The commodity currency revolution

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The commodity currency revolution

MD: I tripped over the following YouTube propaganda and thought I should warn you about GoldMoney.com. Macleod gave a link to this article which I will now annotate.

MD: First, I’ll relate my story. Then I’ll annotate this article by Macleod. Neither Turk nor Macleod have a clue about what money is. It is obvious from this YouTube discussion and will likely be evident from this article as well. You can see other reactions to his nonsense by searching for “Macleod” or “GoldMoney” at the end of this article.

First, my story. Over 10 years ago I was buying gold because I was convinced the financial system was going down the toilet. GoldMoney.com had this value proposition: If I bought “gold grams” from them, they would store the gold in secure vaults around the world. They claimed to be governed by the Isle of Wight I think. At the time, gold and silver were going up quite aggressively against the dollar.

First, I dipped my toe in. I sent them about $1,000, let it sit in the account for a little while, then asked them to send me the $1,000 plus the appreciation back. They did it without a hitch. Next, I sent them quite a bit more money from my retirement fund. And I ran an experiment. I asked them to send me some gold. They did this…but there was a hitch. I had to pay “import duty” on the gold. The round trip “load” was 10% so I decided as long as gold was diving, I’d wait until it hit bottom to ask for my delivery. At least the import duty would be lower.

Anyone who has watched gold knows it has been a poorly performing asset. The cement blocks I’ve bought over that same period have done much better than my gold at GoldMoney.com. Every few months I would do my reconciliation of my account so I could update my own records.

All of a sudden I couldn’t get into my account. At the time I was busy with other things and procrastinated. But when I finally raised the issue with them they claimed their “regulator” needed additional information. I said “no problem”. Just close my account under our original terms and send me the gold.

They refused. But they said they would send me dollars to my bank account. I had to close my bank account some years earlier because my money proved not to be safe there. They said I had no recourse but to do as I was told. I went to the “WayBack.com” archive and gave them a link to our original agreement…which specifically said they weren’t regulated by any financial regulator…and that was part of their “value proposition”.

As of this writing the issue is still not resolved. They owe me a response in our dialog. I told them I was under no illusion that this matter would be resolved “legally” as the legal process is corrupt beyond hope.

Now…on to Macleod’s nonsense.

By Alasdair Macleod Goldmoney Insights April 07, 2022 We will look back at current events and realise that they marked the change from a dollar-based global economy underwritten by financial assets to commodity-backed currencies. We face a change from collateral being purely financial in nature to becoming commodity based. It is collateral that underwrites the whole financial system.

MD: Right now, as I noted, I’m looking back and seeing that Goldmoney is not to be trusted.

The ending of the financially based system is being hastened by geopolitical developments. The West is desperately trying to sanction Russia into economic submission, but is only succeeding in driving up energy, commodity, and food prices against itself. Central banks will have no option but to inflate their currencies to pay for it all. Russia is linking the ruble to commodity prices through a moving gold peg instead, and China has already demonstrated an understanding of the West’s inflationary game by having stockpiled commodities and essential grains for the last two years and allowed her currency to rise against the dollar.

MD: Note, with a “real” money process, geopolitics can play no role at all. Of course, Macleod is clueless about that.

China and Russia are not going down the path of the West’s inflating currencies. Instead, they are moving towards a sounder money strategy with the prospect of stable interest rates and prices while the West accelerates in the opposite direction.

MD: Notice he uses the term “stable” for interest rates and prices. We know that prices will do what they will do. It “is as it is” they say. But with a “real” money process, we know INTEREST is zero for responsible traders like you and me. And we know prices are not influenced by the money at all. Money is guaranteed to have perfect supply/demand balance throughout its life…and thus zero inflation and deflation.

The Credit Suisse analyst, Zoltan Pozsar, calls it Bretton Woods III. This article looks at how it is likely to play out, concluding that the dollar and Western currencies, not the rouble, will have the greatest difficulty dealing with the end of fifty years of economic financialisation.

MD: We know that any regulated money scheme will eventually blow up. If they can envision a Bretton Wood III, they can envision a XVIII…it’s like the Superbowl. And he needs to learn how to spell “ruble”. I wish he could help me with “dealing” with GoldMoney.com. Oh…and with a “real money process”, there is no such thing as financialisation…or backing for that matter.

Pure finance is being replaced with commodity finance

It hasn’t hit the main-stream media yet, which is still reporting yesterday’s battle. But in March, the US Administration passed a death sentence on its own hegemony in a last desperate throw of the dollar dice. Not only did it misread the Russian situation with respect to its economy, but America mistakenly believed in its own power by sanctioning Russia and Putin’s oligarchs.

MD: The USA has had its death sentence my whole life…nearly 80 years. When I started my career, about 1/4th of my income went to government…and about 1/4 of the citizens were dependent on government. By the end of my career 50 years later, both those ratios have increased at an exponential rate to over 3/4…and we know even they can’t go past 4/4ths.

It may have achieved a partial blockade on Russia’s export volumes, but compensation has come from higher unit prices, benefiting Russia, and costing the Western alliance.

The consequence is a final battle in the financial war which has been brewing for decades. You do not sanction the world’s most important source of energy exports and the marginal supplier of a wide range of commodities and raw materials, including grains and fertilisers, without damaging everyone but the intended target. Worse still, the intended target has in China an extremely powerful friend, with which Russia is a partner in the world’s largest economic bloc — the Shanghai Cooperation Organisation — commanding a developing market of over 40% of the world’s population. That is the future, not the past: the past is Western wokery, punitive taxation, economies dominated by the state and its bureaucracy, anti-capitalistic socialism, and magic money trees to help pay for it all.

MD: Maybe we should remember that only the USA congress can declare war. Sanctions are a siege tactic…and a siege is an act of war. Congress just declares war on inanimate things like “drugs”…they don’t want the competition. I wish they could declare war on “stupidity”…but of course that would be shooting themselves in the foot. For a long time I have realized that Britain and Israel were our worst enemies. But government is now eclipsing them.

Despite this enormous hole in the sanctions net, the West has given itself no political option but to attempt to tighten sanctions even more. But Russia’s response is devastating for the western financial system. In two simple announcements, tying the rouble to gold for domestic credit institutions and insisting that payments for energy will only be accepted in roubles, it is calling an end to the fiat dollar era that has ruled the world from the suspension of Bretton Woods in 1971 to today.

MD: And again remember the latency. In 1971 when the USA formally renegged on their guarantee of $35/ounce for gold (after confiscating all their citizens gold at $28/ounce)…in 1971, the real price of gold was over $70/ounce. France demanded a debt payment in gold and the jig was up. But it had obviously been up for some time at that point.

Just over five decades ago, the dollar took over the role for itself as the global reserve asset from gold. After the seventies, which was a decade of currency, interest rate, and financial asset volatility, we all settled down into a world of increasing financialisation. London’s big bang in the early 1980s paved the way for regulated derivatives and the 1990s saw the rise of hedge funds and dotcoms. That was followed by an explosion in over-the-counter unregulated derivatives into the hundreds of trillions and securitisations which hit the speed-bump of the Lehman failure. Since then, the expansion of global credit for purely financial activities has been remarkable creating a financial asset bubble to rival anything seen in the history of financial excesses. And together with statistical suppression of the effect on consumer prices the switch of economic resources from Main Street to Wall Street has hidden the inflationary evidence of credit expansion from the public’s gaze.

MD: We should remember, in 1964 we could buy a gallon of gas for a quarter dollar…which was 90% silver. In 1965 they quit minting silver into the coins…but the 1965 quarters still traded for a gallon of gas. This proved beyond all doubt that the silver had nothing to do with the trade. It implicitly demonstrated that money “represented” an in-process promise to complete a trade over time and space. And coins and currency were just tokens representing that promise. Why doesn’t Macleod make note of that?

All that is coming to an end with a new commoditisation — what respected flows analyst Zoltan Pozsar at Credit Suisse calls Bretton Woods III. In his enumeration the first was suspended by President Nixon in 1971, and the second ran from then until now when the dollar has ruled indisputably. That brings us to Bretton Woods III.

MD: And as I noted, even if you believe Macleods nonsense about commoditisation, don’t resort to Goldmoney.com for your commodity. They can’t be trusted.

Russia’s insistence that importers of its energy pay in roubles and not in dollars or euros is a significant development, a direct challenge to the dollar’s role. There are no options for Russia’s “unfriendlies”, Russia’s description for the alliance united against it. The EU, which is the largest importer of Russian natural gas, either bites the bullet or scrambles for insufficient alternatives. The option is to buy natural gas and oil at reasonable rouble prices or drive prices up in euros and still not get enough to keep their economies going and the citizens warm and mobile. Either way, it seems Russia wins, and one way the EU loses.

MD: What’s good for the goose is good for the gander. We played that card with the middle eastern nomads in the 1930s. They must accept only dollars for their oil. Write all you want Macleod. Theirs no end to their ability to rig any game.

As to Pozsar’s belief that we are on the verge of Bretton Woods III, one can see the logic of his argument. The highly inflated financial bubble marks the end of an era, fifty years in the making. Negative interest rates in the EU and Japan are not just an anomaly, but the last throw of the dice for the yen and the euro. The ECB and the Bank of Japan have bond portfolios which have wiped out their equity, and then some. All Western central banks which have indulged in QE have the same problem. Contrastingly, the Russian central bank and the Peoples Bank of China have not conducted any QE and have clean balance sheets. Rising interest rates in Western currencies are made more certain and their height even greater by Russia’s aggressive response to Western sanctions. It hastens the bankruptcy of the entire Western banking system and by bursting the highly inflated financial bubble will leave little more than hollowed-out economies.

MD: Wouldn’t it be neat if this Bretton Woods III thing actually fixed the problem once and for all by instituting a “real money process”? There would be no such thing as a central bank…anywhere on the planet. In fact, banks would probably cease to exist as well. And of course Goldmoney.com wouldn’t exist either.

Putin has taken as his model the 1973 Nixon/Kissinger agreement with the Saudis to only accept US dollars in payment for oil, and to use its dominant role in OPEC to force other members to follow suit. As the World’s largest energy exporter Russia now says she will only accept roubles, repeating for the rouble the petrodollar strategy. And even Saudi Arabia is now bending with the wind and accepting China’s renminbi for its oil, calling symbolic time on the Nixon/Kissinger petrodollar agreement.

The West, by which we mean America, the EU, Britain, Japan, South Korea, and a few others have set themselves up to be the fall guys. That statement barely describes the strategic stupidity — an Ignoble Award is closer to the truth. By phasing out fossil fuels before they could be replaced entirely with green energy sources, an enormous shortfall in energy supplies has arisen. With an almost religious zeal, Germany has been cutting out nuclear generation. And even as recently as last month it still ruled out extending the lifespan of its nuclear facilities. The entire G7 membership were not only unprepared for Russia turning the tables on its members, but so far, they have yet to come up with an adequate response.

MD: Earth to Macleod…oil doesn’t come from fossils. It abiotic. And further, planet Earth loves CO2. It basks in CO2. The global warming nonsense is just that…nonsense!

Russia has effectively commoditised its currency, particularly for energy, gold, and food. It is following China down a similar path. In doing so it has undermined the dollar’s hegemony, perhaps fatally. As the driving force behind currency values, commodities will be the collateral replacing financial assets. It is interesting to observe the strength in the Mexican peso against the dollar (up 9.7% since November 2021) and the Brazilian real (up 21% over a year) And even the South African rand has risen by 11% in the last five months. That these flaky currencies are rising tells us that resource backing for currencies has its attractions beyond the rouble and renminbi.

But having turned their backs on gold, the Americans and their Western epigones lack an adequate response. If anything, they are likely to continue the fight for dollar hegemony rather than accept reality. And the more America struggles to assert its authority, the greater the likelihood of a split in the Western partnership. Europe needs Russian energy desperately, and America does not. Europe cannot afford to support American policy unconditionally.

That, of course, is Russia’s bet.

MD: Imagine if Russia and China adopted a “real money process” and quit counterfeiting money. Then the whole world would have to follow suit. And governments couldn’t create money to wage wars. They couldn’t counterfeit money to buy citizen’s support. They would be less than 1/10th the size they are now.

