talking about two different arenas where gold competes, because I can’t see bitcoins being very useful if civilization collapses.

    They can both be right, but only if neither explanation is the whole story.

  • Johnny Evers

    Gold has been a long-term store of value for centuries, so I wouldn’t expect that to change overnight or even in the next few centuries.
    It’s that ability to store value that will keep it viable when/if central banks try to replace one medium of exchange with another.
    I would guess that gold will have value long after the dollar and other currencies lose their value; hopefully none of us will be around for that.

  • wildebeest

    I don’t see gold as money, moreover it has never been money, not even in ancient times.
    Only authority can create money (note not “trust” is the determinator of the purchase power of money and should be viewed seperatedly).
    When you use gold as a mean of exchange I call it barter because you exchange one commodity for another.
    Money is “immaterial” and we need a material component to track it and to be able to recognize the owner. Gold was the bearer of money and so was paper, but nowadays bits are. The commodities that incorporate the immaterial element should not be elevated to the notion of money itself.
    But I must admit that there is a huge difference between theory and practice, precisely because the masses define or see money differently.
    Money is neither a store or value and should not be.
    My theory that distinguishes the immaterial element from the bearer component also leads to the redefining of Gresham’s Law. The bearer destroys money when the market price for the commodity exceeds the purchase power of money for that commodity.

  • Suvy

    I just view gold as another currency. If shit hits the fan, the price of gold shoots up. Buying gold is basically the same as buying a put in case of a really bad scenario. It’s a tail-risk hedge.

  • Cullen Roche

    Yeah, commodities can always be used as hedges or insurance. Gold probably more than others.

  • Boston_AL

    Wildebeest: you wrote {I don’t see gold as money, moreover it has never been money, not even in ancient times.}

    From your statement I can only assume that you don’t know your global or US history very well then I must assume. Worse, you did not verify your statement before publishing such nonsense.

    Have you never heard of Spanish “gold doubloons” and “gold escudos”? (Circa 1500’s -1800’s)

    And the USA itself produced gold coins from the 1795 until April 5, 1933 when good old Franklin Roosevelt outlawed US citizens from possessing gold and confiscated all privately held gold (in coinage or otherwise) for the government to possess. Have you never heard of (US) $20 dollar gold coins?

    History of US Gold Coinage:

    President Roosevelt Confiscates Gold from US Citizens:

    While a US $20 dollar may fetch far more than $20 in today’s (government) inflated “paper” money, it was worth $20 the day it was minted. The difference is that the US government’s printing presses worked overtime producing many more “paper” dollars since then.

    Note: A dollar today is worth less than $0.05 of what a dollar was worth (could buy) in 1920!

  • Cullen Roche

    1) The US govt doesn’t actually print much money at all except in a literal sense. Most of the money in our system is issued by banks as loans. And the govt prints dollar bills to service bank account holders so they can draw down those accounts for transactional purposes. The whole concept of the US govt “printing money” is highly misleading as most people use it. The only thing the govt really prints are the notes to service bank accounts and the T-Bonds that it issues when it runs a budget deficit.

    2) A dollar in 1920 has fallen by 95% in purchasing power. But our wages have more than offset this decline. That’s why GDP per capita was $5300 in 1913 and is $51000 in 2013. Our increased productivity actually means that our dollars buy MORE goods and services today than they did in 1913. So we’re better off, not worse off as this presentation often implies.

    You might want to read this paper of mine. It will clarify all of these points in more detail:

  • kees

    I think that 1-2 billion Chinese and Indian people disagree with you, Cullen.

  • Macro Polo

    Don’t agree – Gold is acting more like treasuries (read: safe haven), which have been bid since the Fed started tapering QE, both turned on the day tapering began.

    Probably has something to do with QE ending and the liklihood of systemic risk rising again, I guess.

  • Macro Polo

    Err.. that link didn’t work – I was aligning the gold price to the inverse of the 10 year yield.

  • Boston_AL

    Mr. Roche,

    You and I both know that expansion of the Fed’s balance sheet (digital money) as well as actual money printing at the USA Treasury or borrowed constitutes expansion of the money supply (Inflation), unless accompanied by an equal expansion of the countries GDP.

    Crude oil at $103/bbl is not due to just user demand. It is also – and I would argue more so – a product of government inflation of the US dollar.

    BTW: This was not the point of my discussion above to wildebeest.

    The point was that Gold (and Silver) and other precious metals have been historically utilized in/as currency. Why? Because it placed public trust in the currency. First that it actually held real value other than paper or worthless metal. And second that it could be monetized into a standard measure units for the purpose of exchange (to replace bartering). Both gold and silver were utilized in the US currency in the past for these reasons. Even paper money was back by gold and silver. (Eg: gold and silver certificates)

  • Caustic Pop

    Here’s gold’s correlation to the CRB:

  • J Thomas

    “From your statement I can only assume that you don’t know your global or US history very well then I must assume.”

    No, he’s making a semantic distinction. He’s talking about subtle meanings.

