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Deviant Investor: The Luster of Gold Returns Due to Economic Uncertainity

Deviant Investor: The Luster of Gold Returns Due to Economic Uncertainity

MD: It’s always fun to examine the articles written by gold bugs who are clueless about what money is. The landscape is always rich with delusions. Let’s see.

The Luster of Gold Returns Due to Economic Uncertainity

Guest post from Paul Somerfield

The role of gold as a safe-haven investment is one of the fundamental principles of modern markets and it seems as if recent movements have once again confirmed this fact.

MD: That being true … and it probably is, gold is “precluded” from ever being money. Of course, if you know what money is, among its very few attributes is: real money has “no intrinsic value.” Anything having intrinsic value disqualifies itself from being money … it is a promise to deliver that has already been delivered. Money is an “in-process” promise to deliver on a trade.

The price of December gold futures rose to $1,279.40 dollars per ounce; the highest level since early June. During this same time, the cash value of gold has likewise increased by 6.2 per cent. Both of these observations could be great news for medium-term investors and these rates may very well be indicators of a more bullish gold market. What are some of the underlying factors which have caused such gains?

MD: A proper MOE “never” changes the value it stands for. That’s why the HUL (Hour of Unskilled Labor) is the ideal unit for money. HULs have never changed what they trade for over all time. They have always traded for the same size hole in the ground that they trade for today. The fact that  gold price is changing like this proves it is “not” money. Either the value of gold is changing, the value of the dollar is changing, or both.

Tepid Consumer Spending

 

One of the most important influencing factors in regards to the price of gold involves consumer sentiment and spending.

MD: … again proving it is not money. Real money doesn’t care about consumer sentiment and spending. It is strictly valued as a pair of traders value it at an instant in time. Once valued that way, the trader creating it is obligated to reclaim it and destroy it as promised. If he mis-valued it, he has to adjust his behavior accordingly (work harder than planned or bask in his brilliance). None existed before his trading promise (for that promise), and none must exist after delivery (or default mitigated by interest collection). Inflation of the money itself is thereby guaranteed to be zero. What else can it be?

This is generally seen as a broad snapshot of how an economy is performing. It should also come as no surprise that spending within the United States will have a decidedly profound impact upon the valuation of this yellow metal. Recent figures have shown that spending only increased by 0.1 per cent in June. This is actually the smallest increase witnessed so far during 2017. Thus, some market makers are wary about the medium-term status of the domestic economy.

MD: Spending tells you nothing about money. It could be coming from traders creating new money (which they later will destroy), or from money traders have acquired and accumulated in their previous trades. As soon as they spend it, it is available for other traders to claim and return if they have in-process trading promises to deliver. Regardless,, spending is of no import whatever. Neither is saving.

The Question of Federal Reserve Interest Rate Hikes

 

There has been a fair amount of speculation as to whether or not the United States Federal Reserve will enact an interest rate hike.

MD: This is the biggest delusion and “hand-tipper” of all … i.e. the notion that the Federal Reserve sets interest rates. The operative relation for “any” money … proper or improper … is: INFLATION = DEFAULT – INTEREST.

Defaults are being perpetually made by counterfeiting governments … they make trading promises and never deliver … they just roll them over. This is far and away the largest supplier of defaults … and if inflation is to be zero, they must be met with interest collections of like amount. Since the whole “improper” process we have to use is open-ended, with no direct negative feedback loop (like defaults being immediately met by interest collections), the unmeasurable INFLATION can be anything governments say it is … until it is so out of wack their improper MOE collapses … and they reset and start the con all  over again.

Any such hike is normally closely tied into inflationary figures. However, softer inflation has pointed to the well-founded observation that the Federal Reserve may postpone any rate increases for the time being.

MD: Inflation is “not” measurable … it can only be estimated … and is thus always a fiction. Only a “proper” MOE process can know what inflation is. And such a process knows what it is in real time … all the time. It is zero. The inflation  being referred to here is a strictly a made up number. And until the inevitable money calamity, it will be predictably very low. If they report it as it really is, the Social Security payments have to be automatically adjusted (COLAs). And that blows the whole Ponzi scheme. None of this could be happening with a proper MOE process.

