The Fraud of Money as Debt

[MD] The provocative (and ill-informed) title of this article begs some annotation. At Money Delusions, it is obvious and provable to us that  not only is money debt, it always has been and it always will be. Money is a promise to complete a trade over time and space … and a promise is obviously a debt.

So let’s see what this moron Shorty Dawkins has to say on the subject.

When the Federal Reserve System was established in 1913, it transferred the power of the US Treasury vis-a-vis the creation of money, into the hands of the Federal Reserve. The Fed creates money out of thin air and loans it to the US Treasury in the form of interest bearing debt instruments. Thus, the money of the US is based on debt. With over $20 trillion in Federal debt, the interest paid on that debt in fiscal year 2018 is estimated to be $310 billion. That’s no small amount!

[MD] What was actually transferred was the propensity to counterfeit.  Neither the Treasury nor the Fed create money. Only traders create money. You can’t give a single example where money is created that a trader is not involved and did not initiate it … that is, unless it is created by counterfeiting. And regarding the interest paid: If the process is a “real” process, the interest paid is exactly equal to the defaults experienced. Why don’t we ever see these people quoting defaults experienced?

What if money were not created out of debt? Is that possible? Sure. If the powers of the Federal Reserve were taken back by the US Treasury, it would be possible to spend money into existence, rather than into existence as debt.

[MD] Can he say anything more stupid? “Spend money into existence?” And if not into debt, into “existence” as what? Kind of left something out didn’t you Shorty?

The Federal budget for 2018 is: Total expenditures‎: ‎$4.094 trillion. The total estimated revenue‎: ‎$3.654 trillion. This leaves a projected deficit‎ of ‎$440 billion. Since the deficit must, under the current Federal Reserve System, be borrowed from them, at interest. Thus the deficit grows and next year’s interest payment will increase.

[MD] If a “real” money process were in existence, the government creating this debt would only do it once … and then be excluded from the marketplace as a trader. Deadbeat traders are automatically excluded when their interest load (due to their propensity to default) comes to equal the trading promises they seek to have certified.

However, if the US Treasury were to create the money, it could simply spend it into existence to cover the deficit. No interest need be paid! As the previous debt interests of the Federal Reserve came due, they could be paid off by money created by the US Treasury in the same manner. Eventually, the entire debt could be paid off in this manner.

[MD] “No interest need be paid” is true only for responsible traders. Governments are not responsible traders. In fact they never deliver. They just roll over their trading promises … and that is default … and purposeful default is counterfeiting! I’ll bet Shorty has a perpetual motion machine he would like to show us as well.

Beware! This is not free money!

[MD] In a “real” money process, money is “always in free supply”. That’s not to say it is “free money”. Rather, it says money “never” restricts the trading intentions of responsible traders who create it. They “always” deliver on their promises.

It may sound like free money, but it isn’t. As more money is spent into creation, inflation takes its toll. The true definition of inflation is the increase of the money supply above the value of goods and services produced. When the money supply increases faster than the value of production, there is more money chasing fewer goods and prices rise, as the value of the money decreases. If too many dollars are created, the value of the dollar decreases. Under the Federal Reserve System the value of the dollar has decreased by 98%, meaning that something bought in 1913 for $1 would now cost $98, disregarding any increases in productivity of a particular product.

[MD] In a “real” money process, inflation takes no toll … it  is guaranteed to be perpetually zero. The true definition of inflation is the amount that supply of the money itself exceeds the demand for the money … and we know in a “real” money process, supply and demand for the money itself is perpetually in perfect balance.

The fraud of the Federal Reserve System is that it was sold as a means of preserving the value of the dollar and that it would prevent crashes in the economy. Both of these selling points have not proven accurate. There have been multiple crashes of the economy since the Fed was established, including the Great Depression.

Ideally, the US dollar should be backed by gold and silver, or some tangible item, but that discussion is for later. First things first. We must End the Fed.

[MD] Gold and silver and any other commodity cannot maintain perpetual perfect balance of supply and demand for themselves. So obviously they are useless as money. Thus, your later discussion can be suspended. You don’t know what your talking about Shorty … and that is easy to prove.

The Federal Reserve has never been good for the public. It has only been good for the big banks. They love it, because it makes them money. Who pays? We do. We are slaves to debt. Isn’t it time to eliminate the Fed and turn its powers over to the US Treasury, where it belongs?

[MD] Even the blind squirrel occasionally finds an acorn. Congratulations Shorty. Governments are created by the money changers … always have been, always will be … unless we can effect iterative secession and have it our way in our own space.

[MD] It brought some amusement. It was easy fodder for illustrating how stupid the gold bugs are.

Shorty Dawkins

I am a writer of novels, currently living in the woods of Montana. My 5 novels can be seen here: https://oathkeepers.org/my-5-books-shorty-dawkins/

[MD] Frightening. Hopefully that doesn’t lead to the natural conclusion that there are people reading your novels. Stupidity is already widespread enough don’t you think Shorty?

GoldMoney.com: Gold – Crossing the Rubicon

Gold – crossing the Rubicon

Gold is challenging the $1300 level for the third time this year. If it breaks upwards out of this consolidation phase convincingly, it could be an important event, signalling a dollar that will continue to weaken.

MD: Look at how silly this reads if you know what real money from a “proper” MOE process is. Referring to “real” money that sentence would read something like:

The HUL (Hour of Unskilled Labor and the unit of “all” real money) still trades for the same size hole in the ground that it did last month … and last year … and last century … and for all time.

The factors driving the dollar lower are several and disparate. The US economy is sluggish relative to the rest of the world, the rise of Asia from which America is excluded is unstoppable, geopolitics are shifting away from US global dominance, and the end is in sight for monopolistic payment for oil in US dollars.

MD: With a proper MOE process, the money cannot be driven higher or lower or anyplace else. It has nothing to do with the economy. If the traders don’t see clear to delivering on their trading promises over time and space, their money creation goes down. Otherwise, it stays the same or goes up. Either way, as far as real money is concerned, the economy is a non-issue. Real money is in perpetual free supply and is always where it needs to be when it needs to be there to immediately serve the demands of any state of the economy … i.e. what traders want to promise to do over time and space. There is “no” monetary policy,  geopolitics, state dominance, commodity influence or anything else to cause it to deviate from its appointed task … that task being to keep track on all certified in-process trading promises spanning time and space.

These subjects have been covered in some detail in my recent articles, which will be referred to for further clarification where appropriate. This article summarises these trends, and explains why the consequence appear certain to drive gold, priced in dollars, much higher.

MD: And he knows his writing is non-sense … because I have annotated it for him numerous times in this very way.


The importance of gold and reasons for its suppression

The post-war Bretton Woods Agreement confirmed the US dollar to be fixed to gold at $35 per ounce. All other national currencies were linked to gold through the dollar at the central bank level. Ordinary civilians, businesses and commercial banks were not permitted to exchange their currencies for gold through central banks, so this was simply a high-level arrangement designed to maintain control of gold priced in dollars.

MD: Gold attempted to become money by edict as described here. You can’t make something money by edict and expect it to work. It is just a stand-in for real money. Look how silly this is. The gold was what gave everyone confidence in the money … even when they were explicitly told they couldn’t exchange their money for gold … the very basis for that confidence. Who’s going to believe nonsense like that?

A few years after Bretton Woods, in 1949 and when the newly-fledged IMF began to collate statistics on national gold reserves, the US Treasury was recorded owning 21,828.25 tonnes of gold, 74.5% of all central bank reserves, and 43.6% of estimated above-ground gold stocks. However, over the years the proportions changed, and by 1960, US gold reserves had declined to 15,821.9 tonnes, 47% of central bank reserves, and 24.9% of above ground stocks.

MD: With real money, none of the nonsense in the above paragraph is ever called for. There are “no reserves”. Nobody cares where the money is. Traders making new promises spanning time and space create it in the amounts and at the place they need it … they get their promises certified … and then go about delivering on them. That means doing something to reacquire money in circulation and return it … upon which it is immediately destroyed. They don’t have to go hat in hand to someone who has “proof of work in hand” before they can make their promise.

Clearly, American control of gold had weakened considerably in the two decades following Bretton Woods. This weakening continued until the failure of the London gold pool, the arrangement dating from 1961 whereby the major American and European central banks collaborated to defend the $35 peg.

MD: Again notice. With “real” money from a “proper” MOE process, you don’t have this nonsense. You have a peg … a real one … one that never changes over time and is used as the obvious unit of measure … you have the HUL … the Hour of Unskilled Labor.

It has traded for the same size hole in the ground over all time … and we have all been one at sometime in our lives (usually in high school summer jobs). we never lose a reference to its “real” value. That is made possible and maintained through its perpetual “guarantee” of zero inflation.

That guaranteed behavior is implicit in the process and real under direct observation … it is the nature of every trade … i.e. perfect perpetual balance between the supply and demand for the money itself.

Gold has never gotten close to delivering that sub-minimal attribute of real money. In fact, it claims to be money via the opposite path … that it is “rare”.

The Americans had abused the gold discipline by financing foreign ventures, notably the Korean and Vietnam wars, not out of taxation, but by printing dollars for export, and it began to put pressure on the dollar. The London gold pool effectively spread the cost of maintaining the dollar peg among the Europeans. Unsurprisingly, France withdrew from the gold pool in June 1967, and the pool collapsed. By the end of that year, the US Treasury was down to 10,721.6 tonnes, 30% of total central bank gold reserves, and 15% of above-ground stocks.

MD: “Abused the gold discipline”. Now that is rich!!! And remember, the co-option of trader’s invention of money by the money changers now has “all” taxation going to paying tribute (interest) to those money changers. Governments are sustained totally by counterfeiting. It’s not “Americans” who abused the money … it’s the governments … which are demonstrably everything that is “non-American” in values and behavior.

And again notice, all the machinations he describes are of no interest to a “proper” MOE process at all … not at all!

Inevitably the decline continued, and by the time of the Nixon shock (August 1971 – the abandonment of the gold exchange commitment) it was clear the US Government had lost control of the market. She had only 9,069.7 tonnes left, representing 28.3% of central bank gold, and 11.9% of above ground stocks. Monetary policy switched from the fixed parity arrangements centred on gold through the medium of the dollar, to a propaganda effort aimed at removing gold from the monetary system altogether, replacing it with an unbacked dollar as the international reserve standard.

MD: “The Nixon Shock”. The French called them on their obvious bluff and lie. You don’t have money by edict. The most efficient and fair process allowed to be instituted will always prevail … and there can be any number of instances of it. Their operation is totally transparent. There is no concept of the “backing” of the money. The fact that “all” defaults are immediately recovered by interest collections of like amount is what guarantees perpetual zero inflation of the money … it’s what gives the money its integrity. There is no “standard” … international or otherwise (other than the obvious use of the HUL as an unvarying unit of measure). There are no “reserves” … international or otherwise.

The result was the purchasing power of the dollar and the other major currencies measured in gold has all but collapsed, as shown in the chart below.

MD: Duh … the only right value for inflation is zero. Real money from a “proper” MOE process guarantees it perpetually.

Currencies priced in gold

Between 1969 and today, the dollar’s purchasing power relative to gold declined by 97.3% (the blue line). By banning gold from having any monetary role, the US removed price stability from the dollar.

MD: Ramping up of government counterfeiting (and then lying about the obvious inflation that results) is what removes value from the dollar. Instability comes from the fits and starts of their counterfeiting. If they did it predictably, we would still have the 4% leak … but we could compensate for it with regular 4% price and wage increases. But with “real” money, none of those degrees of freedom even exist. It’s a much kinder and gentler environment for traders (like you and me).

More recently, since the great financial crisis the quantity of fiat money in the global currency system has expanded dramatically relative to the long-term average growth rate of money and bank credit. This is illustrated in our second chart, which records the growth in the total amount of fiat dollars in the US banking system.

MD: Note the presentation of the “fiat” qualifier for money. Knowing what “real” money is … i.e. a promise … you know that it is fiat. But they say it as a slur. Their alternative, gold, is obviously deflationary and strangles trade … but it’s not fiat. It’s not money at all. It represents a trade completed. How stupid they are!

Fiat money quantitiy

MD: Draw that curve for “real” money and it’s a perfectly straight horizontal line … a HUL is always a HUL and always trades for the same size hole in the ground. This is the pot calling the kettle black.

The fiat money quantity is the sum of true money supply and commercial bank reserves held at the central bank (the Fed). It is the measure of all deposits, including those of the commercial banks. Monetary inflation has expanded dramatically since the great financial crisis, illustrated by its acceleration above the long-term trend. The consequences for the dollar’s purchasing power in time will be to accelerate the dollar’s decline even more.

MD: The money quantity is the sum of “all in-process trades”. And it is always exactly what it needs to be. Supply of real money is perpetually in balance with demand for real money. What could be simpler. What could be more appropriate? That’s what it is right now in spite of the improper MOE process the Fed runs. Government counterfeiting is also a trading promise … which is DOA (Default on Arrival … they never deliver … they just roll their trading promises over). That would be ok if it was met by equal interest collections. But it is not. Those interest collections (taxes) go straight to the money changers. Thus, “all” governments are sustained by inflation. So are all finance practitioners.  With “real” money, Their cherished (1+i)^n formula (the time value of money) runs a constant 1.000 perpetually. They have no reason to exist.

The monetary expansion of the dollar has been echoed in the other major currencies, with negative consequences for global price inflation in the coming years. Meanwhile, gold’s inflation, at roughly 3,200 tonnes annually, is about 1.9% of above-ground stocks. The different rates of increase between above-ground gold stocks and the fiat money quantities of unbacked state-issued currencies is what ultimately drives the price of gold measured in those unbacked currencies. It is easy to see why a higher gold price, reaffirming gold’s role as sound money at a time of excessive fiat currency inflation, is viewed by the major monetary authorities as a potential threat to their currencies’ credibility.