    To the extent that gold is valuable in itself, when you buy something with gold you are doing barter. Gold used to be a sometimes-convenient way to do barter.

    Back in the old days, a $20 gold coin didn’t have $20 worth of gold in it. But people traded them for as much as $20 worth of gold bullion. Was it because people trusted them not to be shaved or counterfeit? Was it just because they reduced the overhead of testing that the gold was real? Then they were a special commodity, a sort of pre-tested gold.

    But to the extent that people accepted them because they knew other people would accept them, independent of the actual amount of gold if they were melted down, they were money.

    It’s a subtle distinction. A commodity that you can trade almost as easily as money is a whole lot like money.

  • Johnny Evers

    There is a subtle campaign to make money strictly a medium of exchange, and no longer a store of value.
    It absolutely has to be a store of value — even if it’s for a very short time. You earn money on Monday, you spend it on Friday so it must retain its value at least for those four days.
    I’m not sure why this campaign is going on. Perhaps it’s because in our current debt situation, we need to pay back those debts in debased money. Perhaps it’s because if money is strictly a medium of exchange it gives more power to central banks. It certainly gives more power to people with real assets.

  • J Thomas

    “There is a subtle campaign to make money strictly a medium of exchange, and no longer a store of value.
    It absolutely has to be a store of value — even if it’s for a very short time. You earn money on Monday, you spend it on Friday so it must retain its value at least for those four days.”

    That’s true. The faster the velocity of the money, the less that matters, but it will matter some regardless.

    Does it make sense to ask what is the average velocity of money? If you get a dollar, how long does it take you on average to spend it?

    If you’re lower class and you have a job and 3 months worth of savings in the bank, then in a FIFO sense it might make sense to say you keep each dollar around 3 months.

    But if you get paid every 2 weeks and you’re broke by payday, then you keep each dollar around 2 weeks.

    The faster you spend your money, the less inflation hurts you.

  • Johnny Evers

    There is a school of thought out there that savings are bad, that the economy would pick up if people would spend their money faster. This school of thought holds that saving is inefficient.
    But if a typical person does that, then he will become dependent on government later when he can no longer work. Perhaps that is the goal.

    In present circumstances, where there is so much downward pressure on wages, inflation hurts the working class most — no matter how fast they spend their money — because prices rise more than wages.

  • Cullen Roche

    What school of thought says saving is bad?

  • Auburn Parks

    Right. Like for example, when you say that T-bonds aren’t money, and then contradict that POV by saying QE isn’t “money printing”. You worship at the altar of bank deposits and yet when QE results in trillions of dollars of NET new bank deposits, “its just an asset swap”.

    So which is it?

    Is QE “printing money” because it reduces the number of T-bonds held by the public and increases bank deposits?

    Or is QE NOT “printing money” because it merely swaps 2 different forms of money?

    Either way there is some logical inconsistency going on here.

  • Cullen Roche

    You sound angry again. I don’t know why you’re angry at me. I am not the enemy of MMT and your deeply held beliefs.

    Anyhow, there’s no inconsistency if you understand that monetary policy and fiscal policy are not the same thing. Since you’re combining the Fed/Tsy in your views then you’re getting all confused on this stuff. You have to work through these things as the institutions actually exist and not as MMT distorts them. So…

    QE is monetary policy and is implemented by the central bank. It changes the composition of pvt sector financial assets by creating money in exchange for T-bonds/MBS.

    Deficit spending is fiscal policy and is implemented by the Tsy. This increases the amount of financial assets the private sector holds.

    Bank lending is private sector borrowing and increases the supply of deposits.

    Pretty clear in my view. And you don’t need to “worship” at any altar to get it. You just need to view the institutional and operational framework as one consistent view that accurately reflects the reality of our monetary system.

    And please, point your MMT hate at someone else in the future. It’s just wasted breath here. Thanks.

  • Johnny Evers

    QE combines fiscal and monetary policy.
    Fiscal policy — Treasury issues bonds to the system and transfers existing deposit.
    Monetary policy — Fed exchanges bonds for deposits.
    Net result — Deposits are added. The two institutions are definitely working together.
    Note: This isn’t theory or politics. I don’t really care if it contradicts somebody’s paradigm. It’s just an observation.
    Our challenge is to figure out where it leads.

  • Cullen Roche

    No, this is factually incorrect. You’re combining monetary policy with fiscal policy because you have an agenda to promote and you continually fail to understand the operational realities at hand.

    A simple counterfactual proves you wrong. Just implement QE with a budget surplus and it becomes obvious that QE has NOTHING to do with fiscal policy. Your consolidation of the two implies that the central bank is buying directly from the Tsy or that the banking system couldn’t on-sell the bonds. This is factually incorrect and I’ve asked you nicely, on multiple occasions, to stop confusing people with your scaremongering agenda. This forum is not here for you to promote your agenda of fear and misinformation so please stop using it for that. Thanks.