A slower pace of rate increases has historically tended to support the value of precious metals and there is no doubt that these latest observations have played an important role.

MD: All rates of increase (or decrease) are very small and slow. It is a death of a thousand cuts … and then the camel collapses under the addition of a single straw (to mix metaphors).

A Rising VIX?

MD: This VIX thing is amazing … just in the fact that it exists. They invented the options trading model (Black-Scholes) which was very sensitive to the underlying “distribution”. So what do they do? They game the distribution. They invented the VIX and now bet on that. You can’t make this up.

 

One of the most recent news stories involves the Dow Jones closing above 22,000 points for the first time in history.

MD: Right. All companies are increasing in value simultaneously and continuously … but inflation is near zero? Bet me!

Although this is supposedly good news and a sign of a relatively strong domestic economy, some are concerned that the CBOE Volatility Index may be in for a reversal in the near future.

MD: CBOE  Volatility Index … another VIX like measure … without a knob. They have made this thing so complicated and attached so many knobs, there is never any hope they can know how to turn all those knobs. When it blows up I hope someone has a camera on as they all violently turn  the knobs … like kids in the car arcade ride, going in a circle and turning the steering wheels … connected to nothing … violently, as if they’re having effect.

It is important to point out the inverse relationship between the VIX and index values. Still, any sudden increases in the VIX index will likely cause some investors to pull their money out of the open markets and to place their funds into safer havens.

 MD: Important to point out? To whom … fiction writers?

The Trump Dilemma

 

One point that cannot be stressed enough is the instability associated with the White House. As the Trump administration continues to flounder and as officials seem to be replaced on an almost daily basis, some are questioning whether or not the president can deliver on many of his other promises put forth during the election campaign.

MD: Since a “proper” MOE process has no “social” linkage or dependency whatever, “real” money does not have this instability.

It is also important to point out that politics could also play a role in the price of gold; particularly if tensions continue to rise between the United States and Russia.

MD: I’m surprised he says it this way. Politics plays a role in the value of the dollar. As such, it plays a role in the price of everything in the same way. If gold was money this wouldn’t matter. But “mining” and amount of trade play a role in the value of gold … and that makes it unsuitable as money.

Rumors of a so-called “trade war” may further exacerbate this situation. Although more rhetoric than reality at the present, the possibility of protracted political instability may help to support gold prices.

MD: Again, “real” money is not affected by trade wars. The traders with in-process trades still have to reclaim the money they created …. trade war or not. If the war causes many to fail (i.e. defaults), what do we know will instantly happen? Of course, interest collections will increase by like amount and the warring parties will have their playing field instantly impacted … in a negative feedback fashion. No manipulation necessary.

The Other Side of the Coin

 

Not all analysts believe that gold will remain bullish indefinitely. The traditional overhead resistance of $1,280 dollars is approaching and there could be a reversal soon. Regardless, the long term trend is strongly upward due to continually devalued fiat currencies.

MD: Again proving … it is not and cannot be money.

The coming days will be interesting in terms of gold prices. Those who hope to keep abreast of the latest news should employ reliable online resources such as CMC Markets. Gold may indeed have regained its luster to the average trader.

 

Thanks to Paul Somerfield

 

Gary Christenson

The Deviant Investor

MD: Remember folks … .these people are “gold dealers”. They want to keep people buying and selling gold so they have to keep making up and telling new stories.

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Cafe Hayek: Adam Smith … an economy, if only allowed to work freely

Cafe Hayek: Adam Smith … an economy, if only allowed to work freely

The genius of Adam Smith and other eighteenth-century philosophers lay in their recognition of this coordinating characteristic of the exchange process, and in their explicit analysis of the precise manner in which such an economy would work.  Smith showed that such an economy, if only allowed to work freely, in contrast to the network of mercantilist controls that governments of Europe imposed on their economies in the sixteenth and seventeenth centuries, would increase the “Wealth  of Nations.”

MD: So why don’t the Mises Monks get this.? When you declare “gold is money” by edict, you are “imposing controls”.

A “proper” MOE process that knows money is created by traders making trading promises spanning time and space and getting them certified … such a process requires “no” controls whatever. All it has to do is record money creation and destruction and immediately recover defaults incurred by interest collections of like amount. It just reacts … it doesn’t control.