MD: Notice they say “price” inflation. “Prices” have to do with the supply and demand of the object in question. Inflation has to do with supply/demand of the money itself … witch is properly and perpetually zero. They just don’t get it! And look at all this effort to keep track of gold … and calling it backing. Remember, there’s just one ounce per person on Earth (and I have well over my fair share). That’s just $2,000 per person. It’s lost in the noise of trading and saving levels. That’s the “backing” they’re in love with. You can’t make this stuff up!

There can be little doubt that without the propaganda war against gold led by the US monetary authorities, without the expansion of unbacked paper gold constituting artificial gold supply in the futures and forwards markets, and without the secret interventions of the US’s Exchange Stabilisation Fund, the gold price would be considerably higher, expressed in dollars.i

MD: With a “proper” MOE process competing with what we have now … and with “would-be-stand-ins” like gold, this article couldn’t exist. Gold would be priced in HULs and that would only change with the supply and demand for gold … the supply and demand for HULs being in guaranteed perpetual perfect balance. Thus the HULs required to buy gold would be related to miners, electronics manufacturers, dentists, and jewelers. GoldMoney.com would be out of business. So, who do you think needs to keep driving the propaganda? Follow the “fake” money. Imagine “real” money.

However, gold remains centre-stage as a global hedge against the decline in purchasing power of fiat currencies. Besides rescuing the financial system from collapse nine years ago, the expansion of bank credit is inherently cyclical.ii The credit-cycle for China’s yuan appears to be moving into a new expansionary phase, reflected in a rising trend for nominal GDP. This will be put into context later in this article, but it is noticeable that on the back of China’s GDP growth, Japan, the EU and the UK are also enjoying export-led revivals.

MD: Actually, my six months of canned food and my free and clear land and improvements are a far better hedge than gold. Look at the Weimar debacle. Gold played no role at all. They did a reset. Everyone got screwed to various degrees. And they started over. It took about 3 years to ramp up and explode … it was reset in about 6 months and started all over again. But look at all the hand waving … “… new expansionary phase …”

The US does not share these benefits, partly because China and Russia, the founders of the Shanghai Cooperation Organisation (SCO), are deliberately freezing America and her money out, and partly because of America’s own tendency towards trade isolationism.iii It is therefore less certain that America is close to moving from the recovery stage of the dollar’s credit cycle into expansion. In the absence of other factors, the difference in interest rate outlooks this implies should be reflected in a declining dollar exchange rate against the other major currencies, a trend that has been under way since last January.

MD: A proper MOE process cannot be frozen out by anybody or anything. It is as good as a money process can be. Competitors can only copy it. They can only compete through greater and greater efficiency and fairness. There is no such thing as an “interest rate”, let alone an “interest rate outlook”.

Despite the massive expansion of fiat money over the last nine years, it is possible for governments to stabilise the future purchasing power for their currencies. It will require their fiat currencies to be tied convincingly to the characteristics of gold. It depends on the government concerned accepting that gold is superior money to its own currency, owning sufficient physical gold reserves to convince the markets, and the gold price being at a level where the arrangement sticks. There is no doubt that China, Russia, as well as the other SCO member states and their populations regard gold as a superior money to fiat currencies, partly because their fiat currencies do not have well-established records of objective exchange value.

MD: Right. You’re counterfeiting hand over fist and inflating the money … and you’re going to harness that by “convincingly tying your counterfeiting to characteristics of gold”. Amazing! And “owning sufficient physical gold reserves”? Like more than your 1oz fair share? What’s with these idiots!

In the US, Japan, the UK and through much of Europe, the populations have experienced a longer, generally more stable objective exchange value for their currencies. Under pressure from their governments to use only state-issued currency, they have lost the habit of regarding gold as money. The monetary authorities of these countries, with a few exceptions, also do not regard gold as having any monetary role at all, beyond paying lip-service to a vague concept it has value as an asset which is no one else’s liability.

MD: Lost the “habit” of “regarding gold as money”. I don’t know about you but I have never regarded gold as money. It hasn’t been money in my 70+ year lifetime … anywhere. Nor in my father’s 80+ year lifetime. And I saw it proved not to be money (in concept) when in 1964. Then I traded a quarter … with 90% silver … for a gallon of gasoline. And then the next year in 1965 when they made quarters with 0% silver … I did the same thing … one 0% silver quarter traded for a gallon of gasoline. Now come on! What does that tell you about the role that precious metals obviously plays in the eyes of traders like you and me? Zero … right? Right! With a “proper” MOE process, there are no “monetary authorities” … in this country or anywhere else … ever.

Therefore, understanding the role of gold and the protection it can offer fiat currencies is split into two geographic camps: the governments of Asia which are actively accumulating, or would like to accumulate additional reserves of monetary gold, and the governments of North America and Western Europe which see the gold price as irrelevant from the monetary point of view.

MD: I understand the nature and role of “real” money. I understand it is created and destroyed only by traders. I understand that gold plays no role whatever. How about “you” get some understanding of the obvious!


Gold reserves and gold secrets

We shall now briefly comment on the positions of the main monetary authorities on the global gold stage, their current gold policies, and how they are likely to change. These are the US, China, and the member nations of the SCO.

MD: Tips his hand right away. With a “proper” MOE process, there are “no” monetary authorities … on the global gold stage or anywhere else. There are no “policies”. There is just the process that all trading promises creating real money are certified and transparent; that deliveries on those promises are perpetually and openly monitored; that defaults are detected and mitigated by interest collections of like amount … transparently; and that no money exists before a trading promise is certified, nor after the trading promise is delivered and the money destroyed, for any trading promise … period!

United States

The US monetary authorities were behind the push to remove gold from the monetary system, when they terminated the Bretton Woods Agreement in 1971. They are somewhat schizophrenic on the issue, the US Treasury claiming it still owns 8,133 tonnes of gold, reflected in the Fed’s balance sheet at the last official price of $42.22 per ounce. Interestingly, when the previous Fed Chairman, Ben Bernanke, was questioned on the subject by Senator Ron Paul in 2011, it was clear he did not regard it as money, only a legacy asset. If this is true, the Fed should substitute the reference to gold in its balance sheet with an unsecured loan to the US Treasury, which if Ben Bernanke is right, has a greater monetary credential than gold. It would also end the embarrassing calls to audit the Fed.

MD: Knowing they have taken the wrong fork in the road, we’ll now just scan forward to see if they ever bring themselves back. Don’t hold your breath. If we see a glaring misconception … in the midst of this total misconception, I’ll call it to your attention.

The resistance to leaving go of gold rather proves that gold is still money. However, the monetary policies of the Fed since the great financial crisis are predicated in the belief that gold is not money. This dichotomy is also shared with the Bank of England, the Bank of Japan, and the European Central Bank.

They all say that the world has moved on from the days when gold was part of the monetary system, so they are ill-prepared to discard the Keynesian beliefs upon which their current monetary policy is based. Their advanced, welfare-state economies are simply too far down the road of the state theory of money to turn back. However, this exposes their currencies, and particularly the US dollar as the world’s reserve currency, to a substantial loss of purchasing power as the rapid monetary expansion of the last nine years works its way through to consumer prices. The election of President Trump promising to make America great again is turning out to be a failure. The removal only last week of Steve Bannon, his chief strategist, clears the way for the pre-Trump establishment to reassert itself. Gone is Bannon’s talk of a financial war against China and Russia, and doubtless, with a trio of the Generals Kelly, Mattis and McMaster now in control of the White House, it will be back to military options.

General Kelly, who was appointed to bring some order into the White House is doing this by removing dissenters from the mainstream. This was why Bannon had to go, and why President Trump himself will have to knuckle under and become as anodyne as President Obama. The mainstream is back and little has changed.

MD: Bannon had to be let go because Kelly knows gold is money? Wow!

Meanwhile, the US economy muddles along without clear signs of improving consumer demand. It seems increased trade tariffs against China remain on the agenda, in which case they will amount to a self-harming tax on American consumers. Furthermore, global economic growth and progress is being driven primarily by China, from which America is excluded. And as the interest rate differentials start to widen between a stagnating US economy and an expanding Asia that also benefits Japan, the EU and the UK, the dollar is likely to weaken considerably in the foreign exchanges, as well as in terms of the commodities a dollar will buy.

MD: Remember … tariffs are just a way for the governments instituted by the money changers to deliver tribute to those money changers. They steal it directly from the traders.

Some forecasters believe that the US economy is stalling and deflation beckons. This is a mistake. The conditions replicate an inflationary outlook, whereby prices start rising at an accelerating rate, driven by a falling purchasing power for the dollar. The dollar is likely to lose more purchasing power through the effects of the last nine years’ monetary expansion working through to consumer prices. Additionally, foreign nations and commodity suppliers doing business in Asia are likely to be sellers of dollars for other currencies as the world moves towards an Asia-centric global economy. For deflation to take hold, there must be a shortage of dollars, not the substantial excesses in existence today.

China

In partnership with Russia, China is ringmaster for all Asia. The Chinese economy is run with a beneficial mercantilist approach. The primary political objective is to plan an economic future for the benefit of its people. Instead of democratic responsibility, the leadership commands the economy strategically in the universal interest of its citizens, crushing all individual dissent.

MD: How is Chinese money created? Same bogus way the Fed does it, right? Through government counterfeiting, right? Institute a competitive “proper” MOE process and you put the Chinese manipulators on the ropes too … immediately

The Chinese state, having embraced important concepts of free markets, operates rather like the East India Company of old. Through a series of five-year plans, hundreds of millions of workers are being moved from less productive employment, redirected and retrained to more productive, higher technology and service occupations. The whole economy is in a planned transition. Low-skill jobs are being mechanised. Already, China is expanding into the rest of Asia, promising to move whole communities and countries out of relative poverty. The trans-shipment of goods across the Eurasian continent is expanding rapidly. The Chinese have also taken economic control over much of sub-Saharan Africa to secure the natural resources for the Grand Plan.iv

Most of this expansion is financed through bank credit, issued through the large state-owned banks. Unlike economic policy in the West’s welfare states, which is aimed at preserving legacy businesses, the positive redeployment of capital resources limits the build-up of malinvestments in China. Furthermore, the expansion of nominal GDP, which is the direct consequence of the expansion of bank credit, is accompanied by genuine economic progress, which is decreasingly the case in the West.v

MD: Financed through “bank credit”? That’s an open myth. Banks have no credit to give. They’re just the score keepers for the money changers. They are their retailers. Just store fronts. They are empty suits.

Consequently, China’s credit bubble is arguably less dangerous than those in the US, EU, UK, and even in Japan. However, credit bubble there is, and it is part of a global credit cycle that afflicts all fiat currencies. Undoubtedly, the Chinese authorities are aware of this danger, evidenced by their repeated actions to contain credit-fuelled speculation before it gets out of hand. [Crypto-currency enthusiasts, beware!]vi

So far, China has pursued a policy of managing the yuan’s exchange rate against the US dollar, and consequently records $3.08tr in foreign reserves, the vast bulk of it in dollars. At some point, China will need to abandon foreign exchange support of the dollar, because the dollar’s purchasing power measured in commodities is likely to continue its decline. This policy is making the raw materials China needs more expensive priced in yuan.

It is therefore becoming more sensible for China to dispose of her dollars and encourage the yuan to rise against it on the foreign exchanges. Admittedly, this will damage the profits of exporters to dollar-denominated markets, but should have the beneficial effect of redirecting capital and labour resources from these legacy businesses towards the new activities favoured by the five-year plan. Now that the process of refocusing the economy from manufacturing and exporting cheap goods towards a technology and service driven economy is well underway, China must be getting closer to ditching the dollar as the yuan’s reference currency. It is near the time for China to stop supporting the one currency she wants to do away with.

MD: With a “proper” MOE process, “all real” money, regardless of who certifies it exchanges at a constant rate with all other “real” money. And if they all adopt the HUL as the obvious unit of measure, that exchange rate between all moneys is 1.000. Supply and demand for goods themselves is what determines their price … everywhere … all the time. You change nothing by exchanging 1 dollar for 1 yuan for 1 HUL and back to one dollar.

All the indications from China’s gold policy are that the end-plan is to tie the yuan to gold. In 1983, China introduced regulations appointing the Peoples Bank with the role of acquiring gold on behalf of the state. Analysis of contemporary prices, Western central bank sales and leasing into a prolonged bear market, shows China could accumulate significant quantities of gold bullion. In the 1980s, China had capital inflows she wished to neutralise, followed by the trade surpluses that began to accumulate in the 1990s. Adding to her programme of acquisition of gold from abroad, China beefed up her gold mining capacity and her gold refining state monopoly. Today, she is the largest mine producer by far, and takes in gold doré from other countries to refine and keep.

MD: Tie the yuan to gold. That 1oz per person? Going to strap them down with that are you?

By 2002, she had accumulated enough bullion by then permit her own citizens to buy gold, and even advertised on television and other media to encourage them to do so. Deliveries into private ownership through the Shanghai Gold Exchange (controlled by the Peoples Bank) has totalled over 15,000 tonnes after 2002, though some of that will have been recycled as scrap. I have speculated that by 2002, the Chinese state could easily have accumulated over 20,000 tonnes before the Shanghai Gold Exchange was established, rather than the paltry figure of 1,843 tonnes in declared reserves today. Whatever the true figure, the Peoples Bank has purposefully been acquiring gold for thirty-four years, and by 2002 had built a strong and satisfactory position, clearing the way over the last fifteen years for her people to do the same.vii

MD: Permitted them to buy gold. Did any buy more than their 1oz share? That means some others couldn’t buy their 1oz share, right? Stupid is as stupid thinks.

China now has an iron grip on the physical gold market. The launch of the Hong Kong owned LME’s new gold contract is the latest move, building on China’s policy of using the Hong Kong and London connection for the development of her interests in international capital markets. The contract has been a success from day one. While the American banks push the price round on the Comex futures market, the real control over the market is now in Chinese hands.