  • Boston_AL

    J. Thomas: you wrote {Back in the old days, a $20 gold coin didn’t have $20 worth of gold in it.}

    Sir, you are incorrect, and I would advise you to check your facts before you make such silly statements. A $20 gold US coin was indeed woth $20 when it was originally minted. (See link below)

  • J Thomas

    Boston_AL, you are correct. It’s crazy that it would be that way, but that’s what Wikipedia says.

    If a $20 gold coin has $20 worth of gold in it, then they’re minting it for FREE. It makes no sense. But there it is, the truth has no obligation to make sense. Any little fluctuation in foreign exchange rates could leave foreigners taking our gold coins and melting them down for the gold. Crazy.

    “In 1834, the mint value of gold to silver of 15:1 (6.11% silver) was changed to 16:1 (5.73% silver) and the metal weight-content standards for both gold and silver coins changed, because at the old ratio and content, it was profitable to export and melt U.S gold coins. Also, the gold proportion was dropped from 22 karats (.9167 fine) to 21.58 kt (.8992 fine).”


    Thank you for alerting me to this anomaly.

  • Johnny Evers

    Do I have an agenda? No.
    Is this scaremongering? No, it could be argued that this is a good thing.
    I am NOT implying that there is no market for treasuries, just that the Fed has joined the market.
    I am NOT saying the Fed is buying directly from the Treasury, just that the Fed is buying on the secondary market.

    Where I am making the leap is putting the two operations together. You don’t want to do that. You fight very hard to claim the Fed is not a federal agent, for example.

    As to your counterfactual: Let’s say there was no deficit spending AND the Fed was buying bonds.
    That would drive down the outstanding federal debt. That would monetize past deficit spending.

  • jaymaster

    Gold has value because it is soft, heavy, and shiny, and it stays shiny forever.

    It makes people look better when they wear it.

    And it is rare.

    This has always been so.

    Some people think it’s magical. And when I hold it, cut it, melt it, and most especially, work it with a hammer, I can almost understand that. But believing in magic takes a leap of faith.

    Believing it has value as money takes a leap of faith too. But that’s no different than believing a dollar bill has value.

    When will gold become a pure commodity? Maybe when we lasso a few asteroids, or perfect the extraction of gold from sea water, to the point where it becomes ubiquitous.

    Or maybe when we advance as a species to the point where we no longer value shiny objects.

  • J Thomas

    He’s probably talking about me, but he has it oversimplified.

    I’ll try to sketch the argument quickly, oversimplifying to do it.

    Imagine a steady-state economy. The population is not growing, the weather is reliable, there’s no new technology and all the resources are renewable. Those are all complications which get in my way.

    We need a balance between consumption and investment to replace depreciating tools-of-production and infrastructure. Every year we cut 5% of our forests, and we must replant that 5% so that in 20 years we’ll have forests to cut down. Etc.

    We would have more this year if we just consumed everything and didn’t invest, but that would be stupid. Or we could reduce our consumption and invest more, but that would be stupid too. We don’t need more axes so we can cut down forests faster, we’re already cutting them down at the right rate. We don’t need more looms to make cloth faster, because we’re already allocating all our resources as well as we can. Overinvesting costs us, and it does not repay us. Similarly it doesn’t help us to leave trees to fall down and rot, or to leave crops in the field for the fieldmice. What we waste today does not make us better off later.

    So in this imaginary situation there is a right amount of investment. Too little reduces production later. And too much reduces consumption now and at best has no value later.

    Now add one complication. Weather is unreliable and you don’t know how big the crops will be. Then in good years there’s more food than needed, and in bad years there isn’t enough. The natural thing is for people to put off consumption in good years so they can claim they deserve food in bad years. But it isn’t possible for everybody to do that because in bad years there isn’t enough food to go around. A simple solution — poor people can’t save in good years because they’re poor. So they don’t deserve to eat in bad years and they starve. Somebody has to, and it’s them.

    An alternate solution — if there are ways to store food, then you can store enough to handle the bad years. Then the rich can eat fresh fruits and vegetables and the poor can be forced to eat MREs. It’s their own fault for being poor and not saving.

    Independent of investment, people have the moral belief that if they defer consumption now, society owes them the same or more consumption later at whatever time they choose. There is no necessary connection between the amount of stuff unconsumed now and the amount of stuff later. But sometimes there *is* a connection — *sometimes* investment now results in increased production later.

    Everybody wants to be the ones with savings who’ll be first in line for resources when there’s a shortage. But every lender requires a debtor, and it isn’t possible for everybody to be first in line. When everybody tries to save, we all lose.

    I strongly suspect that in the real world even with all the complications, we have ways to encourage people to save more and invest more, but when they are saving too much we don’t have good ways to encourage them to save less and consume more. How could that even be ethical? The ones who get to make the best investments will wind up rich. When there’s too much saving, what can we offer people to balance that chance?

    So anyway, when too many people try to save too much, something has to give.

    They can try to lend money, and sometimes interest rates will be below inflation while other times there will be lots of defaults.