Russia’s point of view

For the second time in eight years, Russia has seen its currency undermined by Western action over Ukraine. Having experienced it in 2014, this time the Russian central bank was better prepared. It had diversified out of dollars adding official gold reserves. The commercial banking system was overhauled, and the Governor of the RCB, Elvira Nabiullina, by following classical monetary policies instead of the Keynesianism of her Western contempories, has contained the fall-out from the war in Ukraine. As Figure 1 shows, the rouble halved against the dollar in a knee-jerk reaction before recovering to pre-war levels.

MD: Imagine the chart below if Russia (and the USA) had instituted a “real ” money process. That chart would be a straight horizontal line at 100. It wouldn’t wiggle at all. Now how could that be bad?


The link to commodities is gold, and the RCB announced that until end-June it stands ready to buy gold from Russian banks at 5,000 roubles per gramme. The stated purpose was to allow banks to lend against mine production, given that Russian-sourced gold is included in the sanctions. But the move has encouraged speculation that the rouble is going on a quasi- gold standard; never mind that a gold standard works the other way round with users of the currency able to exchange it for gold.

MD: With a real money process you have none of that nonsense.

Besides being with silver the international legal definition of money (the rest being currency and credit), gold is a good proxy for commodities, as shown in Figure 2 below.[i] Priced in goldgrams, crude oil today is 30% below where it was in the 1950, long before Nixon suspended the Bretton Woods Agreement. Meanwhile, measured in depreciating fiat currencies the price has soared and been extremely volatile along the way.

MD: Macleod doesn’t seem to realize that the changing supply/demand for gold and the changing supply/demand for oil…and for virtually all commodities will always dictate price. But with a real money process, a perpetually perfect balance of supply and demand for money is “guaranteed” and thus plays no role in pricing at all. It doesn’t need to be as complicated as these dolts are making it folks.


MD: It’s interesting that the curve above for goldgrams is a constant “zero”. That’s what your gold is worth to you if you bought it from Goldmoney.com…absolutely zero. They say “the regulators made us steal it from you”.

It is a similar story for other commodity prices, whereby maximum stability is to be found in prices measured in goldgrams. Taking up Pozsar’s point about currencies being increasingly linked to commodities in Bretton Woods III, it appears that Russia intends to use gold as proxy for commodities to stabilise the rouble. Instead of a fixed gold exchange rate, the RCB has wisely left itself the option to periodically revise the price it will pay for gold after 1 July.

MD: Is it just coincidence that “Pozsar” looks a lot like “Ponzi”? And earth to Pozsar, money is always and only linked to one thing…a responsible traders promise to complete a trade over time and space. The only reason we have all the nonsense that this article pontificates about is because moneychangers (and the governments they institute) counterfeit money at will. Stop that and bingo…problem solved.

Table 1 shows how the RCB’s current fixed rouble gold exchange rate translates into US dollars.


MD: Need to add cement blocks to the above chart. They did better than gold.

While non-Russian credit institutions do not have access to the facility, it appears that there is nothing to stop a Russian bank buying gold in another centre, such as Dubai, to sell to the Russian central bank for roubles. All that is needed is for the dollar/rouble rate to be favourable for the arbitrage and the ability to settle in a non-sanctioned currency, such as renminbi, or to have access to Eurodollars which it can exchange for Euroroubles (see below) from a bank outside the “unfriendlies” jurisdictions.

The dollar/rouble rate can now easily be controlled by the RCB, because how demand for roubles in short supply is handled becomes a matter of policy. Gazprom’s payment arm (Gazprombank) is currently excused the West’s sanctions and EU gas and oil payments will be channelled through it.

MD: With a real money process governing all nations money, exchange rates between the various currencies would be constant. In time they would all adopt the HUL (hour of unskilled labor) as the unit of measure. Since that never changes in value…i.e. always trades for the same size hole in the ground…exchange rates would be perpetually 1.0000 for all nation’s money. There would be no need for nations.

Broadly, there are four ways in which a Western consumer can acquire roubles:

  • By buying roubles on the foreign exchanges.
  • By depositing euros, dollars, or sterling with Gazprombank and have them do the conversion as agents.
  • By Gazprombank increasing its balance sheet to provide credit, but collateral which is not sanctioned would be required.
  • By foreign banks creating rouble credits which can be paid to Gazprombank against delivery of energy supplies.

MD: Be careful. That’s like Goldmoney.com saying a way to acquire gold is by sending money to them. But when you ask for your gold they say net not, nay, nope, nix, n’t;

The last of these four is certainly possible, because that is the basis of Eurodollars, which circulate outside New York’s monetary system and have become central to international liquidity. To understand the creation of Eurodollars, and therefore the possibility of a developing Eurorouble market we must delve into the world of credit creation.

MD: Macleod. Everyone here are MoneyDelusions knows that the Euro is pure nonsense…like all government managed (distorted and misguided) money…like putting lipstick on a pig.

There are two ways in which foreigners can hold dollar balances. The way commonly understood is through the correspondent banking system. Your bank, say in Europe, will run deposit accounts with their correspondent banks in New York (JPMorgan, Citi etc.). So, if you make a deposit in dollars, the credit to your account will reconcile with the change in your bank’s correspondent account in New York.

MD: But if the USA government claims you owe them money, they grab it right out of your bank. Your bank does nothing to defend you. And you “won’t” get your money back. You will die first. And of course the government is faceless…so there’s nobody for you to kill in return. They call it civilization.

Now let us assume that you approach your European bank for a dollar loan. If the loan is agreed, it appears as a dollar asset on your bank’s balance sheet, which through double-entry bookkeeping is matched by a dollar liability in favour of you, the borrower. It cannot be otherwise and is the basis of all bank credit creation. But note that in the creation of these balances the American banking system is not involved in any way, which is how and why Eurodollars circulate, being fungible with but separate in origin from dollars in the US.

MD: In a real money process, there is really no reason for loans. Only deadbeat traders (i.e. those who default on their promises need ever resort to loans.

By the same method, we could see the birth and rapid expansion of a Eurorouble market. All that’s required is for a bank to create a loan in roubles, matched under double-entry bookkeeping with a deposit which can be used for payments. It doesn’t matter which currency the bank runs its balance sheet in, only that it has balance sheet space, access to rouble liquidity and is a credible counterparty.

MD: The solution doesn’t lie in creating new government entities to do the counterfeiting. The solution is to take the money process out of the hands of “all” governments. Let it rest with the traders like you and I.

This suggests that Eurozone and Japanese banks can only have limited participation because they are already very highly leveraged. The banks best able to run Eurorouble balances are the Americans and Chinese because they have more conservative asset to equity ratios. Furthermore, the large Chinese banks are majority state-owned, and already have business and currency interests with Russia giving them a head start with respect to rouble liquidity.

MD: Remember when we did it to the Japanese in the late 30’s. We restricted their trade. And we enticed (forced) them to attack us (yes…our government was fully aware of Pearl Harbor and the war it would enable them to start.)

We have noticed that the large American banks are not shy of dealing with the Chinese despite the politics, so presumably would like the opportunity to participate in Euroroubles. But only this week, the US Government prohibited them from paying holders of Russia’s sovereign debt more than $600 million. So, we should assume the US banks cannot participate which leaves the field open to the Chinese mega-banks. And any attempt to increase sanctions on Russia, perhaps by adding Gazprombank to the sanctioned list, achieves nothing, definitely cuts out American banks from the action, and enhances the financial integration between Russia and China. The gulf between commodity-backed currencies and yesteryear’s financial fiat simply widens.

MD: And Goldmoney.com will claim some government is prohibiting them from delivering your gold to you. See how easy that works?

For now, further sanctions are a matter for speculation. But Gazprombank with the assistance of the Russian central bank will have a key role in providing the international market for roubles with wholesale liquidity, at least until the market acquires depth in liquidity. In return, Gazprombank can act as a recycler of dollars and euros gained through trade surpluses without them entering the official reserves. Dollars, euros yen and sterling are the unfriendlies’ currencies, so the only retentions are likely to be renminbi and gold.

In this manner we might expect roubles, gold and commodities to tend to rise in tandem. We can see the process by which, as Zoltan Pozsar put it, Bretton Woods III, a global currency regime based on commodities, can take over from Bretton Woods II, which has been characterised by the financialisation of currencies. And it’s not just Russia and her roubles. It’s a direction of travel shared by China.

MD: This is like your wife always claiming to have a yeast infection. Pretty soon you find a way around that.

The economic effects of a strong currency backed by commodities defy monetary and economic beliefs prevalent in the West. But the consequences that flow from a stronger currency are desirable: falling interest rates, wealth remaining in the private sector and an escape route from the inevitable failure of Western currencies and their capital markets. The arguments in favour of decoupling from the dollar-dominated monetary system have suddenly become compelling.

MD: When does the obvious cease to be a belief?

The consequences for the West

Most Western commentary is gung-ho for further sanctions against Russia. Relatively few independent commentators have pointed out that by sanctioning Russia and freezing her foreign exchange reserves, America is destroying her own hegemony. The benefits of gold reserves have also been pointedly made to those that have them. Furthermore, central banks leaving their gold reserves vaulted at Western central banks exposes them to sanctions, should a nation fall foul of America. Doubtless, the issue is being discussed around the world and some requests for repatriation of bullion are bound to follow.

There is also the problem of gold leases and swaps, vital for providing liquidity in bullion markets, but leads to false counting of reserves. This is because under the IMF’s accounting procedures, leased and swapped gold balances are recorded as if they were still under a central bank’s ownership and control, despite bullion being transferred to another party in unallocated accounts.[ii]

MD: Actually there is no end to the money-changers creativity in cheating you. Deal them out of the game. Institute a real money process. There’s really no use in reading this nonsense further. I’m tired…and throwing in the towel. Just one parting comment: Do business at Goldmoney. com at your own risk A word to the wise is sufficient.

No one knows the extent of swaps and leases, but it is likely to be significant, given the evidence of gold price interventions over the last fifty years. Countries which have been happy to earn fees and interest to cover storage costs and turn gold bullion storage into a profitable activity (measured in fiat) are at the margin now likely to not renew swap and lease agreements and demand reallocation of bullion into earmarked accounts, which would drain liquidity from bullion markets. A rising gold price will then be bound to ensue.

Ever since the suspension of Bretton Woods in 1971, the US Government has tried to suppress gold relative to the dollar, encouraging the growth of gold derivatives to absorb demand. That gold has moved from $35 to $1920 today demonstrates the futility of these policies. But emotionally at least, the US establishment is still virulently anti-gold.

As Figure 2 above clearly shows, the link between commodity prices and gold has endured through it all. It is this factor that completely escapes popular analysis with every commodity analyst assuming in their calculations a constant objective value for the dollar and other currencies, with price subjectivity confined to the commodity alone. The use of charts and other methods of forecasting commodity prices assume as an iron rule that price changes in transactions come only from fluctuations in commodity values.

The truth behind prices measured in unbacked currencies is demonstrated by the cost of oil priced in gold having declined about 30% since the 1960s. That is reasonable given new extraction technologies and is consistent with prices tending to ease over time under a gold standard. It is only in fiat currencies that prices have soared. Clearly, gold is considerably more objective for transaction purposes than fiat currencies, which are definitely not.

Therefore, if, as the chart in the tweet below suggests, the dollar price of oil doubles from here, it will only be because at the margin people prefer oil to dollars — not because they want oil beyond their immediate needs, but because they want dollars less.


China recognised these dynamics following the Fed’s monetary policies of March 2020, when it reduced its funds rate to the zero bound and instituted QE at $120bn every month. The signal concerning the dollar’s future debasement was clear, and China began to stockpile oil, commodities, and food — just to get rid of dollars. This contributed to the rise in dollar commodity prices, which commenced from that moment, despite falling demand due to covid and supply chain problems. The effect of dollar debasement is reflected in Figure 3, which is of a popular commodity tracking ETF.

A better understanding would be to regard the increase in the value of this commodity basket not as a near doubling since March 2020, but as a near halving of the dollar’s purchasing power with respect to it.

Furthermore, the Chinese have been prescient enough to accumulate stocks of grains. The result is that 20% of the world’s population has access to 70% of the word’s maize stocks, 60% of rice, 50% of wheat and 35% of soybeans. The other 80% of the world’s population will almost certainly face acute shortages this year as exports of grain and fertiliser from Ukraine/Russia effectively cease.

