The economic plague besetting the globe can be entirely explained by the cycle of failure of passive capital, which repeats throughout history.
This futility of finance is mathematically caused by the pervasive human demand for a guaranteed return on savings and a guaranteed insurance in all outcomes, i.e. to avoid risking their knowledge or lack thereof— the generative essence of socialism.
Fortunately, the age of the rise of knowledge capital threatens to breakout of this futile cycle, because in its purest form, knowledge can not be held in a store-of-value (a.k.a. money) and money can only represent some quantity of hard resources and manual labor.
The inexorable decline in the value of hard resources relative to the value of knowledge, offers an opportunity for prosperity in the new world order ahead— the antithesis of the fallacy that claims geologic resources capacities are peaking in a Neo-Malthusian collapse of civilization with its ridiculous return to horse and donkey locomotion.
I advise reading the information that I have linked to, in order to get many relevant details that I necessarily had to omit from this quite lengthy essay.
Since recorded history began, the knowledge production share of the economy is inexorably increasing, which is why the cost (i.e. relative value) of hard resources has inexorably declined over the centuries (see the chart). Iron was a precious metal 323 B.C..
If in your mind, the following explanation is not a sufficient proof of the above assertion, then please read this to make the logic crystal clear.
Manual labor refers to repetitive physical movements that do not use the brain creatively— labor without knowledge creation.
As mankind has progressed through hunting, agriculture, industry, then now software, the proportion of mankind's time devoted to production with hard resources and manual labor has decreased. This allowed more time for man to pursue the creation of knowledge. Knowledge's proportion of GDP measured in units of the relative value of time expended (instead of money spent) is inexorably increasing. The “relative value of time expended” is the knowledge value, thus knowledge production becomes a greater proportion of value in the GDP.
Thus, hard resources production is decreasing as a proportion of GDP. Equivalently this can be explained as increasing the aggregate production capacity (at the lower marginal cost) lowers the price, then the knowledge production that achieved this, receives the relative value of the gain in efficiency.
Thus, increasing hard resources production (i.e. prosperity) can not be obtained without increasing knowledge production, e.g. more production of fish requires the knowledge of how to create a net.
Production with hard resources and manual labor requires financing. To the degree that knowledge production is not financed, then the value of financing declines and value of knowledge production increases relative to each's proportion of GDP.
Hunting and gathering required extensive hours of manual labor for a subsistence level of nutrition— all of mankind's time was consumed in producing food. Agriculture increased the economy-of-scale of food production, yet it still required three to six months of financing (savings) for the hard resources (e.g. seeds, fertilizer) and manual labor inputs. Mechanized agriculture still required financing the amortized depreciation of the machines. Against the violent protest of the cottage industry Luddites, mass production industry further increased the economy-of-scale of manufactured goods, a.k.a. hardware, but knowledge remained a small component of cost as explained below. Ongoing automation continues to reduce the manual labor required.
The initial and ongoing engineering of the plant is an insignificant cost relative to the initial and ongoing hard resources required by mass production industry. Thus the amortization of the hard resources (and any residual manual labor) dominates the calculation for the return on investment for mass production industry.
Ten men with spoons can't create more production than one man with a hydraulic backhoe. The hydraulics amplify the limbs of its driver. Steve Jobs explained that the Computer is the Bicycle (tool) of the Mind and Jobs elaborated on the tool that amplifies the mind.
Apple's rise to the largest global market-cap, surpassing Exxon-Mobile is an anecdotal evidence that knowledge capital is outpacing hard resources capital.
These hard resource capital intensive paradigms put a relatively large amount of passive hard savings at risk in order to create a relatively small amount of productive value, as compared to software. Software is the encoding of dynamic knowledge, thus it is alive like a living organism.
For example, for each small change in some parameter in the mass produced item, it typically requires at least a new mold, and perhaps even other assembly line modifications. Thus there is very little dynamic knowledge value that can be accommodated per unit of input hard resources capital. Whereas, a feature in a software can be changed digitally without any hardware changes. Thus, software has nearly zero hard resources capital requirement per unit of productive value— the marginal utility of software relative to hard resource constraints is nearly constant (this will be an important point later w.r.t to gold, so please remember it).
