How far will gold and silver fall?

... and just as a followup on the interest paid to the Fed. The Fed pays a 6% dividend on the stock held by the member banks in their region, and the excess over expenses is paid back to the US Treasury. So there is no pile of interest building up someplace that the banking elite is using to buy the world, if that is your concern.

 

Log in or Sign up to hide this ad.

This is an interesting point that I hadn't considered, as I have always been of the mindset that money is the representation of goods and services. If I understand you correctly, you are saying that dollars + bonds + other collateral = such representation. This muddies the waters a bit. I suppose I can agree with you that this is the case today, but that is not the intended relationship as I understand it in historical context. Of course there is no shortage of deviation from the status quo in today's complex market. I appreciate your insight. Time to do some more research =)

 

There is no doubt that the act of lending by banks increases the money supply, and the repayment of loans and interest reduces the money supply. But your scenario doesn't identify a problem. Interest on loans existed under the gold standard also, and someone could have just as easily asked "where will the gold come from to pay the interest?" And the answer then and now is that it comes from the increase in production of goods and services. In a completely stagnant economy where only 10 coconuts exist and nothing else, the interest would be a problem. But an economy where there is a fixed amount of wealth with not possibility of ever increasing it would not have an active capital market anyway.

 

Think of it this way. There exists about $50trillion in assets in the US, which increases almost every year. There is also about $2Trillion in circulating currency to grease the wheels of commerce. There is no doubt that the currency is dropping in value almost every year, but this doesn't decrease the ever-increasing pool of wealth.

I'm not smart enough to explain it any better.

 

I am not an expert on Chinese history but as far as I can tell this was an asset based paper money system. It was not fiat.

 

I am not talking about the interest on a loan. There is nothing wrong with that. The interest comes from the borrower and does not result in an increase in the money supply. I am talking about the interest on the currency itself due to the nature that it simply exists.

 

How can this be? How can you have $50T in assets but there is only $2T of currency in existence. Think of it this way. If you are trapped on a life boat with several other thirsty people, and the only person with a bottle of water decides to sell it, the most this bottle of water can ever be worth is the total amount of money on that boat. The demand might be infinite, but the money value of the bottle of water is limited to the currency that is on the boat.

 

Gold might fall back to the $1500 level and silver might fall back to the $26 level and maybe it will do it this year. This is just a wild guess on my part.

 

There is no interest on the currency. There is interest on the Treasury bonds.

 

And that is the core of the misunderstanding. There isn't a dollar in circulation for every house, every piece of land, every stock, every bond, every item of inventory, every building, every jet plane, every car, etc... The value of those things is measured and quoted in dollars, but the Fed doesn't print a dollar every time something comes into existence.

 

If silver ever drops to below $10.00 a lot of mining companies would go bankrupt or shut down their operations thus creating a shortage which would only push prices up again.I can't see it ever happening in my lifetime.
To recover the oil in the Alberta Tar Sands, they need X amount of dollars to be profitable.I am guessing if oil dropped below $40.00 the place would be shut down.
Two different commodities but the same premise.

 

I can't be certain, but I am under the impression that if interest is set to 3% which is roughly the annual increase in gold supply it will be a wash. Although I am not a fan of interest anyway and would be fine replacing it with a flat fee on loans. If the lender doesn't like it, just raise the fee or change the increments it's due in, and have a stipulation to seize assets upon failure to meet a deadline. Risk can be avoided if desired, and would be if people had to loan out their own hard earned money instead of being gifted it for the sake of making a loan.

I think I get where you're going with this, that there is more wealth than there are dollars to buy it since dollars can be reused after exchanging hands without requiring new ones to represent every single transaction independently (unless paid with credit or a loan). I would make a distinction however between things like buildings, vehicles, land (physical assets) and stocks and bonds (IOUs you can exchange for more IOUs that you can use to buy physical assets). When I say goods and services I mean physical assets and services, which I believe amounts to significantly less measured wealth than say bonds or especially the derivatives market. A piece of paper or cyber-asset doesn't do you any good in and of itself, so I don't include those when I think of what money is a representation of, but sure they have value as the governmental seal of approval is there. Not saying that's necessarily the right way to look at it, just how I have been.

 

Or you simply are incorrect on the accumulated assets inside the USA. You didn't offer up any supporting information on that and you ignore the effect on prices when people sell out. I will continue to contend the aggregate value of all assets is limited to the available currency that can purchase it.

Another example. There are two fields of corn worth $1000 each. Someone would then state, OK, the total value of this corn is $2000. But if there is only $1000 in available currency, then the value of this corn can never be more than $1000. Because, and this should be simple to understand, someone buys that $1000 of corn in one field. The value of the second field drops to $0 as the buyer has no more money.