China’s actions show that she has to a degree already tied her currency to commodities, recognising the dollar would lose purchasing power. And this is partially reflected in the yuan’s exchange rate against the US dollar, which since May 2020 has gained over 11%.

Implications for the dollar, euro and yen

In this article the close relationship between gold, oil, and wider commodities has been shown. It appears that Russia has found a way of tying her currency not to the dollar, but to commodities through gold, and that China has effectively been doing the same thing for two years without the gold link. The logic is to escape the consequences of currency and credit expansion for the dollar and other Western currencies as their purchasing power is undermined. And the use of a gold peg is an interesting development in this context.

We should bear in mind that according to the US Treasury TIC system foreigners own $33.24 trillion of financial securities and short-term assets including bank deposits. That is in addition to a few trillion, perhaps, in Eurodollars not recorded in the TIC statistics. These funds are only there in such quantities because of the financialisation of Western currencies, a situation we now expect to end. A change in the world’s currency order towards Pozsar’s Bretton Woods III can be expected to a substantial impact on these funds.

To prevent foreign selling of the $6.97 trillion of short-term securities and cash, interest rates would have to be raised not just to tackle rising consumer prices (a Keynesian misunderstanding about the economic role of interest rates, disproved by Gibson’s paradox[iii]) but to protect the currency on the foreign exchanges, particularly relative to the rouble and the yuan. Unfortunately, sufficiently high interest rates to encourage short-term money and deposits to stay would destabilise the values of the foreign owned $26.27 trillion in long-term securities — bonds and equities.

As the manager of US dollar interest rates, the dilemma for the Fed is made more acute by sanctions against Russia exposing the weakness of the dollar’s position. The fall in its purchasing power is magnified by soaring dollar prices for commodities, and the rise in consumer prices will be greater and sooner as a result. It is becoming possible to argue convincingly that interest rates for one-year dollar deposits should soon be in double figures, rather than the three per cent or so argued by monetary policy hawks. Whatever the numbers turn out to be, the consequences are bound to be catastrophic for financial assets and for the future of financially oriented currencies where financial assets are the principal form of collateral.

It appears that Bretton Woods II is indeed over. That being the case, America will find it virtually impossible to retain the international capital flows which have allowed it to finance the twin deficits — the budget and trade gaps. And as securities’ values fall with rising interest rates, unless the US Government takes a very sharp knife to its spending at a time of stagnating or falling economic activity, the Fed will have to step up with enhanced QE.

The excuse that QE stimulates the economy will have been worn out and exposed for what it is: the debasement of the currency as a means of hidden taxation. And the foreign capital that manages to escape from a dollar crisis is likely to seek a home elsewhere. But the other two major currencies in the dollar’s camp, the euro and yen, start from an even worse position. These are shown in Figure 4. With their purchasing power visibly collapsing the ECB and the Bank of Japan still have negative interest rates, seemingly trapped under the zero bound. Policy makers find themselves torn between the Scylla of consumer price inflation and the Charybdis of declining economic activity. A further problem is that these central banks have become substantial investors in government and other bonds (the BOJ even has equity ETFs on board) and rising bond yields are playing havoc with their balance sheets, wiping out their equity requiring a systemic recapitalisation.


Not only are the ECB and BOJ technically bankrupt without massive capital injections, but their commercial banking networks are hugely overleveraged with their global systemically important banks — their G-SIBs — having assets relative to equity averaging over twenty times. And unlike the Brazilian real, the Mexican peso and even the South African rand, the yen and the euro are sliding against the dollar.

The response from the BOJ is one of desperately hanging on to current policies. It is rigging the market by capping the yield on the 10-year JGB at 0.25%, which is where it is now.

These currency developments are indicative of great upheavals and an approaching crisis. Financial bubbles are undoubtedly about to burst sinking fiat financial values and all that sail with them. Government bonds will be yesterday’s story because neither China nor Russia, whose currencies can be expected to survive the transition from financial to commodity orientation, run large budget deficits. That, indeed, will be part of their strength.

The financial war, so long predicted and described in my essays for Goldmoney, appears to be reaching its climax. At the end it has boiled down to who understands money and currencies best. Led by America, the West has ignored the legal definition of money, substituting fiat dollars for it instead. Monetary policy lost its anchor in realism, drifting on a sea of crackpot inflationary beliefs instead.

But Russia and China have not made the same mistake. China played along with the Keynesian game while it suited them. Consequently, while Russia may be struggling militarily, unless a miracle occurs the West seems bound to lose the financial war and we are, indeed, transiting into Pozsar’s Bretton Woods III.

[i] Chart kindly provided by James Turk from his recent book, Money and Liberty (pub. Wood Lane Books)

[ii] See Treatment of Reserves and Fund Accounts — Balance of Payments Division IMF Statistics Department.

[iii] Gibson’s paradox showed that the price correlation with interest rates was with the general price level, not with the rate of price changes. Because Keynes and others failed to explain it, modern economists ignore this relationship with respect to monetary policies. See https://www.goldmoney.com/research/goldmoney-insights/gibson-s-paradox

The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

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MoE As a Unique Type of Economic Good

  • David Lawant David Lawant this is my bio More posts by David Lawant.

MD: This blog named MoneyDelusion.com (note singular, not plural like this one) I tripped over. It was created in 2020. MoneyDelusions.com (note plural…was created three years earlier in 2017). This David Lawant is likely a Mises Monk. He’s posted three articles to his blog…one each day for three days…and then nothing. I wonder what he thinks he’s up to. Let’s see if he knows anything about money. If he does he’ll be the first Mises Monk I’ve found who does…and wouldn’t that be exciting!

David Lawant

28 Oct 2020 • 7 min read

MoE As a Unique Type of Economic Good

A Medium of exchange (MoE) is an economic good that is used in exchange for other goods. Money is nothing more than a special case of media of exchange that happens to be universally accepted through a process that has already been well described elsewhere. Under this definition Bitcoin is not money because it’s not commonly accepted (yet), but it certainly is a MoE. For this text you can read these two concepts as synonyms, as everything here about money can be generalized to media of exchange without any loss in meaning.

MD: Right off the bat it looks like he doesn’t get it. A “medium” is the environment (control) within which “media” exists. It’s a minor point…unless his confusion goes deeper. Nope: Second sentence his thinks “money” is a special case of “media”. This is wrong. Money “is” the media. Different “cases” would be like ledger entries, demand deposits, coins, currency, etc. And what is this “universally accepted process described elsewhere”? Now he swerves into correctness…Bitcoin “is” not money…but it looks like it’s “acceptance” that is not mature enough…and thus will eventually be money. He’s wrong. It’s not created correctly. That’s what keeps it from ever being money. That’s what makes it just being stuff of simple barter exchange like gold and silver. And read that last sentence again. He is “money deluded”…that’s for sure.

Media of exchange are not a payment system, as Pierre Rochard correctly and insistently emphasizes. Although a payment system might be a nice-to-have feature to transfer a MoE form one hand to another, it is important to understand that these are completely orthogonal concepts. The channel through which a good is exchanged is not important for the economic analysis of a MoE. What matters is that the good is primarily used to be exchanged for other goods. Ludwig von Mises traced this confusion to a juridical view of money:

…the principal, although not exclusive, motive of the law for concerning itself with money is the problem of payment. When it seeks to answer the question ‘What is money?’ it is in order to determine how monetary liabilities can be discharged. For the jurist, money is a medium of payment. The economist, to whom the problem of money presents a different aspect, may not adopt this point of view if he does not wish at the very outset to prejudice his prospects of contributing to the advancement of economic theory.

MD: See…I told you he was a Mises Monk…and his brain is thoroughly contaminated. We here know that money is “an in-process promise to complete a trade over time and space.” It is always, and only, created by traders like you and me. It may never circulate as an object of simple barter exchange…but virtually always does. And when it does, it trades like any other object that two traders are willing to exchange. But its process is what makes it special. Real money has zero intrinsic value. But when properly protected from counterfeiting, it is the most efficient and most trusted of any object of simple barter exchange. This is because its value never changes over time and space. This is because there is no interest load associated with using it. And it is because the “process (e.g. medium) guarantees this to be so. It cannot operate any other way.

Some Bitcoiners question whether it makes sense to stress so much the MoE aspect of money if it is only a stage in the evolutionary process brilliantly depicted by Nick Szabo (collectible, store of value, medium of exchange, and unit of account). The point, as Szabo points out, is that something special happens when an economic good becomes a medium of exchange.

MD: Here you see a very common attribute of the Mises Monks…that is worship of other Mises Monks. They’re truly a mutual admiration society. It is a religion…and misguided like all religions. But the key thing to note here: An economic good does not “become” a medium of exchange (or even properly a “media” of exchange). Money is not an economic good…it is a “promise”. And “real” money is a promise that is guaranteed to be kept. It’s designed into the process. The sidebar explains it in very simple terms.

Categorization of Economic Goods

One of the most basic distinctions in economics is the one between consumption and production goods, usually called by Austrian economists as first-order and higher-order (second-order, third-order, etc…) goods. We can get away for now with the following simplified definition: first-order (consumption) goods satisfy direct human needs and higher-order (production) goods are used to produce lower-order goods.

MD: Money has no interest in what it is being traded for or how it will be used…or why it is being traded. Why should it? Why do they make this complicated? If I trade money for a hammer, do I care if it’s used to pound nails or to blacksmith wrought iron…or just to hang on the wall? If this article tells us why “he” cares we’ll correct him at that instant.

There’s nothing intrinsic about whether a good is first or higher order. For example: I can consume a certain amount of water to satisfy my thirst (i.e., water as a first-order good) or alternatively I can provide this same amount of water to cattle which I will ultimately consume as food (i.e., water as a second-order good and cattle as a first-order good).

First- and higher-order economic goods, albeit ultimately connected to a fundamental theory of value, are different enough to be treated separately in many instances. As Jesus Huerta de Soto puts it: “this classification and terminology were conceived by Carl Menger, whose theory on economic goods of different order is one of the most important logical consequences of his subjectivist conception of economics”.

Peter Paul Rubens’ representation of an altcoiner trying to spin up a monetary system (c. 1614–1616)

MD: More praise for fellow Mises Monks. Look how far we are into this article and he still has said nothing that has to do with money. He’s just tried to act like an intellectual. We know that as “double talk”. And watch out for creation of a new “..ist”…in this instance “subjectivist”. Does the world really need any more “ists”?

We have thus defined that media of exchange are goods that have no real “utility” aside from being exchanged for other goods, which in turn have real “utility” of their own. So how do we classify media of exchange? Are they first-order (consumption) or higher-order (production) economic goods? Is there anything especial about media of exchange that warrants a special analysis of them?

MD: When you realize that it’s the entire trading universe that is the “medium” of exchange, you don’t have to classify anything. In trading, those who prefer to trade for gold know its value. If they trade in silver, they know its value. What is different about “real” money is “its value never changes.” This can’t be said for any other object of simple barter exchange.

MD: The preferred unit for money is the HUL (Hour of Unskilled Labor). For all time in the past it has traded for the same size hole in the ground. And in a “real” money process, it will trade for the same size hole in the future. It is the traders who decide in their personal trades how many HULs is being traded.

MD: And this is a great simplification over the complicated process he alludes to. In his process you have to know the changing value of every good and service …in your mind. But when it comes to “real money” as one of the exchanged objects, you always know its value. When you were in high school (i.e. unskilled labor) you knew exactly what people were willing to pay for it. With the improperly managed dollar, people were willing to pay me $1.50 for a HUL. Today they are willing to pay $8.00. Why? Because the improper “dollar process” has allowed counterfeiting. They have allowed the supply/demand balance to change over time…and it is with supply continually outstripping demand through government counterfeiting (i.e. making promises they never keep)…counterfeiting “inflates” the supply. It’s just that simple.

Media of Exchange Are a Sui Generis Type of Economic Good

The number of economists who don’t have good answers to these questions is astounding. Most simply classify media of exchange as a higher-order good by exclusion. They don’t have direct “utility”, so they cannot be first-order economic goods.