MD: “Iron grip on gold market”. Well, dentists and jewelers and electronics manufactures … you know where you need to go to acquire your feed stock. And you traders creating money to effect trades over time and space … fear not … you’re not affected in the least. Just institute your “proper” MOE process and let those idiots do as they please … as long as they leave you alone.

China and her citizens are still accumulating gold. Basically, gold that goes into China does not come out. This contrasts with the US and the EU, where people are strongly discouraged from regarding gold as money or a store of value. For geopolitical purposes, it matters not who is right, but who has the power to be right. By ending the yuan’s exchange relationship with the dollar and transferring it to gold, global monetary hegemony would be transferred from America to China and her sphere of influence in one big step.

The Shanghai Cooperation Organisation

The SCO is driven by China in partnership with Russia. As well as a population of 3.3bn, it is the principal trade partner of Japan, the Koreas, and all the South-east Asian nations, adding a further 830 million people into the SCO’s sphere of influence. Dependents on the SCO for their exports of raw materials takes in nearly all sub-Saharan Africa, adding another billion. Europe, Australia and New Zealand are also drawn into the SCO’s circle of trade influence, a further 700 million. That totals over 5.8bn, leaving nations with a population total of about a billion either neutral or siding with America. Yet, it is the US dollar that settles the bulk of world trade.

There are strong indications that gold will be part of the settlement medium for the SCO’s future trade. Not only is China driving the SCO in partnership with Russia, which appears to be gold-friendly as well, but central bank demand for physical gold has mostly been from SCO member states and affiliates.

MD: Again … ground your thinking as you read all this nonsense. There is only 1oz per person on Earth … and everyone reading this has more than their 1oz fair share.

India, which lacks enough gold at the state level to support her membership, is using increasingly desperate measures to acquire gold from her own citizens. India’s economic renaissance, since the socialist Ghandi dynasty was ousted, has been on the back of Keynesian policies, so there is likely to be a strong intellectual resistance to gold in the monetary elite. Furthermore, senior appointees to the Reserve Bank have traditionally been on the advice of the Bank of England, which is anti-gold, and at the same time conscious that Indian gold demand on top of that of China is undermining control over the London bullion market. India’s gold policy as a member of the SCO is somewhat confused,

MD: “Membership” in what? The community of idiots? As Groucho Marks once said, “I wouldn’t be a member of any club that would have me as a member.”

The imbalances between gold ownership of the various SCO member states rule out a new super-currency, so it is likely to be the yuan that is predominantly used for Eurasian trade settlement, with other members pursuing a currency board approach for their own currencies.

MD: With a “proper” MOE process (i.e. real money) there are no imbalances … anywhere … any time. They really tip their hand when they make these idiotic statements.


Control over the oil market

The most significant post-war financial agreement achieved by America was with Saudi Arabia, whereby the Saudis agreed to only accept dollars in payment for oil in return for American protection. The agreement was adopted by all OPEC members, in return for the ability to fix oil prices as they pleased. This put the American banks firmly in control of the expansion of global credit, as well as the recycling of the currency surpluses arising from sales of oil to oil consuming nations, particularly benefiting the friends of America. That one decision, negotiated by Nixon and Kissinger, set up the dollar as the world’s reserve and trade currency after the end of the Bretton Woods agreement, and remains so to this day.

MD: A proper MOE process employs no agreement. It is just a transparent process traders (like you and me) use to effect our trades over time and space. If we don’t want to use it we don’t have to. The agreement is implicit in our use and the perpetual transparent view of its operation.

Today, Saudi Arabia is no longer the stable theocracy it was, and at current oil prices is running into financial difficulties. It plans to sell a five per cent stake in the national oil monopoly, Aramco, to raise $200bn to plug the gap in state finances. It can only do this by way of a public listing and offering if it can verify its stated oil reserves, which may prove difficult. If one was to guess an outcome for this dilemma, it would be that Saudi’s largest customer, China, could come to the rescue. And it would be expected that China would gain some influence over the disposition of Saudi’s oil sales.

MD: A proper MOE process (i.e. real money) cares nothing about religion … or superstitions of any kind.

It would be a typical Chinese strategy, repeating in the case of energy what China has already achieved in gaining control over the global economy. Other than America, whose consumption exceeds its supply by a significant margin, Russia is the largest global supplier (just), followed by Saudi Arabia. Between them they account for 22.4% of global supply. Other Asian suppliers in the SCO or allied to it gives a further 12%, making 34.4%. Coordinating these supplies gives China and her partners more production leverage on the global oil market than Saudi Arabia had in the 1970s.

MD: You do what I do when my consumption overwhelms my ability to supply? I increase supply or reduce consumption. Governments should try that.

Already, China is showing a preference to settling trade and energy deals in yuan, but to take this much further, it will need to offer gold convertibility to compete with the dollar. This appears to be being pursued in two steps, the first being oil suppliers given the opportunity to sell their oil for yuan, and to sell their yuan on the Shanghai futures exchange for gold, before the second step, a formal yuan convertibility, is eventually offered.

The yuan-gold contract already exists, the oil-yuan contract will shortly be introduced. The Shanghai International Energy Exchange is currently training potential users and carrying out systems tests prior to launch later this year. Obviously, these futures contracts in gold and oil may need to be initially supported by the state banks to enable them to build liquidity. But importantly, it will allow Iran, Russia and other Asian producers to avoid Western banking sanctions by selling oil for gold.viii

MD: With “real” money, the contract creating the money is strictly binding to the trader creating the money. He has what he traded for and his trading partner has the money he created … which he puts into circulation as he acquires things he needs. If the money creating trader defaults, those are mitigated immediately by interest collections … usually from other unreliable traders according to “their” propensity to default. Responsible traders “never” have an interest load.


Geopolitics could set the timing

MD: A proper MOE process cares nothing about politics … geo or otherwise. It, by its very nature, is immune to political intervention.

The course of economic and monetary events in Asia was predetermined by the Chinese some time ago. We saw evidence of this in the UK, when China decided its international financial markets would be operated between Hong Kong and London, cutting out New York entirely and the dollar as much as possible. The Hong Kong Exchange bought the London Metal Exchange in 2012, and a year later London’s role was cemented when the then Chancellor of the Exchequer, George Osborne, visited China. This was followed by Britain becoming the first developed nation to join the Chinese-led Asia Infrastructure Investment Bank, much to the annoyance of the US.

The Obama administration had no effective response to China’s strategy, and continued to attack China’s partner, Russia, through proxy wars in Ukraine and Syria. The bid to take control of resource-rich Afghanistan failed. The election of President Trump brought with it uncertainly in US foreign policy, prompting a visit by President Xi to President Trump last April. There was no doubt that Xi decided he needed to assess Trump personally. He is likely to have come away with the view that Trump was unpredictable, and so it has proved.

MD: Well, if we had a “Money Delusions Exposure” administration we would have a response to China’s strategy. We would institute a proper MOE process. Their strategy would then have to be doing the same as we did. If they don’t they’re not competitive. They wilt on the vine.

We can only guess as to whether Xi’s visit has caused the Chinese to accelerate their planned move away from the dollar to their ultimate trade settlement and monetary plans. The threat of an American invasion of North Korea will be watched closely by Beijing in this context. The prospect of American troops on the Chinese border only 500 miles from Beijing will be prevented at all costs, so retaliation by an attack on the dollar would be the most effective response.

The removal of Steve Bannon last week and the control of the White House passing to three generals are important developments. In his last interview while still officially appointed, Bannon correctly analysed the geopolitics between China and the US. His analysis was very much on the lines presented in this article. However, his assessment was that the US needed to fight a trade and financial war against China, and forget anything military. In his words, “unless someone solves the part of the equation that shows me that 10 million people in Seoul don’t die in the first 30 minutes from conventional weapons, I don’t know what you are talking about, there’s no military solution here, they got us.”ix

Bannon’s mistake is to assume America still wields its traditional financial power, when it is clear to informed outsiders that this is no longer true. However, the generals now in charge of the White House are more likely to stoke up proxy wars, either because that is where their skills lie, or more cynically perhaps they are influenced by the arms manufacturers who are looking for defence contracts. They have taken no time in ratcheting up the American presence in Afghanistan and clearly have a desire to gain influence in Pakistan, both of which are on China’s eastern flank, where she is building commercial and infrastructural ties.

MD: It is still the case. As long as they can make the objects they use for force, they can prevail. Oh … also, they have to keep their subjects stupid enough to want to carry those objects of force to their targets … return from the mission is not of import. Those directing the force never lower themselves to actually delivering that force personally.

So, geopolitics are back on familiar ground. Trump is now neutralised and will increasingly look like a cowed Obama. Perhaps more troops will be sent to Syria. Perhaps more advisors will be sent to Ukraine. Perhaps more missiles will be installed in Poland, or the Baltic states. North Korea will rumble on, in a stalemate protected by its nuclear weapons. But increasingly, China’s interests are now served by taking the next step to disentangling herself from the dollar, and that will mean selling down her dollar reserves to stockpile the copper and the other industrial materials she needs. It will also mean lending dollars to trade counterparties, such as Saudi Arabia, to be repaid in yuan.


Conclusion

MD: How do you conclude something that is proven to be absolute nonsense in its opening paragraph? It should have concluded right there.

China and Russia’s geopolitical strategy has been evolving long enough for observers to understand it and the implications for the West. We can assume the strategic thinkers and intelligence agencies of all the major players have a reasonable grasp of the implications, including America, which is determined not to lose in this Great Game. That was the point behind Steve Bannon’s candid interview with Politico.

Bannon was deluded about the extent of America’s economic and financial power. He is now out. We are back to geopolitics being decided by the military. Meanwhile, China’s interests have almost certainly moved firmly towards dumping the dollar. This can only be done successfully by linking the yuan to the characteristics of physical gold, the market which China has effectively cornered.

If gold crosses the $1300 Rubicon, it may be taken as an early sign that China’s long-term plan of monetising her gold is progressing towards the next stage. The oil-for-yuan futures contract is due to be launched very shortly, allowing countries like Iran to buy gold freely, paid for by oil sales.

MD: If gold crosses the $1,300 Rubicon, it’s still a ways below the Rubicon I acquired more than my fair share at. I acquired it when I was still drinking the gold-bugs coolade. I thought the train was leaving the station. Hopefully when we get back to my Rubicon, there will still be idiots out there to take it off my hands. If a “proper” MOE process gets instituted, I am toast.

Alternatively, if China defers securing the yuan to gold, the dollar still looks like weakening against other currencies, reflecting a US economy isolated from the positive Asian story. The pace of the rise in the gold price might be slower, but the direction seems equally certain.

Eventually, gold will need to rise to a level where the Chinese are prepared to set a conversion rate. Expect China to use its control over physical gold markets to achieve it at a time of its own choosing. Leaving the $1300 price behind could well be the start of the move towards this objective.

MD: Eventually, traders (like you and me) will take the bull by the horns and institute a “proper” MOE process. And they won’t let the money changers and governments instituted by them get anywhere near that process. And then we’ll all live happily ever after … unless we’re money changers, government workers, government suppliers, government contractors, or otherwise dependent on the government. There is absolutely nothing preventing us from doing it … that is other than “us” ourselves. Unfortunately, with 3/4ths of the fruits of our labor going to governments and those dependent on them, we’ll probably just have to wait for the collapse … iterative secession … and then institute a proper MOE process in our own space. Them them go pound sand.


MD: Ah … footnotes. As George W. Bush noted (one of his near non-existent wise observations), I have just read a “scholarly article”.

i The Exchange Stabilisation Fund was created under the Gold Reserve Act 1934 as a fund within the US Treasury. Its specific purpose is to manage the gold price. Congress has no right to any information concerning the Fund’s activities, so they remain a closely guarded secret out of the public eye.

ii For a description of the credit cycle and the current state of play see: https://www.goldmoney.com/research/goldmoney-insights/follow-the-money

iii The SCO now includes China, Russia, India, Pakistan, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Among other future members are Turkey, Iran and Afghanistan. The estimated population of this economic unit when all future members have joined is 3.3bn, nearly half the world’s population.

iv More background on China’s grand plan is available here: https://www.goldmoney.com/research/goldmoney-insights/time-for-a-new-gold-standard-for-asia

v It is crucial to understand the difference between GDP and genuine economic progress. It is a common misconception in Western financial markets that China’s credit bubble is more dangerous than those in Western welfare states. All credit bubbles are dangerous, more so if they do not finance economic progress.

vi The commodity rehypothecation scandal in 2014, the stock market collapse in 2015, and commodity speculation last year are examples of bubbles popped by state intervention.

vii For the background to my assessment of gold bullion owned by the Chinese government, see: https://www.goldmoney.com/research/goldmoney-insights/china-s-gold-strategy

viii At current rates of Iran’s oil exports to China and at current gold prices their annual value is approximately 300 tonnes of gold.

ixSee http://www.politico.com/story/2017/08/17/steve-bannon-interview-american-prospect-241729

 


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

 

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Deviant Investor: Total Eclipse of Sense

The Deviant Investor

A Non-Traditional Perspective

MD: Hmmm. “A Non-Traditional Perspective” … this from the guy who will not let my posts pass his moderation … because they are “unorthodox”. Go figure.

My creation of this website and blog at least partially resulted from his (and other goldbugs and Mises Monks) defensive maneuvers.

Let’s see what pearls of wisdom his non-traditional perspective brings us. We certainly won’t expect to be disappointed when he links his wisdom to an event that is mathematically predictable over the whole span of time we have had the math … and into the foreseeable future.

Total Eclipse of Sense

The eclipse of the sun occurs today. The silver moon covers the golden sun, plunging a small portion of the United States into darkness for a few minutes. Perhaps it is time to do a sanity check.

Investors Business Daily: “U.S. Has 3.5 Million More Registered Voters Than Live Adults

We blame the Russians but the election fraudsters are us.