    They can try to invest in new money-making projects, and lots of the time the new projects will go bankrupt and take their money. Also, with people trying to save instead of consume, who’s going to buy the products the new projects create? It requires a certain children’s-crusade attitude to make speculative investments when demand is falling.

    A poor person who has bought land will find in the crisis that nobody wants to buy it and he can’t afford the taxes.

    They can buy gold, and if they have gold options then in the crunch the exchange will go bankrupt and their gold will be gone. Or if they have physical gold the government will make it illegal again. Etc.

    If the real economy doesn’t grow very fast, there has to be some way to separate most of the savers from most of their money. Because the economy can only pay off so much to people who contributed to it by not buying stuff earlier.

    Inflation makes it extra hard for poor people to save. It takes a certain minimum before you can make profitable investments. In the meantime the money you save dwindles away from inflation before you can do much with it.

    So one set of advice for poor people is to try to save anyway. Eat spam instead of hamburger and velveeta instead of cheese. Put soybean TVP in your meatloaf. Eat ramen instead of spaghetti. The less you spend, the more you can save. And then after many years of sacrifice you will have a good retirement provided you made the right investments.

    Nobody is making the opposite advice. That would say to go ahead and enjoy the good times while they last. Eat real hamburger and put real cheese on your real macaroni. Go ahead and buy clothes that last instead of Walmart schlock. And when the bad times come you likely won’t be much worse off than you would anyway.

    Nobody recommends that. And I don’t either. Because maybe the choices are:

    1. Go ahead and invest in businesses that are trying hard to create better more-expensive products competing for shrinking disposable income.

    2. Go ahead and buy stock in companies that look good on paper, hoping you can sell them even higher to somebody else.

    3. Spend your money and give #1 and #2 above a chance to actually profit.

    If you do #1 or #2 and you fail then you’ll be in a big club and people will sympathise. Better if you were the genius who beat the odds, but we can’t all be geniuses.

    But if you do #3 people will not think you are a hero who tried to keep the system working. They will tell you to your face that you are a lazy improvident slob who isn’t looking out for his own welfare who doesn’t deserve to live.

    That was longer than I intended. Sorry about that.

  • Johnny Evers

    You mis-characterize my comment and then delete my response.
    Do you do this to others?
    If you want to propogate your ideas, you need to be able to defend them and address the specifics of what people are saying. It’s not helping you to accuse people of agendas or to distort their arguments.

  • J Thomas

    “You mis-characterize my comment and then delete my response.”

    Probably he does not intentionally mis-characterize your words. Probably he did not understand them the way you meant them.

    You failed to get your point across.

    This is a very common problem for people who have original ideas. Other people assume you are saying something they’ve seen before, and look for the closest match and then answer that. If you want to communicate you must find a way to get past that.

    Try saying it in different words. Maybe look for whoever he’s mistaking you for, study what that guy says, and then figure out how to say your stuff so it doesn’t sound the same.

    When you’ve worn out your welcome one place, go somewhere else and try to get understood, The experience may let you come back with a better technique.

    It surely seems unfair that you have to work so hard when other people can just say MMT or Keynes and everybody (maybe) understands. But that’s the price you pay for saying something they don’t expect.

    So play the hand you’re dealt.

  • Johnny Evers

    Your example is based on needing to save resources for later. For example, we stockpile food (if possible) for when the crop fails.
    I am thinking more of saving income in order to obtain resources later. You save now, so that you can buy food later when you can no longer trade your labor for food.

    Saving resources has to be a collective probject. The government has to keep people from chopping down all the trees. It has to go to war to keep the oil flowing.
    Saving income — if the unit of money is kept stable, can be done by the individual. If we can’t keep the unit of money stable, then saving income must be collective. It’s not an either/or solution. Social Security is a form of collective ‘savings.’ Having children can be a form of savings. Gold is a form of savings. Stocks are a form of savings. Trusting the government can be a form of savings.

  • Cullen Roche

    I don’t put Tsy spending with Fed ops because they’re two different things. That’s the whole point. You’re consolidating them and then claiming that you didn’t consolidate them. If you don’t get it then you don’t get it, but please stop confusing people here with that message. Thanks.

  • Jonathan

    This is US centric point view, that is the point of view of about 5% of the world population. Despite this, of course THIS MUST BE the truth. It seems to me that in other part of the world people like to think differently than us. It’s not a matter of better or worst because DO NOT EXIST a better or worst. But when you belong to the 5% and pretend to ignore the other 95% well you’re looking for troubles and the US is really looking for troubles.

  • Cullen Roche

    I didn’t delete your comments. They get hung up in spam for your various reasons (probably because you format text weird in many comments). And I am not the one distorting. You are coming here and commenting on a site that I ALLOW you to comment on. By definition, YOU are the one distorting MY argument.

    I am not getting into some petty back and forth with someone who has, for years, proven that they do not want to understand how the monetary system operates….

  • Marc

    Cullen – As a corollary to the view that electronic money absolutely is the future, does this not paradoxically give physical gold perhaps a role as a measure of insurance against potential cyberattacks that, say, wipe out or otherwise alter electronic records in a way that cannot be recovered?