In theoretical terms, we can say that software production has a very high degrees-of-freedom, compared to hardware production. In science, degrees-of-freedom can be equivalent to potential energy. Thus software has orders-of-magnitude more potential energy than the production with hard resources or manual labor.
Imagine a vehicle without a reverse gear, it has one less degree-of-freedom, thus it has to go around the block in order to go in reverse, thus consuming more energy and which is the same as noting it had less potential energy to contribute.
Knowledge can't be static, because life is dynamic. A static system would have no freedom to change, a.k.a. zero degrees-of-freedom. Thus knowledge is not only what we know now, but more crucially how we structure that knowledge so that it can adapt to change. Because even if we knew everything about now, if that knowledge was not allowed to change, it would have zero potential energy to do anything.
In other words, a system of static knowledge is a system that does nothing.
Knowledge capital (i.e. design, art, engineering, marketing, human resources, software, etc.) is about producing dynamic configurations of systems, because life is not static. Knowledge capital is about maximizing fitness to our diverse and dynamic world. Maximizing success comes from maximizing degrees-of-freedom and the potential energy is limited by the constraints.
It is suggested that non-technical readers skip this remainder of this section, since it is technical discussion of the assertion that “degrees-of-freedom = potential energy”.
"A physical system can have as many resonant frequencies as it has degrees-of-freedom; each degree-of-freedom can vibrate as a harmonic oscillator."
"Mechanical resonance is the tendency of a mechanical system to absorb more energy..."
Visualize an object held in the center of a large sphere with springs attached to the object in numerous directions to the inside wall of the sphere. These springs oppose movement of the object in numerous directions, and must be removed in order to lower the friction and increase the degrees-of-freedom of the movement of the object. With increased degrees-of-freedom, less work is required to produce a diversity of configurations (i.e. movements, or analogously new features in software), thus less power to produce them faster. And the configuration of the subject matter which results from the work, thus decays (i.e. becomes unfit slower), because the resistance forces are smaller.
Requiring less work, to produce more of what is needed and faster, with a greater longevity of fitness, is thus a form of potential energy. Think about the term “fitness”-- it means how efficiently does our system adapt to new configurations. Potential energy is fitness.
Erik Verlinde has made some amazing revelations from this physics perspective that have held up to peer-review, i.e. that gravity is due to degrees-of-freedom and spacetime is merely one of many possible emergent phenomena of the universe. I was also thinking along this line back in 2007, before Erik announced his research.
If the aggregate nominal interest rate is consistently greater than the increase in the aggregate nominal production (i.e. in the whole aggregate economy), then it can't be paid except by debasing the money, and thus it isn't paid in equivalent purchasing power.
If the aggregate nominal interest rate is consistently close to the increase in the aggregate nominal production, then passive capital is taking the increase in value without supplying any new knowledge. The Buffett-esque retort might be that the allocators of capital are rewarded for their insightful knowledge of the relative efficiency amongst the choices of priorities. However, the required fitness adaptability for the dynamism of knowledge, necessitates that knowledge formation be diversified, granular, and local, as opposed to top-down. An alternative mathematical perspective will make this more clear, as will the subsequent sections.
The cycle of failure for financing hard resources and manual labor, is due to the mathematic impossibility of expecting a greater proportion of the nominal GDP due to the aggregate nominal interest rate, when the financed production creates no knowledge, yet knowledge production is increasing as percentage of nominal GDP.
In other words, where the money claims to also represent a store of knowledge value (which isn't true), and the financed production produces only hard resources and or manual labor, then the nominal return has to be greater than the nominal interest rate to compensate for the declining value of hard resources.
To the degree that knowledge production is not financed, for passive capital to retain its share of GDP (i.e. retain its aggregate net worth), mathematically it must steal from knowledge production.
Thus if knowledge production was increasingly not financeable, then we would expect to see top-down suppression of knowledge production by vested financing interests and widespread theft by those vested interests trying to maintain levels of net worth they would not have in an economy with more knowledge production.