Blame the Russians!

Zero Hedge: “Only in California…

“According to a statement from Western United Dairymen CEO, Anja Raudabaugh, California’s Air Resources Board wants to regulate animal methane emissions even though it admits there is no known method for achieving the type of reduction sought by SB 1383.”

(Legislation to regulate cow and sheep flatulence – how charming!)

MD: We need to regulate those people’s exhaling. After all, it is CO2 … that deadly greenhouse gas. It can be done by inhibiting their inhaling. Enter SB 1383A stage left.

A new proposal: SB-219 blasts a deeper hole into common sense regarding the use of pronouns, gender choice, gender identity, bathrooms, transgender and more. What will be considered “normal” in five years on the left coast?

MD: Hopefully it will be sovereignty. But that’s much too much to even dream for.

Now in California! Perhaps coming to your state soon?

MD: If we’re talking about secession, I sure hope so.

Thanks to the Federal Reserve policies, commercial fractional reserve banking and U.S. government spending, prices have risen for decades.

MD: Fractional reserve banking hasn’t cause that. That’s just enabled the money changers to leverage their self given privilege by 10x … making them become capitalists in just two years and allowing them to then take “their” money off the table … and in 30 years, multiply what they let ride by 12,000 times. No … the price changes caused by the unbalance between supply and demand for the money itself comes straight from the government … their continual rollovers which are defaults not met by interest collections of like amount. It’s called counterfeiting. All the taxes go to the money changers in the form of tribute (interest) they demand … for doing absolutely nothing! But then, they instituted the government didn’t they. What should we expect?

However we are assured there is almost no consumer price inflation.

MD: There can’t be if you’re going to have COLA’s in your pension formulas. That’s suicide when you can’t stop the counterfeiting. The only thing you can resort to is the “thumb on the scale” trick .. and that’s exactly what they’re doing. Based on my SS check year over year, inflation has been 0.27%. Based on the cost of my rib eye steaks, it’s been about 27%.

One of the mandates of the Fed is “stable prices.” Hmmmm!

MD: And of course we here at MD know that  a “proper” MOE process employees cares nothing about prices, employment, balance of trade, or anything else. It has no monetary policy. It has no reserves. It functions just like the over-speed governor on your lawnmower … through negative feedback correction (mitigated defaults immediately with interest collections of like amount). It is totally objective and can’t be manipulated at all.

Socialism:

Global warming: Do you think the politicians would have supported the global warming story if they could not tax greenhouse gases? The worry in the 1970s was global cooling. That story died because there is no way to tax the global cooling story or make a profit from it.

MD: No. That’s also why marijuana will soon become the national flower.

 

****************************************

 

The reality that is worth understanding:

Time for a sanity check. Gold or paper? Results or promises? Face reality or blame Russia?

Gary Christenson

MD: Actually, a pretty good effort this time by the clueless Gary Christenson.

Goldmoney: Shakespeare on Finance

MD: I am a Goldmoney sucker. Rather than go to the pawn shops and gold shops to get my gold, I went to Goldmoney. That was back in the day when I was sure the “train was finally leaving the station”.  Gold against the dollar was going up very quickly … as was silver.

To test the wisdom of what I had done, I tried to get physical gold from them. The process was slow and expensive. My turn-around costs exceeded 10% … and that’s not including the import duty I had to pay. So all but one ounce still rests with them. I really don’t ever expect to see it again. When we have a reset, there will be all kinds of reasons why I can’t get to that gold.

As it turns out, I was even stupider than I thought. Gold went down against the dollar … and is still down. Go figure.  So let’s see what wisdom Turk, the gold salesman, is putting out now. Here at MD we “know” gold is not money.

And look at the title: Here at MD we know there is no such thing as finance when you have access to a “proper” MOE process. This is because inflation is guaranteed to be perpetually zero … the time value of money is zero and it is in perpetual free supply to responsible traders. When (1+i)^n is perpetually 1.000, there is nothing for finance to do. They’re all out of work.

Shakespeare on Finance

We are told by Shakespeare: “Neither a borrower nor a lender be.” Is it good advice?

Like so many things in life, the answer is – it depends.

Individuals are different, and what is right for one person may not be suitable for another. What’s more, everyone’s circumstances are different, which may require different decisions that result in a myriad of outcomes.

Consider too what has happened to money in the four centuries that have passed since Shakespeare penned those immortal words. The Bard himself lived during a time of sound money, with commerce conducted using gold and silver coins.

MD: The obligatory “sound money” nonsense. We at MD can blow those arguments out of the water very simply by blasting their claimed attributes of money … one after the other.

But sound money ended in Britain and pretty much the rest of the world with the outbreak of war in 1914, though the last remnants survived until 1971.

MD: Gold as money never ever existed. If it ever got close, it was just as an expensive, inefficient, risky, trade restricting stand-in for money … that was always in the wrong place and in the wrong hands.

We now live in a world of fiat currency, where money-substitutes called dollars, pounds, euros and yen circulate rather than money itself. So what would Shakespeare be saying today?

MD: Boy does he need a good dose of reality. Fiat money “is” real money. The instances he enumerates are just from improper MOE processes. This is very familiar territory here at MD.

It’s an interesting question. Unfortunately The Bard is not around to answer it. But here’s how I see it.

MD: Actually, we should probably be looking for Francis Bacon. It’s not likely Shakespeare wrote a single line attributed to him. And I’m sure any of us who could have know him contemporaneously would find that obvious.

Let’s look at lending first. The interest rate one can earn on a savings account or other bank deposit is near zero. Even though the Bank of England and other central banks are talking about raising rates – and the Federal Reserve recently bumped up interest rates slightly – central bank policy across the globe is aimed at keeping interest rates low.

MD: Here at MD we recognize the term “lending” for what it is … a corruption of the traders invention and creation of money … by the money changers who co-opted the process. And the “proper” value of interest is zero … as is the proper value of inflation. Interest rates aren’t arbitrary. Interest is the immediate mitigation of defaults on money creating trading promises. These articles are always such painful reading. We here at MD see them for what they are: erudition founded on false premises. I’ll scan ahead now to see if there is anything in here even tangentially worth reading … and not purposeful self serving disinformation.

More importantly, interest rates on bank deposits are generally lower than the rising cost of living. What this means is that money put on deposit in a bank loses more purchasing power from inflation than it gains from the interest income earned on the deposit. It is in effect a tax on your wealth – your purchasing power. So Shakespeare’s advice could apply to making bank deposits, but borrowing is a trickier proposition.

Borrowing is always a two-edged sword. There are always risks when borrowing money, but there can be benefits too.

For example, it often makes sense to obtain a mortgage to purchase a house, given that having a shelter is a basic human need. But even here there is a risk. If mortgage payments are not paid on schedule, one risks losing their house, and perhaps even the equity they have built up in it.

MD: Only under an “improper” MOE process. In a “proper” MOE process, the only risk anyone takes is making a bad trade. All the risks you see enumerated here are money changer imposed risks … and they’re not risks … they’re purposeful predatory traps.

Borrowing for whatever purpose requires a lot of thought, but so does lending because it has risks too. These realities lead to an important question that tests Shakespeare’s admonition. Should one borrow or lend in today’s fiat currency world?

MD: What a stupid false choice! The real choice is: Should a trader trade over time and space today … or just in the here and now. The question only comes into play when you trade in the face of money changer predation and the manipulation by the governments they institute. They call it the “business cycle”. It is more properly their “farming operation.”

To help answer this question, I’ve created Lend & Borrow Trust Company Limited (“LBT”), and am pleased to say that Goldmoney is one of its investors. In fact, it is Goldmoney’s customers who I believe will understand the potential that LBT offers, as I explain in the following FAQs.

MD: Right out of the money changers playbook. I wonder what he would create if he had a clue what money really is. Frankly, having the where-with-all to create Goldmoney, he does have the where-with-all to institute a proper MOE process. But the problem is, there is no money to be made doing that. Unlike a Mutual Insurance Fund where money is made on investment income and otherwise premiums equal claims, with a “proper” MOE process, defaults equal interest collections … but there is no investment income … there is nothing to invest.

And this LBT is a little too close to LGBT for my comfort, thank you very much!

What is LBT?

LBT is an online peer-to-peer platform where lenders and borrowers interact to lend and borrow British pounds, Canadian dollars, euros, US dollars and Swiss francs. LBT is unique because it is the first P2P platform where all loans are secured by the borrower’s investment-grade gold and silver.

MD: I wonder if I could use this to get rid of my Goldmoney with no transaction cost.

What does LBT offer to lenders?

LBT provides an alternative to bank deposits. It enables lenders to earn interest income outside the banking system with five major national currencies. Through LBT’s online auctions, lenders:

  • may earn interest income at a rate above the inflation rate, and
  • are secured by the borrower’s gold/silver, which is sold to repay the lender if the borrower defaults.

MD: See how they must sustain the money changers “improper” MOE process to make a living. Do we really think people like Turk are our salvation? Do we really think the Harlem Globe Trotters and the Washington Generals are competing? … that they don’t report to the same management?

What does LBT offer to borrowers?

LBT enables borrowers to monetise their precious metals. Through LBT’s online auctions, borrowers:

    • may borrow at interest rates lower than available from banks,
    • use their investment-grade gold and silver bars as collateral to borrow, and
    • borrow in any of five currencies: GBP, USD, CAD, EUR and CHF.

MD: But can I do it without this fiction of borrowing. Can I just sell my “records of gold” for dollars and use it to pay off the money changers … who are overtly fleecing me right now at 8.25%?

How much can I lend?

There is no maximum, and the minimum is £5,000 or currency equivalent.

How much can I borrow?

You can borrow up to 65% of the value of your gold and silver that you pledge as collateral at loan commencement. LBT actively monitors this loan-to-value and makes a margin call if it rises to 75%, requiring the borrower to pledge more collateral and/or partially repay the loan to reduce it back to 65%. If the margin call is not met, LBT sells enough metal to meet the 65% benchmark.

Is LBT regulated?

Yes, LBT is based in the England and regulated by the Financial Conduct Authority to operate an electronic system in relation to lending. LBT does this through online auctions in which its customers participate.

MD: This is starting to look real humorous … like other religions. You’ve gotta love words like “authority” and “financial conduct”.

How are auctions started?

Online auctions are started by either the borrower or lender. Through these auctions lenders and borrowers compete with each other to seek an interest rate at which they are prepared to lend or borrow.

Can I borrow using my gold and silver in Goldmoney?

Yes, you choose how much and which metal or both you would like to pledge as collateral. At this time, only gold and silver stored in England and Hong Kong can be used.

How do I get started?

Click here to visit the LBT website and open an account.

Is there risk to lending or borrowing?

Yes, there is risk with everything in finance. Therefore, each individual needs to weigh the benefits LBT offers relative to the risks of lending and borrowing. If you are uncomfortable in making financial decisions, we recommend that you seek advice from a professional advisor. View LBT’s Risk Disclosure.

Did Shakespeare have any other financial advice?

There are many, and here’s my selection. “Money is a good soldier,” meaning it should be working for you because “Gold that’s put to use more gold begets”, provided of course it is done wisely.

MD: The trouble is “gold is not money” Turk! Would you refer to a “promise” as a soldier? Of course not! So why would you be comfortable referring to “money” as a soldier. Promises don’t “work for you”. You “work to deliver on them”. Big difference to the responsible trader. Not so much to the deadbeat.

 


This financial promotion has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by Lend & Borrow Trust Company Limited, which is authorised and regulated by the Financial Conduct Authority (“FCA”).


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.

MD: Anyone ever seen an instance of someone claiming “gold is money” and not finding them to be a gold salesman … or someone who has been deluded by a gold salesman?

Deviant Investor: Debt, Dollars, DOW, War, Silver and Shirts

MD: The Deviant Investor is a gold salesman. He will do whatever it takes to make a market for his gold. It is easy to find the delusions in his articles. In fact, he “knows” the truth … he just has too big a stake in the delusion to admit it. He won’t pass my comments through his moderation. That was one of my principal motivations for creating this site. It gives me a chance of mitigating the blocks “all” the Mises Monks throw up against me. If you’re dealing in the truth, you don’t have to block anything. The truth always prevails.

Let’s see what kind of delusions … and propaganda … this article contains. It’s always fun.

Debt, Dollars, DOW, War, Silver and Shirts

Yes, they are connected.

Dollars are created as debt. More dollars in circulation = more debt.

MD: He gets it right. Notice, he hasn’t said dollars are money. They obviously “are” money … but from an “improper” MOE process. They obviously do represent “in-process promises to complete trades over time and space”. And all of them created by government promises are counterfeit … and indistinguishable from all others in circulation. That’s why we have inflation … 4% per year compounding.

More debt means consumption is “pulled forward” from the future so consumption can occur now. This usually ends badly.

MD: Fallacy number 1: A trading promise spanning time and space says nothing about consumption. If I create money to build a house and engage a contractor, I cannot consume that house until the contractor completes it. The contract can be written so I give him a certain amount of money when the contract is agreed to; a certain amount along the way; a certain amount when he delivers the house; a certain amount sometime after that when I confirm he has met the terms of the contract in his delivery … none of which assumes consumption. And it hardly ever ends badly.

But he says consumption “can” occur now. That too does not end badly. Most people buy a house that already exists. They move in and make monthly payments. It is far and away the minority that default on this trading promise spanning time.

Commercial banks and central banks have created trillions of new dollars. Each new dollar devalues every other dollar currently in circulation, in savings, and in pension accounts. Prices rise!

MD: No bank of any kind has “ever” created money. In “all” case, it is a trader who creates the money. The banks have just reserved for themselves the privilege of certifying that money … and the privilege of collecting tribute on that certification … to the tune of 10x the amount of their “so-called” stake in the creation … which after two years is provably zero.

Wars are costly, kill people and produce little. Governments like wars because they create demand for production of war materials.