MD: Here we see the pot calling the kettle black. I’m going to just let him spew on here. To put what he writes in context, he thinks gold is money. He thinks money “always” has intrinsic value. Gold thus gets its value by digging dirt and refining it. But dirt in your back yard isn’t going to give you any gold…no matter how much you refine it. And you can argue until you’re blue in the face that you put as much work into your backyard dirt as the gold professional put into his. He got gold…you didn’t. He got something to trade for his HULs…you didn’t. But when you know money is a promise, and you know “real” money comes from a process that “guarantees promises”, you don’t need to screw around with things like gold. I’ll let you read on yourself for a while. These guys make me tired..

Austrian economists think this approach is simplistic and inconsistent. They defend a three-fold categorization of economic goods: first-order (consumption) goods, higher-order (production) goods and media of exchange. This is a key proposition in Ludwig von Mises’ indispensable Theory of Money and Credit. He even criticizes his master Eugen von Böhm-Bawerk and defends the position of Karl Knies, economist of the rival German historical school, in this respect:

Production goods derive their value from that of their products. Not so money; for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money. The laws which govern the value of money are different from those which govern the value of production goods and from those which govern the value of consumption goods.

The peculiarity of media of exchange, and by extent of money, as economic goods is clearly exposed by a simple conundrum. We know intuitively that every economic good can command a price because it has “utility”. If the “utility” of a MoE is to have purchasing power (i.e., a price), how to we get out of this circular reference to understand how money has value? Mises derived his famous regression theorem to solve this apparent circularity by introducing the time element, but this is outside the scope of this text. What matters for us is that media of exchange are unique because their “utility” and purchasing power coincide. As Murray Rothbard puts it:

Without a price, or an objective exchange-value, any other good would be snapped up as a welcome free gift; but money, without a price, would not be used at all, since its entire use consists in its command of other goods on the market. The sole use of money is to be exchanged for goods, and if it had no price and therefore no exchange-value, it could not be exchanged and would no longer be used.

MD: Here is a good time to comment on this thing they call “price”. It’s how much of the stuff you have and are willing to trade for how much of the stuff your trading partner has and is willing to trade. If the “stuff” is real money, you both know exactly what is being traded…one hour of unskilled labor…and it’s guaranteed. You can convert that to dollars, marks, franks, ounces of gold, or pork bellies. It’s up to you to decide on that conversion. But one thing you don’t have to do with “real” money. You don’t have to decide what a HUL is worth. You always know, because at one point in your life your were one…an hour of unskilled labor. So if you’re using “real” money, your trade just got less risky by a factor of two (i.e. one of the objects being traded is “guaranteed” not to change over time and space). Let’s let him blab on further for a while..

This special relationship between “utility” and price for media of exchange makes its analysis unique and leads to conclusions that might seem counter-intuitive compared to the analysis of typical commodities. As Mises points out: the real problem of the value of money only begins where it leaves off in the case of commodity-values. Rothbard agrees with Mises on this point:

In the case of consumers’ goods, we do not go behind their subjective utilities on people’s value scales to investigate why they were preferred; economics must stop once the ranking has been made. In the case of money, however, we are confronted with a different problem. For the utility of money (setting aside the nonmonetary use of the money commodity) depends solely on its prospective use as the general medium of exchange. Hence the subjective utility of money is dependent on the objective exchange-value of money, and we must pursue our analysis of the demand for money further than would otherwise be required.

MD: This is a lot like hearing someone quote bible verses isn’t it.

This is the first stepping stone to intellectually justify why immutability and censorship resistance are such important concepts for media of exchange. As we will see in future texts, it will lead to the Austrian view that, contrary to other types of economic goods, increasing the supply of a MoE will only benefit some at the expense of others. On the other hand, reductions in the supply of a MoE do not make society worse off. The purchasing power that is hoarded is transmitted to others in the exact same proportion.

MD: So what do you think it will take for these “intellectuals” to grasp the concept of perpetual supply/demand balance…guaranteed? They’re beating a dead red herring…to mix a metaphor.

B2C, B2B and… B2MoE?

The singularities of different types goods are not just an abstraction — the business and investing communities also understand this well. The contrasts any executive or investor sees between business-to-consumer (B2C) and business-to-business (B2B) companies are too obvious to state here. Financial professionals are also familiar with the division between retail and wholesale banking. It is very to easy to understand that these are fundamentally different businesses that have unique challenges.

One of the reasons why Bitcoin is so novel is that companies and investors have never dealt directly with media of exchange before, but only with services built on top of an established MoE. These services are just typical consumer or production goods, not media of exchange. Trying to fit the standard toolkit to such a unique type of economic good without first considering its idiosyncrasies might lead to expensive mistakes.

Bitcoiners, possibly due to their Austro-Hungarian DNA traces, understand these concepts fully. Still, it is important to be mindful of them and make them explicit, especially as more new people start to get involved with Bitcoin. Most arguments against Bitcoin can be traced down to a misunderstanding of how media of exchange actually work. Traditional economists are generally not better positioned to understand this either, as monetary economics has been reduced to reading FOMC tea leaves and computing econometric analyses.

The next time someone points a laughable obsession over the 21 million hard cap or satellite dishes, try to gauge his understanding of some basic monetary concepts like the ones discussed here. Then think again about what is actually laughable. The next time someone tries to shill another “blockchain” that optimizes for a number of features, or for any specific feature, at the expense of immutability and censorship resistance, try to understand whether this person has considered the fact that media of exchange work under different rules.

MD: Do you think he could be more clueless? I ask you, as a trader and given the choice of an inflating money, a deflating money, or a money guaranteed to have zero inflation or deflation, which would you choose? Now that you have chosen, would your trading partner make the same choice as you in this instance? For both trading partners to be on an equal footing as far as money is concerned, the money itself must “never” change value. Does the dollar have this attribute? The Zimbabwe or Weimer Germany money? How about gold? How about cement blocks? My cement blocks have held their value better than gold.

The positions of Bitcoin proponents are usually grounded on air-tight logic and sound economic theory that extends back for a long time. This is neither dogmatism nor tribalism. Contrary to what many believe, the Austrian School of Economics does not take individual freedom and property rights as an axiom, but it arrives at those ideals through rigorous deductive logic. It certainly is a longer route to appreciate the free market system, but it might be the only one that does not lead one astray over time.

PS: An upcoming text in this series will delve deeper into the concept of utility and will probably be a required companion to this text. For now, I’m working with the oversimplified concept of utility as the satisfaction of someone’s needs. For that reason, “utility” is used in quotes throughout this text.

In that sense, a more rigorous way to transmit the main message of this text is (to paraphrase Mises): “In the case of money, subjective use-value and subjective exchange-value coincide. Both are derived from objective exchange-value, for money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it”.

MD: As always, I couldn’t be more relieved to have reached the end of this article. And look at the help from his Mises Monk pals and scrutiny he got. Pretty scary isn’t it.

Acknowledgements

A draft of this text was improved on by invaluable feedback from Saifedean Ammous, Michael Goldstein, Shaine Kennedy, Stephan Livera, Acrual and Sosthéne. Stay toxic, friends!

References

Free Post Projection and Throwness Bitcoin’s 10x Advantage Over Gold Might Not Lie Where You ThinkI have been thinking for a while about why sound money survived for thousands of years but was quickly

  • David Lawant

David Lawant 29 Oct 2020 • 7 min read Free Post Institutions Versus Organizations Governance by Laws Without LegislationCarl Menger, the founder of the Austrian school of economics, is a remarkably popular economist in crypto twitter because Bitcoin builds on so many of his

  • David Lawant

David Lawant 27 Oct 2020 • 6 min read Money Delusion © 2022 HomeSignupTwitter Published with Ghost

If The Fed Starts A Digital Currency, It Had Better Guarantee Privacy

If The Fed Starts A Digital Currency, It Had Better Guarantee Privacy
Tyler Durden’s Photo
by Tyler Durden
Tuesday, Apr 05, 2022 – 08:00 PM

MD: As always, Money Delusions will use the true definition of “real” money to annotate this article. The article appear in ZeroHedge.com as “If the Fed Starts A Digital Currency, It Had Better Guarantee Privacy”. And the title itself reveals confusion about what money is…and what its characteristics are. This begins by knowing what money is (i.e “an in-process promise to complete a trade over time and space”); how money is created (i.e. transparently in plain view by traders like you and me); how money is destroyed (i.e. also transparently by the trader delivering as promised); what happens if the trader “defaults” (i.e. “interest” of like amount is immediately collected); and how money trades in the interim (i.e. anonymously as any other object of simple-barter-exchange). Let’s get started:

Authored by By Andrew M. Bailey & William J. Luther via RealClearPolicy.com,

President Biden’s latest executive order calls for extensive research on digital assets and may usher in a U.S. central bank digital currency (CBDC), eventually allowing individuals to maintain accounts with the Federal Reserve. Other central banks are already on the job. The People’s Bank of China began piloting a digital renminbi in April 2021. India’s Reserve Bank intends to launch a digital rupee as early as this year.

MD: They immediately exhibit that they don’t know what money is. “Banks” have nothing to do with “real” money at all. It is the most obvious corruption of real money. And “digital” is just one of many forms of money.

Most commonly, money is just an entry in a ledger. In some cases it is in the form of coins and currency…both carefully designed to resist counterfeiting. In some cases it is in the form of a check (i.e. against a demand deposit). And we already have a fairly digital form of money in “debit cards”…a link to your ledger records that you carry in your purse. “Credit cards” are not an example of money. Rather, they are an example of “money creation”.

When you charge something on a credit card, “you” are creating money…a promise to complete a trade over time and space. When you use a “debit card” you are merely submitting proof that you hold some previously created money.

A CBDC may upgrade the physical cash the Federal Reserve already issues – but only if its designers appreciate the value of financial privacy.

Cash is a 7th century technology, with obvious drawbacks today. It pays no interest, is less secure than a bank deposit, and is difficult to insure against loss or theft. It is unwieldy for large transactions, and also requires those transacting to be at the same place at the same time — a big problem in an increasingly digital world.

MD: And before cash we had the tally stick…which claims to be the best implementation of money. And tally sticks were “real” money. They represented a promise to complete a trade over time and space. They worked better than gold. In fact, they could claim any kind of “backing” the trader’s agreed to (e.g. pork bellies). But nobody “traded” tally sticks. Thus, in that respect they weren’t money at all. They really were close to “crypto” in that respect…but much cheaper to create. You could create a tally stick with a twig and a knife. Today’s crypto requires insane amounts of electricity waste to create. They call it “proof of work”…which of course is nonsense.

Nonetheless, cash remains popular. Circulating U.S. currency exceeded $2.2 trillion in January 2022, more than doubling over the last decade. The inflation-adjusted value of circulating notes grew more than 5.5 percent per year over the period. And U.S. consumers used cash in 19 percent of transactions in 2020.

MD: Actually, the money changers are revealing the imminent collapse of cash. They hold lots of cash (counterfeited by government) and are doing everything they can to exchange it for real “property”. I get a dozen calls a day from “so-called investors” who want to “buy” my property. It’s a game of musical chairs. They don’t want to holding it when the “reset” comes as they know it will be instantly worthless. And also note, with “real” money, inflation is perpetually zero. No adjusted valuation is ever necessary.

Why is cash so popular, despite its drawbacks? Cash is easy to use. There are no bank or merchant terminal fees associated with cash. And, most importantly, it offers more financial privacy than the available alternatives.

MD: In actuality, cash is “not” easy to use. You almost never see it being used…even in restaurants and bars. I use it in bars just to keep score. I take a certain amount of cash, which when I’ve used it up I know I’m about to have had too much to drink. I spend lots of time explaining to other patrons why I can’t let them buy me a beer.

When you use cash, no one other than the recipient needs to know. Unlike a check or debit card transaction, there’s no bank recording how you spend your money. You can donate to a political or religious cause, buy controversial books or magazines, or secure medicine or medical treatment without much concern that governments, corporations, or snoopy neighbors will ever find out.

MD: With a “real” money implementation, there is no need for banks to be involved. All that is necessary is a “block chain” like implementation that resists the “three general problem” and counterfeiting. And when properly implemented, the “block chain” implementation is cost free. It has no use for “proof of work”. It “knows” it’s keeping track of performance on promises.

Privacy means you get to decide whether to disclose the intimate details of your life. Some will happily share. That is their choice. But others will prefer to keep those details private.

MD: But keep in mind, while “real” money used in trade is “always anonymous”, it’s creation is always “open and transparent”. Awareness of this distinction is crucial.