I assert that is what we see today. To correctly argue that politics is the cause of allowing excessive indebtedness and its resultant misallocation of resources (which is a loss of knowledge), is as irrelevant as arguing whether the chicken or the egg is first. It is sufficient that there exists the destruction and suppression of knowledge coincident with the macro-economic failure of over indebtedness, to conclude the financing and knowledge production do not coexist. Because we know from the “Economy of Knowledge” section, that knowledge production must increase as a share of GDP for there to be increasingly prosperity.
I attempted a summary of professor Michael Pettis's research and exposition on the decline of China's consumption share of GDP from a normal level in 1980 to a perversely low abnormal level today, on par with the most ravaged African countries such as the Congo. Simultaneously, China's fixed investment (think high rises and infrastructure) rose from normal to perversely high abnormal levels, unparalleled in history (except for some parallels to recent Spain, e.g. grotesquely high unparalleled levels of per capita cement consumption).
Lets consider if this means that China has been doing its citizens a favor, by accelerating development and modernization of infrastructure.
But the problem is that at least 64 million high rise apartments are unoccupied because the people don’t earn high enough wages to afford the quality that was built.
So lets see. The govt pegged the Yuan to the dollar (not allowing it to appreciate when so much foreign direct investment was flowing into China), which prevented the value of wages from being worth more on the international setting. Thus making imported copper and concrete more expensive, thus meaning the people could not afford to use the infrastructure.
And this peg of the Yuan thus increased exports (wages and costs of exports artificially lower) and decreased CONSUMER imports. Thus China had a huge unnatural trade surplus because of a price fixing action by a centralized authority.
So where to spend this dollar surplus? Did they spend it all on gold to bankrupt the dollar? No that would kill their exports. So they recycled it into USTbonds, and bought copper, concrete, and other imported raw materials. So in order to make sure these raw materials would be utilized, they created massive debts at the LGUs (local govts) with a massive stimulus in 2008 that was 12% of GDP, much larger as a % of GDP than any other government bailout in the west in 2008. And increasing the debt of LGUs was something that had been going on for a decade or more. It was the way China recycled its trade surplus, without having to increase wages.
The LGUs did not pay market price to the peasants for the land they took for developers. In China, the govt owns all the land. They paid the peasants just enough for a bus ticket to work in sweat shops in the cities.
There is no way to consider it anything but a transfer of wealth from the poor to the vested members of the Communist party (and friends). Even the middle class’s gains will prove to be ephemeral, because of the bubble that has been created and the middle class holds the bubbled assets that will fall in price [when the Minsky moment appears].
Pettis had estimated that state enterprises in China are operating at on the order of -800% (minus!) profit margins via indirect and direct subsidies. I have heard that many manufacturers in China operate on razor thin profit margins, and this is offered as one explanation why some don't pay suppliers for up to 90 days. China has been increasing loan subsidies to exporters, presumably so they can stay in business at low or negative profit margins. This of course increases overcapacity and exacerbates China's extreme structural imbalances. So the economy is held up artificially by debt, and there is evidence that the insiders steal.
Many of the developed western countries, especially the USA, have abnormally high consumption share of GDP (the mirror image of China's low consumption), which was stimulated and sustained by over indebtness due to government inflation lies and central bank policy that since about 1994, achieved interest rates (click the “Bond Yields 1985 - 2000”) that in reality were negative after being adjusted for the true unreported inflation rate. China helped to sustain that western debt bubble, by selling the manufacturing goods below the market cost of production, due to the Yuan peg mechanism. To maintain that peg, China created 45% of the broad money supply growth (i.e. debt and debasement) since 2007 amongst the 16 largest national economies.
Real aggregate interest rates below 0% since 1994 can mathematically only mean that finance is stealing elsewhere, because why else would finance accept a negative return of purchasing power.