MD: Governments do not profit from production of war materials … only the money changers do. Governments are instituted by the money changers … not by the people. They “protect” the money changers privileges … first by laws … then by force. They also use this force to expand the money changers privileges … by empire-building wars. The money changers retain hold on the reins at all times All but two of the central banks in the world are controlled by a single family … the Rothschields.

Further, governments are sustained by inflation. “All” taxes collected go directly to the money changers in the form of tribute. Neither governments nor money changers can function without inflation. They need their cherished (1+i)^n to give them a value greater than the 1.00000 a proper MOE process guarantees. They call it the “time value of money”. And they get away with it.

More production means a higher GDP (even if the concept means little). Politicians point to higher GDP and claim it is good. More production creates employment. Everyone wins, unless the bomb fell on you. Unless the drone targeted you. Unless you live on a fixed income and prices continue to rise. Unless you are a soldier and were injured or killed.

MD: GDP is unmeasurable … as is inflation. A “proper” MOE process cares nothing about GDP … and it “guarantees” zero inflation of the exchange media itself … it doesn’t have to measure it.  It cares nothing about employment. It cares nothing about prices but the zero inflation guarantee assures any price changes are strictly associated with the supply/demand balance of the object of the exchange … not the supply/demand of the money itself … which is always perfect at 1.0000.

As dollars are devalued, prices rise for most goods and services. Yes, televisions are less expensive, but have you checked the price of beer, medical care, cigarettes, cars, Whisky, college tuition, food, and 101 other items we need?

MD: Irrelevant to a proper MOE process. Further, a proper MOE media would ideally be in units of HULs (Hours of Unskilled Labor). The value of a HUL has never changed. Today it trades for the same size hole in the ground as it ever did or ever will. And we have all been HULs at one point in our lives, so we can all identify with them and hold them in perpetual perspective. This certainly isn’t true of an ounce of anything.

As dollars are devalued, the price of silver rises. Each dollar buys a smaller piece of silver. Wars burn many dollars, many ounces of silver, and consume other commodities, which rise in price. Demand for silver increases, dollars buy less, and supply increases slowly, if at all. Prices for silver rise because of supply, demand, and devaluation.

MD: Which is a straw man red herring argument when it comes to a “proper” MOE process … and “real” money.

The DOW is higher because each dollar buys less. Central bank “printing” of many extra dollars supports the DOW. Wall Street hype helps also. Regardless of the hype, a good crash occurs every decade or so, and after the crash the stock market rises again. Most people buy high, watch it crash, and sell low. How many people will take profits near the top in this market? BUY SILVER!

MD: When you take measurements with a rubber band … that constantly stretches like our inflating money … or constantly contracts like gold and its foolish copier Bitcoin, you add a degree of freedom that just makes life difficult for traders. But we have always seen this variable added … because it enables the “controllers” to take their pound of flesh from the traders. DI wants that pound of flesh … and so do the money changers. But then again, DI is just a money changer. It just needs to stir the pot.

As prices rise, shirts cost more.

MD: Ok. For what follows, DI is going to describe what to it is “rocket science”. To we here at MD, we know it is just the obvious result of “improper” MOE process practices … and thus irrelevant to a “proper” MOE process. Read it and smirk. Scan down to my next comment if you don’t need a dose of this levity.

Debt, dollars, DOW, war, silver, and shirts are connected. They rise and will continue to rise, two steps higher and one lower, as long as we use debt based fiat dollars.

Examples:

Money supply and debt increase. Look at official national debt since 1913. Can you think of a single reason why it will reverse a century-long exponential trend (debt doubles every 8 to 9 years) and turn lower?

Wars will continue and prices will rise. The helmet for an F-35 will cost $400,000. The price for a World War II P-51 aircraft was $52,000.

Silver prices have increased for 90 years and will continue to increase.

The price for shirts is higher, much higher. Dollar devaluation increases prices.

This dress shirt is currently available from Nordstrom for $175.00

Debt, dollars, DOW, war, silver, and shirts are connected.

MD: Ok, I’ll break back in here. One thing I failed to note was another obvious attribute that a “proper” MOE process cares nothing about … that being the “money supply” … and that being the associated manipulation they call “monetary policy”. Everyone here already knows that nonsense for what it is … irrelevant nonsense. “All” money in circulation (created by traders … not supplied) represents “in-process trading promises”. It doesn’t exist before the trading promise is made nor after delivery is achieved as promised … unless there is defaulting and counterfeiting not mitigated immediately by interest collections of like amount. The “unless” results in INFLATION … and that’s what little Gary is describing. It need not exist. But if he has his way we will have DEFLATION (with his gold-is-money by edict nonsense). And that will strangle trade. You’re not going to part with any of your money today when tomorrow it will trade for much more stuff. Zero is obviously the only right value for inflation … and gold can never deliver that value, let alone perpetually guarantee it.

Option One:

Reduce Federal government expenditures, declare peace, balance the budget, let it crash … and DREAM ON!

MD: Institute a “competitive and proper MOE process” in competition with the current money changer instituted “improper” process … and watch money changers and governments wilt. No dreaming and no legislation required. The process is totally transparent so no regulation is required. The process is totally decentralized and can have any number of participants … just like Mutual Casualty Insurance Companies. The most competitive ones giving the best service to traders prevail.

Option Two:

More of the same. More debt, dollars in circulation, continuing wars, and higher silver prices. Shirts will cost $500 instead of $1.00 in 1934 and $175.00 today.

Option Two – so what?

Taxes increase as dollar devaluation continues. Can you afford higher taxes? Will your income rise enough to meet your increased expenses and higher taxes? Will Social Security and your pension pay you in mini-dollars, or micro-dollars? Can you live on pension payments denominated in micro-dollars?

MD: Did you ever stop to think that 3/4ths of the fruits of your labor already go to taxes … and that of the 1/4th that remains, most goes to money changer tribute and insurance companies.

You retain almost none of the fruits of your labor … right now! It goes like this: You start with things like 8% sales tax; then add federal tax … then state tax … then taxes and fees on things like gasoline and your phone and your beer and the lottery (if you’re stupid enough to play it) and everything else you touch. It is not a difficult exercise at all to see that you pay 50% in these “sort of” overt taxes.

But then look at every product and service you buy. The entity producing it is paying over 50% too … and they’re passing that on to you. So of the 50% you have left after paying your taxes, you’re buying products that have 50% taxes in their price. That takes you to 75% (i.e. 3/4ths).

And remember that 100% of these taxes go to the money changers in the form of tribute (they call it interest). “All” the services you think these taxes are buying are actually coming from INFLATION (a designed in leak which the money changers feign targeted at 2% and deliver at 4%).

That’s what “all” government lives off of … inflation. They make trading promises (create money) just like you and I. But they never deliver. They just roll them over. That is counterfeiting. And all money, defaults or counterfeits, that is not reclaimed by “legitimate interest collections” … not by money changer tribute … causes inflation by the operative relation: INFLATION = DEFAULT – INTEREST.

DI cannot dispute anything I have just presented … so they don’t even try. My comments don’t even make it through their moderation.

CONCLUSIONS:

 

  • Debt, dollars, DOW, war, silver, and shirts are connected.
  • Prices for food, housing, transportation, clothing and most other items will increase. Believe the “low” consumer price inflation myth at your own peril.
  • The future may look like the 1930s – where debt killed. Or, more likely, it will look like the 1970s – continual price increases, stagflation, weak economy, rapidly rising gold and silver prices, and increased global stress.
  • My bet is 1970s inflation and worse. Do you own due diligence but remember dollars will be devalued further and higher prices are inevitable.
  • Do you own enough silver?

MD: If you own any gold and silver and you’re not a jeweler or dentist or electronics manufacturer, you are a fool. And “I” admit to being a fool. I drank the coolade and bought quite a bit of the stuff before I realized the truth. I can’t sell it because it’s doesn’t even trade for the dollars I gave up for it … let alone the dollars I need to cover the inflation. Luckily, I also bought land in a low tax, low services county in Texas, which gives me a sustainable retirement.

What I really hope we achieve is “iterative secession”. But it’s not going to happen in my lifetime … and it’s not going to happen with people like Gary Christenson spreading confusion and delusion like this.

Gary Christenson

The Deviant Investor

Reply to RED

Reply to RED in discussion about a Bitcoin shop.

 

14 hours ago

R: I have been a bit busy, but finally have a little free time to respond.

Dissecting select statements and then sniping at them with what is often presumptuous and self serving rhetoric (as you did with the Bitcoin shop piece and other readers feedback is a “TACTIC”.

MD: Replying without even referencing the issue of focus is worse. That’s typically what I run into. You are correct. It is a TACTIC. I read an article through the frame of what I know. When I come across something that is in violation of what I know and can prove, even if all I see is a symptom, my TACTIC is appropriate for calling attention to it.

R: Apparently you believe that this type of “dialogue” places you in the critics seat or “instructor” role providing “instructive critique”; it does nothing of the kind, and rest assured you do not enjoy that relationship with me.

MD: “Apparently” is the operative word here. Its root is “appear” … and thus it must appear so … to you. I am in the critics seat. And I am an instructor if I can produce evidence that contradicts what I am reading and prove it. And that is true even if my profession is not “instructor”. The root of the word is “instruct” and it means “teach a subject or skill”. And that’s exactly what my comments do … in as unambiguous fashion as possible.

R: Allow me to demonstrate:

TM – Without even knowing what those theories are, I think it is foolish. You don’t fix an “improper” MOE process by resetting it. You don’t fix an “improper” MOE process by switching to another “improper’ process. And if you have a “proper” MOE process in operation it never requires “re-booting”………”

RD – How can you comment upon the efficacy of any theories if you do not read them. You speak of a “proper” MOE but you repeatedly fail to identify it. Your statement indicates that it is not necessary to learn anything about other theories as only your own are of importance.

MD: When I know what is true and can prove it, I don’t need to know what is theorized if the mention of the theory makes it obvious, it goes against what is provably true. Re. Failing to identify a “proper” MOE process: that takes me about 500 words. I have done it at least 4000 times over the 4+ years it has become obvious to me. I can’t begin every comment with those 500 words. If you want to know the “proper” MOE process, just ask (actually, you can now see it in the right panel). I am now using my MoneyDelusions site to annotate these articles. Contained in the right column is the definition of money and the proof. I do need to add the description of the process … but anyone understanding the definition and proof should be able to easily arrive at the process themselves … and quickly see the defects in other “theories”.

TM – [T] Who is “they”. With a “proper” MOE there are no gains! … period! Usually are reset means the create a new name for their money, you redeem the old money for the new money at 1,000,000 to 1 … and it all starts over again

……”

RD – Who to you think “they” are? It is the authors of the piece at the link. If you read the piece you would know this.

MD: Actually, it is not the authors of the piece … even in this instance. That’s why my method of annotating the actual article is my preferred mechanism. It was actually this article that motivated me to do it create the Money Delusions site. I had done it once before sometime back under a different umbrella … but after a while I was banished for breaking some rule … I was never told what. Money Delusions is now on my own host so I don’t have to deal with such nonsense. It’s not pretty yet … and may not ever be. But the points I make are indisputable.

TM – [T] “All” money is fiat … because all promises are fiat … they are made up by the person making the problem. And that’s not a bad thing … though fiat is “always” used as a slur…..”

RD – Of course the dollar and other currencies are Fiat money. The fact that I called the dollar Fiat currency should make it obvious to you that I am well aware all paper currency is Fiat. Bellicose statements are not required.

MD: What is obvious to me is you haven’t thought very deeply on the issue. Whether money is in the form of coin, currency, or simply ledger references is irrelevant. It “always” stands for an “in-process promise to complete a trade”. It is always … and only … created by traders getting their trading promises certified so they can span time and space.  And of course, “all” promises are “fiat” … so “all” money is “fiat”.

As with you, the use of the term “fiat” is to contrast it with “sound” through a slur. “Sound” implicitly means “having intrinsic value” … and the the Bitcoin nuts have to extend it … having reference to “work done”. But once money becomes sound … i.e. trades for something of intrinsic value, it ceases to be money. The trade completed. When you say gold is money, all you’re really saying is that it is an inefficient, expensive, clumsy stand-in for real money. Anyone who takes it as money must somehow exchange it in a future time and space with zero loss of value in the gold itself. And that’s impossible because the supply/demand balance for gold is far from stable. With “real” money it is “perfectly” stable … perpetually … everywhere!

You are correct: Bellicose statements are not required. They just kind of take on that tone after addressing the tone deaf for 4+ years … who, in the final analysis resort to religious arguments when they’re trapped by proof … or run away as soon as they become unhappy with the form.

R: Do you see what I mean? Your style of communication does nothing to advance the discussion let alone your own theories.

MD: My style of communication does more than your style of rebuttal. You haven’t addressed anything of substance which I have asserted. You have only addressed my form. That is “your” TACTIC. It is avoidance. Avoidance is far worse than abrasiveness.

R: I am quite busy and have little time to engage in this level of discourse, let alone time to even read the DB, and I am “done” with this communication thread.

MD: You’re not too busy to make false assertions. You are just too busy to support them and defend them. As usual … the line goes dead … not after rebuttal but after rejection. There are no gloves soft enough for engaging you people.

R: Respond if you must, and if it follows your prior “protocol”, rest assured that it will receive all of the consideration it deserves!

MD: Here’s an article from GoldMoney.com about crypto currency. They don’t get it either … and I prove them wrong. See it at:

Gold Money: Cryptocurrency – its status as money

It’s one of my many new instances of trying to get the “obvious” across to the deluded.

Gold Money: Cryptocurrency – its status as money

Cryptocurrency – its status as money

The cryptocurrency craze is fascinating to an economist, or at least a student of catallactics, because it is a test of the theory of exchange ratios and prices, which is what catallactics is about.

MD: Catallactics … now that’s a new one: Catallactics is a theory of the way the free market system reaches exchange ratios and prices. It aims to analyse all actions based on monetary calculation and trace the formation of prices back to the point where an agent makes his or her choices. It explains prices as they are, rather than as they “should” be.