In a digital world, personal information can spread far and wide. And it can be used to exclude or exploit people on the margins. The choice about what information to share is important. For some, flourishing depends on carefully choosing how much others know about their politics, religion, relationships, or medical conditions.

Financial privacy matters just as much as privacy in other areas. What we do reveals much more about who we are than what we say. And what we do often requires spending money. In many cases, meaningful privacy requires financial privacy.

MD: Again, keep in mind that money is only concerned with the problem of “counterfeiting”. It cares not at all who is using it and for what. But people using it must know and expect it is genuine…i.e. not counterfeited. And of course we all know the principal counterfeiters of money are governments. For a “real” money process to exist, it’s operation must be transparent and impervious to any attempts to control or to counterfeit it. It is simply about record keeping.

Privacy also operationalizes the presumption of innocence and promotes due process. You are not obliged to testify against yourself. If law enforcement believes you have done something unlawful, they must convince a judge to issue a warrant before rifling through your things. Likewise, financial privacy prevents authorities from monitoring your transactions without authorization.

MD: Law doesn’t apply to a “real” money process. But open communication and mitigation is crucial. Again, it’s about making counterfeiting impossible. And when detected it must reveal who did the counterfeiting; see that the counterfeiting doesn’t happen again; and treat the counterfeiting for what it is… a “default”. And thus it immediately mitigates it with “interest” collection of like amount. This must be totally transparent…so the marketplace can ostracize the perps. Who pays the interest? Other irresponsible traders.

The recent executive order, to the administration’s credit, notes that a CBDC should “maintain privacy; and shield against arbitrary or unlawful surveillance, which can contribute to human rights abuses.” But a reasonable person might worry that the government is paying lip service to privacy concerns.

MD: A principle “axiom” must be observed at all times. If you are considering a government solution to any problem, you are still looking for a solution. Government is “never” the solution to any problem. It is just a magnifier of the problem.

A recent paper from the Fed, offered as “the first step in a public discussion” about CBDCs, suggests the central bank has no interest in guaranteeing privacy at the design stage. Instead, it maintains that a “CBDC would need to strike an appropriate balance […] between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.” The Fed then solicits comments on how a CBDC might “provide privacy to consumers without providing complete anonymity,” which it seems to equate with “facilitating illicit financial activity.” A U.S. CBDC, in other words, will likely offer much less privacy than cash.

MD: No central entity (especially a central bank) is ever involved in a “real” money process. Rather, it is the “process” that is the entity. As such, the process is universally used and totally transparent to all traders at all times.

We do not deny that financial privacy benefits criminals and tax cheats. Such claims tend to be exaggerated, though. In reality, it is a small price to pay for civil liberty. That due process applies to everyone — criminals included — is no reason to scrap the Fourth or Fifth Amendments.

MD: Taxes implies government…so it is a non-starter. If government participation was ever a valid option, it would be the “only” viable option. You would pay taxes (and only taxes) for everything. Your gasoline, your groceries, your clothing…all would be free. You would just pay tax and it would be covered out of that. Some people call this communism. Some call it insurance. It’s all nonsense.

Policymakers may be tempted to compromise on financial privacy when implementing a CBDC. Instead, they should attempt to replicate the privacy afforded by cash. Like non-alcoholic beer, the Fed’s “digital form of paper money” would superficially resemble the real McCoy while lacking its defining feature.

MD: Policy is the the marker here. No process is every properly governed by policy. The closest we should ever come to adopting policy is the “golden rule”. Policy is different from process. Money is a “process”. It cares nothing about policies like full employment and setting inflation at 2% (while continuously failing by a factor of 2).

What is an “improved currency”? (A Quora question)


What is an ‘improved currency’? – Quora

There is only one “currency” that can’t be improved upon. That is a currency that is the product of a “real money process”. Once this currency is instituted, no further improvement is possible. It begins with knowing what money is.

Attributes of this “perfect” currency, all the time and everywhere are:

  • Free supply of money
  • Perpetual zero INFLATION
  • Zero INTEREST load on responsible traders
  • Perpetual 1.0 exchange rate among currencies
  • Zero time value of money

Why don’t we have this perfect money? Because bankers don’t allow it.

First, they claim 10x leverage over you and me. You “save” a dollar with them, they “loan” out ten dollars. Thus, if you make 4% on your money, they make 40% on your money. That’s a pretty big deal. To do this they put in a dollar of capital and get certified by the state (that they create). Their money doubles in just 2 years. Your money takes about 17 years to double. They call that “capitalism”. Neat, huh? Look mom, I’m a capitalist.

They arbitrarily collect tribute (they call it INTEREST). They allow the state (which they create) to counterfeit (states call it Roll Over) the money resulting in higher prices (they call it INFLATION). And they never report DEFAULTs. That’s like an insurance company arbitrarily setting PREMIUMS; never reporting CLAIMS.

Money is provably “an in-process promise to complete a trade over time and space.” It is always, and only, created by traders like you and me. For example, when we buy anything on “time payments”, we are creating money. And as we make those payments were are destroying money.

The proof is in examining trade. Trade happens in three steps: (1) Negotiation; (2) Promise to Deliver; (3) Delivery as promised.

In simple barter exchange, (2) and (3) happen simultaneously…on the spot. With money, (2) and (3) happen over time and space.

For example, we buy a car with 60 monthly payments. We create the $30,000 and give it to the seller…and he gives us the car. Then, each month we recover (earn) and destroy $500. After 60 months, we have recovered and destroyed the full $30,000. We have kept our promise.

But what if we fail to keep our promise? What if we miss a payment or two? This is where the “real money process” comes in. The process perpetually monitors everyone’s performance on money-creating-transactions like this. Missing a payment is known as a DEFAULT. You are now an “irresponsible trader”. That DEFAULT is immediately made up by an INTEREST collection of like amount. Who pays the INTEREST? Irresponsible traders (according to their propensity to default) do. If you make up the DEFAULT, you get the INTEREST back.

Immediately mitigating this DEFAULT guarantees perpetual perfect supply/demand balance of the money itself…i.e. zero INFLATION. Thus, there is no domino effect when you DEFAULT. There is just the automatic negative feedback mechanism of increased INTEREST load.

The operative relation is: INFLATION = DEFAULT – INTEREST = zero.

You are familiar with all these terms. However, you have been taught to believe that INTEREST is the “time value of money”.

Bankers claim that when there is “too much money in circulation”, they can claim higher INTEREST “tribute” from you. And when there is too little, they can claim less. Looking at the relation you quickly see there is no justification for this whatever. This allows them to manipulate the money…they call it the “business cycle”. And they make no mention of DEFAULTs at all. That’s like reporting COVID “cases” and not mentioning COVID “deaths”…which of course government is doing right now!

You can see from the relation that the “time value of money” is perpetually zero. A dollar today is worth exactly the same as a dollar 10 years from now. It trades for the same stuff.

The so-called “sound money” people claim gold (or something rare) is the basis of sound money. Others claim proof of work (Bitcoin…proof of wasted electricity) is the basis of sound money. You are learning here how foolish they are.

Let’s consider the unit of money to be a HUL (Hour of Unskilled Labor)… not a Dollar or Mark or Yen or Euro…or any other arbitrary and meaningless unit. We choose this HUL unit because we are all implicitly aware of its value. It’s what we, as high school students, typically traded for money. It trades for a certain size hole in the ground…regardless of when a high school student digs it.

Contrast that with the dollar. In 1960 when I was in high school, a HUL was worth $1.50. Today it is worth about $15.00 (minimum wage). However, with a “proper money process” we don’t want this to ever change…a HUL is a HUL is a HUL…anytime and anywhere.

Further, in 1964 a quarter contained 90% silver and traded for a gallon of gasoline. In 1965 a quarter contained 0% silver…and still traded for a gallon of gasoline. Obviously, the silver played no role in the trade. And today, you need 10 quarters to trade for a gallon of gasoline. No quarters traded today contain silver. The “sound money” people have hoarded all those. And the government loves it. All those quarters were retired…and they didn’t have to pump any gasoline in exchange. They do the same thing now with “collector” quarters (different stamping for each state). They’ve done it with stamp collecting. And they do it with the lottery…prey on the stupid.

Our HUL can only trade for the same size hole in the ground if we “guarantee” perpetual perfect balance of supply and demand for the HUL itself. And the process guarantees that.

Before you make your car-buying-promise, no money exists for that promise. After you deliver on your promise, no money exists for that promise. In the interim, the HUL you create goes into the mass of HULs we call the marketplace. It is the most common object of simple barter exchange. It enables us to make trades over time and space.

And obviously “all” those HULs represent a “promise to complete a trade over time and space”. And obviously “all” of them are created by traders like you and me.

In Unprecedented Move, Congress Proposes Taxpayer-Funded Bailout Of $550 Billion CMBS Industry

Profile picture for user Tyler Durden

by Tyler Durden

Wed, 07/29/2020 – 22:05

MD: Note: There are charts embedded in this article which link back to the original. In time they will likely get broken.

MD: A proper MOE (Medium of Exchange or Money) Process treats all “traders” equally. But this instance does bring on to the stage an important case. What limits should be placed on the size of “promises” it will embrace…and why?

The case is fairly simple for individuals. It easily embraces the case for viable shelter (buying a house). It easily embraces the case for viable transportation (buying a car). It easily embraces the case for unanticipated medical needs (supplementing insurance). But how does it deal with the case for highly leveraged promises?

I will answer this question as I read the article and intersperse my comments. Hopefully it will address these issues. The most important issues are regarding “leverage” and detection of “rollovers”.

The only way to get really wealthy in any society is through unusual leverage.

Banks grant themselves 10x the leverage you and I have. As individuals we have no leverage. We work an hour…we make some number of HULS (note: HULs…Hours of Unskilled Labor… are the ideal MOE measure). We must be really really good at what we do (e.g. neurosurgery) to be worth 10x what we were in high school).

The mom and pop shop has almost no leverage. They “are” the business. But as they grow they hire help. And that is the beginning of their leverage growth. They take a piece of their workers’ labor as if they performed it themselves. As they grow they retain earnings but may also take on debt (i.e. they make money creating promises) or they take on partners (sell shares in their company). The money creating case is problematic. You can’t just say I want to create a car company and create $100B (or 10B HULS).

Then we have the financial wizards. They claim to be able to deploy surplus HULs better those who earn those HULs. And they take a piece of the action if they succeed. They don’t suffer if they fail; their clients do the suffering. They use options, derivatives, high speed trading, and myriad other tricks to multiply the natural leverage this game brings them.

Selling shares is not problematic. Each shareholder has to decide how he’s going to come up with the money to pay for his share. And the business itself decides how it will reward his participation. There are many games being played in this space to help mom and pop keep control as they grow. For example, they can give themselves options to buy shares as payment. They can mix debt and equity instruments as warrants. The options have proven to be inexhaustible…their consequences unknowable and unsupportable.

Such tactics are of no concern to the MOE process. Its only interest is in the “reasonableness” of the money creation and tracking its return and destruction. That means assessing the trader’s propensity to default and monitoring his performance in real time. And we know how to address such issues. We call them actuaries. They have great experience in the mutual casualty insurance business.

So now lets see how we address this very unusual but real instance of a threat to the MOE process. More importantly, we see how the MOE process places the responsibility exactly where it belongs…with the promise maker and with the process behavior. This characteristic gives some assurance of self discipline.

If the trader screws up, the trader must back his failed promise or he must pay the consequences (i.e. be banned from creating money…as we know all governments will be banned if they don’t change their behavior).

If the process screws up (i.e. supports an irresponsible trader), it must penalize oncoming traders (responsible or irresponsible) immediately. They pay INTEREST (which is returned if they prove to be responsible).

Now to the article. My interspersed comments appear formatted as this pretext is formatted. And please bear with me…I’m thinking through this as I write and it’s worth at least what you’re paying for it.

==================

Well, with everyone and everything else getting a bailout, may as well go all the way.

MD: What a remarkable opening. Is that like “if rape is inevitable, relax and enjoy it”?

