MD: At Money Delusions we have come to know that neither the “Keynesian’s” nor the “Austrians” are even close to getting INFLATION right. How can you get INFLATION (or more generally economics) right when you don’t know what money is? Further, this, like government (i.e. the Republicans and Democrats) is like watching the Harlem Globe Trotters and the Washington Generals. It’s theater. But just for exercise, let’s annotate this article from that infamous Mises Monk, Bob Murphy, who has relaxing life away as a college professor (most recently at Texas Tech, my sons’ alma matre). With an NYU PhD we don’t ever expect much but a professional shill. Interestingly, not only does Murphy claim to know what money is…he’s proving he doesn’t know in his books.
The government’s latest report puts the twelve-month official consumer price inflation rate at 8.5 percent, the highest since December 1981:
MD: Of course we at MoneyDelusions know INFLATION cannot be measured. We also know with a “real” money process, it is guaranteed to be perpetually zero…we don’t need to measure it. But look at the time series below. Notice, it starts its abrupt ramp up at the end of 2021…when the SSA had to finally admit they had been lying about INFLATION for fully 20+ years. In January, 2022, annuitants got a 5% raise. That’s not the 7% average inflation that we provably had since 911…but it’s 5x the less than 1% they claimed we had. The numbers are pure fiction. So why try to tell a story about what they mean?
As economists debate the causes of, and cure for, this price inflation, it’s worth recounting which schools of thought saw it coming. Although individuals can be nuanced, generally speaking the Austrians have been warning that the Fed’s reckless policies threaten the dollar. In contrast, as I will document in this article, two of the leaders of the Keynesian and market monetarist schools didn’t see this coming at all.
MD: Notice Mises Monks like to refer to “price” inflation…as if there was any other kind. What we have had for the last three or four generations is government counterfeiting. They claim to be doing it at 2%…but on average have been doing it at 4% … since 1913.
My Worst Professional Mistake
Before diving into it, I need to address a problem: my hands-down worst professional mistake occurred during the early years of the Fed’s “QE” (quantitative easing) programs, when I made bets on (consumer price) inflation with two economist colleagues. I ended up losing those bets and thereby gave Paul Krugman the opportunity to lecture me on my intellectual dishonesty because I clung to my (ostensibly falsified) Austrian model even after my prediction blew up in my face. Indeed, if you check out my Wikipedia entry, you’ll see that apparently my life story is that I was born, got my PhD, and lost an inflation bet—in that order. (For those interested in the details, I summarize the episode with relevant links in this postmortem blog post. I also participated in a 2014 Reason symposium along with Peter Schiff and others, commenting on the lack of inflation.)
MD: Now come on Bob! Do you really think giving everyone 1 weeks rent as a stimulous is going to do anything different than buying them beers for a week?
Ever since the rounds of QE failed to yield surging consumer price inflation at the scale some of us warned of, the Keynesians and market monetarists understandably ran victory laps, saying that they were to be trusted over those permabear Cassandra Austrians. (To be sure, the market monetarists were far more civil about it than the prominent Keynesians.) So it is not with gloating or vindictiveness that I write the present article, but rather I do it to set the record straight and document for posterity that the leading Keynesians and market monetarists totally missed this bout of price inflation.
The Keynesians Camp: Paul Krugman and Klaus Schwab
Let’s do the fun one first: Paul Krugman has not fared well in light of our current inflationary experience. As late as June 2021, Krugman wrote an article in the New York Times titled “The Week Inflation Panic Died.” Here are some key excerpts, with my bold added, and keep in mind that when Krugman wrote this, the most recent Consumer Price Index (CPI) inflation rate was only 4.9 percent:
Remember when everyone was panicking about inflation, warning ominously about 1970s-type stagflation? OK, many people are still saying such things, some because that’s what they always say, some because that’s what they say when there’s a Democratic president….
MD: Even if they were able to measure INFLATION, the disruptions caused by a two year shut down would make their numbers useless.
But for those paying closer attention to the flow of new information, inflation panic is, you know, so last week.
Seriously, both recent data and recent statements from the Federal Reserve have, well, deflated the case for a sustained outbreak of inflation … [T]o panic over inflation, you had to believe either that the Fed’s model of how inflation works is all wrong or that the Fed would lack the political courage to cool off the economy if it were to become dangerously overheated.
Both beliefs have now lost most of whatever credibility they may have had….
The Fed has been arguing that recent price rises are similarly transitory … The Fed’s view has been that this episode, like the inflation blip of 2010–11, will soon be over.
And it’s now looking as if the Fed was right …
…. Monetary doomsayers have been wrong again and again since the early 1980s, when Milton Friedman kept predicting an inflation resurgence that never arrived. Why the eagerness to party like it’s 1979?
To be fair, government support for the economy is much stronger now than it was during the Obama years, so it makes more sense to worry about inflation this time around. But the vehemence of the inflation rhetoric has been wildly disproportionate to the actual risks—and those risks now seem even smaller than they did a few weeks ago.
MD: Really? Remember all the vaccinations? Who paid for those? Government you say? With money they counterfeited into existence? And who got the money? Drug companies and medical delivery plants like hospitals? As far as the economy was concerned, all that money went down a rat hole. But in reality, it went into government, and government dependants pockets.
Of course, Krugman’s confident dismissal of those Biden-hating doomsayers blew up in his face, as CPI inflation kept ratcheting higher and higher. In a December 2021 NYT column, Krugman threw in the towel and admitted he had been wrong, but in his own special way (again, with my bolding):
The current bout of inflation came on suddenly…. Even once the inflation numbers shot up, many economists—myself included—argued that the surge was likely to prove transitory. But at the very least it’s now clear that “transitory” inflation will last longer than most of us on that team expected….
… I believe that what we’re seeing mainly reflects the inherent dislocations from the pandemic, rather than, say, excessive government spending. I also believe that inflation will subside over the course of the next year and that we shouldn’t take any drastic action. But reasonable economists disagree, and they could be right….
The latest projections from board members and Fed presidents are for the interest rate the Fed controls to rise next year, but by less than one percentage point, and for the unemployment rate to keep falling.
MD: So how does the Fed control interest rates? Don’t they sell their counterfeit money at auction? And don’t they use that to pay back the counterfeit money they sold at earlier auctions? And don’t they guarantee their member banks 10x leverage regardless?
Perhaps surprisingly, my own position on policy substance isn’t all that different from either Furman’s or the Fed’s. I think inflation is mainly bottlenecks and other transitory factors and will come down, but I’m not certain, and I am definitely open to the possibility that the Fed should raise rates, possibly before the middle of next year….
Maybe the real takeaway here should be how little we know about where we are in this strange economic episode. Economists like me who didn’t expect much inflation were wrong, but economists who did predict inflation were arguably right for the wrong reasons, and nobody really knows what’s coming.
For those keeping score at home, remember that when I pointed out that Keynesians Christina Romer and Jared Bernstein had been notoriously wrong in their forecasts of unemployment following the Obama stimulus package, Krugman told us that “some predictions matter more than others.” So this time around, Krugman can’t argue that his botched inflation predictions are irrelevant. Instead, as we see above, he’s claiming that his opponents were right but for the wrong reasons. Even when Krugman is wrong, he’s still better than his enemies!