Ah … so with “real” money, catallactics doesn’t exist at all. Exchange rates are always 1.000 everywhere. Money is always an in-process promise to complete a trade and cares not about prices at all. See how simple this is? See how complicated they perpetually try to make it to keep you confused and mystified?

A proper MOE process cares nothing about prices. Only traders care about prices. Whatever they decide they should be, they are committed to in making their trading promises and deliveries. If they’re wrong, it’s for their account … not the MOE’s account.

For this reason, the outcome of the cryptocurrency craze is of great theoretical interest. It is also of interest to students of the psychology of speculation.

Supporters of cryptocurrencies claim they are money.

MD: Without knowing what money is … go figure! Gold bugs claim gold is money. They are wrong too! Cryptocurrencies are close to real money than gold is. Real money has “no” inherent value … and neither do cryptocurrencies. Gold does have inherent value to jewelers and dentists and electrical contact manufacturers.

If they are unable to substantiate this claim, then we must conclude that cryptocurrencies are only a medium for speculation, drawing on increasing numbers of the public to maintain their value.

MD: And as this pot calls another kettle black, what does that make gold?

For this reason, their validity as money is fundamental to their future.

MD: i.e. … they have no future … which has been obvious to we at MD all along.

Supporters of cryptocurrencies are certainly very sensitive to accusations that they are not money, presumably for this reason.

MD: So are the gold bugs. They inevitably resort to religion (it has been money for 5,000 years) when their other arguments on gold being money are obliterated (e.g. there’s only 1oz … $2,000 … per person on Earth … a fraction of total trade and savings).

Mere opinions do not matter. A critical, detached analysis is needed. The purpose of this article is to test the proposition, that cryptocurrencies are money, from a sound theoretical perspective.

MD: What theory is needed? Here at MD we can state the definition, the proof, and describe the simple process in less than 300 words. No theory can survive in the face of that competition.

The basis of money

Before cryptocurrencies, there was government money, and before that metallic money, which was gold and silver.

MD: This isn’t about history. The Earth didn’t become a sphere with Columbus. The Earth did not cease being the center of everything with Copernicus.

Government money evolved out of metallic money, drawing upon it for its credibility, before abandoning all pretence at convertibility when the US Treasury finally abandoned the dollar peg in 1971. The difference between the two is gold and silver are chosen by people exchanging goods in free markets, while government money is imposed on people by their governments.

MD: Actually, it was proven to all traders … who knew it implicitly … in 1965. In 1964 a quarter with 90% silver traded for a gallon of gasoline. In 1965 a quarter with 0% silver traded for a gallon of gasoline. This is abject proof that the precious metal played no role in money (i.e. the trade) whatever. Even today, to trade for a gallon of gas, it matters not at all if it’s a pre-1965 quarter. You need 7 more to make the trade.

Catallactics, as a theoretical discipline, investigates the exchange of goods in a free society, and is the basis of classical economics from Cantillon, Hume, Ricardo, Jevons/Menger through to the Austrian school. Government money does not stand up to catallactic examination, because its issuance always subverts free markets by interposing influence from the state into transactions between ordinary people.

MD: Which is irrelevant to what money is. Government money is improper because it allows open counterfeiting … by the government itself. Real money doesn’t allow that. Further, government money does not have a direct linkage between defaults and interest collections. This allows it to impose the fiction of monetary policy and time value of money (i.e. enable… actually require 2% and achieve 4% … inflation). Governments are instituted by money changers. That’s how they protect their con.

The modern justification for government money has its origins in the German historical school of economists, when Georg Knapp declared, on what appeared to be little more than a point of principal derived from the supremacy of the not-long formed federal German state, that the state has the sole right to issue its citizen’s currency.

MD: And if anyone seeing MD was there at the time, they would present the real definition of money; the proof; and the description of the proper process … and that would have been the end of that myth … nipped in the bud.

Knapp’s one book was titled The State Theory of Money, published in 1905. In it, he argued that state money may be recognised by the fact that it is accepted in payment by the state. Money exists according to state regulation and creditors must accept it without being legally entitled to other forms of money in exchange for it.

MD: Anyone can refuse payment of any kind at any time … if the agree to in advance. They can also demand a certain kind of payment if they can get agreement to a trade with that stipulation. However, in the face of a real and proper MOE process, no-one in their right mind would enter into such a restricted trading promise. They have a very competitive alternative. When it comes time to pay tribute to the state, they can exchange their “real” money for the state’s fake money and make their payment. The states fake money will always be inflated. That’s how states finance themselves. All taxes go to paying interest to the money changers that instituted the states in the first place. The state itself is sustained by inflation.

In his preface to the first edition, Knapp made it clear that he regarded money as a matter for political science. In other words, its existence, in accordance with the tenets of the German historical school, was a matter for the executive setting the law instead of free markets. The first sentence of Chapter One leaves us in no doubt on this matter: “Money is a creature of law”.

MD: Too bad we weren’t there at the time. We would make him disprove the obvious.

The law is horribly deficient. It does not even recognise that the purchasing power of money can change.

MD: Oh really? Not if it’s “real” money it can’t. Real money guarantees zero inflation of the money itself. Ideally denominated in HULs (Hours of Unskilled Labor), its value is obviously constant. A HUL trades for the same size hole in the ground over all time … and everywhere.

The law does not compensate those robbed by currency debasement. The law makes no distinction between fiat money and credit money. The law will tax you if you benefit from the wisdom of holding catallactic money instead of state money. The law denies the logic of catallactics entirely, and rules only on state money, irrespective of whether it is backed or convertible into gold. It does not recognise the money chosen by free markets. The law is not equipped to decide on monetary matters.

MD: Now tell me. Knowing what money really is, is this not pure ridiculous double talk or what?

Therefore, by no stretch of the imagination was Knapp’s treatment of money catallactic. Money issued by the state cannot last beyond the ability of a government to impose it on its people. Knapp died in 1926, three years after his own government’s money had collapsed both predictably and dramatically, disproving his state theory of money.

MD: Money issued by the state cannot compete with real money. At best, it can mimic it … and at that point traders don’t care if the state creates it or not.

Today’s state-issued currencies are no different in concept from the currencies that collapsed in the wake of the First World War. With no convertibility into gold or silver, they depend for their purchasing power and validity as money on no more than the rule of law and public faith in the state.

MD: But they’ve never had convertibility to gold and silver. There is only 1.2 ounces of the combined stuff per person on Earth. Today, miners are willing to trade $2,000 to produce a new ounce … so that is its value. It is so painful to read this nonsense over and over and over again when it is so easily proven fallacious.

Since the Bretton Woods Agreement began to collapse, the dollar lost over 97% of its value measured in gold. These are relative purchasing powers set in the markets between sound money, still accepted as such by most of the world’s population (even though it is not usually used for day to day purchases), and the reserve state-issued currency.

MD: But if you look at a log graph, you can see it was losing at a steady rate of 4% per year since 1913 … and before. Bretton Woods was no epoch. It was an obvious application of a fiction … of a myth … and it’s cover was blown in 1965 … and the French called them on it in the early 70’s.

Supporters of cryptocurrencies appear to be more aware than most of the weaknesses of state currencies, particularly when the issuing central banks have stated that their objective is to continually reduce their purchasing power every year as a matter of policy.

MD: Actually, they bought into the stupidity of the gold bugs … that an attribute of money be that it be “rare”. How stupid. We here at MD know real money is in perpetual free supply . the very opposite of rare. We can prove it in less than 100 words.

The collapse in purchasing power seen so far has destroyed nearly all the value of money-based savings such as bank deposits and bonds, a government policy set to continue. Furthermore, there may be an understanding among some cryptocurrency enthusiasts that credit money, issued by the commercial banks, undermines the purchasing power of state money as much, if not more, than the issue of money by central banks.

MD: Yet nobody is “selling” their cryptocurrencies or trading them for other things … nobody except drug dealers and money launderers. That’s the nature of a deflationary money. That’s why it doesn’t work.

Is it not better, they argue, for ordinary people to take back control of money from their governments?

MD: Just institute a competitive “proper” MOE process. They can’t compete with it without fixing the problems described in this article. Let the chips fall where they will.

In their utopian world, we can escape the hidden tax of monetary inflation, and we can keep our ownership of money private.

MD: With a proper MOE process, ownership of money is always private. Creation of money, on the other hand, is always public and transparent … and authenticated … and accounted.

Bitcoin’s founder came up with a formula that would restrict its inflation by making it progressively difficult to “mine”.

MD: He went too far. He provided no way for it to maintain perfect balance between supply and demand for it … i.e. zero inflation … zero deflation. He created a limit on how much could ever be created … i.e. guaranteed deflation … i.e. guaranteed strangulation of trade.

By introducing new block-chain technology, he created a self-auditing digital version of bearer paper money. Not only is the concept extremely clever, addressing the weaknesses of state money head on, but bitcoin was introduced at a time when central banks have been openly discussing their intention to eliminate physical cash.

MD: Block chain technology, if blocks can be created freely at zero cost, is very helpful to a “proper” MOE process. It makes the transparency of the money creation a trivial task. It assures regulation (and its inherent corruption) is unnecessary by giving everyone a clear and detailed and indelible and real time view of what is going on.

Bitcoin has certainly caught the imagination, spawning by the time of writing over 900 other imitations, according to Wikipedia’s List of Cryptocurrencies. Instead of Bitcoin and its imitators being used as money, they have become vehicles for outright speculation.

MD: Which was predictable … yet they still want to debate it! They are living proof of the fallacy of their own arguments… but then so are the gold bugs.

Presumably, supporters of cryptocurrencies hope that at some stage, their monetary characteristics will come to the fore, once the speculation has subsided. However, we can see that cryptocurrencies exist despite the law, and the law barely recognises their validity, even banning them in some jurisdictions. They are not Knapp’s creatures of the law. For cryptocurrencies to be money, they must therefore conform to the characteristics of money demanded by catallactic theory.

MD: When will they ever learn, if you resort to law to deal with issues, you have already conceded defeat … you have capitulated to your enemies? Examine the principles. Laws are not needed. They are counterproductive.

Cryptocurrencies fail the regression test

In an exchange of goods for money, both buyer and seller will subjectively value the goods side of the transaction. To do that, both must assume that there is no subjectivity in the value of the money being exchanged. So, while the good, or service, is valued subjectively, the value of money must be regarded as wholly objective, otherwise the transaction descends into the realms of barter.

MD: And a gold bug makes that statement when the medium he proposes fails the same test. Go figure! And ounce of gold has never traded for the same size hole in the ground … over any span of time. Just look at the last 4 years!

The regression theorem demonstrates that money in a transaction has its objective exchange value determined by reference to recent experience.

MD: No it doesn’t. It is reference to the opinions of two traders at an instant in time … regardless of their experience … regardless of how recent a similar trade was made. It is the trader creating the money (or accepting it and anticipating exchanging it for something else) who has the perception. And they both must suffer the consequences of mistake. The creator must return a like amount as promised … regardless of what it trades for among other traders. And with guaranteed zero inflation of the money itself, the users of the money have greatly simplified their trades … especially over extended time and space.

We know without question the value of money in a transaction, because of what it bought yesterday.

MD: That’s a major major fallacy. The value of the money itself (if it is real) never changers. But the perception of what it will trade for changes continually … except, that is, for what size hole in the ground it will trade for. Everyone knows that when stocks are lightly traded, their price becomes strictly speculation … and very volatile.

And yesterday, we knew its value from our experience of the day before. By a process of regressus in infinitum, the value of money is traced back to its original subjective value for non-monetary use, before it became adopted as money. In other words, for money to become money, it must have had and must still possess a subjective value as a good.

MD: He says … with his feet firmly planted in air!

This is not to say the value of money is based on its use as a good. The purchasing power will be determined by its demand as money, and its value in terms of its purchasing power will fluctuate. When silver was dropped as money in favour of gold in the late nineteenth century, its price fell back towards its use-value as a good.

MD: With real money you have no concern of its “demand as money”. You know it is perpetually equal to its “supply as money”. This demand as money only comes into play when you have a clumsy stand-in for money … like gold and silver.

Even when the purchasing power of money changes, it is still regarded as the objective value in an exchange. Indeed, prices in one centre which get out of line with prices in another centre will correct through a flow of money to the centre where goods are cheaper, from where the goods are expensive.

MD: Oh really. Tell that to someone owning a structure on a property in a depressed area of Philadelphia or Detroit wanting to trade for an essentially equal structure in San Francisco. Seeing any flow of money from San Francisco to Philadelphia ghettos? You aren’t are you. And it’s not because of money.

Prices correct by surplus money moving to where there is a deficiency. All the time the purchasing power of money undergoes a period of adjustment, the buyers and sellers of goods assume it is the prices of the goods adjusting, not that of money priced in goods. Money retains its role as money by still being regarded as the objective value in the exchange of goods.

MD: Surplus money? That’s a straight admission he has no idea what money is. Real money doesn’t exist before a trading promise creates it … nor after the trader delivers as promised … for that particular trade. And “all” money comes from just such trading promises. Thus, there is “never” a surplus. Supply is perpetually equal to demand. It is the nature of every trade.

It is of paramount importance that money retains this credibility in all circumstances. As well as passing this test, the money must be durable, reliably stable, and as a store of value, dependable. For all these reasons, gold and silver have long survived the regression test, while the many other commodities and goods used as money over the millennia have all failed.

MD: Look at those attributes: Durable (a ledger entry is durable if it’s transparent and recorded in multiple locales). Reliably stable (you can’t beat free supply and perfect supply/demand balance). Store of value (you can’t beat zero inflation). Dependable (you can’t beat beyond competition). But gold and silver really don’t pass any of these tests … and he says they have long survived all of them. Ask the poor guy who lost a whole Spanish galleon of silver in a storm. And he closes with his cherished religious argument … used as money over the millennia.