Two months after we reported that the state of California is trying to turn centuries of finance on its head by allowing businesses to walk away from commercial leases – in other words to make commercial debt non-recourse – a move the California Business Properties Association said “could cause a financial collapse”, attempts to bail out commercial lenders have reached the Federal level, with the WSJ reporting that lawmakers have introduced a bill to provide cash to struggling hotels and shopping centers that weren’t able to pause mortgage payments after the coronavirus shut down the U.S. Economy.

MD: Well, the concept of “throwing good money after bad” is well known. And this likely falls into that category. Shopping malls have become a thing of the past. They had their 50years in the sun and have now been made obsolete by a better idea (.e.g. Amazon). The handwriting was on the wall way before the COVID-19 hoax and government lock-down suspended trade. COVID-19 is a neutron bomb attack. It kills people but doesn’t destroy things. For those still alive, a restart should be a simple process. Suspend the delivery on existing money creating promises until the external restrictions have been lifted. Continue to support new money creating promises using regular actuarial principles. Such principles will detect “rollover” attempts and reject them.

I think the obvious solution is to recognize the situation and do an “automatic extension” of promise time terms (the “time” part of the time and space spanning trade) of all affected promises, and move painlessly on down the road. Nobody gets hurt.

The bill would set up a government-backed funding vehicle which companies could tap to stay current on their mortgages. It is meant in particular to help those who borrowed in the $550 billion CMBS market in which mortgages are re-packaged into bonds and sold to Wall Street. What it really represents, is a bailout of the only group of borrowers that had so far not found access to the Fed’s various generous rescue facilities: and that’s where Congress comes in.

MD: The problem as expressed here does not exist with a proper MOE process. Money is not “backed” by anything but the process. So there is no such thing as a CMBS market or mortgage-backed securities and bonds. If we had a proper MOE process, such techniques could still exist for those who want the risk of non-responsible traders. But that is no concern or responsibility of the money process. And the phrase “government-backed funding vehicle” is a marker. This is not a viable proposal with the word “government” in it.

To be sure, the commercial real estate market is imploding, and as we reported at the start of the month, some 10% of loans in commercial mortgage-backed securities were 30 or more days delinquent at the end of June, including nearly a quarter of loans tied to the hard-hit hotel industry, according to Trepp LLC.

MD: And if those leases were taken on by trader created money, then an automatic 30 day extension would have already been applied to their promise. Such extensions could go on indefinitely. There are no so-called investors involved at all. Mom and pop created the money (they created money for the full lease as if it was a purchase…but is paid out to the seller monthly) and this is one of those unavoidable occurrences that the money process naturally accommodates. Loan sharks anticipate this too. They take the property. Moving these leases into the MOE process space stops the domino effect such instances create.

MD: The above curve illustrates the superiority of the MOE process solution. In April, the COVID-19 hoax lock down occurred. Up until then the market was healthy and getting more healthy. Then wammo!. With the MOE process, the above curve would go flat…or maybe even continue to go down. And a new curve would start up. That curve would be the automatic extensions of the time component of the money creating promises. There is no pain to anyone anywhere…and everyone is still responsible for their promise. Note, this concept also applies to floor plans purchased in anticipation of normal business sales performance…now interrupted by the lock down. Such provisions are now provided by banks through lines of credit or compensating balance loans…and they profit exorbitantly.

“The numbers are getting more dire and the projections are getting more stern,” said Rep. Van Taylor (R., Texas), who is sponsoring the bill alongside Rep. Al Lawson (D., Fla.).

MD: In our system “sponsoring a bill” means “bowing to a lobbyist”. That’s how our corrupt system works. That’s what gives the wealthy so much leverage over the mom and pops. A proper MOE process levels the playing field…at no cost or risk to anyone.

Van Taylor (R-Texas) is sponsoring the bill to aid hotels and shopping centers.

Under the proposal, banks would extend money to help these borrowers and the facility would provide a Treasury Department guarantee that banks are repaid. The funding would come from a $454 billion pot set aside for distressed businesses in the earlier stimulus bill.

MD: You’ve got to love that phrase “banks would extend money”. Folks. The banks don’t have money. They have a 10x leverage privilege. A proper MOE process makes that privilege unnecessary. Let the banks continue to exist if they want to. But the 10x privilege is an anachronism.

Richard Pietrafesa owns three hotels on the East Coast that were financed with CMBS loans. They have recently had occupancy of around 50% or less, which doesn’t bring in enough revenue to make mortgage payments, he said.

MD: And here is a case where we have to ask: where does the money come from? When you buy a house over time you can securely make that money creating promise. You know what you expect to make and purchase a house accordingly. But if the income is interrupted its your problem to find a replacement for it.

But Pietrafesa has no way of replacing his interruption. Such deals are heavily leveraged (OPM…other people’s money). He couldn’t get the MOE process to allow this money creating trade in the first place. He would have to rely on forming a collective to get his hotel deal done. And if the collective fails, well, as individuals in the collective, they have an incentive to keep it from failing or they lose their share. The MOE process may allow their trading promise to Pietrafesa…but would not allow Pietrafesa’s promise to the owner of the hotel he purchased. For example, just like buying a house with time payments, they could actuarially show they could buy a piece of a hotel with time payments…and be responsible if it fails.

He said he is now two months behind on payments for one of his properties, a Fairfield Inn & Suites in Charleston, S.C. He has money set aside in a separate reserve, he said, but his special servicer hasn’t allowed him to access it to make debt payments.

MD: Here we have the domino effect. He’s paying a “special servicer” to cover this risk. He’s buying insurance. It’s an actuarial problem. And insurance companies are the ultimate leveragor. In insurance CLAIMs = PREMIUMS. The money is made on the investment income. But with a real MOE process which guarantees zero INFLATION, investment income can’t benefit from the leverage INFLATION gives. The insurance business becomes a risk mitigation business with a proper MOE process…as it should be.

“It’s like a debtor’s prison,” Mr. Pietrafesa said.

MD: An MOE process does not have a provision for penalizing. It only has a provision for naturally ostracizing. Pietrafesa would have to pay INTEREST if he DEFAULTs and tries to create money again. And he has to make up that DEFAULT to become a responsible money creating trader again. It’s the natural negative feedback stabilizing loop of the process.

Those magic words, it would appear, is all one needs to say these days to get a government and/or Fed-sanctioned bailout. Because in a world taken over by zombies, failure is no longer an option.

MD: These days are no different than other days. In the olden days the zombies were taken over by the Rothschilds…through their J.P.Morgan agency. It was and is a protection racket…just like the mafia runs. A proper MOE process removes the leverage and drives them out of business…kind of like legalizing drugs drives those dealers them out of that business. Ultimately, people need to be responsible for their own stupidity…but not for the stupidity of others.

While any struggling commercial borrower that was previously in good financial standing would be eligible to apply for funds to cover mortgage payments, the facility is designed specifically for CMBS borrowers.

MD: Thus, the leverage is in the ability to lobby. Such advantage needs to be eliminated…in a very natural, not legislative, manner. A proper MOE process goes far in enabling that.

It gets better, because not only are taxpayers ultimately on the hook via the various Fed-Treasury JVs that will fund these programs, but the new money will by default be junior to existing insolvent debt. As the Journal explains, “many of these borrowers have provisions in their initial loan documents that forbid them from taking on more debt without additional approval from their servicers. The proposed facility would instead structure the cash infusions as preferred equity, which isn’t subject to the debt restrictions.

MD: The taxpayers are not on the hook. Our current process with no stabilizing negative feedback will just keep escalating until it blows itself up. Then most people (not in the inner circle with advance warning) lose; it resets; and starts all over again…with the insiders picking up the pieces for pennies on the dollar. We now pay over 3/4ths of what we earn to governments. Where does communism begin? Where does slavery begin?. It’s not a good system folks. We’ve been duped. And praising the constitution and wrapping ourselves in the flag is not going to fix it. It was broken when it was installed…the anti-federalists got it right but lost the argument.

Yes, it’s also means that the new capital is JUNIOR to the debt, which means that if there is another economic downturn, the taxpayer funds get wiped out first while the pre-existing debt – the debt which was unreapayble to begin with – will remain on the books!

MD: When a building collapses, it’s kind of immaterial whether the lower floors or the upper floors collapse first. When this calamity happens, the dirt this house of cards stands on is the only thing of value.

Perhaps sensing the shitstorm that this proposal would create, the WSJ admits that “the preferred equity would be considered junior to other debt but must be repaid with interest before the property owner can pull money out of the business.”

MD: And this is how we get 40,000 new laws every year. They start with a bad process (i.e. principles diluted by laws) and are stuck with a huge maintenance problem.

What was left completely unsaid is that the existing impaired CMBS debt will instantly become money good thanks to the junior capital infusion from – drumroll – idiot taxpayers who won’t even understand what is going on.

MD: “will instantly become money”: Let’s examine this. We know what money is. So somehow he’s saying that some trader instantly makes a promise spanning time and space here. Who’s the trader, the taxpayer? Well that’s no different than what we have now with government doing perpetual rollovers of their trading promises. That’s not money creation. That’s counterfeiting. We already know that.

How did this ridiculously audacious proposal come to being? Well, Taylor led a bipartisan group of more than 100 lawmakers who last month signed a letter asking the Federal Reserve and Treasury to come up with a solution for the CMBS issues. Treasury Secretary Steven Mnuchin and Fed Chairman Jerome Powell have indicated that this may be an issue best addressed by Congress.

MD: “asking the Federal Reserve and Treasury to come up with a solution”? They’re the problem. Institute a proper MOE process and we drive out the problem. That allows us to address issues in a “proper” context rather than an “opportunist” context.

In other words, while the Fed will be providing the special purpose bailout vehicle, it is ultimately a decision for Congress whether to bail out thousands of insolvent hotels and malls.

MD: The malls have no future. They are the buggy whip of a previous era. They need to be plowed under and reseeded. But the hotels are viable. They are just suspended in time. If they’re collectively owned they are the responsibility of the members of the collective. They are suspended in time. They are not failing. And suspension carries no cost in this instance except maintenance. Remember, with a propper MOE process, money has zero time value.

Failure? That’s something else again. It all get’s back to the individual traders’ responsibility and recourse. A proper MOE process should allow small traders to create money to tide themselves over the temporary situation. It should not support large highly leveraged traders to do so. It’s an actuarial problem.

And if some in the industry have warned that an attempt to rescue the CMBS market would disproportionately benefit a handful of large real-estate owners, rather than small-business owners, it is because they are precisely right: roughly 80% of CMBS debt is held by a handful of funds who will be the ultimate beneficiaries of this unprecedented bailout; funds which have spent a lot of money lobbying Messrs Taylor and Lawson.

MD: Handful of “funds”. What is a fund but a collective… where the manager gets the gains and the participants get the losses. People who buy into a fund roll their own dice. When the fund is a pension fund, only the pensioner should have control. With perpetual zero inflation, placing their pension under a rock is a viable solution.

Of course, none of this will be revealed and instead the talking points will focus on reaching the dumbest common denominator. Taylor said the legislation is focused on – what else – saving jobs. What he didn’t say is that each job that is saved will end up getting lost just months later, and meanwhile it will cost millions of dollars “per job” just to make sure that the billionaires who hold the CMBS debt – such as Tom Barrack who recently urged a margin call moratorium in the CMBS market – come out whole.

MD: Saving jobs “is” the issue. These workers are suspended in time. It’s their responsibility to provide for themselves. They can do this by creating money to tide themselves over (say for a year or two if necessary). A proper MOE process could actuarially support this money creation.

Say we have the maitre-d of the hotel restaurant. It’s pragmatic for him to span this interruption and go back to work as if nothing happened. So he creates a time and space spanning money creating promise. He creates two years of normal income to be paid back 1/100th monthly. The payback begins two years hence and proceeds 100 months. When he goes back to work he begins paying back, essentially cutting his own salary a manageable amount. And while suspended, he can put up dry-wall and make some pin money.

For the bar-back it’s a little different. He may make a money creating promise covering 3 months income to be paid back monthly beginning in three months over a two year span. And he immediately goes looking for a replacement job…maybe putting up dry-wall. His job is not his “career”.

“This started with employees in my district calling and saying ‘I lost my job’,” Taylor said, clearly hoping that he is dealing with absolute idiots.

MD: An idiot institutes processes that have built in domino effect.