    Just a thought…

  • Cowpoke

    “And economists use different definitions for lots of different things.”
    Amen to that

  • Johnny Evers

    Fair enough.
    I’ve noticed that certain words get caught in the ‘moderation’ filter — Em-em-Tee, money-tization.

    MR is an offshoot of the former and you can see there is bad blood between the two camps, like there often is when a school of thought splits.

    The Treasury issues bonds and the Fed exchanges for them. Two separate actions. Are the two institutions working together? I guess that is the disagreement. I think they are working together, with plausible denial.
    Let me ask you this: If you lend me money, and I pay you back — is that one thing or two? Because I see it as one thing.
    Is the Fed ‘paying back’ the debt. Cullen says it’s not, right? In his view, the T-bond still exists.
    That’s another disagreement but we’re not disagreeing on fact, we have a disagreement on interpreting the facts.
    Operation ‘realities’ are open to interpretation. For example, I know people who are taking out student loans, who have no interest and no ability to pay them back. To them, their reality is that somebody else will pay the lender. They might not even know the Fed exists, but today’s reality is that the Fed will indeed pay the lender.

  • jaymaster

    Maybe you haven’t heard about what’s happening in some of the poorest places on Earth. They’re going straight to digital money.

  • Cullen Roche

    MR and MMT are both sympathetic to Post-Keynesian ideas. We’re both offshoots of PKE. So yes, we have some similarities and some competing ideas. If there’s “bad blood” then it’s really no different than any other economic disagreement. Monetarists have “bad blood” with non-monetarists. It’s inevitable. And, in retrospect, it’s clear that I was never really an MMTer to begin with even though I mistakenly labelled myself as such. I never bought into the idea of a money monopolist, never adopted the “taxes drive money” theory, never adopted the Job Guarantee, never adopted their views on current accounts, never adopted their views on the hierarchy of money, etc. So there was never really a “split” to begin with because I was never really ever a full MMTer to begin with and only briefly called myself an MMTer during 2010/11. It was my mistake for ever assuming that a partial agreement with some MMT ideas made me “MMT”. That was clearly wrong in retrospect.


    If you borrow money and pay it back then those are separate transactions. To treat them as the same thing assumes that you necessarily pay back the funds.

    And it’s a fact that the Fed is not “paying back” the debt. It is holding it temporarily and it will be reissued at some point. It doesn’t cease to exist even if it’s in the Fed’s black hole balance sheet.

    And yes, operational realities are open to interpretation, but you are consolidating things that make them operational myths. Your loan example is perfect evidence of this.

  • Anonymous

    I’ve spent my last 10 years between India, China and south east Asia (now) working for a big european firm, so I know what I’m saying. When I will be in Africa I will tell you about what happening there. I don’t care about gold, I don’t own any of it, but I don’t like people who pretend to know about other people without spending time outside his country, it’s arrogant and silly.

  • Boston_AL

    You forget that we are talking the late-1700’s thru 1800’s. Labor was cheap. So was the value of gold.

    P/S Even as late as 1967 1 oz of gold was priced at only $35.50.

    Here is the historical gold price chart from 1792 to 2012. (Your obvious sarcasm not withstanding. eg: you wrote: {If a $20 gold coin has $20 worth of gold in it, then they’re minting it for FREE})

  • Boston_AL

    There has been a great deal of government inflation (debasement) of our currency in the last 45 years!

  • Boston_AL

    Mr. Roche: you wrote {I was never really ever a full MMTer to begin with and only briefly called myself an MMTer during 2010/11. It was my mistake for ever assuming that a partial agreement with some MMT ideas made me “MMT”. That was clearly wrong in retrospect.}

    Wow! I am sincerely impressed by your admission here. That take a true man to admit when he is wrong. I have a new-found respect for you sir. (Honestly)

    Best regards !

  • J Thomas

    “I am thinking more of saving income in order to obtain resources later. You save now, so that you can buy food later when you can no longer trade your labor for food.”

    Yes. And here’s how I see that go. If you avoid consuming resources that are needed for investment — resources needed to build roads or factories or whatever we need to produce more — then later when you want to consume there’s more to go around. Your sacrifice has paid off.

    Now suppose you avoid consuming resources that are then wasted. You have done nothing to increase production. If anything production will be reduced because demand is down. Sometime later during a shortage you think you deserve to have the scarce goods because you could have consumed them years ago and you didn’t? Maybe people will go along with that, but I see no particular moral reason why they ought to.

    I say, if you sacrifice and your sacrifice results in production increasing, then you deserve rewards for it. But if you sacrifice and nobody particularly benefits then no, you don’t deserve anything.

    If we have more investment money sloshing around than we need, and less demand, what good does that to anybody? If we had more demand we’d have more actual investment to satisfy that demand. We’d have more people working. (We’d also use up nonrenewable resources faster. An important side issue.)

    Too much money earmarked for investment is a bad thing. I don’t know what to do about it.