The state-issued currencies that exist today have generally retained their role as money by being initially convertible into gold and silver, or more lately convertible into a partially gold-backed dollar.i

MD: As in “partially pregnant”?

By ditching gold, the abandonment of the last vestiges of the dollar’s convertibility in 1971 led to the loss of its vital regressive quality and most of its purchasing power.

MD: The day before they ditched it, it traded for $35. The day after it traded for $70. Bet me the dollar lost it’s value in that one day. The little kid (the French) just came out and said “the king has no clothes”! He had no clothes the day before either!

All the other state currencies that took the dollar to be their reserve currency have suffered the same fate. And while we all use government-issued currencies, giving them an objective use value today, there are enough examples of state currency failure to confirm that they have a fundamental weakness in not conforming to the regression theorem.

MD: Linking currencies (money) to another is just stupid. If you’re going to go to the trouble of having your own currency, at least have control of it. If I was the ruler of Xenotopia and I instituted the HUL, I wouldn’t care what currency anyone else created or used. I would know I have done the best that can be done.

There is no regression in the case of cryptocurrencies, certainly not as money. They were created out of thin air, and are less convincing catallactically than the state currencies that were at least commenced as gold or silver substitutes. While cryptocurrencies can claim a free-market origin, and their creators might think for that reason they are superior to state money, they fail the regression test and so cannot claim to be catallactic.

MD: Did this guy just learn the word “regression”? “Catallactically”? Both words are irrelevant. They are doubletalk!

I don’t think I can go on. If you’re new to MD, read on and annotate yourself for practice. As you can see, knowing the concepts and principles that is very easy to do. If you adhere to them, your annotations will be exactly like those of others with like knowledge … regardless of your religion, you have irrefutable concepts, proofs, and principles when it comes to the subject of money.

Can cryptocurrency be used as money?

This does not entirely disqualify cryptocurrencies form being used as money. There is nothing to stop Citizen A coming to an agreement with Citizen B to accept a cryptocurrency in payment for a good. In such an agreement, the cryptocurrency fulfils the role of money. But whether the cryptocurrency will circulate more widely as money is the true test. To answer this question, we need to delve into exchange theory itself.

Money is necessary because we divide our labour, with all individuals specialising in their production to maximise their output. To avoid barter we need a mutually agreed and acceptable medium to acquire the goods and services produced by others. In a free society, where this division of labour occurs without third party intervention, the money that is used to facilitate the exchange of goods is also chosen by the parties exchanging goods and services. The only currencies that have been chosen by free markets, and have survived for millennia, are gold and silver.

The reason gold and silver were accepted is they have a subjective value for alternative uses, in accordance with the regression theorem as described above. Both metals are to this day sold as jewellery and for industrial purposes. Crucially, this is not true of unbacked paper money, and even less so of it in its electronic form.

The history of the failure of unbacked currencies remains unblemished by success, suggesting that it is only a matter of time before today’s currencies will also fail. The purchasing power of today’s fiat currencies is in continual decline, and since the last tie with gold was abandoned in 1971 when they became pure fiat, they have all lost most of their purchasing power, compared with that of the original sound money, gold.

The creation of fiat currencies had their origin in being a substitute for gold. They were redeemable at the currency holder’s option, into a defined weight of pure gold. Earlier, some currencies were convertible into silver, but relative to gold, silver fell into disfavour in the late nineteenth century.

But this was only one of three types of state money. A second form is bank credit, created out of thin air, but expressed in the deposits that resulted from credit being drawn down. This credit money is indistinguishable from money issued by a central bank, an important point when central bank money was convertible into gold, and credit money was not. And lastly, there are base metal tokens in the form of coins, which without conversion into gold or silver, were just that, tokens.

These forms of money are accepted because the subterfuge by which gold substitutes were replaced with pure fiat was achieved without the public being generally aware it was happening. Their money was progressively untied from gold convertibility, so that it could be debased as the state willed.

Both metallic and state money work because their day-to-day values in terms of the goods they buy are stable, with the price of gold expressed in fiat no more volatile than cross-rates between fiat currencies on the foreign exchanges. In their current state, this is not true of cryptocurrencies, which are immensely volatile.

It has been argued that the supply of the first significant cryptocurrency, bitcoins, is limited, in the same way that the new supply of gold is limited, relative to above-ground stocks. Therefore, bitcoins have the same supply characteristics as physical gold. This is undoubtedly true, but it does not make bitcoins money. We must disregard the estimated 100,000 world-wide outlets that claim to accept bitcoin in exchange for goods as not material, because the number is too small, and their acceptance of bitcoins is likely to be either strictly limited, or for speculation instead of money.

Instead, bitcoin and the other 900 or so cryptocurrencies have become purely vehicles for speculation. A Google search for using bitcoin as money yields little more than how it might be used to launder money. Other than its potential for money-laundering and tax evasion, it is hard to see that enthusiasts are interested in using it as a legitimate form of payment for goods.

And no wonder. Bitcoin started in 2008, when the price rose from a few cents to over $3,400 this week. Speculating has become so profitable, that more and more people are being drawn in. Every fall in the price is seen to be an opportunity to buy more. Whatever the outcome, this volatility disqualifies bitcoin from circulating as money, with an objective exchange value, for the exchange of goods.

A spectacular bubble in progress

We know from our analysis of cryptocurrencies that they have no catallactic pedigree, and that their volatility makes them unsuitable for use as money. Therefore, we are forced to conclude they have no monetary credibility, and are solely media for speculation. We can now make one certain estimation, and that is of their eventual demise. That this will happen when the bubble bursts can be firmly predicted, even though the timing cannot.

How it all ends is yet to be revealed. Government intervention, so far, has been restricted to closing cryptocurrency exchanges where there has been evidence of fraud or money-laundering. Some governments ban cryptocurrencies altogether, though it is hard to see how such a ban can be enforced. However, if governments decide to put an end to the cryptocurrency phenomenon, they can probably do so collectively through bank regulation, instructing banks not to open accounts for any commercial entity involved with cryptocurrencies.

International agreement on banking coordination always takes time, but the motives for government intervention are not hard to see. At the top of the list for governments with intractable budget deficits is tax evasion, real or imagined. Money laundering is a second reason, but this is often a cover for the first. Alternatively, it is possible governments will become concerned at the bubble-like characteristics, and wish to contain the financial damage to ordinary tax-payers when the bubble bursts. However, governments are notoriously bad at recognising financial bubbles before they collapse.

More likely, this phenomenon will end the way all bubbles do. The success of the South Sea Company spawned imitators, just like bitcoin today. Speculators late to the party bought into other, lower-priced ventures, diffusing the potential demand for South Sea Company shares. Mostly, they were no more than financial vol-au-vents, whose rapid deflation helped undermine all speculative sentiment. The similarity between pure bubbles over the centuries can be striking, and the cryptocurrency craze is no exception in this regard.

Another parallel is with the tulip mania of 1636-1637, where something as inherently worthless as cryptocurrencies was driven to fantastic heights. But if we seek differences from past bubbles, the cryptocurrency bubble has the potential to be larger than any bubble recorded to date, fuelled by a globally connected population that requires no more than a mobile phone to participate. Furthermore, the expansion of unbacked bank credit has the possibility to fuel the price relationship between cryptocurrencies and fiat currency on a scale hard to imagine. The point reached during the Mississippi Bubble, when the French aristocracy pawned their estates to speculate in the market, is yet to be commonplace with cryptocurrencies.

It’s worth noting that all cryptocurrencies together are worth roughly $120bn, with bitcoin $55bn of that total. This is only a very small fraction of cash and deposits world-wide. Therefore, the point where new money to fuel the craze runs out does not appear to have been reached, and could have much further to go.

But bubbles always collapse in time. If it is permitted to inflate to its ultimate potential, the eventual collapse of this extraordinary phenomenon will impoverish the inexperienced speculating public, who as always, will be left with life-changing losses. The eventual collapse could be significant enough to generate an economic slump on its own, just like the Mississippi and South Sea bubbles four hundred years ago.

For now, the development of this bubble is in the hands of a speculating public, who periodically see manias as a failsafe way to make money. But the answer to the question posed in this article’s headline is that cryptocurrencies are not money and never will be.


iIn the case of the euro, there is an extra step, it being comprised from several currencies that had their origins in gold, or were linked to the dollar through the Bretton Woods Agreement.


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.

 

Defiant Investor: Hatch: Those opposing debt don’t deserve to be here.

MD: Most “debt” is an “in process promise to complete a trade over time and space”. And “all” debt” represents an in-process trading promise of some kind. It may be in the form of a note … or it may be in the form of money created by a trader. Nobody in the whole world opposes debt … i.e. making trading promises. “All” people on Earth make trading promises and are in the process of delivering on them … all the time.

With that in mind, let’s see what the predictably confused Defiant Investor has to say on the subject.

Sen. Hatch: Those Opposing Debt ‘Don’t Deserve to be Here’

Guest Post from Clint Siegner, Money Metals Exchange

Republican leaders in Congress, with the urging of Treasury Secretary Steve Mnuchin, are anxious to raise the federal borrowing limit from $19.8 trillion – no strings attached.

MD: Remember, governments “never” deliver on their trading promises. They just roll them over … and “all” rollovers are defaults … and guaranteed defaults are counterfeiting. So they’re asking to raise the “counterfeiting limit” here. There have never been any restrictions on government counterfeiting … none!

The only hitch is those pesky conservative voters who were promised restraint by party leaders. GOP establishment hopes to quietly pass a “clean” bill to raise the debt ceiling – a direct betrayal of that voter base – don’t currently enjoy enough support from other Republican members who still consider themselves accountable. So, a deal with the Democrats beckons.

Republicans technically have the power to finally honor the limit on borrowing by reducing spending. After all, Republicans control both Congress and the White House.

MD: But just like the Harlem Globe Trotters and the Washington Generals work for the same company, so do the Republicans and Democrats. It’s all theater.

The last thing most Republican voters want is for McConnell and Ryan to start cutting deals with Nancy Pelosi and Chuck Schumer for a debt ceiling hike and MORE spending. But that may be exactly how this batch of sausage gets made. Watch for a coalition of big government Republicans and Democrats to leave future generations holding the bag – yet again.

Sen. Orrin Hatch (R-UT) says any politician who opposes more debt “doesn’t deserve to be here.”

MD: As I have illustrated, no person on Earth opposes debt. All are indebted in some way to someone or something. But “more” debt? That’s another matter altogether. We exceeded the “more debt” limit before I was born … i.e more than 70 years ago. With a proper MOE process, governments would have no debts. They would be precluded from having them (as any trader is precluded from creating money) by their propensity to default on their trading promises … such propensity being 100%.

GOP Senator Orrin Hatch is scornful of anyone in his party trying to impose spending restraint. He had this to say: “Some conservatives think they can get some programs cut. Well, that’s not gonna happen… We have to pay our bills and anybody who doesn’t want to do that doesn’t deserve to be here.”

MD: But people who take on bills they have no hope of paying? … they deserve to be there? In my opinion “there” doesn’t even deserve to be. Iterative secession is the only solution.

Hatch and his friends in leadership – on both sides of the aisle – share a bizarre philosophy when it comes fiscal responsibility. They insist that the best way to meet obligations is to embrace perpetual deficit spending and simply borrow without limit to cover it.

MD: If they didn’t share that philosophy, they wouldn’t be in leadership. It’s required by the money changers who institute governments in the first place. It’s their whole con.

As far as they’re concerned, any elected officials with an opposing view don’t even belong in Washington DC.

Given that Congress has raised the borrowing cap 72 times since 1962, and that neither party has ever held the line, we can certainly agree that believers in fiscal restraint are marginalized on Capitol Hill. Representatives who bluff about fiscal responsibility, but eagerly fold at the first opportunity, fit right in, of course.

There are some hoping to see a real fight, and perhaps even a victory in the coming months.

It can’t be ruled out, but leadership is anxious to avoid any fuss and will reach across the aisle rather than consider the fiscally responsible course.

MD: Reach across the aisle? Remember the Globe Trotters?

Nevertheless, conflict over raising the debt ceiling could add to the headwinds for the Federal Reserve Note. And, in the long run, borrowing without restraint will further devalue the greenback. Perhaps more investors will be reminded of that fact in the coming weeks and buy some gold.

MD: “could add to the headwinds”? The operative relation: INFLATION = DEFAULT – INTEREST. DEFAULT in this case is certain. INTEREST in this case is way below what it needs to be to reclaim these DEFAULTs (i.e. this counterfeiting). Thus INFLATION is certain … but since it can’t be measured, lying about it is also certain.

Buy gold? I favor buying raw unimproved land in a low tax, low services county. And have lots of friends who want to come and live on it with you and help you defend it when the inevitable reset comes.

What I really favor is iterative secession … at least to the county level in my case.

Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.

MD: We only hear this “buy gold” nonsense from people in the business of selling gold. If they believe in gold so much, why are they selling?

 

Gold Money: Follow the money.

 

https://www.goldmoney.com/research/goldmoney-insights/follow-the-money?utm_source=Goldmoney+Insights&utm_campaign=ca347fc6a5-Goldmoney_E_News_06_10_2016&utm_medium=email&utm_term=0_3ade49cca2-ca347fc6a5-320598633

Follow the money

Since 2009, equities and other financial assets have climbed a wall of worry. Initially, it was recovery from the threat of a complete financial collapse, before the Fed saved the system once again.

Systemic collapse continued to be on the cards, with European banks at risk of bankruptcy. We still talk about this today. More walls of worry to climb.

The global economy has not imploded, as the bears have consistently warned. Systemic and other dangers still exist. The bears now point to excessive valuations as the reason for staying out of the market. But this misses the point: the general level of asset valuations depends not on fundamentals, but on credit flows.