China is the sucker that swallowed the declining low knowledge, low value-added, mass production industrial age (we outsourced that declining value industry to them), while China simultaneously suppressed knowledge formation in order to maintain the Yuan peg slavery and trap its citizens in a low knowledge production economy. So much so, that its knowledge producers, i.e. educated graduates, struggle to survive. Wage inflation in China isn't prosperity— inflation is always the result of wasting (or stealing, or a natural disaster destroying) resources, and is always a regressive tax. Inflation doesn't require that money is handed to consumers, as it can result from an insufficient supply due to misallocation via increased debt. At the start of this section, I explained mathematically that misallocated financing (i.e. wasting resources) requires monetary debasement. Giving up two to three decades of knowledge formation, and adding a demographic timebomb with its 1979 one-child policy, China has been set up to remain the persistent drag on the global economy that it has been.
I have elaborated on China's predicament, and further defended my thesis.
Who profited from this price fixing, debt form of globalism? Clearly what was sustained was passive capital via theft by political control, at the expense of knowledge capital formation. In China the internet is so censored that Google had to pull out. There is a threat of knowledge capital suppression in the USA by SOPA and PIPA bills, where the knowledge producers have the technical control and some political support, versus the passive capital interests which are embedded in the politics of the welfare state. The welfare state caters to those who don't produce enough knowledge to fund themselves.
My thesis is that the wealthy passive capitalists intend to maintain and increase their net worth in fixed and financial investments by any means, e.g. QE-ternity, as the old world they are invested in has reached its futility. The model of passive finance has always been one of privatizing gains and socializing losses, i.e. protecting the net worth of the kings of passive capital. The princes of passive capital such as savers in bonds, stick with their king until the bitter end when the king necessarily steals from them too. The pawns of passive capital such as savers in house equity, have already been sacrificed.
The masses have thought wealth was something tangible, e.g. houses, cars, hardware, and the ability to buy services from people who want something tangible.
Knowledge capitalists produce on an individual level far in excess of their material needs.
The kings of passive capital are going to own most of the dying hard resource capital, which is apocalyptic for those who stay mired in the passive capital arena.
You may remember the hilarious Wendy's commercial.
If knowledge production is increasingly unfinanceable, then finance must decline in relative value in the economy, else prosperity can not be maximized.
Yet in our global economy, finance is huge like the big bun, and renumeration to individualized knowledge production is tiny like the beef. For example in 2011, of Apple's $108 billion in revenue and $26 billion in profit, only $2.5 billion was paid to individual appstore developers, which have provided 30 billion downloaded apps.
The massive global debt bubble has misallocated capital to such an extent that there is an excessive misallocated demand for hard resources and manual labor, which has caused many investors to think myopically that the new economy is going backwards to restart the industrial age, and that knowledge production is less valuable than control of hard resources and labor. The cost of hard resources has been inexorably declining over the centuries due to advances in knowledge. This recent blip up is statistical noise (on the long-trend) caused by an acceleration of demand due to misallocated debt. My thesis is not that there should not be increasing production of hard resources to service the developing world, but that it can instead be done more efficiently via knowledge production, and thus without the failure of misallocation due to mindless top-down debt expansion. As I explained in the previous sections, all sustainable gains in recorded history have come from knowledge production. And recorded history is repleted with examples of implosion and loss after periods of debt misallocation.
The Neo-Malthusian and other erroneous explanations of globalism's failure (or even claims that globalism is succeeding, e.g. Europe achieving a political union), attempt to blame the economic imbalances on something other than corrupt vested passive capital trying to steal, where it can no longer compete. Figuratively speaking, perhaps they haven't looked inside the big bun, which is a tapeworm economy.
What I sarcastically refer to as Henny Penny's "Chicken Little" redux, Neo-Malthusianism (e.g. peak energy, peak food, peak metals, global warming, etc..) makes the erroneous statistical claim (read to the end of the linked page including this comment) that the some long-term trend will reverse due some small blip up on the curve in the trend chart. If you doubt my assertions, please review all the scientific facts at the linked pages and the petition signed by 31,000 scientists and 9,000 PhDs which was reported only by the non-mainstream media. For example, the hockey stick was a statistical lie, and zooming in on Al Gore's chart showed that CO2 lags temperature by roughly 800 years, thus CO2 can't drive global warming (but the sun does).