And for the sake of completeness, let’s reproduce this quotation from Klaus Schwab (who has doctoral degrees in both economics and engineering) and Thierry Malleret in COVID-19: The Great Reset. Writing in July 2020, Schwab and Malleret claimed:
At this current juncture, it is hard to imagine how inflation could pick up anytime soon…. The combination of potent, long-term, structural trends like ageing and technology … and an exceptionally high unemployment rate that will constrain wages for years puts strong downward pressure on inflation. In the post-pandemic era, strong consumer demand is unlikely. (p. 70)
MD: Earth to economists! The jig is up. We have a Wiemar, Zimbabwe, and Venezuela moment at our doorsteps. And there’s nothing they can do about it. Why do I get a dozen calls each day from so-called investors wanting to buy my real property for cash? Because they know the counterfeiting that produced the cash they think they have has yielded it worthless.
The Leader of the Market Monetarists, Scott Sumner
As I said earlier, the market monetarists are far more civil than Krugman, Brad DeLong, and some other leading Keynesians. (And as far as I know, they’re not bent on world domination either.) But to repeat myself: since 2008, the one trump card the market monetarists had in their rivalry with the Austrians was that many of us prematurely warned about consumer price inflation à la the 1970s, whereas the market monetarists relied on TIPS (Treasury inflation-protected securities) yields and other market indicators to reassure their readers that inflation wouldn’t be a problem.
In that context, then, it’s very interesting that Scott Sumner, founder and leader of the market monetarists, wrote a blog post entitled, “Fed Policy: The Golden Age Begins,” in January 2020. Here are the key excerpts, with my bold:
We are entering a golden age of central banking, where the Fed will become more effective and come closer to hitting its targets than at any other time in history. Over the next few decades, inflation will stay close to 2% and the unemployment rate will generally be relatively low and stable. And this certainly won’t be due to fiscal policy, which is currently the most recklessly pro-cyclical in American history.
… Fed policy is becoming more effective because it is edging gradually in a market monetarist direction….
If they continue moving in this direction, then NGDP [nominal gross domestic product] growth will continue to become more stable, the business cycle will continue to moderate, inflation will stay in the low single digits, and unemployment will stay relatively low and stable.
It won’t be perfect; the business cycle is not quite dead. There will be an occasional recession. But the business cycle is definitely on life support….
As an analogy, when I was young I would frequently read about airliners crashing in the US…. My daughter is a junior in college and doesn’t recall a single major airline crash in the US, excluding a couple of small commuter planes in the 2000s…. After each crash, problems were fixed and planes got a bit safer.
Recessions and airline crashes: They are getting less frequent, and for the exact same reason.
Before closing, let me deal with the obvious response from the market monetarist camp: They could defend Sumner’s claims by arguing that the Fed only strayed from the ideal path because of covid. Well, sure, but Sumner was still wrong for placing so much faith in central bankers and their “independence.”
Furthermore, as I explain in my chapter on market monetarism in this book, Sumner’s criterion of “NGDP growth” as a measure of tight or loose policy is almost a tautology. It is close to me arguing, “We will continue to see rising prices because of the Fed’s reckless policies, unless demand growth subsides, in which case we won’t.”
MD: When will the day come that Bob Murphy gets a clue?
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MD: A common provocative phrase. Money is an “in-process promise to complete a trade over time and space.” Well, substituting this provable definition for the “money” in the phrase, we essentially get “time is an in-process promise”. Obviously, it is not. Rather it is a fourth dimension defining “when” something is located “where.” Further we know that money is “always and only created by traders like you and me.” Well, you and I don’t create time. So how can time be money. The real principle is the “time value of money”. Does money today have a different value than money last year…or money a year from now. The simple answer: In a “real money process”, the value of money never changes…not over time…not over space. Thus, we can’t say it has time value.
It’s a phrase you’ve heard before. And probably a phrase you’ve accepted as truth. And it’s certainly true that there are plenty of ways that time and money relate to each other.
But a few months ago, I started to wonder: Is time really money? And if not, how does that change the way I think about my time and my money?
MD: Shouldn’t you begin by defining both “time” and “money”?
Today begins a series exploring those questions. I’ll tackle them from different angles and different aspects of entrepreneurship so that we can make more intentional decisions about how we spend our time and our money.
MD: How we “spend” our time and our money? That’s like “making more intentional decisions about how we trade.” There are only two ways: (1) Simple barter exchange in the here and now. (2) Exchange spanning time and space.”
First, a little context.
“Remember, time is money” is a line from Benjamin Franklin’s 1748 essay, “Advice to a Young Tradesman.” He encourages the reader to consider the money they might spend if they take a day off, as well as the money they’d lose for not working. I don’t know about you, but I feel like I’ve been running that calculation on repeat since I was sixteen years old! At least in the US, it seems we’re born with this idea already encoded into our brains.
MD: This is kind of a false choice. When you’re working, you’re in the process of making a trade. Not all work results in useful gain. Further, when you’re idle you’re in the process of doing something besides trading your “time and effort” for something. “Rest” is just such a thing…and if you don’t make that trade regularly you will die of exhaustion. Regardless, this has nothing to do with money.
Max Weber cites this aphorism repeatedly in his book, The Protestant Ethic and the Spirit of Capitalism. He sees it as a sort of semiotic turning point—a shift from the godly ethic of vocation to the secular ethic of capitalism. And remember, this phrase dates back to at least 1748. That’s 274 years of cultural indoctrination to this idea.
Now, if all of that sounds like I’m firmly against considering time as money (or money as time), I’m not. But I do think it’s an incredibly complicated truism that’s worth interrogating instead of merely accepting as immutable.
To kick off this deep dive into the question of whether time is actually money, I wanted to talk about money. And what money actually is, how we think about it, why the way we think about money matters. So I called up Paco de Leon, who just released a fantastic new book called, Finance For The People. She’s also the founder of The Hell Yeah Bookkeeping, which serves production companies and creative agencies. Paco knows more than a thing or two about money. But I wanted to start with the basics:
MD: Well, let’s see if Paco does indeed know a thing or two about money.
What is money?
At its most fundamental level, Paco told me, “Money is a shared delusion.” Money is valuable because we believe it’s valuable, not because it has inherent worth. If you’ve ever heard the term “fiat currency,” this is what it refers to: money that’s based on an agreement rather than an intrinsic value.
MD: Does a promise have value? Yes…of course it does. We value promises continually throughout our lives. And some promises we come to “not” value…because we know they won’t be kept. But knowing “all” promises creating money “will” be kept, either by the creator of the promise (and thus the money), or by the process that “guarantees” that the promise is delivered…and thus has value.
How is this guarantee accomplished? Well, it’s a lot like “casualty insurance”. You can send a ship of goods half way around the word. You can buy an insurance policy to guarantee “you” get paid for those goods and your ship returns. This is called a “PREMIUM”. And if your ship doesn’t return, you make “CLAIM” on the insurance provider. And in the insurance business, the operative relation is: PREMIUMS = CLAIMS. The money is made on the “investment income” from the PREMIUMS.
The operative relation for money is INFLATION = DEFAULT-INTEREST =zero. If the promise is not delivered, that is DEFAULT. Mitigating DEFAULTs with immediate INTEREST collections of like amount “guarantees” zero INFLATION. The crucial issue is “how” do you collect INTEREST and who do you collect it from?
That answer is you put the INTEREST load on irresponsible traders who have a non-zero propensity to DEFAULT. This is the same as the actuarial process of insurance: those who have the most CLAIMs pay the HIGHEST premiums.