It “guarantees” perpetual free supply of money, zero inflation, and zero interest load on responsible traders.

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Cafe Hayek: Economic Inquiry and its Logic

MD: Cafe Hayek (i.e. Don Boudreaux) doesn’t know what money is. If we have a reset, he and other Mises Monks want to be on the front lines imposing “gold is money” on us. That will strangle trade. It’s hard to think of anything worse than the Keynesian inflation oriented nonsense we have had my whole lifetime (> 70 years) but they want to show us something worse.

I review their articles because they “are” the enemy … and are their own enemy … they just don’t see it!

>Quotation of the Day…

Posted: 08 Aug 2017 03:45 AM PDT

(Don Boudreaux)

… is from page 27 of my late colleague Jim Buchanan’s 1979 paper “General Implications of Subjectivism in Economics,” as this paper is reprinted in Economic Inquiry and Its Logic (2000), which is volume 12 of the Collected Works of James M. Buchanan:

Indirectly, however, and in opportunity-cost terms, the empirical-nonempirical debate is of importance.  The young and aspiring economist who becomes the expert empiricist has necessarily sacrificed training time in learning more about the process to which his highly polished technical tools are to be applied.  These gaps in the training of modern economists are beginning to show up in many forms, not the least of which is the deadly dullness that dominates whole departments in many universities and colleges.

MD: And the pot characteristically calls the kettle black.

DBx: Someone can possess nearly god-like mastery of econometric techniques and still be a poor economist (or worse).

MD: When someone plays the “god” card they are tipping their hand revealing their irrationality. It’s always scary,

At the heart of economics, done correctly and productively, are habits and patterns of thought – namely, the economic way of thinking.

MD: Actually economics is just traders and trading. The co-option of money by the money changers and the governments they institute has added a significant “manipulation” factor that swamps anything rational traders do. A “proper” Medium of Exchange (MOE) process has “no” monetary policy.

There lies, for example, the professional instinct incessantly to ask probing questions (above all, “As compared to what?”); the recognition that reality is always far more complex in its details than even the most detailed ‘model’ can possibly capture (and yet the understanding that that reality is comprehensible only through the lenses of well-crafted models or theories);

MD: How about the reality that “zero is the only right value for inflation of money itself”. That’s provable. It’s not theory. And the Keynesians and the Mises Monks don’t get it at all!

and the stubborn insistence on consistency (such as the sound economist’s refusal to regard human and institutional imperfections as infecting only human interactions that occur in non-political settings – such imperfections also infect human interactions that occur in political settings).

MD: But the insistence on “sound” money (i.e. “gold is money”)? That’s ok according to the Mises Monks … even though it predictably “strangles” traders and trade.

Wow me all you want with your econometric wizardry and prodigiousness at digging up, assembling, and processing data.

MD: You mean data processing like INFLATION = DEFAULT – INTEREST = zero? … that’s not heavy math Don!

If you fail to exhibit the economic way of thinking, you are no economist in my book.

MD: Irrational thought should not be tolerated either!

Unless they are filtered through, and assessed according to, the economic way of thinking, all of your numbers and correlations, no matter how high those correlations might be, tell neither you nor anyone else anything of value.

MD: He says … without defining “economic way of thinking”. Economic way of thinking has always been trivial. As Yakov Smirnoff, the Russian comedian, said “business is simple:  buy low, sell high.”

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Managing cash flow

Cash Flow Metrics Entrepreneurs Need to Keep in Mind

by

accountfully-brad
MD: Traders have always been the only creators of money. Because the money changers and the governments they institute have taken control over trader’s money creation, this has turned into “credit”, and “loans”, and “monetary policy”, and “interest rate setting by LIBOR” … and on and on.

If we ever get a “proper” Medium of Exchange (MOE) process, all this nonsense will be federated to retail “certifiers of trading promises”. Certification means authenticating the trader, documenting the trading promise, monitoring the trading promise for delivery, and mitigating defaults experienced with interest collections of like amount. And it means doing this all “transparently”. There are no secrets at this level … none. A trader is always a unique entity (i.e. person) and no aliases are allowed. Note: Once this money is created, the use of it is “totally anonymous”, whether it’s a ledger entry, currency, or coin.