  • J Thomas

    “Saving income — if the unit of money is kept stable, can be done by the individual.”

    People tend to believe the government has a moral obligation to keep prices stable. If you choose not to buy a loaf of bread today but instead you save your money for fifty years, fifty years later you should be able to buy a loaf of bread with that money. When I think about it, that seems like kind of an astounding thing to happen.

    What if everybody did it? For 50 years everybody buys less bread than they want to, because they’re saving their money. Then in year 50 they take the money out of their mattresses and they all go out to buy bread! Why would an economy that has endured 50 years of low demand be better ready to cater to their sudden requirements?

    I tend to think a healthy economy should have high investment (making new things and better things and making them more efficiently) and high employment and high consumption. We don’t have enough people who can afford to consume enough to give us high investment or high employment. Am I wrong?

  • J Thomas

    “Your obvious sarcasm not withstanding. eg: you wrote: {If a $20 gold coin has $20 worth of gold in it, then they’re minting it for FREE}”

    No, no sarcasm.

    Sure, for a long time the dollar was pegged to the commodity gold. Of course the price didn’t change much. If the dollar was still pegged to gold today we’d have awful deflation and it would cause us lots of problems.

    People have looked at 1850 prices and tried to estimate inflation from them. Of course the products aren’t really comparable etc, but usually they figure what you could buy for $1 in 1850 would go for around $28 now. So a $20 gold piece was worth around $500. Wikipedia says $1200, which is not too far off.

    If we can take these numbers as accurate (which we can’t really, but they’d be a start and probably around the right ballpark) the dollar deflated around 25-fold since then, while the value of gold has risen maybe 3 times in terms of physical stuff you could trade for it. Tentatively, most of the difference would be inflation of the dollar while only 3x of it would be increased value of gold.

    Interesting if true.

  • BK


    To me, it is quite weird – to illustrate the thesis that gold is now behaving more and more like an ordinary commodity, you are using the chart showing gold divergence from commodity index. The opposite would be a proof of your thought. The chart you show only says the commodities become more expensive priced in gold.

    I’d say the honest attempt to research it would look into historical relationship between gold and commodities (accounting for gold being part of the index), and then compare it to the current trend.

    Yet, even this would not prove anything, I am afraid. To revert to “ordinary commodity” gold value needs to loose “money” component, and to be priced based on its marginal utility as a commodity (dental use?, electronics?). Jewelry though will always be a borderline usage, as it is an implied storage of value. Thus, in addition to pricing, gold should loose it’s appeal as jewelry material.

    Do you see this happening? I do not.

  • Johnny Evers

    I do think there is a moral imperative to keep the currency stable, because inflation causes the most harm to those who have the least ability to plan for it.
    If I save, I am merely moving my spending from one point in time to another. I am not depriving the economy.
    And if I do not save, then somebody else must spend for me.
    If ‘everybody did it.’ Well, ‘everybody’ is at different points in their lives. There will also be savers and there will always be those spending down their savings. When there are an excess of savers retiring, perhaps that is a good thing, as in Japan, in that it can cushion economic weakness.
    I do admit that I see moral arguments to live an austere, moderate life. I see a society that is obsessed with buying more stuff.
    .There are those who would say this would damage the economy; I would counter that a lot of economic activity that looks positive today carries costs that must be borne later.
    Also, a lot of positive human activity simply can’t be measure on an economic scale. A stay at home mother may create more human value that one who works as a CEO but her ‘work’ adds nothing to GDP. A man might retire from a high paying job and join the peace corp and contribute more to society, but again, it can’t be measured.
    Very interesting questions. I don’t have the answers.

  • Lucas

    Hi, look sorry im a few days after the punch here.

    I think it would turn into a commodity if it was able to be consumed and expended. Yes there is some form of consumption for like Jewelery and stuff, but that’s not as substantial as its other cause.

    I guess what I am trying to say here is that as a planet – Gold isn’t a commodity because Commodities are produced and have no real control over the price they are sold for and the markets they are destined to go to.

    I dont believe that Gold is decoupling from its monetary value. What you could be seeing is a nascent bump because the dematerialization that has been promised is not ‘materializing’

    Basically the theory is that with 1 iPhone you replace an alarm clock, calculator, abacus, etc etc. And this is a statement that is propsed by Vaclav Smil not me:

    People think that we are getting better because we are dematerializing. Look at your iPhone. A perfect example of dematerialization. Before that you would need, what? An alarm clock. A telephone. A camera. A compass and a map. Now you don’t need any of these things — you just need one cell phone. So instead of having the mass of all these things like before, you dematerialize.

    Well, that’s fine. But do you know how many of these cell phones we are throwing away every nine months? One billion. We are only seeing dematerialization in relative terms. Our refrigerators weigh less than they did 20 years ago, they are better insulated, they are better built. Certainly our electronics weigh less than they weighed 20 years ago. (But of course our cars do not weigh less, because most of our cars in North America are SUVs.)