About 10 or 11 years ago, I went to a lecture on money & meaning at my alma mater. Yes, I am that kind of nerd. That was the first time I was introduced to this idea—this fact, really. Money becomes valuable because you and I (and millions of other people) believe it is valuable. We believe it strongly enough to use money as a means of exchange and pay taxes and wages. The government incentivizes us to believe that—but ultimately, without the trust of US consumers, the dollar just wouldn’t be as valuable.
MD: So the lecture didn’t tell you that government is a dead-beat trader? If someone repeatedly lies to you, does that incentivize you to believe them? Of course not. You are admitting…you are deluded by government. A “real” money process gives money value buy guaranteeing the completion of a trading promise spanning time and space. It doesn’t require government. In fact, government behavior precludes it from creating money…i.e. a promise it is known never to deliver…but rather to just roll over with a new promise…to deliver on a failed promise with a new promise, also guaranteed to fail.
Further, this lecturer explained money exists to make exchanging goods—buying and selling—easier. Instead of every trade being a negotiation of how many eggs are worth a pound of wheat, we can assign a monetary value to each product and then independently decide whether we want to trade our money for the eggs or the wheat or a new phone.
MD: The common unit of measure is only part of the story. Our current money process gives a name to a certain amount of gold and/or silver. That name is the “dollar”. It assumes that the value of gold and silver never changes. That assumption is a delusion. If they had chose the name HUL (standing for Hours of Unskilled Labor), that would have been better. A HUL trades for the same size hold in the ground over all time.
We’re seeing this play out in real-time right now with cryptocurrency, my current research obsession. What do people believe bitcoin or ether is worth? And how does that value fluctuate based on the number of people who believe in its value? How is a quote-unquote currency impacted if few sellers accept it as payment from buyers? If you’re curious about how this “money is a shared delusion” thing plays out practically, learn about crypto and all the wild things happening in that market. (Hint: it’s not great.)
MD: Crypto (specifically Bitcoin) claims a solution to the “byzantine general’s problem”. Basically it tries to guarantee truth. It does this with a concept it calls “proof of work” and therefore proof of value. It’s another delusion. You don’t create value by digging a hole and then filling it in again. But you do expend work. A real money process makes no claims whatever about the value of the “promise” (i.e. money). It just guarantees that is ultimately delivered on…and destroyed. In the interim it trades as the most common object in simple barter exchange.
Back to the kind of money we have a stable agreement about. It can be hard to integrate the idea that money is a shared delusion because it’s so integral to the way we navigate the world. Our survival, in many ways, depends on how we earn and spend money. Paco was fascinated with that duality; money is both imaginary and key to our contemporary existence. She said, “Once we start to examine what [money] is at its core, we can start to ourselves, ‘If this thing is based on belief, well, how else is the way I interact with it based on beliefs?’”
MD: Do you describe “insurance” as a “shared delusion”…because it’s so integral to the way we make promises? Our survival depends on being of value. And that means trading our time for sustenance. Paco evidently failed in her examination of what [money] is at its core. You plant seeds with the belief that they will grow into a plant that you can eat. If you have a brown thumb like I have, you don’t believe it. But you can see skilled farmers making things grow. For me, I choose not to trade my time in planting. Rather, I trade it for something the farmer wants…and I trade that for the fruits of “his” planting. Don’t make this more complicated than it is.
What we believe about money impacts how we interact with it.
It’s the reason you and I can make drastically different money decisions, and they’re still the right decisions for us. Money isn’t an immutable, universal Truth—but a fluid, relative representation of value, which is always individual. What I value is not what you value. What you value is not what I value. What we each value will be decided by our circumstances, values, personal preferences, and priorities. And even within that relativity, there’s also the question of how value is related to available resources. For instance, I might understand and appreciate the value of investing in a house in Montana right now. It’s where we plan to move in about five years. But saying the market there is volatile would be an extreme understatement. Could I put together a down payment to buy property there? Sure. But I have to weigh the value of that money against the potential risk of buying now versus purchasing a few years from now.
Money isn’t an immutable, universal Truth—but a fluid, relative representation of value, which is always individual.
Paco gave me an even better example. Imagine you’re at a restaurant with a friend, and the Happy Hour special is $1 oysters. If you’re not an oyster fan, know that that price is a steal. You say to your friend, “I love oysters! Let’s get a dozen—that’s such a good price.” But your friend is dubious. “$1 oysters?” they say, “That’s… suspicious.” Maybe they are old. Perhaps the restaurant got them from an unscrupulous purveyor. Maybe they’re just not very good. You and your friend are working with the same financial information on the surface. It’s Happy Hour, and the oysters are $1 each. But you bring your beliefs about money and value to the table, and your friend brings theirs. The result is two drastically different approaches to the potential purchase.
MD: But none of that has to do with money. That has to do with trade. Trade has three stages: (1) Negotiation; (2) Promise to deliver; (3) Delivery as promised. In simple barter exchange, (2) and (3) happen simultaneously in the here and now. Money enables (2) and (3) to happen over time and space. And money has nothing to do with “belief”. That’s all taken care of in stage (1)…and it only applies to the two parties involved.
Our values, personal histories, upbringing, geographic location, culture, class… all these things and more influence the way we approach the proverbial $1 oyster. So do the beliefs that we have about ourselves. Paco told me that many of her original stories about money were informed by her belief that she wasn’t good enough. It might be easy to write it off as a “money mindset thing.” Yet, her anxiety about not being good enough was based on real experiences. She told me, “Being queer and a woman of color has not been a nice day at the beach. I’ve heard family members talking about so-and-so being gay. I remember hearing that story and being like: okay, noted, not okay to be gay.” She also picked up the “not good enough” message from thirteen years of Catholic school—a privilege in many ways, but also a daily immersion into a story about being fundamentally flawed.
MD: If Paco was this easily conflicted about money, what did she have to say about trade? Could she compare and contrast the two? I think you were wasting your time with Paco. In the land of the blind, the one eyed person is most value. In the land of the queer, the straight person has a value deficiency in at least one category of trade…that being an inter-personal relationship…which is the most equitable trade possible.
The worry about not being good enough coalesced into a story that she should take what she’s given and be grateful for it, grateful to be included, to belong. But eventually, she started to shift that story—and decided to go out on her own in order so she could take control of the value of her work on the open market. And… still, she was undercharging for bookkeeping services and consulting. “I was that $1 oyster,” she said. So the work continued. She pursued therapy and other ways of processing her beliefs and experiences to unpack why she was perennially coming up short on decisions about price.
MD: Again, this has nothing to do with money. She is addressing the (1) Negotiation state of trader.
This is what we mean when we talk about understanding your money mindset. It’s not about “charging what you’re worth” or investing in yourself. It’s really a process of unpacking unconscious stories, weighing them against cultural conditioning, and finding ways to resource yourself to shift your thinking. “Thinking bigger” is just a bandaid over a much bigger issue. If you try to cover your money wounds with “charge what you’re worth,” you won’t get very far without bleeding out. This is why so much money mindset advice feels like a panacea. Before we can write a more effective money story, we actually have to root out and process the old one.
Before we can write a more effective money story, we actually have to root out and process the old one.
“The quality of your thinking impacts the decisions you make,” Paco told me. That’s why she cares about really getting to the heart of how we think about money, rather than trying to plaster over it with affirmations and financial advice. When you say something like “charge what you’re worth” to cover over feelings of inadequacy, the inadequacy is going to leak through. Those unexamined feelings influence your decision-making. So you find a way to rationalize a decision prompted by your original, negative money story rather than the one you think you’re telling. Paco says:
“Just feel your damn feelings on the upfront! Recognize that you’re an emotional creature. Sometimes your feelings are going to get in the way. Feel them and manage them and regulate your nervous system.”