For example in the case of peak metals theory, the lower mining ore grades do not prove that there is depleted ore in narrow veins deep below the surface (as peak alarmists claim), rather it is a necessary condition where ore is now extracted in greater economies-of-scales employing huge open pits and massive mechanization. This phenomena only says that we don't have the economic incentive to explore for those deep ores, because the marginal cost of production is now lower with the mechanized open pits. It is purely an economic phenomenon, and not geologic. Where supply is declining it is because global demand and prosperity is not maximized, because of the vested interests suppressing knowledge production and stealing (which causes inflation).
Tangentially, I can imagine a future of autonomous bots that burrow and follow veins with near zero stripping waste ratio and thus replace open pits as the most energy efficient (i.e. low cost) paradigm. Given automation and elimination of manual labor, then the cost of hard resources is proportional to the cost of the energy efficiency of extraction.
As explained in the “Economy of Knowledge” and “Energy of Knowledge” sections, knowledge doesn't exist now if it isn't dynamically adaptable in the future. The only systems in nature which can do this, are those that are composed of autonomous agents without top-down control, e.g. ant colonies, the neurons and synapses of the human brain, free markets, and unregulated social networks.
Due to aggregating and concentrating capital via an interest rate, as opposed to dispersing and scattering capital, finance mathematically must over time reduce the quantity of autonomous decisions (at least decisions about who receives funding to produce). Thus if financing were the predominant long-term trend, knowledge could not be.
The more potential energy in the knowledge capital, the more priceless it is sell its future. There are knowledge producers such as the creator of the open-source software movement, who absolutely refuse to work at any price where they don't have sufficient ownership of their knowledge, so as to prevent limitations of its potential future use. Due to the transactional cost Theory of the Firm which provides for the economic existence of the corporation, corporate capital accumulates by defending or increasing the transactional cost between otherwise autonomous knowledge producing actors. Thus increasing corporate control of knowledge is the antithesis of increasing knowledge. Knowledge can only increase by increasing the autonomy of the knowledge producing actors. This tension is depicted graphically.
Thus, finance and corporations are inherently ownership centralization paradigms. Whereas, knowledge ownership can not be centralized without destroying it.
For example, if a corporation purchased a huge library of software modules or books, written by different authors, the managers could create nothing with this without the authors (or others) who are knowledgeable of these modules or books. If these authors were not already organically interacting, then they would not be able to at any price, unless there was interoperability knowledge potential enumerated by some knowledgeable person(s). Thus always the knowledge is owned by the knowledge producers. When a knowledge producer is gone, the knowledge previously produced is destroyed, if it was not adopted by another sufficiently knowledgeable producer.
The Inverse Commons explains that unlike sharing of hard resources, the sharing of knowledge increases the value of the shared knowledge. Current knowledge becomes more valuable as it gains more future potential uses, and only autonomous knowledge actors can maximize diverse use cases of interoperability.
Software has minimal financing requirements, e.g. one or two humans with computers can write software that launches a $millions start-up. I did this once or twice by myself with no employees (e.g. CoolPage.com by 2001 if in Shadowstats inflation-adjusted dollars).
Since the ownership of knowledge can't be transferred with money, financing incurs the risk of guaranteeing knowledge to spontaneously create itself where it did not already exist. No level of guaranteed interest rate can compensate for this lack of knowledge in the act of financing. What attracts savers to be passive capitalists is the economy-of-scale, where the due diligence effort (i.e. knowledge production) applied does not rise significantly with the amount saved (i.e. loaned) at interest. The collective politics will guarantee (insure) the return by debasing the money as necessary to pay for the lack of knowledge production— another evidence that financing is a centralization paradigm because knowledge can't be owned with money.
Whereas, equity investment has no guaranteed return and requires knowledge production.
“Equity investments” that are based on consistent dividends, are essentially a low knowledge production investment decision with a semi-guaranteed return similar to financing. It is instructive to note that as of 2008 “No stockholder has made a real inflation-adjusted penny in equity in Coca-Cola in 46 years.”.
Passive capitalists will find it nearly impossible to venture into high-tech knowledge investing, because they necessarily must approach it from the financing perspective, as their objective is to deploy large quantities of capital passively, i.e. to approach the theoretical constant marginal utility of gold. For example, Buffett's BYD (which makes electric cars) investment has performed poorly. A scientifically knowledgeable person knows that the energy-density of batteries is not ROI competitive with petrol.