And while it is unclear if this bill will pass – at this point there is literally money flying out of helicopters and the US deficit is exploding by hundreds of billions every month so who really gives a shit if a few more billionaires are bailed out by taxpayers – should this happen, well readers may want to close out the trade we called the “The Next Big Short“, namely CMBX 9, whose outlier exposure to hotels which had emerged as the most impacted sector from the pandemic.

MD: The money flying out of the helicopters is counterfeit. It will go directly to producing INFLATION. It will only create taxes to the extent the money-changers demand their tribute payments…that’s where “all” taxes go.

With a proper MOE process the domino effect is mitigated; a natural stabilizing negative feedback mechanism prevails; and a pragmatic self controlled recovery is instituted. Remember. When you have a government solution to a problem, you just have the same problem multiplied and are still looking for a solution.

Alternatively, those who wish to piggyback on this latest egregious abuse of taxpayer funds, this crucifxion of capitalism and latest glorification of moral hazard, and make some cash in the process should do the opposite of the “Next Big Short” and buy up the BBB- (or any other deeply impaired) tranche of the CMBX Series 9, which will quickly soar to par if this bailout is ever voted through.

MD: And the real character of so-called “investors” is revealed and amplified. Without a proper MOE process, money is the chips in an opportunist, privileged casino called capitalism. Traderism is where real money lives.

MD: So here we have another good example where a proper MOE process doesn’t “treat” a problem; rather it anticipates it and prevents its effect.

Coronavirus: Amazon squeezing workers “unacceptable”.

https://www.azerbaycan24.com/en/amazon-squeezing-workers-amid-covid-19-crisis-is-unacceptable-french-finance-minister/?cf_chl_jschl_tk=87bc0cd9fbd6c3b2d9b38d1168015e34c8425d67-1584621871-0-AdgqRVnYRkygZ207fh9by5kTd_juzE3wnYY9cOwcqwx5eOeb44m-0EF_bPMVWVta9HbFWypcx1ziUQK_kUjcRe4bmxX3S5uK1mv-O2-HBnv_9nEiHDKVVbeOD95P0RD_HJrHu7cL2KtQwZukaqKsQGd3mLBhkdjUTBUWE_-cKDPZ6Eg7cjUnChIi68xjhKcMi5EXOLH2Yh5hNk1ln8QbBucB92UhXwIp4nyuG74wrGoXkYYS2EFjZ46E9APjXzOyDdCM4UEivaJRW3-VCf0fcYAHUqfxtEzdzBHnA-CHa6rDgCTcNYAp1zviT0OW9QUAUqS0Ew0ePqU69ZodhITlSI8X0x68TxvXk1LpcZ7WlleXYyufHd-GjZjrsLm6kTu_6HMnZj0oGsCuh9TkLx4MBA6S11938rTXg-0W1YHUisMrOeTY5ZJCDbYdJ3OmjuZdG9b7fLW7u0ti4kRygBvrHNE

MD: Here at Money Delusions we are constantly comforted with how a “proper money process” makes even enormous problems and issues almost go away. This is a good example.

With the Covid-19 crisis, we have the general class of problems that affects everyone simultaneously in a global fashion. If the solution is for everyone to shelter in place, well, that puts out of work everyone who can’t do their job remotely…they can no longer trade their value to others.

This article takes a case in point where the French government is dictating a solution (e.g. shelter in place). And Amazon is responding rationally. It’s really all about where the buck stops. Here are the steps: (1) Government dictates quarantine. (2) Amazon workers comply. (3) Amazon workers don’t get paid. (4) Government says “that’s unacceptable”.

First, it’s interesting that government acknowledges that some things are not acceptable. I, for one, find that government taking a full 3/4ths of what I earn is unacceptable. If I just declare it unacceptable (which it obviously is) nothing happens. But if I refuse to pay tax … well, the government pulls rank and forcefully takes my stuff.

In the case of government, they seem to think it is acceptable to demand workers be paid for doing nothing when doing nothing is dictated by the government. If the government feels that way, the government should be doing the paying. But in reality, no-body should be doing the paying.

In a free market of traders, traders deliver value and are compensated. Failing to deliver value results in no compensation. It’s just that simple. A calamity like Covid-19 is not the only thing that can tip over trader’s apple carts. There may be severe storms. There may be destruction of their work place. There may be a death or illness in the family. All such things are really the trader’s responsibility…not the responsibility of their trading partners nor of governments (to whom they trade their freedom for safety).

So what does all this have to do with Money Delusions?

Remember, money is “always and only created by traders like you and me”. It is “never created by banks nor the governments they institute”. So if the citizens are going to give government this power they must expect to suffer the consequences.

This represents a perfectly good reason for a trader to make a trading promise spanning time and space … i.e. to create money. The trader knows his trading is going to be inhibited for maybe up to 1/4 or 1/2 a year. He hasn’t planned for this. Once it has happened, he studies the situation and sees this is likely to happen in about 7-1/2 year intervals. So he immediately creates money to carry him over this 1/2 year of making no trades with the promise that he will return and destroy that money over a 7 year period (e.g. 84 monthly payments). That gives him a good cushion.

In this way, all traders take their own responsibility for the problem and initiate a solution. Over that period the trader can adjust his prices or work more hours to make up for this unintended idle time.

As we read this article I think we’ll find that the government claims the responsibility is Amazon’s … not the government’s and not the traders.

Amazon squeezing workers amid Covid-19 crisis is ‘unacceptable’ – French finance minister

© REUTERS/Mourad Guichard

French Finance Minister Bruno Le Maire said Amazon’s refusal to pay wages of staff who walk out over coronavirus fears is “unacceptable” as the country is considering nationalization of bigger companies at risk.

MD: So it is evident, it is the trader who is refusing to work. Thus, it is the trader who must suffer the consequences.

“These pressures are unacceptable, we’ll let Amazon know,” Le Maire said after several hundred workers protested the company’s policy on Wednesday. The e-commerce giant refused to pay workers who walked out or stayed at home in self-isolation over coronavirus fears.

Le Maire said Thursday that he would soon present a variety of plans to President Emmanuel Macron to assist the country’s biggest companies, such as BNP Paribas, Renault, Air France KLM, through the coronavirus crisis, some of which might include nationalization.

MD: Nationalization? The government just takes one trader’s business to satisfy another trader’s grievance? That’s what you get when you trade liberty for protection!

“We have several options on the table for all of the major industrial companies which could face major threats on the market, it could be us raising our stake in their capital… or it could be nationalizations,” Le Maire said.

MD: And where does the government get its “stake”? By stealing from traders. Government shouldn’t be able to do this. With a “real money process” it wouldn’t be able to do this. Governments never deliver on their promises. They just roll them over and that is default. A real money process would ostracize them.

“Free” Money Destroys the U.S. Financial System – Bonner & Partners

MD: At Money Delusions we quite frequently come across one of these beauties we just can’t pass up. The only way to deal with this kind of nonsense is to annotate it in place.

Bill Bonner’s Diary
“Free” Money Destroys the U.S. Financial System
By Bill Bonner
August 29, 2019 Print

MD: He begins with the obligatory flowery writing which is not relevant to the subject.

POITOU, FRANCE – Today, we are packing up, closing the shutters, putting away the lawn chairs and the croquet set.

Everything needs to be stored away; otherwise, rain, wind, and sun will do their damage. The wood cracks; the metal rusts; the curtains fade…

…It is nature’s way. And no matter what we do, nothing resists time.
Dirty War

In preparation for our departure, yesterday we got on our bicycles and rode around the countryside, saying goodbye to old friends.

Our first stop was a visit with a retired colonel, a man who had spent his life in the military – including engagements in the war in Algeria and peacekeeping operations in the Congo.

He is 80 years old and had cancer a couple of years ago; we didn’t expect to find him still alive. But he seems to be recovering and was cheerful and chatty.

“The Algerian conflict was a dirty war. We could have won the war militarily. But it was ruining the integrity of the army, turning it into a ruthless and unruly police force. I asked myself if I should resign. But I stuck with it and did the best I could. I don’t regret it.”
Broken Man

After a cold beer and warm conversation, we got back on our bikes and pedaled along the country road.

The next stop was to see a friend who used to work on our farm until he retired about 10 years ago.

He is in remarkably robust shape. At 79, he works in his garden every day and chops his own firewood.

But his oldest son was killed in a car crash last year – the second of his three children to die. Since then, he has seemed a bit like a broken man.

“How are you, Francois?” we asked.

“Okay,” was the answer from his mouth.

But his eyes told a different tale. He suffered.

After a few minutes and a glass of cold, freshly squeezed apple juice, we mounted up again.

A few miles farther on was the house of another retired couple.

Both are in their late ’70s. The woman is small, lively, energetic, and as friendly as ever. But her husband has multiple sclerosis. He no longer leaves the house, except to go to the hospital.

Still, his mind is alert, and he is keenly interested in China.

We took him a book from our library that we knew we would never read. It was written long ago in Chinese and now translated into French.

“In Chinese, there is no clear separation between writing and the ideas it conveys,” he explained. “Both should be true, beautiful, and timeless. To the eye… and to the mind.”

“Uh… yes,” we replied.
Rare Truth

MD: Ok, hopefully we’re now going to get into our subject matter … money. Look for clues that he knows what money is. We don’t expect to find them… but it’s always fun to look for them in these pontifications.

But our beat is money. And in today’s money world, truth is rare; beauty can be found only in irony and mockery.

Yesterday, for example, the president of the USA came out with this:


Our Federal Reserve cannot “mentally” keep up with the competition – other countries. At the G-7 in France, all of the other Leaders were giddy about how low their Interest Costs have gone. Germany is actually “getting paid” to borrow money – ZERO INTEREST PLUS! No Clue Fed!

MD: So the president is clueless about money too. What’s new.

The president is disturbed because the Fed is not debasing the U.S. money supply fast enough.

“Everybody else is doing it,” he seems to say. “Why aren’t we?”

Of course, “we” are. Our Fed is lending out fake money to member banks at a rate that is about even with consumer price inflation.

MD: Change the word “lending fake” to “counterfeiting” and you have the proper description of what is going on

This “free” money does to the U.S. financial system about what a hurricane does to a South Florida swimming pool; it becomes a greasy swamp with an alligator in it.

MD: In a “real money” process, we know that money is in perpetual free supply. Traders like you and I can create it any time we want to … and we want to when we can see clear to a trading promise spanning time and space. There is no “financial system”. There is only a purely objective process.

But our guess is that other Leaders were not “giddy” about the storm, but puzzled. Why would investors take shelter in a 10-year Italian bond at less than a 1% yield?
Raving Mad

MD: Notice the focus on so-called “investors”. In a real money process, everything is focused on traders like you and me. It’s about trading. It’s not about gaming the process for yield. And no “shelter” is needed. A real money process “guarantees” perpetual perfect balance between supply and demand for money itself … thus perpetual zero inflation and zero time value of money. The time span is not relevant.

There is the smart money. And there is the dumb money. But this money must be stark, raving mad.

MD: In a “real money process” money has no intellect. Money is a promise made by a trader. And a real money process does not allow a broken promise by one trader to affect other “responsible” traders. Defaults are immediately mitigated by interest collections of like amount. These collections are paid by irresponsible traders according to their propensity to default (i.e. risk).

Italy’s economy has been in a slump for more than 10 years. Its native-born population is expected to be cut in half by the end of the century. It owes more than 130% of its GDP.

MD: The “it” referred to here is the government. And the amount it “owes” is simply the amount it has counterfeited. It never had any intention of keeping its promises. No government does.

And its government bumbles from one unstable coalition to another… barely able to govern at all.

MD: That’s the modus operandi of all governments. It’s like the Harlem Globetrotters and the Washington Generals. They pretend to be in a basketball competition … but they work for the same guy.

You’d have to be nuts to lend money to Italy…

…unless you thought the fix was in.

MD: In this context, “lend” assumes new money is not being created. Rather, the control of existing money is being handed over to another party (the government) for some consideration (yield). So what does he mean here by “unless the fix is in”? He’s saying you don’t loan to a “deadbeat counterfeiter” unless the fix is in. I don’t know about you, but I only loan to a deadbeat counterfeiter when forced to … taxed… and I have zero expectation that the loan will be repaid…ever.

That is, buying Italian bonds – or German bonds, or French bonds… or USA bonds, for that matter – makes sense only if you are front-running central banks, counting on them to do something even nuttier than you did, buying your overpriced bonds at even higher prices.