MD: Again…is irrelevant to money.
The Moral Quality of Money
When we start talking about how our beliefs impact our decisions with money, we inevitably land on assumptions about the moral quality of money. Money and what we do with it seem to signal whether we’re a good or bad person, a good citizen or a bad citizen.
MD: This is nonsense. If you have grapes and you want strawberries money gives you an option. You can “sell” your grapes for some number of HULs …hours of unskilled labor. You know a HUL value because you traded in them at some point in your life…usually a job during high school. You then take those HULs and find someone with strawberries. And you negotiate that trade. Using money you have two negotiation steps. (1) grapes for HULs; (2) HULs for strawberries. If you make a bad trade on you grapes, you still have a chance of correcting it on your trade for strawberries. Or you can gain on both trades or you can lose on both trades. It’s about your ability to trade. It’s not about money.
The messages around this can come from the oddest places—or, maybe, the most predictable least helpful places. For instance, in an interview on cable news, former Labor Secretary Elaine Chao said that low-wage workers had a patriotic duty to get back to work. Prosperity gospel preachers tell you that wealth is a sign of god’s favor. And the vast majority of the political machine in the US has been touting the welfare queen as the ultimate moral villain since Reagan.
MD: And again, be that as it may, it has nothing to do with money.
These messages aren’t the whole of the moral lessons we learn about money—they’re just the tip of the iceberg. They’re signposts of a pervasive, inescapable message about money; having money is good and, if you don’t have it, you better work your ass off for more of it so you can be good.
Paco said:
“We are overly focused on our own personal shortcomings, right? You did this wrong. You are bad. You are not disciplined. But what I really think what we need to focus on when we feel these negative feelings of shame and guilt is exploring and understanding where they came from. Who taught you that you should be ashamed of this? Where did you pick that up? Was it a move? Was it a song? Was it your grandparents?”
MD: I wonder what Paco would have to say about trading for art?
She said we pick up these expectations from family, friends, and society. When we violate that behavior, we feel bad. The answer? Paco says that financial pros need to help people heal the parts of them that are broken to help the people they serve to heal.
MD: And don’t forget the things we pick up from advertising and other forms of information and/or brainwashing.
Nowhere is moralizing more prevalent than in discussion about debt. But as Trump and other billionaires have proved repeatedly, debt only seems to be bad when you’re the wrong kind of person with that debt on your balance sheet. So I asked Paco: what’s the deal with debt?
MD: While you were at it did you ask her “what the deal with a promise”? Is a promise a debt? Of course it is.
As is her gift, Paco gave me a great analogy. Debt is like fire, she said. Fire has benefits—it lets us cook our food, for instance. But if that fire gets out of control? Well, then there’s a problem. Debt has significant benefits. Without the invention of the 30-year mortgage, many of us would not be able to own real estate. Without a loan or a business credit card, we might not be able to make investments in the growth of our companies. But debt can quickly get out of control. And that’s when it becomes a problem. “We shouldn’t look at things with this tunnel vision of ‘debt is bad,’” Paco said. Black and white thinking rarely (maybe never?) benefits us.
MD: The “30 year mortgage” illustrates the scam that is our existing money system. (1) It assumes someone is “lending” you the money when in actuality, “you” are “creating” it. (2) It assumes you must pay “interest” on the money you have still not returned. Both are false in a “real” money process. In a “real” money process, money is in perpetually free supply. It never changes its value. And it imposes no resistance to trading (e.g. interest load).
Is time money?
As I mentioned, I’m really interested in exploring the maxim, “time is money.” In what ways is that true? In what ways is it not true? And how might a fundamental, unexamined belief that time is money benefit or harm us and our work? So I asked Paco for her thoughts. She told me that there was a long time where she definitely ascribed to this philosophy. She’d make calculations about what she wanted to buy and whether the price was worth the amount of time it would take to earn that amount. She said it wasn’t a horrible way to think about money—but it’s certainly not the only way to think about the relationship between time and money.
MD: You took time to write this article. I took time to make these annotations. I received nothing in trade for my effort. That makes me a fool. What did you receive for writing the article?
For instance, when she started hiring, she realized that she could create leverage with other people’s time. As a business owner, she could use their work to earn more. She also thinks about how money can buy time, “Time is a non-renewable resource. Money is a renewable resource.” And, of course, she’s very interested in investing in a way that produces more money without more time spent on work.
MD: “Money is a non-renewable resource”: Try this? You can make money writing this article. You can obtain a hole by digging. If you need a hole, would you choose to spend your time writing this article for money…then trading that money for a guy to dig your hole? What if it takes twice as long to dig the hole yourself than to have the guy do it. Did you “reclaim” some non-renewable time? You know the old axiom: work smarter, not harder.
Paco and I agree that the danger in believing “time is money” is that it often reinforces conditioning around productivity and usefulness. We learn at an early age that the goal is to get as much done in a certain period of time as possible—the more ways we can hack our time to produce more, the more we’re rewarded. We’re also taught to evaluate our worth to society from the perspective of productivity. Taking time off, therefore, risks getting you labeled as lazy. And that brings us back to the core belief Paco (and I) have had to wrestle with: Am I enough? Am I doing enough?
MD: And again, that’s all irrelevant.
“Am I deserving of the space to just be a human appreciating the sunshine on my face? I want to normalize wanting to chill,” she told me.
“To me, money is freedom and it’s power. It allows me to live a life of dignity.”
MD: And if sea shells were money does that make picking up sea shells bring you more freedom and power? You know it doesn’t. You can’t just call something money and make it be so. It’s the process that brings the value.
As we started to wrap things up, Paco told me that she really wants people to be able to live a life of dignity. Yes, we need to concern ourselves with our own personal finances. But we should also be concerned about the public policies that would allow all people to live dignified lives. She said, “let’s just solve that problem first. And then luxury will follow.”
MD: If “all” people just took care of themselves “all” would be fine. That’s everyone’s first task…take care of yourself.
I’ve been rolling the idea of “dignity” around in my mind since I talked to Paco. Who is denied dignity? What are the mechanisms that enforce that denial? What does a dignified life look like, and how much does it cost?
Paco does such a great job of addressing the things we can control about money. And she also does a great job acknowledging that there is much that’s out of our control. This is certainly true when it comes to dignity, as well. We can do a lot for ourselves to ensure a dignified life. But for many of us, factors out of our control make it incredibly difficult. So, what policy changes could we advocate for so that all people could have access to a dignified life? What community care projects could help more people live with dignity?
MD: If you have money and you created it, you must eventually return it as you promised and it is destroyed. If you obtained your money in trade, it’s no different than grapes you obtained in trade…except for the process. With a “real” money process, you can put your money under a rock for 10 years…then take it out and trade it for the same size hole in the ground as you could 10 years ago. With grapes…well, they rotted 10 years ago. And with our counterfeit dollar, you can trade for a hole that is 2/3rds as big…assuming 4% inflation caused by government counterfeiting.
We all have room to work on our beliefs about money, and many of us have enough space to start changing the larger conversation, too.
MD: Actually, everything in your article is about “trade”…not “money”.
MD: This article is so typical of what we see coming out of ZeroHedge.com. These people actually believe what they write. As usual, we’ll dissect the article in place and expose the delusions. We’ve done it repeatedly before. The trouble is, they either will never get it…or the are an active part of the scam.
It’s no secret that China and Russia have been stashing away as much gold as possible for many years.