One general rule for investing in knowledge production, is to invest close to what you know well. Because knowledge is inherently local and autonomous. If there is some popular investment theme, then it must have a very low relative knowledge production— the extreme case is depositing money in the bank, where the depositor doesn't even care how the money is invested.
The creator of the open-source software movement enumerated some business models that apply to knowledge production. The general concept is to not own the preexisting base of knowledge (it is always owned by the individuals and can't be transferred with money), rather to create a market for the services of the preexisting knowledge producers. In short, top-down fund some incremental advance in knowledge production and own the market for it. Remember that in the Theory of the Firm, corporations only exist where there is a transactional cost (barrier) to the autonomous knowledge producers achieving the same market organically. So the key is to identify these market barriers and invest to solve them.
Passive capital is financing those hard resources in the internet space, e.g. the massive server farms that serve the billion users of Facebook and Google, funded by collecting ad revenue rents on all internet activity— an implicit attempt to make knowledge capital subservient. Yet given the non-autonomous top-down control of thousands of knowledge producing employees, and the requirement to defend the transactional cost that sustains the corporate profit, Facebook and Google can't produce software diversity fast enough to service all the features that users want. Diversified software start-ups will flourish.
And perhaps even without driving Google's revenues if ever someone creates a scalable revenue model that doesn't rely on online ads and the outlandish IPO valuations based on projecting ad revenue per captive user. In short, I don't believe those models are sustainably increasing knowledge production— don't think match making ads (a.k.a. spam) is high knowledge production activity. If people stop trying to hide and ignore ads (click-through rates have collapsed), then I might change my mind. The internet is fundamentally different from the TV, because we go there to proactively seek knowledge with our mind full awake, by having control over what we click, unlike the TV where we passively absorb and our mind goes to sleep. I have some (far-fetched) ideas about a new revenue model.
Unlike financing, knowledge investing is not guaranteed to present us an investment opportunity at every moment that we have excess capital. There will be times when we need to store our savings with no knowledge production, yet we want to protect the purchasing power. In a world where financing entirely disappeared, this would become impossible, because any hard savings would not pace with the inexorable knowledge production. However, due to the desire of humans for guaranteed returns and the Iron Law of Political Economics, financing is not likely to stop attempting to enslave knowledge production.
Thus, when someone asked my advice for “short selling” China, and I offered my opinion that due to the Iron Law of Political Economics, we can't know for how long the irrationality of increasing debt can continue, before we finally have the sovereign-debt Big Bang, i.e. global contagion debt deleveraging Minsky moment. I opined that physically held gold (and silver) is the safest and surest store of hard resources value that can not go “proof it's gone” and will maintain hard resources and manual labor purchasing power during negative real interest rates in the ongoing indebtedness mode, in eventual debt deleveraging deflation implosion, war, confiscations, capital controls, brokerage failures, insurance failures, and other chaos ahead.
Unfortunately, gold is also an enslavement mechanism, because its supply can only grow at 2-3% per annum. Thus it overly rewards “burying capital in a hole”, which is the antithesis of prosperity (since 2% is a natural population growth rate, unless we destroy future demographics…again antithesis of prosperity). It gives all the power to “he who holds the gold, makes the rules”. So society will always eventually debase any gold standard, and convert it to a fiat, e.g. the futures market in gold now. But during the period of gold discipline, the power will rest with those who control most of the 150,000 tonnes above ground. And certainly that is not the masses. Do I need to define slavery any other way?
Someone asked me why holding savings in gold with hard resources deflation wasn't superior for society to the fiat inflation we have now, and I explained that even if the masses held physical gold (i.e. well distributed wealth), then the money supply could not expand fast enough for financed production to outpace the natural population growth rate. And with that inherent deflation, conservative savers are either motivated to hold the physical thus removing it from the circulating money supply, or to deposit it in return for an interest rate in which case mathematically the banks must do fractional reserve banking. Thus, mathematically there is no such thing as a global gold standard with prosperity and no fractional reserve banking, except where it existed because it wasn't global and gold was being imported into the system at faster than 2-3% per annum and was physically circulated (e.g. Europe's gold coming into the USA during 1800s and early 1900s).