    Many things are dematerializing, but they are dematerializing per unit. Yet we are selling many more units, so in total terms, global consumption is vastly increasing. This is like efficient energy consumption. We increase the efficiency of energy consumption, but have three televisions instead of one. Per refrigerator, per television, per car, the consumption is down. But overall, the consumption is up.

    So what you see is maybe not gold becoming more money like – but maybe the demand of commodities and a dematerialization false economy pushing demand up.

    We are consuming more commodities now than at any other time on the planet and we are depleting the biosphere faster than it can create for us.

    You know how that impacts prices. Gold consumption is driven by different psychology and isnt as coupled to a consumption society as the majority of the other commodities.

  • boston_AL

    And like that, Japan’s Bitcoins were gone! (excellent article)

    Personally, I don’t understand why anyone would have invested in Bitcoin. And those that did have lost much.

    For how can a virtual currency backed by nothing of real value (eg: gold and/or a nation’s promise) ever be worth the equivalent of an ounce of gold? It’s absurd!

    The only reasons Bitcoin was elevated to such nose-bleed lofty levels is because:

    A) Used by drug dealers to transact, launder and transfer real money (Silk Road)
    B) Used by people trying to transfer real money out of their country (eg: Wealthy Chinese) to escape possible wealth confiscation.
    C) Organized crime groups to move and launder money globally (Russian mob, etc)
    D) idealistic fools who actually thought a virtual currency was safe and could be worth as much as an ounce of gold.

  • J Thomas

    “I do think there is a moral imperative to keep the currency stable, because inflation causes the most harm to those who have the least ability to plan for it.”

    If money was a commodity, like gold, the government etc could not keep its value stable. Its value would rise and fall according to supply and demand, like all the other commodities.

    In bad times people would want to hoard it, and that would make its value rise which would reward them for hoarding it.

    “If I save, I am merely moving my spending from one point in time to another. I am not depriving the economy.”

    You don’t get it. (Few do.) We pretend that money is some sort of absolute right. That prices ought to be stable, and that the economy is like an automat — you put your coins in the slot and out comes your food. Keep your money in your pocket and any time you want to you can buy a loaf of bread, and the price should never change.

    We can mostly keep this illusion because our economy has been so wonderfully productive. And whenever a price goes up we can blame government as the sole cause of inflation.

    Supply and demand says you can afford more bread if you buy it when it’s plentiful and do without when it’s scarce.

    The government CANNOT keep prices stable except as some sort of statistical average that people can argue about.

    The economy is designed to predict how much of everything to make, so that people who can afford it can buy what they want.

    If too many people “save” then the economy slows down until a sufficient number of people become poor enough that they cannot save. It’s a feedback system. Depression is a mechanism the economy uses to prevent too much saving. The economy slows down and resources get wasted — including people who want to work who don’t get the chance — and the sacrifices do nothing to increase the amount produced later.

    We assume that we have the right to save as much as we want, but this is the result.

  • J Thomas

    “As a corollary to the view that electronic money absolutely is the future”

    Electronic money is the present. Most of your money *is* IS *IS* recordings in your bank’s electronic ledgers. It has no other existence.

    It is hardly any different from the line of credit your credit card company extends you.

    “does this not paradoxically give physical gold perhaps a role as a measure of insurance against potential cyberattacks that, say, wipe out or otherwise alter electronic records in a way that cannot be recovered?”

    Hardly. If the IRS decides you have broken their regulations, they *could* freeze your assets and just take the money from your bank and brokerage accounts. They don’t actually do that without a lot of warning, but they could.

    And if DHS decides you are a terrorist they will do that with no warning whatsoever.

    If it happened, and you tried to run for the border, which would help you more — a stack of gold coins or a gun? Actually I guess you’d need both. And a stack of $20 bills would probably be more useful, but that would depreciate with inflation as many years as it took before you needed them.

  • Johnny Evers

    I think you’re missing the point that not EVERYBODY is saving.
    The economy has many different people at different points of the cycle.
    The people who save too much (in your opinion) and balanced by the people who spend too much, i.e., retired savers spending down their money.
    Saving does not slow down the economy if their savings are put to productive use.
    Why do you think it’s wasteful if I don’t spend my money right away? You don’t get your paycheck on Friday and spend it by Saturday night. That’s on a very short scale, obviously, but on a longer scale, retirees who take lump sum 401k rollovers don’t spend it in the first year.
    Do we have a right to expect that our labor today can pay us back years later?
    Of course, that’s the social contract. That’s how human beings are hardwired. That’s what we work for.
    People have always labored as adults and took care care of children, knowing that their children’s children would take care of them. Their ‘savings’ consisted of investing in their children or in their farms.
    If a man takes his money and buys land to plant apple trees that will bear fruit in 20 years, that’s they type of savings I’m talking about.

  • wildebeest

    You may be right that I don’t know US history very well, but I do know European (Belgium) history way better. And our financial history is far more interesting than yours. It really gets going in the late Medievals, especially as Antwerp became the financial center of Northern Europe for quite a while.
    But let us skip the naughty parts and I’m glad at least the commenter J Thomas understood what I tried to explain (not saying he agrees though).
    Have a good look at the Doubloon picture!
    It was money not because the coin was gold but because the authority said it was. Without the image the coin would have been what it really is, just a commodity.