MD: And if they had a clue they wouldn’t be doing that. At the point where gold can have meaning in economics, the game is already over. There is only enough gold on the planet for each person to have less than 2 ounces…less than $4,000. If gold were actually the media of exchange, it would have to trade for a few orders of magnitude greater than that. And if it did, people would be digging up their own back yards looking for the stuff. It’s beyond stupid. Miners who actually know how to find and refine gold would become enormously wealthy, but could never create enough for the rest of us to use it in trade…i.e. as money.
China is the world’s largest producer and buyer of gold. Russia is number two. Most of that gold finds its way into the Russian and Chinese governments’ treasuries.
MD: Where it does absolutely nothing for the benefit of anyone.
Russia has over 2,300 tonnes—or nearly 74 million troy ounces—of gold, one of the largest stashes in the world. Nobody knows the exact amount of gold China has, but most observers believe it is even larger than Russia’s stash.
MD: Ok. Take that number. 74,000,000 ounces. Divide that by the 7 billion people on the planet. That comes to about 0.01 ounces per person on the planet. Times $4,000 per ounce you have $40. That’s 4 trips to McDonalds. Now what?
Russia and China’s gold gives them access to an apolitical neutral form of money with no counterparty risk.
MD: Counterparty risk? What does that have to do with anything. 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. And it is always properly destroyed when we deliver as promised. In the mean time it circulates as the most common object of every simple barter exchange. It’s a record keeping problem…and a discipline problem if the trader fails to deliver as promised.
Remember, gold has been mankind’s most enduring form of money for over 2,500 years because of unique characteristics that make it suitable to store and exchange value.
MD: This stupid argument won’t even play in Peoria… let alone throughout the world.
Gold is durable, divisible, consistent, convenient, scarce, and most importantly, the “hardest” of all physical commodities.
MD: And here we have an open admission of ignorance about money. Durable isn’t an issue. An open record keeping system (e.g. ledger) is durable. Divisible? You can divide a number to any number of pieces you choose. If you buy a car by creating $70,000 in new money, that money can circulate as any denomination the marketplace requires. In the USA the smallest denomination is one cent…and most people won’t bend over to pick one up. Consistent? What does that mean? A promise is a promise. Delivery is delivery. What’s to be inconsistent? Convenient? What in the world is more convenient than a record keeping system? Create checks, currency, coins, … they’re just convenient place holders for what is recorded in the ledger. Scarce? This is the one that gets me most. The media of exchange should never be scarce. Quite the contrary, it should be in perpetual free supply. It should resist trade not at all. Hardest? As in harder than a Hershey bar? How ridiculous! And the one they left out…which is historically the biggest problem with any substitute for “real” money…it must be non-counterfeitable! And who is the biggest counterfeiter in “all” cases? Government!
In other words, gold is the one physical commodity that is the “hardest to produce” (relative to existing stockpiles) and, therefore, the most resistant to inflation. That’s what gives gold its superior monetary properties.
MD: Another open admission to stupidity. The money relation is: INFLATION = DEFAULT – INTEREST. Counterfeiting, the biggest cause of default not mitigated by interest collection, is the biggest source of inflation. It’s a very small fraction of traders who don’t deliver as promised. And when that happens, a “real money process” makes an immediate and equal interest collection of like amount. This guarantees that inflation will be perpetually zero.
Russia and China can use their gold to engage in international trade and perhaps back the currencies.
MD: Only as long as ignorance regarding real money prevails.
That’s why gold represents a genuine monetary alternative to the US dollar, and Russia and China have a lot of it.
MD: And of course there is no shortage of “stupid” people who think that matters. Real traders will “create” a “real money process” every time if not conflicted by the money-changers and the governments they institute. I’m now going to let him spew on as long he purveys the same ridiculous fiction. If he comes up with some new nonsense I’ll break back in.
Today it’s clear why China and Russia have had an insatiable demand for gold.
They’ve been waiting for the right moment to pull the rug from beneath the US dollar. And now is that moment…
This is a big problem for the US government, which reaps an unfathomable amount of power because the US dollar is the world’s premier reserve currency. It allows the US to print fake money out of thin air and export it to the rest of the world for real goods and services—a privileged racket no other country has.
Russia and China’s gold could form the foundation of a new monetary system outside of the control of the US. Such moves would be the final nail in the coffin of dollar dominance.
Five recent developments are a giant flashing red sign that something big could be imminent.
Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”
In the wake of Russia’s invasion of Ukraine, the US government has launched its most aggressive sanctions campaign ever.
Exceeding even Iran and North Korea, Russia is now the most sanctioned nation in the world.
As part of this, the US government seized the US dollar reserves of the Russian central bank—the accumulated savings of the nation.
MD: Oh I would so like to have Putin’s ear here. The best thing he could do is institute a “real money process” and use his gold to allay his doubters…he’d never have to touch any of it. In fact, I would like to see Elon Musk do it, rather than buy Twitter (that will bury him in criminal lawsuits should he succeed there).
It was a stunning illustration of the dollar’s political risk. The US government can seize another sovereign country’s dollar reserves at the flip of a switch.
MD: …until its counterfeiting is so obvious and egregious it deals itself out of the game all together.
The Wall Street Journal, in an article titled “If Russian Currency Reserves Aren’t Really Money, the World Is in for a Shock,” noted:
“Sanctions have shown that currency reserves accumulated by central banks can be taken away. With China taking note, this may reshape geopolitics, economic management and even the international role of the U.S. dollar.”
MD: Is anyone getting the dozen or so calls a day that I’m getting…from so-called investors who want to trade dollars for my real property? Why do that unless you know the dollars you hold are about to be worthless.
Russian President Putin said the US had defaulted on its obligations and that the dollar is no longer a reliable currency.
The incident has eroded trust in the US dollar as the global reserve currency and catalyzed significant countries to use alternatives in trade and their reserves.
China, India, Iran, and Turkey, among other countries, announced, or already are, doing business with Russia in their local currencies instead of the US dollar. These countries represent a market of over three billion people that no longer need to use the US dollar to trade with one another.
The US government has incentivized almost half of mankind to find alternatives to the dollar by attempting to isolate Russia.
MD: I vote for a competitive HUL (Hour of Unskilled Labor) based “real money process”. The HUL is valued today (i.e. trades for the same size hole in the ground) as it has for all time…recorded or otherwise.
Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities
Russia is the world’s largest exporter of natural gas, lumber, wheat, fertilizer, and palladium (a crucial component in cars).
It is the second-largest exporter of oil and aluminum and the third-largest exporter of nickel and coal.
Russia is a major producer and processor of uranium for nuclear power plants. Enriched uranium from Russia and its allies provides electricity to 20% of the homes in the US.
Aside from China, Russia produces more gold than any other country, accounting for more than 10% of global production.
These are just a handful of examples. There are many strategic commodities that Russia dominates.
In short, Russia is not just an oil and gas powerhouse but a commodity superpower.
After the US government seized Russia’s US dollar reserves, Moscow has little use for the US dollar. Moscow does not want to exchange its scarce and valuable commodities for politicized money that its rivals can take away on a whim. Would the US government ever tolerate a situation where the US Treasury held its reserves in rubles in Russia?
The head of the Russian Parliament recently called the US dollar a “candy wrapper” but not the candy itself. In other words, the dollar has the outward appearance of money but is not real money.
That’s why Russia is no longer accepting US dollars (or euros) in exchange for its energy. They are of no use to Russia. So instead, Moscow is demanding payment in rubles.