Gold is a store of hard resources and manual labor. It can't be a store of knowledge capital, because as I explained in the prior two sections, knowledge capital can not be transferred from its individual owners via a money transfer.
The new world order is one of enslavement for those reliant on passive capital. It is simultaneously freedom and enormous wealth for those who produce much knowledge capital.
Transistioning to a gold standard requires imploding the extremely high levels of leverage in the global economy (even in China), thus would at least temporarily implode the uneconomic activity in the economy, i.e. much of the global economy would implode. The more plausible solution will come from outside the current system, which is to increase unfinanced, equity-funded knowledge production to grow the economy out of the leveraged morass.
Gold is the preeminent store of hard (not knowledge) value, because it has a near constant marginal utility. Gold's constant marginal utility assumes passive capital can always passively extract rents via interest rates, i.e. that there is no management overhead limitations and the ability exists to plow unlimited passive capital into interest bearing investments. Gold has the highest ratio of above ground stocks relative to flows (flows of both velocity of circulation and annual mining supply) of any known hard resource in the universe. Thus its value is the stable base fulcrum upon which all other finance rests. This is why gold sits at the bottom of Exter's inverted pyramid, and is the queen of the passive capitalists and the last to be sacrificed to their goal.
Gold's constant marginal utility does not apply to knowledge production. Gold has a declining marginal utility w.r.t. knowledge investing, because knowledge investing is necessarily local and has limited scale. The Mythical Man Month is evidence that passive capital (i.e. mindlessly throwing more money at software production) can't buy knowledge production. Knowledge capital is stored in the minds of the individuals and in the Inverse Commons (and yours truly has idea for a more fungible Inverse Commons, in order to reach higher economies-of-scale).
Note that productive output from knowledge capital (e.g. software programs, designs, marketing portfolios, etc.) can be traded for passive capital, notwithstanding I've already explained that in the purest conceptualization the knowledge capital can't be purchased by passive capital at any price. Of course the real world will exhibit some impure gradients between a pure knowledge world and the hardware world, and due to transactional cost Theory of the Firm, these gradients present the opportunities for corporate profit.
I elaborated on the prior paragraphs of this section.
Note that insurance is necessarily a passive capital phenomenon, because a passively pooled investment does not create (significant) knowledge production. And it isn't surprising that insurance must decline in the knowledge age, because except in the case of acts of nature that can't be reasonably mitigated by human action a priori (are there any that can't?), game theory illustrates that insurance incentivizes what it tries to insurance against. For example, insure against theft and owners have less motivation to secure and guard their possessions. Insurance against bad health reduces the incentive to resist supersized meals and other risky choices.
There is a lot of noise about financial regulation, which is irrelevant if finance is becoming irrelevant. As previously explained, knowledge capitalists don't need to finance their inputs from their mind and the Inverse Commons. They only need to produce, and their production is worth far much in excess of their material needs (needs that would otherwise require financing). Instead of incurring crippling student debt, young people should consider working for free, to jumpstart their knowledge capital.
This juncture in history is not like prior cycles where when the dow-to-gold ratio declined to less than 1, and gold was able to buy cheaply the assets (e.g. bonds or real estate) that would appreciate the most as the economy recovered. Regardless of the potential reoccurrence of such as low dow-to-gold ratio, I previously explained that gold can't buy knowledge capital, and knowledge capital appreciates orders-of-magnitude faster than passive capital.
Final note: I had in 2011 used some of the theory presented in this essay to correctly predict that Europe would not disintegrate, when most thought Greece was going to exit. I stand by that prediction that the passive capital will huddle together (with a totalitarian and fascist government) as it shrinks in relative value.
Disclaimer: The above expressed opinions and citations are my own and not necessarily endorsed by this site. My opinions and citations are shared as alternative perspective for your entertainment only. I cannot prevent you from deeming that my essay is educational. I am not a professional advisor, thus I claim safe harbor and I am not responsible for any outcomes, mental state, decisions or actions you experience or make after reading this essay or cited sources.