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John Exter in 1973 Described a Pyramid of Collapsing Values. It looks Like This.

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December 18, 2008

In 1973, I first heard John Exter present his case for a rising gold price in a deflationary market. He was talking about falling asset prices.

He was a gold bug. Yet he believed deflation was imminent. He was wrong. I said so at the time.

Yet the pyramid has logic to it.

It places gold as the money of last resort.

Exter believed that investors in a collapsing asset market would seek safety. Safety increases as you move down the pyramid. The ultimate safe asset is gold, he argued.

We have not tested his theory. We are as close to a test today as we have ever been.

My view is that we can have falling capital markets under mass inflation. Gold plays the role as the investment asset of last resort under mass inflation.

In a panic move downward, gold does serve as the hedge of preference. But as soon as the crisis ends, gold falls back into the pattern that prevailed before the crisis.

Exter was describing a collapse. But in a collapse, who will recognize the value of a gold coin? Only a coin dealer. He will charge a hefty premium. He will pay you in dollars.

To move back to gold coins as money, the economy will first return to barter. That means social collapse. Under such circumstances, your geography will be crucial, not your supply of gold coins.

This is why I have never accepted Exter's thesis. It works for inflation. It works for deflation only in a life-threatening crisis. Why? Because to get back to gold coins as money, we must first go through a social catastrophe: the breakdown of fractional reserve banking. Such a scenario is possible, but it is unlikely. It is far more likely under severe price inflation than in severe price deflation.

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