MD: Bingo. Game over for the Earth’s, and History’s, most egregious counterfeiter.
That’s an urgent problem for Europe, which cannot survive without Russian commodities. The Europeans have no alternative to Russian energy and have no choice but to comply.
European buyers must now first buy rubles with their euros and use them to pay for Russian gas, oil, and other exports.
This is a big reason why the ruble has recovered all of the value it lost in the initial days of the Ukraine invasion and then made further gains.
In addition to rubles, the top Russian energy official said Moscow would also accept gold or Bitcoin in return for its commodities.
“If they want to buy, let them pay either in hard currency—and this is gold for us… you can also trade Bitcoins.”
Here’s the bottom line. US dollars are no longer needed (or wanted) to buy Russian commodities.
Warning Sign #3: The Petrodollar System Flirts With Collapse
MD: I’m really skimming now. This guy is so far off the tracks there’s no hope of bringing him back. I think I’ll quit here.
Oil is by far the largest and most strategic commodity market.
For the last 50 years, virtually anyone who wanted to import oil needed US dollars to pay for it.
That’s because, in the early ’70s, the US made an agreement to protect Saudi Arabia in exchange for ensuring, among other things, all OPEC producers only accept US dollars for their oil.
Every country needs oil. And if foreign countries need US dollars to buy oil, they have a compelling reason to hold large dollar reserves.
This creates a huge artificial market for US dollars and forces foreigners to soak up many of the new currency units the Fed creates. Naturally, this gives a tremendous boost to the value of the dollar.
The system has helped create a deeper, more liquid market for the dollar and US Treasuries. It also allows the US government to keep interest rates artificially low, thereby financing enormous deficits it otherwise would be unable to.
In short, the petrodollar system has been the bedrock of the US financial system for the past 50 years.
But that’s all about to change… and soon.
After it invaded Ukraine, the US government kicked Russia out of the dollar system and seized hundreds of billions in dollar reserves of the Russian central bank.
Washington has threatened to do the same to China for years. These threats helped ensure that China cracked down on North Korea, didn’t invade Taiwan, and did other things the US wanted.
These threats against China may be a bluff, but if the US government carried them out—as it recently did against Russia—it would be like dropping a financial nuclear bomb on Beijing. Without access to dollars, China would struggle to import oil and engage in international trade. As a result, its economy would come to a grinding halt, an intolerable threat to the Chinese government.
China would rather not depend on an adversary like this. This is one of the main reasons it created an alternative to the petrodollar system.
After years of preparation, the Shanghai International Energy Exchange (INE) launched a crude oil futures contract denominated in Chinese yuan in 2017. Since then, any oil producer can sell its oil for something besides US dollars… in this case, the Chinese yuan.
There’s one big issue, though. Most oil producers don’t want to accumulate a large yuan reserve, and China knows this.
That’s why China has explicitly linked the crude futures contract with the ability to convert yuan into physical gold—without touching China’s official reserves—through gold exchanges in Shanghai (the world’s largest physical gold market) and Hong Kong.
PetroChina and Sinopec, two Chinese oil companies, provide liquidity to the yuan crude futures by being big buyers. So, if any oil producer wants to sell their oil in yuan (and gold indirectly), there will always be a bid.
After years of growth and working out the kinks, the INE yuan oil future contract is now ready for prime time.
And now that the US has banned Russia from the dollar system, there is an urgent need for a credible system capable of handling hundreds of billions worth of oil sales outside of the US dollar and financial system.
The Shanghai International Energy Exchange is that system.
Back to Saudi Arabia…
For nearly 50 years, the Saudis had always insisted anyone wanting their oil would need to pay with US dollars, upholding their end of the petrodollar system.
But that could all change soon…
Remember, China is already the world’s largest oil importer. Moreover, the amount of oil it imports continues to grow as it fuels an economy of over 1.4 billion people (more than 4x larger than the US).
China is Saudi Arabia’s top customer. Beijing buys over 25% of Saudi oil exports and wants to buy more.
The Chinese would rather not have to use the US dollar, the currency of their adversary, to buy an essential commodity.
In this context, The Wall Street Journal recently reported that the Chinese and the Saudis had entered into serious discussions to accept yuan as payment for Saudi oil exports instead of dollars.
The WSJ article claims the Saudis are angry at the US for not supporting it enough in its war against Yemen. They were further dismayed by the US withdrawal from Afghanistan and the nuclear negotiations with Iran.
In short, the Saudis don’t think the US is holding up its end of the deal. So they don’t feel like they need to hold up their part.
Even the WSJ admits such a move would be disastrous for the US dollar.
“The Saudi move could chip away at the supremacy of the US dollar in the international financial system, which Washington has relied on for decades to print Treasury bills it uses to finance its budget deficit.”
Here’s the bottom line.
Saudi Arabia—the linchpin of the petrodollar system—is flirting in the open with China about selling its oil in yuan. One way or another—and probably soon—the Chinese will find a way to compel the Saudis to accept the yuan.
The sheer size of the Chinese market makes it impossible for Saudi Arabia—and other oil exporters—to ignore China’s demands to pay in yuan indefinitely. Moreover, using the INE to exchange oil for gold further sweetens the deal for oil exporters.
Sometime soon, there will be a lot of extra dollars floating around suddenly looking for a home now that they are not needed to purchase oil.
It signals an imminent and enormous change for anyone holding US dollars. It would be incredibly foolish to ignore this giant red warning sign.
Warning Sign #4: Out of Control Money Printing and Record Price Increases
In March of 2020, the chair of the Federal Reserve, Jerome Powell, exercised unfathomable power…
At the time, it was the height of the stock market crash amid the COVID hysteria. People were panicking as they watched the market plummet, and they turned to the Fed to do something.
In a matter of days, the Fed created more dollars out of thin air than it had for the US’s nearly 250-year existence. It was an unprecedented amount of money printing that amounted to more than $4 trillion and nearly doubled the US money supply in less than a year.
One trillion dollars is almost an unfathomable amount of money. The human mind has trouble wrapping itself around such figures. Let me try to put it into perspective.
One million seconds ago was about 11 days ago.
One billion seconds ago was 1988.
One trillion seconds ago was 30,000 BC.
For further perspective, the daily economic output of all 331 million people in the US is about $58 billion.
At the push of a button, the Fed was creating more dollars out of thin air than the economic output of the entire country.
The Fed’s actions during the Covid hysteria—which are ongoing—amounted to the biggest monetary explosion that has ever occurred in the US.
When the Fed initiated this program, it assured the American people its actions wouldn’t cause severe price increases. But unfortunately, it didn’t take long to prove that absurd assertion false.
As soon as rising prices became apparent, the mainstream media and Fed claimed that the inflation was only “transitory” and that there was nothing to be worried about.
Of course, they were dead wrong, and they knew it—they were gaslighting.
The truth is that inflation is out of control, and nothing can stop it.
Even according to the government’s own crooked CPI statistics, which understates reality, inflation is rising. That means the actual situation is much worse.
Recently the CPI hit a 40-year high and shows little sign of slowing down.
I wouldn’t be surprised to see the CPI exceed its previous highs in the early 1980s as the situation gets out of control.
After all, the money printing going on right now is orders of magnitude greater than it was then.
Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead
“It’s possible to have more than one reserve currency.”
These are the recent words of Jerome Powell, the Chairman of the Federal Reserve.
It’s a stunning admission from the one person who has the most control over the US dollar, the current world reserve currency.
It would be as ridiculous as Mike Tyson saying that it’s possible to have more than one heavyweight champion.