    I take this even further. Bitcoins are (virtual) commodities, not money.

    What concerns your remark on the debasement of the dollar: you Americans today must be far poorer than your grand-grandfathers in that case. So think again, there must be more to it.

  • J Thomas

    “The people who save too much (in your opinion) and balanced by the people who spend too much, i.e., retired savers spending down their money.”

    If they *are* balanced, then all’s right with the world and I have no complaint.

    “Saving does not slow down the economy if their savings are put to productive use.”

    Agreed. When we have the right amount of saving so that it gets put to productive use, everything’s fine.

    “Why do you think it’s wasteful if I don’t spend my money right away?”

    It might not be. But if demand is low today, you might get fired next week. Then you need that paycheck to last awhile. We need somebody to buy stuff or we’ll shut down. On the other hand it’s your own lookout to have enough savings. If you do your part to keep the economy going and then you personally run into a cash flow crisis nobody will even thank you for your sacrifice.

    “Do we have a right to expect that our labor today can pay us back years later?
    Of course, that’s the social contract.”

    That’s how we want it to go. Sometimes that contract gets violated. After Germany lost WWI a lot of old people found their pensions evaporated into thin air. some of them starved. Germans were naturally angry about it and threw out the leaders who had no choice but to let it happen, and put in a new leader who promised to protect them. It didn’t work out well that time either. They’re doing better this time around.

    There is no guarantee that an actual economy can keep that promise. But we do hope it will come true.

  • Boston_AL


    First of all I said “world history”; not US history. Thus the Spanish Doubloons example (Circa 1500’s).

    Second, “coinage” was a means to “standardize” the values of gold and silver for exchange so that one didn’t have to always carry a “scale” around in order to determine the value of a lump of gold or silver. Plus I have stated elsewhere in these discussions, the coinage – beside having REAL value – was also backed by that nation or ruler (eg: King). Which gave the users of said currency more trust in it.

    P/S The nation or King did NOT impart value into the currency. The gold / silver did that. To think otherwise is naive. Why do you think nations and Kings used gold and silver? Why not wood then?

    As far as Bitcoins. They are NOT a commodity. They are a valueless number sequence/code. They are NOT backed by any sovereign nation or ruler. They have zero “real” value. Bitcoin is the new Tulip Mania. Perhaps that history you are knowledgeable of.

    As for me, I have lived and worked in 4 of the world’s 7 continents and several of the world’s major economic markets.

    If you think that increasing a nation’s fiscal debt by $5+ Trillion dollars and the Fed’s monetary balance sheet by another $4.3 Trillion dollars is good for a nation, I firmly disagree.

    And if you look happened to research and investigate real wage growth in the US, you would see that it has continually fallen since it peaked in 1972.

    nuff said… good day sir.

  • Boston_AL

    P/S In the USA, one might be better well off than his grandfather, but likely NOT better off than his father.

  • Johnny Evers

    Good discussion. Appreciate your thoughts.

  • wildebeest

    I never wrote about value, I wrote about the notion money. It should be useful if you first read what I wrote.
    I’ll use as a mean of last resort an analogy.
    Suppose you own a stock certificate, printed on paper or on a gold plate or simply as today dematerialized where the ownership is registered on bits. The bearer (golden plate) can be worth something but it doesn’t make the value, nor does it represent the stock. The immaterial rights (right to vote, to attend the AM, right on a dividend or on a liquidation bonus, …) are the real values you pay for.
    Money is about the same. Authority creates money and the market determines the purchase power (value).
    When that money is printed on a commodity, you still kinda have a hedge for the value of the commodity.
    The comparison gold-dollar is silly. Some years ago I calculated what I would own when I would have bought gold 20 years ago and put it in my cupboard and compared it with the same amount of dollars which I invested in government bonds. The dollars and its compounded interest beat gold by far. Never forget the interest when you compare the two.

  • JohnL

    Hey fellows thanks for the interesting Sunday afternoon read.
    I’d like to throw in my 2¢.
    The convenience/portability factor add’s a dimension to gold that most other commodity’s lack. So it’s price should function like most other commodities, on a supply and demand basis. But most other commodities lack the convenience factor that during some periods will likely effect golds price.
    I believe that holding gold is no different then holding any other asset that lacks counter party risk, the carrying costs are just different.


  • J Thomas

    “The convenience/portability factor add’s a dimension to gold that most other commodity’s lack.”

    Diamonds should be better, except that there is little resale value.

    Osmium might be better. It’s the rarest metal in the world, and it’s valued at $400/oz for its industrial applications alone. Once it got used for a medium of exchange the price would go way higher than gold. Shinier than gold. Half as bulky as gold.

    The only problem I see with using osmium as a store of value in place of gold is that when exposed to air it turns poisonous. But that’s OK if we just don’t expose it to air.