MD: Credit flows are irrelevant with a proper MOE process. Any trader can create money anytime he can see clear to delivering on a trading promise over time and space. There is no such thing as credit with a “proper” MOE process.

It matters not whether there is cash sitting on the side-lines, or whether speculators borrow to invest, so long as the credit keeps flowing into financial assets. Just follow the money.

It is all about credit, and when you have central banks suppressing interest rates and causing bank credit to expand, they create a credit cycle. Modern credit cycles have existed since Victorian times, the consequence of fractional reserve banking.

MD: It’s not a consequence of “fractional reserve banking”. That just gives a small collection of elite a huge advantage over other traders. They get 10x inflation as a return. But with a proper MOE process, inflation is perpetually zero. Those elite thus have no advantage at all.

The cycle varies in length and the specifics, but its basic components are always the same: recovery, expansion, crisis and destruction. Today, central banks reckon their mission is to stop the destruction of credit, and to keep it continually expanding to stimulate the economy.

MD: It’s a farming operation of the money changers … always has been, always will be. It can only be stopped by instituting a competitive “proper” MOE process.

The economic and financial community fails to understand that the sequence of booms and slumps is not a free market disorder, but the consequence of a credit cycle distorting how ordinary people go about their business. It is a waste of time trying to understand what is happening in the economy without analysing credit flows.

MD: And it’s a waste of time analyzing credit flows under a “proper” MOE process where money is in perpetual free supply, which is in perpetual perfect balance with demand for money.

It is Hamlet without the Prince. This article walks the reader through the phases of the credit cycle, identifying the key credit flow characteristics, whose starting point we will take to be the end of the great financial crisis. It will conclude with a summary of what this tells us about current credit flows, and prospects for the near future.


The seeds of recovery

In a modern credit-driven economy, central banks see their role as preventing recessions, slumps, and depressions.

MD: Then we’re ready for a more modern trader-driven economy … that has no need for central banks.

The need to preserve the banking system, to stop one bank taking out the others in a domino effect, is paramount.

MD: It doesn’t happen … it can’t happen … with a proper MOE process. No trade is ever dependent on money supply.

To prevent the weakest banks collapsing takes financial support from the central bank by increasing the quantity of base money, while at the same time discouraging banks from calling in loans, particularly from their larger customers.

MD: Traders are the only creators of money. And that true even with our improper MOE process. Banks only restrict and manipulate traders and prey on them with their demands for tribute. There is no excuse of a bank being weak now with their 10x leverage (a 4% spread translates into a 40% return … doubling money in less than two years). There is no excuse for a bank at all with a proper MOE process.

Central bank priorities will have switched from fear of price inflation ahead of the crisis to fear of deflation. They are still informed by Irving Fisher’s description of how an economic crisis develops from financial flows. When businesses start to fail, banks call in their loans, causing otherwise sound businesses to collapse. The banks liquidate collateral into the market, undermining asset prices in a self-feeding downward spiral. The way to prevent it is to backstop the banks by issuing more money.

MD: And none of that happens … nor can it happen … with a proper MOE process.

We saw this at its most spectacular in the great financial crisis. The Fed effectively wrote open cheques to any bank that needed money, and for some that didn’t.

MD: And that causes no problem whatever. The banks failing to pay the money back … i.e. return and destroy it … is what causes the problem.

The most important rescue was of Fannie Mae and Freddie Mac, the two private-public entities that dominated the residential property market, with some $5 trillion of agency securities outstanding. The Fed’s initial involvement was to buy up to $500bn of agency debt through quantitative easing, supporting the remaining mortgage debt values and injecting a matching quantity of money into the banks in the form of excess reserves.

MD: This is an example of problems with an unresponsive (or non-existent) negative feedback control loop to achieve stability. With a proper MOE process, at the first instance of defaults, interest collections would increase. With increased interest load, the “flipping” in the housing sector quits working … and thus quickly quits happening.

This didn’t stop with Fannie and Freddie. AIG, Bear Sterns and Lehman were just a few of the names associated with the crisis. Term Auction Facility, Primary Dealer Credit Facility, Asset-backed Commercial Paper, Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, and Term Asset-Backed Securities Loan Facility entered the financial language as new rescue vehicles financed with raw money from the Fed.

MD: The more complicated you let it get … the worse it’s going to get. There is nothing simpler than a proper MOE process. And none of this complicated can nor need exist when such a process is instituted.

It wasn’t just the US. Most major jurisdictions were locked into the same credit cycle, and by 2007-08 they were all on the edge of the crisis. Consequently, the financial crisis in America was replicated in the UK and the Eurozone. Including Japan, the sum of the balance sheets of their four central banks increased from about $6.5 trillion to nearly $19.5 trillion today.

MD: They all use the same improper MOE process. And at the center of it is the family that owns all but two of the world’s central banks … the Rothschilds. Institute a proper MOE process in competition with the Rothschilds and they’ve got a really really big problems.

The increase in the liability side of central bank balance sheets has been substantially in the reserves of commercial banks. This is the most pronounced feature of the current credit cycle, potentially fuelling substantial levels of bank lending when the banks eventually become more confident in their lending to the non-financial sector.

MD: But those reserves are “loaned” out to traders? In other words, traders have been “allowed” to make promises spanning time and space. As long as they deliver on those promises there is no problem.

The recovery phase has now been in place for an extended period, lasting eight years so far. It has been characterised, as it always is, by an increase of financial asset prices. This is partly driven by the suppression of interest rates, which creates a bull market for bond prices, and partly by banks buying government bonds.

MD: With a proper MOE process, there is no such thing as interest rates. Rather cumulative interest collections perpetually equal cumulative defaults experienced. With a proper MOE process, governments would be unable to sell their bonds at any prices. This is because governments are provably total deadbeats and should pay 100% interest because they have 100% defaults.

Government bonds are always accumulated by the banks in large quantities during the recovery phase of the credit cycle.

MD: And what are they buying those bonds with? They’re doing it with the 10x leverage they have. With a proper MOE process, every trader has infinite leverage. That makes their 10x advantage pretty inconsequential.

I’ve gone more than far enough with this article. You get the gist of how to read this nonsense in light of the delusion the writers have. It’s always a good exercise to practice exposing their delusions.

Read on if your stomach can handle it. I have more important things to do..

The shortfall in fiscal revenue and the increased cost-burden on government finances leads to a general demand for credit to be switched from private sectors to governments. For the banks, investing in government debt is a safe harbour at a time of heightened lending risk, further encouraged by Basel regulatory risk weightings. On the back of falling bond yields, other financial assets rise in value, and therefore banks increasingly make credit available for purely financial activities.

In the current credit cycle, the boom in financial assets has been exaggerated by central banks buying government bonds as well. The result is a bond bubble far greater than would otherwise be the case. Consequently, when an economy moves from recovery into expansion, the price effect of the credit flows as they wash out of bonds into lending is likely to be more dramatic than we have ever seen before.

We appear to be on the cusp of this change into a phase of economic expansion for much of the world, though the situation in America is less clear. To understand the implications of this change, we must first examine the underlying credit flows.


Expansion – credit hidden then in plain sight

The stability that returns in the recovery phase, coupled with fading memories of the previous crisis, engenders growing confidence in the non-financial economy, which demands credit in increasing quantities for expansion of production. While interest rates remain suppressed, financial calculations, such as return on capital, make investment in even unwanted production appear profitable. It is the bankers which impede this early demand for money, because they still retain memories of the previous crisis and are determined not to repeat the errors of the past. Furthermore, bank regulators are still closing stable doors long after the horses have bolted.

Banks will have continued lending to big business throughout the recovery phase. Under pressure from large corporates, this lending also extends to their consumers, currently evident with car, or auto loans, financing most of the products of major motor manufacturers. Without this consumer credit, vehicles cannot be sold, and manufacturers would be forced to close factories. That is not where the problem under discussion lies: it is in the other 80% of the economy, the small and medium-size enterprises (SMEs), which the banks see as too risky. However, gradually at first, the banks begin to reassess the risk of lending to non-financial entities relative to owning the government bonds on their balance sheets.

Eventually, a new lending instinct in the banks gains momentum. The central issue is how to fund the early expansion of lending. It is not, as commonly supposed, by drawing down reserves from the central bank and putting them into public circulation. Other things being equal, the banks will retain those reserves as the basis for reorganising their balance sheets. Instead, they redirect their financial resources by reducing the level of government bonds held as assets on their balance sheets, substituting them for more profitable loans.

To the outside observer, there is little change in the rate of increase in the broad money supply, while bond prices fall as the banks sell them in increasing quantities.

Markets have an uncanny knack of discounting the bank selling of bonds from the earliest stages. Interest rates in America have already begun to rise, making short-term bonds, which represent most of the banks’ investments, unattractive. Yields start rising along the yield curve, and the banks who are slow to act find that they have escalating portfolio losses. Inevitably, equity markets turn tail as well, undermined by higher bond yields. Note how talk of valuations misses the point: the point is bank credit is being redirected from financial assets to satisfy traditional loan demand.

Eventually, the loan demands from non-financial SMEs become too persistent and profitable for the banks to ignore, without expanding their balance sheets.

During the expansionary cycle phase, when bond yields are rising and equities falling, business prospects for the non-financials appear much improved. As confidence builds and risk appears to diminish, banks compete to lend. Their base cost, the central bank rate paid on their reserves, is not material. Through the magic of expanding bank credit out of thin air, commercial banks, taken as a whole, can even charge interest at a lower rate than the FFR on loans deemed to be free of risk. In effect, commercial banks decouple themselves from the central banks’ control.

It is only at this stage that measures of total money, such as M2, M3 or true Austrian money supply starts expanding at an accelerating rate.

The Fed is finally forced to step in and raise the FFR sufficiently to bring monetary expansion back under control. The economy is described as “overheating”, with employment full and there are unfilled vacancies. Price inflation will have picked up, and supply bottlenecks appear. Expansion rapidly turns into crisis.


The crisis develops

It should be obvious that as interest rates are raised sufficiently to bring demand for credit under control, companies overloaded with debt are the first to fail. A rash of minor failures is enough to change business attitudes. Suppliers tighten up on credit policies with their customers, and banks become cautious. Those relying on debt finance find facilities are withdrawn, insolvency beckons and failures accelerate.

All that’s needed to trigger the crash is a rise in interest rates to slow the expansion of credit. It is a feature of monetary policy that randomness, the principal characteristic of a sound money, free-market economy, is destroyed by credit expansion. Instead of businesses succeeding and failing all the time as individual businessmen continually reallocate capital to where it is most profitably employed, they are motivated instead by the availability of cheap credit. The recovery phase of the cycle sees unprofitable businesses prevented from failing. While central banks profess to use monetary policy as a tool to maintain consumer confidence, they end up bunching all the failures into one great crash.


This time could be a little different

We are not at the crisis stage yet, but perhaps at the start of the expansion phase. The dividing line between recovery and expansion is always fuzzy. Insofar as we can judge, Japan, the Eurozone and Britain may be entering the expansionary phase. America is still debateable. The banks everywhere still appear to be cautious with respect to lending to SMEs, though it could be beginning to change.

Unemployment levels in most countries have fallen significantly, even allowing for self-serving government statistics. But wage levels for skilled labour are yet to rise, indicating investment in new production is still in its early stages. Statistics, such as industrial production and consumer demand, are still mixed. However, prices of key commodities, such as copper, have been persistently strong of late, indicating that some improvement in conditions globally is beginning to take place.

Admittedly, demand for raw materials is mostly being driven by China’s mercantilist policies, but we must not overlook the recovery in demand from other sources, particularly the Eurozone, Japan and to the surprise of the Remainers, Britain. This is reflected in stronger currency rates against the dollar, the economic signals for America being less bullish. Furthermore, President Trump is adding to economic uncertainty with his isolationist approach to trade and with his political disposition in general.

So, the rest of the advanced world appears to be moving from recovery into expansion, but America remains stuck in the mire. China and other Asian countries are already expanding. China is a special case, being a mercantilist command economy, but India, Indonesia et al, have been in the expansion phase for some time. Dubai is a good marker for the Middle East, with an extreme building and construction boom that has no memory of the dramatic collapse in 2009, when it was bailed out by Abu Dhabi. It is overdue for the next crisis.

While many emerging economies are generally ahead of the advanced countries in the cycle, it is likely that Europe, Britain and Japan are just moving into expansion. The great opportunity, from which America is excluded, is the development of new markets in Asia, led by joint Chinese and Russian initiatives. The EU, led by Germany, is distancing itself from American sanctions against Russia, with an eye on trade opportunities to its east. Brexit is forcing the UK towards free trade, which is a great business stimulant. And Japan, with most of her industrial investments in mainland Asia, is benefiting too.

These economies are now set to expand, a phase that will end when interest rates are raised to a level sufficient to crash them once more. America, burdened with the accumulation of debt and attitudes to trade that excludes it from much of the expansion elsewhere, might hardly participate in the global expansion phase at all, before being undermined by the next credit crisis.

A weakening dollar is a consequence of these developments. For a world expanding without America, there are too many dollars abroad. Far better to dispose of them for a currency that can be invested in an expanding economy.

Instead of economic expansion, a persistently weak currency is enough to undermine the American bond market bubble. Rising commodity prices expressed in dollars, driven by both a weak currency and Eurasian expansion, inevitably results in American stagflation. The Fed, at some stage, will still have to raise interest rates sufficiently to trigger a credit crisis, even if America never gets the benefit of the expansion phase of the credit cycle.

Quite possibly, falling bond prices will do for the Europeans first because their banks remain highly geared. Presumably the ECB will step in. However, eventually we will have the crash, and embark on the next credit cycle, which is bound to be different from the current one. The constant is always monetary policy. Central banks will again expand the quantity of base money to prevent the destruction of credit. Perhaps they might succeed. Eventually, the dollar and the currencies tied to it will be destroyed by a combination of monetary inflation and loss of confidence. But that’s a story for the next credit crisis when it is upon us.


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