In other words, the jig is up.
Not even the Chairman of the Federal Reserve can go along with the farce of maintaining the dollar’s supremacy anymore… and neither should you.
Conclusion
It’s clear the US dollar’s days of unchallenged dominance are quickly ending—something even the Fed Chairman openly admits.
To recap, here are the five imminent, flashing red warning signs the end of dollar hegemony is near.
Warning Sign #1: Russia Sanctions Prove Dollar Reserves “Aren’t Really Money”
Warning Sign #2: Rubles, Gold, and Bitcoin for Gas, Oil, and Other Commodities
Warning Sign #3: The Petrodollar System Flirts With Collapse
Warning Sign #4: Out of Control Money Printing and Record Price Increases
Warning Sign #5: Fed Chair Admits Dollar Supremacy Is Dead
We are likely on the cusp of a historic shift… and what’s coming next could change everything.
* * *
The economic trajectory is troubling. Unfortunately, there’s little any individual can practically do to change the course of these trends in motion. The best you can and should do is to stay informed so that you can protect yourself in the best way possible, and even profit from the situation. That’s precisely why bestselling author Doug Casey and his colleagues just released an urgent new PDF report that explains what could come next and what you can do about it. Click here to download it now.511
MD: Having a total and universal misunderstanding of what money is, we get myriad articles telling how money is being manipulated…or should be manipulated. From the title we expect this is just such an instance. We’ll look…and annotate in place.
What lies beneath
As usual, just over two weeks into the new quarter, and well in advance of the developed economies, GDP-giant China told us exactly what happened there in Q1. When I say ‘exactly’, I mean to the usual degree of decimal-place detail, but the same lack of any useful breakdown: and despite lockdowns so hard that China’s Weibo is allegedly censoring the first line of the Chinese national anthem (“Stand up! Those who refuse to be slaves”) after it was used to vent frustrations.
MD: What a bazaar opening salvo!
Somehow, the expectation was for a 0.7% q/q GDP print, 4.2% y/y, up from 4.0% in Q42021: we got a far stronger print to show Covid, and Chinese data, don’t matter – GDP rose 1.3% q/q and 4.8% y/y.
Does one celebrate the resilience of the economy? MD: How can one separate the economy from the manipulation of its money?
Does one ask how that was possible when March data saw retail sales -3.5% y/y, below consensus of -3.0%, down from 1.7%… and yet higher than expected at 3.3% y/y year-to-date (YTD) vs. a 6.7% print in February that already did not match what *any* retailer is seeing? When fixed asset investment, albeit above consensus, slowed to 9.3% from 12.2% y/y even as property investment was weaker than seen at just 0.7% from 3.7% y/y? And industrial production rose to 5.0% from 4.3% y/y – which must have been via net exports… despite port closures!
MD: Does anyone ask why behavior of an economy should be sensitive to a calendar?
Does one ask why monetary policy was eased last week anyway, with the reserve requirement ratio cut 0.25% again? (That’s a move which will be as ineffectual for the real economy as all the previous cuts were: the only thing it perks up is enthusiasm from analysts who don’t understand how the real economy works.) MD: Does anyone ask why there should be such a thing as a “monetary policy”? Does anyone ask why anyone…or any small group…should have such a knob to manipulate?
Does one ask why China just announced details-free economic stimulus measures? (e.g., “Reform will be deepened to remove consumption constraints. Sound and steady development of consumption platforms will be advanced.” How so, when rumours are that we are soon to see bank deposit rates cuts to make room for lower lending rates, which follows the same financial-repression/demand-destruction path seen in the ‘new normal’ elsewhere?) Probably not. MD: When it is provable that everyone acts in their own self interest, why does not everyone’s self interest have equal weight? Why do we have banks screwing with lending rates when we know it is “traders”, not banks or the governments they institute, that create and destroy money?
Does one ask how local-government debt to build more infrastructure is ‘consumption’? (e.g., “consumption-related infrastructure development may be funded by local government special-purpose bonds, to leverage the catalytic role of investment in expanding consumption.”) MD: Why do we allow something claiming to be government…why do we allow it to control something like infrastructure development…but not manufacturing development? We shouldn’t even have government. What’s it good for?
Does one note an easily achievable stimulus floated is a de facto export subsidy? (e.g., “Export rebates will be better utilized as an inclusive and equitable policy tool that is consistent with international rules, and the business environment for foreign trade will be improved on multiple fronts.”) Yet if China thinks it can grow its way out of a structural crisis by flooding the world with more goods *again*, then it is in for a real shock. MD: Do traders need stimulus? What’s keeping traders from naturally making trades they can see clear to deliver on? Why do people allow a money-changer creation like government to even exist?
Making that point, Bloomberg warns: ‘Global Investors Flee China Fearing That Risks Eclipse Rewards’. All the more reason for a 1.3 % q/q print then(?) The article notes, “Russian sanctions raise concerns the same could happen to China… a growing list of risks is turning China into a potential quagmire for global investors. The central question is what could happen in a country willing to go to great lengths to achieve its leader’s goals.” This is hardly news to those who wanted to see it: but a South China Morning Post politics podcast this weekend in which one of their correspondents stated he had heard directly from an EU source that in recent discussions over Russian sanctions, US officials stated they are already gaming-out the same measures for China – and using language such as “when we sanction China”, not “if”. MD: Sanctions are a siege tactic. And siege is an act of war. Who is conducting this warring aggression…and why? Why does an entity capable of mounting such an attack even exist? Who needs it?
Imperialism and realism: Bancor and Rancor
Meanwhile, in Ukraine, hopes of peace talks appear forlorn: Mariupol appears close to falling, as the city of 400,000 stands in ruins; and despite talking of risks of a Russian tactical nuke, President Zelenskiy defiantly states his country won’t give up the Donbas and can keep fighting for 10 years, if needed. If supported by the West, perhaps it can – and the EU’s Von der Leyen is pushing for Europe to accelerate arms shipments to Kyiv, talking about an oil boycott, again, and sanctioning Russia’s largest bank, Sberbank. Markets were thinking 10 days and none of the above when this all started. MD: Why doesn’t this paragraph state it was Zelenskiy whose artillery caused the ruin of Mariupol?
On another front, as Finland and Sweden race towards NATO membership, Russia is moving forces towards the Baltic. Is this a bluff, as some felt it was over Ukraine? Or is Moscow going to engage in some form of limited confrontation with either or both Scandinavian states to ensure that if they enter NATO they do so already in a conflict with Russia? MD: Why do these countries want NATO membership? What’s in it for them? What do they lose by ostracizing NATO? What if Russia’s movements are totally defensive…or protective of the innocent…which of course they are?
Taking things to a more meta level, last week I argued ‘Bretton Woods 3’ (BW3) — a new global FX and financial architecture– is a fancy name for militarized mercantilism; that the West used to be good at it; that it will be again, even if it means lots of neoliberal norms have to go; and anyone who thinks a BW3 emerges painlessly hasn’t read any history. Usefully, one of the key proponents of ‘anti-American imperialism’ just made the point for me in depth. MD: If you argued for any kind of “global FX and financial architecture” you are stupid beyond belief. At the very least, you are clueless about what money is…where it comes from…and where it goes. Mercantilism is government imposed monopoly. Eliminating government is the solution.
(NB For these thinkers, American imperialism is the only imperialism: everything else is ‘realism’. That was underlined by humanist and coffee-table intellectual’s intellectual —and long-time believer that the auto-genocidal Khmer Rouge get a bad press— Noam Chomsky, who explained this weekend that Ukraine should surrender, because that’s ‘just the way the world is’.) MD: There should be a vaccine against morons like Chomsky.