MD: A good example is financial manipulators buying Venezuelan debt for pennies on the dollar. The holders had little expectation of being repaid. But the purchasers knew they could get the USA government to institute “regime change”. After that, the new regime would “make good” on the bonds. They do this by instituting a new money… i.e. they clean the slate.

Which is what Mr. Trump wants the Fed to do – rig up the credit market even more than it is now.

The Fed should print up more fake money, he believes, and lend it to his government at even cheaper interest rates. The idea is to get the economy running hot in time for the 2020 election.
Free Money

MD: With a “real money process” governments are just traders like you and me. But we know from experience that they never deliver on their trading promises. Then their defaults equal their money creation…and interest collections against them equal these defaults. They can no longer create money. They are thrown out of the game. A real money process cares nothing about “the economy”.

Our guess is that this huge bubble in debt marks a major change in world economic power.

MD: A bubble happens when the preponderance of traders make promises they can’t keep. This happens often in a manipulated money process. After a period of “tight” money, the money changers move to an “easy” money policy. Traders, having been strangled for some period, can now breathe…and they begin trading over time and space … creating money. Then the manipulators tighten the money again (they call the loans and refuse to “grant” new loans). Trades that were sound become unsound … and trades that were depending on those trades become unsound … and on and on. One failed trade cascades into a string of failed trades. A real money process doesn’t exhibit this behavior. If a trader defaults, it doesn’t affect other existing trades. It just serves as an automatic negative feedback … imposing slightly larger interest loads on new irresponsible traders. Responsible traders have zero interest loads because they don’t default.

Americans forsook their gods – honest money, smallish government, balanced budgets.

MD: When did Americans every have honest money, small government, and balanced budgets? The whole idea of forming the USA union was to repay guys like Robert Morris.

Now, those gods forsake them.

Fake money has destroyed real capital, created chaos in the markets, caused trillions in malinvestment, slowed down growth, and resulted in appalling inequality.

MD: Remember, “fake money” is “counterfeit money”. A real money process tolerates no counterfeiting at all.

It has also corrupted the government; the feds use it to avoid making hard – but necessary – decisions.

Fake money finances their fake wars… rewards lobbyists, campaign donors, crony contractors… and has added more than $10 trillion in additional debt in the last 10 years.

And with so much cheap credit available, not a single candidate even suggests balancing the budget or curtailing wasteful spending.

Why make tough choices when you get free money?
The Fix Is In

Germany is actually “getting paid” to borrow, Mr. Trump reminds us.

But people only get free money when the fix is in. And the fix won’t stay fixed forever.

Today’s rigged-up bond bubble will be no exception.

When will it pop? How?

We would love to meet the person who knows the answers to those questions.

MD: Read a history book. It has “rhymed” in this regard innumerable times in innumerable places. It is the money changers principal tactic.

In the meantime, we wait… we watch… and we try to connect the dots. And we wonder: What really matters?

Our final stop yesterday was at the modest house of a woman whose husband had recently died after a long, losing battle with Alzheimer’s disease.

We sat with her for a few minutes and reminisced. We discussed the weather, the small tomatoes in her garden, and what was going on at the local church. But she had her husband on her mind.

“The last words he said were five years ago,” she explained, tears in her eyes. “He said ‘I love you.’”

Regards,
signature

Bill

MD: Beautiful writing Bill … but you’re clueless about money.

Why gold is (not) money.

*** MD: This article is from ZeroHedge.com. There they are clueless about money, but continue to pontificate with articles like this.

At MoneyDelusions (MoneyDelusions.com/wp) we know that gold is not money … and easily prove it. Lets see how they get around our proof.


A couple of months ago, CNBC’s Josh Brown made a blog post saying that “Permabears are Ridiculous People”. Here’s my answer.
Why Gold Is Money: A Periodic Perspective
Profile picture for user Tyler Durden
by Tyler Durden
Fri, 07/05/2019 – 22:25
Authord by Nicholas LePan via Visual Capitalist,

The economist John Maynard Keynes famously called gold a “barbarous relic”, suggesting that its usefulness as money is an artifact of the past. In an era filled with cashless transactions and hundreds of cryptocurrencies, this statement seems truer today than in Keynes’ time.


*** MD: Agreed.

However, gold also possesses elemental properties that has made it an ideal metal for money throughout history.


*** MD: Disagree. It has never been money and never will be money. However, it may be a better money substitute than, say, cement blocks.


Sanat Kumar, a chemical engineer from Columbia University, broke down the periodic table to show why gold has been used as a monetary metal for thousands of years.

The Periodic Table

The periodic table organizes 118 elements in rows by increasing atomic number (periods) and columns (groups) with similar electron configurations.

Just as in today’s animation, let’s apply the process of elimination to the periodic table to see why gold is money:


*** MD: Note, he begins with the premise that money can be stuff (wrong). He then goes through the periodic table to see what the best stuff is for money. With an errant premise, you’re going to come to an errant conclusion. Watch him do it.

Gases and Liquids
Noble gases (such as argon and helium), as well as elements such as hydrogen, nitrogen, oxygen, fluorine and chlorine are gaseous at room temperature and standard pressure. Meanwhile, mercury and bromine are liquids. As a form of money, these are implausible and impractical.

*** MD: So he takes his false premise and hones it down to solids. What if he said music can be found in the periodic table … and the job is to select the best music. See how ridiculous things get when you start with a ridiculous premise?

Lanthanides and Actinides
Next, lanthanides and actinides are both generally elements that can decay and become radioactive. If you were to carry these around in your pocket they could irradiate or poison you.

Alkali and Alkaline-Earth Metals
Alkali and alkaline earth metals are located on the left-hand side of the periodic table, and are highly reactive at standard pressure and room temperature. Some can even burst into flames.

Transition, Post Transition Metals, and Metalloids
There are about 30 elements that are solid, nonflammable, and nontoxic. For an element to be used as money it needs to be rare, but not too rare. Nickel and copper, for example, are found throughout the Earth’s crust in relative abundance.

MD: Ok, here’s another false premise. “Money needs to be rare”. Nonsense. There must perpetually be an equality between the amount of money needed and the amount of money available. No “stuff” will ever meet this requirement. Money logically should be in “free” supply. Something rare will never be in free supply. And we can prove empiracly that he is wrong. In 1963 I was able to trade a silver USA quarter for a gallon of gasoline. In 1964 I was able to trade a composite USA quarter for a gallon of gasoline. Today, I can trade a USA quarter for 1/10th gallon of gas … whether it has silver in it or not. Logical conclusion? The silver (i.e. intrinsic value of the token) has absolutely nothing to do with the trade. Why the factor of 10 difference in trading power of the token? As we know here at MD, it’s because of counterfeiting (i.e. default not mitigated by interest collections of like amount) … predominantly by governments.

Super Rare and Synthetic Elements
Osmium only exists in the Earth’s crust from meteorites. Meanwhile, synthetic elements such as rutherfordium and nihonium must be created in a laboratory.

Once the above elements are eliminated, there are only five precious metals left: platinum, palladium, rhodium, silver and gold. People have used silver as money, but it tarnishes over time. Rhodium and palladium are more recent discoveries, with limited historical uses.


*** MD: They had the specie wars towards the end of the 19th century in the USA. Why? Because, though both gold and silver meet the ridiculous “rare” requirement, the people who had the gold pulled rank on the people who had the silver. They prevailed lawfully (i.e. in an un-principled fashion). Laws only dilute principles as is vividly illustrated in this example.

Platinum and gold are the remaining elements. Platinum’s extremely high melting point would require a furnace of the Gods to melt back in ancient times, making it impractical. This leaves us with gold. It melts at a lower temperature and is malleable, making it easy to work with.
*** MD: Ah … so his wisdom is divine. How interesting!
Gold as Money

Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. Civilizations have consistently used gold as a material of value.


*** MD: This is the “can’t destroy it” and “precident” argument for gold stuff as money. Again, he started with a false premise and he brings forth false arguments. What’s not to love about the process?

Perhaps modern societies would be well-served by looking at the properties of gold, to see why it has served as money for millennia, especially when someone’s wealth could disappear in a click.


*** MD: The gold bugs would be well-served to look at societies, both modern and otherwise, for the real definition of money. In “no” society can you point to a case where money is created that a ‘trader” is not involved in its creation. Money is obviously and provably “an in-process promise to complete a trade over time and space.” It is always and only created by traders like you and me … making promises and delivering with time payments … like for a house or a car.

FACEBOOK creating its own money.

https://www.zerohedge.com/news/2019-06-21/blain-facebook-last-place-we-should-trust-banking-hub#comment_stream

This article on zerohedge addresses the new overture by Facebook to create a new money (Libre). Knowing what you have learned here about money, it is a fun exercise to take articles like this and blow them full of holes.

Money is an “in-process promise to complete a trade over time and space.” It is always, and only, created by traders (like you and me buying things with time payments). It is always properly destroyed by traders delivering as promised. If the trader defaults or if counterfeit money is found, it is immediately mitigated by interest collections of like amount. The operative relation is INFLATION = DEFAULT – INTEREST = zero.

A proper Medium of Exchange (MOE) process monitors the creation of the money and the delivery on the promise. It guarantees a perpetual perfect balance between supply and demand for money while also guaranteeing perpetual free supply of money.

The money creation process and delivery is never anonymous or done in secret. However, in the interim between creation and delivery, the money circulates in private and anonymous simple barter exchange. In today’s technology (block chains) this can be done with great efficiency and robustness. It can employ the greatest deterrent to cheating … that being transparency.

Now all governments are instituted by money changers. They are designed to protect the money changers “banking” operations. These operations just co-opt the trading process, claiming tribute (INTEREST); manipulating supply and demand to keep traders off balance (the so-called business cycle); and funding governments (traders who never deliver as promised) through INFLATION.

If Google (or better yet Amazon) institutes a proper MOE process, they blow this long running conspiracy out of the water. They return the money process to the traders who created it in the first place.

That ain’t gonna happen. Too bad. If it did happen this planet would be a far more pleasant and safe place to waste about 80 years of your time … the only time you will ever get by the way.

So it goes.

Bernie Sanders, Ocasio-Cortez Propose 15% Cap On Credit Card Rates; Visa, MC Tumble

Bernie Sanders, Ocasio-Cortez Propose 15% Cap On Credit Card Rates; Visa, MC Tumble

https://www.zerohedge.com/news/2019-05-09/bernie-sanders-ocasio-cortez-propose-15-cap-credit-card-rates-visa-mc-tumble

MoneyDelusions: We’re going to get this from people who don’t know what money is … and nobody but the money changers seem to know … and they’re liars.
It is easily proven: Money is “an in-process promise to complete a trade over time and space.” It is always, and only, created by traders like you and me. For example, when we promise to buy a house with 360 monthly payments … or a car with 60 monthly payments … we are making a promise spanning time and space. To do this we create a “money obligation” and get it certified by the process … which then monitors it for performance. In most cases it is just an entry in a couple ledgers. One ledger (the money process’) keeps transparent track of the performance on your promise. The other ledger (yours) keeps track of how much performing you have done and have left to do.

In the mean time, this money you created exchanges as the most common object in every simple barter exchange.

Should you fail to meet your performance promise (i.e. DEFAULT), a proper Medium of Exchange (MOE i.e. money) process immediately recovers your DEFAULT with an INTEREST collection (from other irresponsible traders) of like amount. In this way it protects everyone using money to make trades.

The operative relation is: INFLATION = DEFAULT – INTEREST = zero

‘So INTEREST is absolutely “objective”. It’s not dictated by the likes of Sanders or Cortez … or the money changers … or the governments the money changers institute to protect their scam. INTEREST is guaranteed to be zero for responsible traders (non-DEFAULTERS) and adjusted according to a trader’s propensity to DEFAULT (i.e. irresponsibility). Past irresponsibility can be cleared away by simply making up the DEFAULT.

The money itself has no intrinsic value … so precious metals are not money. The money itself is not created from waste … so BitCoins are not money. Money maintains a perfect perpetual supply/demand balance, thus also ruling out precious metals and so-called crypto.

The obvious indicators that you are immersed in a defective MOE process is concepts like “monetary policy”; “stimulation”; “unemployment”; “inflation targets”; “usurious interest”; etc.