 

Then you fundamentally don't understand it. Fiat currency, distilled down, represents nothing more than a future claim on someone's labor. Note this is quite a different paradigm than an asset based currency. Because the FRN is claim on the future, this means it is a debt and debt involves interest. It's this interest component that cause the system to fall apart. Currency enters the system by two methods. First spending by the Treasury. When the Treasury spends money it is borrowed from the Federal Reserve. Interest is owed on this money. Second is through the Federal Reserve system of banks. When a bank needs additional currency from the Federal Reserve, the Fed creates it and hands it over to the bank. There is interest on this created money as well. (I'm ignoring fractional reserve banking as it's not relevant to this point)

The only way to account for this interest is to expand the money supply. It has to happen, it's simple math. As long as this base money remains out there, then there is interest on it. It's why fiat systems fail. BTW you never answered the question on what Fiat system has lasted 100 or even 50 years.

 

It works the same way with fiat.

 

You can believe what you want, but you are wrong. And in your example, the corn will most likely be purchased by a wholesaler using a bank line of credit, who will resell it to a manufacturer for his line of credit, who will turn it into a consumer product that will be purchased by a retailer for his line of credit, and bought by a consumer on a credit card that will eventually be paid using the direct deposit of the consumer's paycheck by his employer. And then the chain will unwind backwards with the retailer repaying his line of credit with the credit card electronic reimbursement, etc... It is unlikely that currency will be used at all. The amount that each party owes will use US dollars as a measure, but no currency will be exchanged.

 

Farmer A and Farmer B each have $1000 worth of corn. Consumer C has $1000 in cash.

C pays A $1000 for all his corn. Now C has corn, and A doesn't.

Farmer A has seller's remorse about getting rid of all his corn. He pays Farmer B $1000, and buys all of his corn.

What a rube Farmer A must be! Everybody knows that Farmer B's corn is worth $0; Fatima said so. Farmer A should've just gone over and taken it.

You can't have it both ways. If you don't like fiat money, don't use fiat logic.

 

I understand your problem because I've read some of the same internet websites with the mis-information you quote. The first thing you need to grasp is that there is nothing wrong with interest. This isn't the middle ages. Another thing to think about is that the Treasury doesn't normally borrow from the Fed. The normal process is to borrow on the open market with the Fed as a backstop. You also seem hung up on currency vs money. They aren't the same thing. Interest is normally paid as a portion of earnings by a business or individual on borrowed money. It is not paid by the Fed.

 

Here is another way to think about it to correct your error. Approach it in reverse. There is about $2trillion in Federal Reserve Notes in circulation plus some coinage. Using your logic, this means that the total value of all commodities, stocks, bonds, real estate, artwork, inventories, farm land, manufacturing facilities, medical equipment, preferred stock, etc... cannot have a value more than the value of the currency. This is obviously wrong.

I hope that helps clear it up for you.

 

Cloud, I think you're making some good arguments and I'm trying to comprehend your viewpoint the best I can. But you keep addressing big business and not what happens to the "little guy" over time. So you're saying interest which helps drive inflation really is not a problem over time? I don't see how anybody can come to this conclusion. Assuming the US makes it another 100 years, our currency system will look like Zimbabwe. Maybe in 50 years. If wages for the little guy can keep up (which they are not and I don't believe they can) than no, it wouldn't be as big of a deal to have $6 gasoline. Or $10 milk. Or 10x that.

What happens when a huge segment of society still doesn't have jobs and the people who are working aren't seeing a nickel's increase in pay over 4 or 5 years? Because that's what's happening. This is a totally different aspect that everyone fails to address here. This is the every day aspect that affects us all and is actually more important to discuss.

I think at minimum, we can all agree the moral of this story is you don't want to let a $100 bill sit too long. Which regardless of the side you want to take, proves fatima's point.

One possible solution that probably seems outrageous since the current system is so ingrained in everyone, is the possibility of NO INTEREST. I know the idea seems wild, would require a lot of changes, and brings up many questions of feasibility but it would allow a system to work without breaking it if it somehow could be implemented.

Getting back to the original question here, I think it will be very difficult for silver or gold to fall. If it does, it will be difficult to buy at the new levels for quite a while. I think all these dealers love raking in the cash as they sell old stock that was bought cheap.

But if they're sitting on piles of silver that they just paid $40 an oz for and it drops to $17 tomorrow, when do you think they'll actually have it for sale, marked down to $17 again? I think they're all going to hold a LOOONG time before everybody would dump at those levels again.