In an interview, Russian politician Sergey Glazyev talks about “the imminent disintegration of the USD-based global economic system, which provided the foundation of the US global dominance… the new economic system [unites] various strata of their societies around the goal of increasing common well-being in a way that is substantially stronger than the Anglo-Saxon and European alternatives. This is the main reason why Washington will not be able to win the global hybrid war that it started. This is also the main reason why the current dollar-centric global financial system will be superseded by a new one, based on a consensus of the countries who join the new world economic order.” MD: The fact that such a thing as “the USD-based global economic system” even exists or should be tolerated is admission of zero understanding of money. They can change the money system all they want. Until they understand what money is…where it comes from…and where it goes, they’ll keep getting the same result. And of course they want that result. This leopard doesn’t change its spots.
So far, so gold-bug, crypto-nite, Chomskyite, Russian/Chinese nationalist, US billionaire hedge-fund manager, or general Down With This Sort of Thing. But we get details: MD: Such nonsense!
“In the first phase of the transition, these countries fall back on using their national currencies and clearing mechanisms, backed by bilateral currency swaps.At this point, price formation is still mostly driven by prices at various exchanges, denominated in dollars.” MD: Open admission of money manipulation. A “real money process” cannot be manipulated in any fashion whatever.
That’s what I have been flagging: things remain priced in USD and, for a few, at the margin, and inefficiently, USD are netted out via bilateral, geopolitical barter. However, “This phase is almost over.” That seems ambitious: it isn’t even a month old! Regardless, next comes “a shift to national currencies and gold,” and then: MD: A problem that does not…and cannot exist with a “real money process”.
“The second stage of the transition will involve new pricing mechanisms that do not reference the USD. Price formation in national currencies involves substantial overheads, however, it will still be more attractive than pricing in ‘un-anchored’ and treacherous currencies like USD, GBP, EUR, and JPY. The only remaining global currency candidate –CNY– won’t be taking their place due to its inconvertibility and the restricted external access to the Chinese capital markets. The use of gold as the price reference is constrained by the inconvenience of its use for payments.” MD: A “real money process” cares nothing about pricing mechanism. That’s up to supply/demand balance of objects being traded. All the “real money process” is concerned with is guaranteeing perpetual perfect supply/demand balance of the money itself.
So, as I pointed out, nothing really works; which, alongside final consumption being in the West, and lots of aircraft carriers, is a strong argument for the USD status quo, imperialist or not. But not to worry if you disagree, because after that: MD: When “it’s broke”, it a good time to “fix it”. You don’t fix something by changing it’s name. This will get fixed when a “real money process” is available for traders to choose. Once that is done, all these broken processes will wilt on the vine. No trader in his right mind would ever use one.
“The third and the final stage on the new economic order transition will involve a creation of a new digital payment currency founded through an international agreement based on principles of transparency, fairness, goodwill, and efficiency.” Which the international community is of course famous for. “A currency like this can be issued by a pool of currency reserves of BRICS countries, which all interested countries will be able to join.” MD: This is like religion…constantly trying to deal with knowledge that encroaches on its myths. They just create new myths…and change the wording of the old myths. It’s pretty disgusting.
Except India is questionable, and even Brazil might be shaky given where it sits geographically, near the source of all those aircraft carriers. And so we have Russia, China, and South Africa. That doesn’t even make a good acronym, let alone bloc.
“The weight of each currency in the basket could be proportional to the GDP of each country (based on purchasing power parity, for example), its share in international trade, as well as the population and territory size of participating countries.” So, it will be dominated by China; and so India is definitely out. “In addition, the basket could contain an index of prices of main exchange-traded commodities: gold and other precious metals, key industrial metals, hydrocarbons, grains, sugar, as well as water and other natural resources. To provide backing… relevant international resource reserves can be created in due course. This new currency would be used exclusively for cross-border payments and issued to the participating countries based on a pre-defined formula. Participating countries would instead use their national currencies for credit creation, in order to finance national investments and industry, as well as for sovereign wealth reserves. Capital account cross-border flows would remain governed by national currency regulations.” MD: If the currencies in the basket were using a “real money process”, their weight would not be relevant. The exchange rate would be constant…and one to one…at all times. This is a problem created by, and moved around by, money changers and the governments they institute. If you turn back the history of these governments you always find “one individual” who got control of a military and directed it to his own ends…and then took charge of the territory it acquired. This typically spans no more than 10 or 20 years in the first instance. And if he’s successful in creating a religion in that period, that religion passes to his heirs…until the people being dominated pull back the curtain and expose the scam. In the case of Britain, the people are so stupid it spans a period going back beyond useful records. That, folks, is perfect stupidity.
So, he is talking about a new ‘gold standard’ based on everything from precious metals to base metals, to water, to one of the key ingredients for cakes, to the GDP of China, questionable data and all. Somehow these back a new global reserve currency which somebody will manage, and provide emergency liquidity in, despite *ALMOST EVERYONE IN THE NEW BLOC RUNNING TRADE SURPLUSES* – and most so with the West, who are not going to join. As such, this is not so much a proposed Bancor, as Keynes floated at the original Bretton Woods before the US insisted on the global role of the USD; nor a monstrous Rancor to devour Wall Street; it’s just plain rancour (“bitterness or resentfulness, especially when long standing”). Indeed, here is the coup de grace: MD: Anyone talking about a standard that changes value with time, is talking nonsense. And gold is anything but constant in value. We can now create new gold at a fraction of earlier costs…except where a new discovery is found … and then you can just pick up nuggets off the ground creating fictitious wealth. Changes like that…or large quantities going down with a sinking ship…create great disruptions. And such disruptions are totally unnecessary…actually impossible…if a “real money process” is in effect.
“Transition to the new world economic order will likely be accompanied by systematic refusal to honor obligations in USD, EUR, GBP, and JPY. In this respect, it will be no different from the example set by the countries issuing these currencies who thought it appropriate to steal foreign exchange reserves of Iraq, Iran, Venezuela, Afghanistan, and Russia to the tune of trillions of USD…. Even if they were to default on their obligations in those currencies, this would have no bearing on their credit rating in the new financial system. Nationalization of extraction industry, likewise, would not cause a disruption.” MD: An open admission to traders that they are…and will continue to be…dictated to by the money-changers. How is it that the real producers in the world (i.e. the traders) can be so totally dominated by the absolute non-producing slugs of the world (i.e. the money changers)?
In other words, adopt the new world order and you get to default on all your FX debt and nationalise all your foreign-owned businesses! That is precisely what I also argued: bet on the new and bet on the default of the old. That is not going to be peaceful or painless – and it will be vigorously resisted. MD: This “new world order” thing is just the new “war monger”. The latest weapons of these war mongers is immigration and virus creation and spread…and they are essentially the same thing.
You want to ensure that even vampire-squid on Wall Street and global-not-local US billionaire hedge-fund managers agree to dump neoliberalism for Western mercantilism and a bifurcated Cold War world of tariffs, capital controls, and naval blockades? Keep talking about mass nationalisations and organised debt defaults in the Eurodollar markets.52,222109 MD: These articles just continue to be less and less interesting…more and more stupidity revealing. Such is life…and then you die.
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.
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!
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.
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).
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.
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.
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.
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
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.
by Tyler DurdenSaturday, May 21, 2022 – 01:30 PM
David Lawant this is my bio 