The retailers will apply costs and employ various actuarial techniques and collateral requirements to accomplish this.

To be a retailer, they must prove “transparently” for all to see that they are maintaining a perpetual perfect balance between the defaults they experience and the interest they collect. And they must show all costs they are applying. The only other requirement is that they impose no interest on responsible traders … i.e. those who don’t default. They may impose interest during the in-process trade, but if the trader doesn’t default, they “must” return those interest payments to the trader. Further, the costs they charge the trader must be part of the certification and must not be changed over the delivery process.

For responsible traders, this will result in free money creation at any time with near zero associated cost. For irresponsible traders who occasionally default, this will result in a fair cost and interest load. For deadbeats this will result in high costs and prohibitive interest loads  … they will still have to resort to pawn shops and pay day loans.

Contrasting with the “improper” process we have today, deadbeats and irresponsible traders can move themselves into the responsible category at any time by simply paying back their default. And also in contrast, they cannot, over any period of time, become responsible traders any other way (i.e. there are no “bankruptcy” provisions when it comes to creating money).

Since a “proper” MOE process guarantees zero inflation, it also supplies an exchange media which has no “time” value. The “i” in (1+i)^n is zero so the compounding is 1.00000 for all “n”. This is going to drive the speculators out of business … along with the so-called investors, who are also just speculators and gamblers.

With that thumbnail sketch in mind, let’s see what pearls this article brings to the subject of “personal money management”. I have a friend who is a gambler … loves poker. She says the key to success is cash management. That applies to all of us. Life is a gamble.

Cash is king, they say.

MD: That’s because of the money changers. Drive them out with a “proper” MOE process and responsible trading is once again king.

As a bootstrapped entrepreneur, managing your cash flow effectively is key to staying afloat while you scale your product. However, many entrepreneurs don’t dedicate time to good accounting practices, sometimes even letting their startup’s money share real estate with personal cash. There’s no surer recipe for disaster.

“A big problem with small businesses that we have that come to us, that have never had a professional accountant, or bookkeeper, or advisor help them with, is that they manage their business out of their bank account,” says CPA Brad Ebenhoeh.

MD: I’ve seen this in friends who have small businesses. When a sale turns into cash, they put a chunk of it in their wallet. They’re always carrying a “wad of cash” … unless they’re dead broke. To me this is a direct indication that they don’t know what they’re doing. When the bills come in they don’t have the cash to pay them. They are soon driven out of business and once again working for someone else.

A “proper” MOE process won’t allow them to bail themselves out by creating new money. This would be a rollover, and if allowed would result in irresponsible traders competing with responsible traders. This is exactly what we have with “all” governments. They never deliver … they just rollover their trading promises. A competing “proper” MOE process will drive the money changers and the governments they institute out of business.

Ebenhoeh, managing partner at startup-focused South Carolina firm Accountfully, explains that the biggest misconceptions behind cash flow is looking at the money coming in as “ready to spend.” For example, if you brought in $20K in sales, it does not mean that you have $20K of immediate, spendable profit.

MD: Confirmation.

“The biggest thing that we do is that we transition them from managing their books out of their bank account, in the business side of the bank account, to actually managing their business from an accrual-based profitability standpoint,” says Ebenhoeh.

MD: In terms our parents gave us … they put them on an “allowance”. It’s amazing how many traders there are out there that can’t impose this self-discipline … really really amazing.

This means switching companies to accrual-based accounting, the process used by most startups. Accrual-based accounting is essentially jotting down revenue when it’s earned versus when the payment is made. “This means that you look at profits and expenses on a period over period basis, which is like month over month basis. And it doesn’t necessarily have to reflect when the money comes in or money goes out,” explains Ebenhoeh.

MD: All accrual based accounting does is remove epochs. It just makes common sense. It should be the “only” kind of accounting anyone would use. When you run your business with monthly, quarterly, or annual statements (which is what our governments do), you get way behind the 8-ball before you know it. This isn’t rocket science.

I’ve been using Quicken since it was created in the late 80’s. I have known my net worth in real time ever since. It’s fun. Actually I knew it before Quicken by using programs I wrote myself for an 8085 micro-computer (Processor Technology SOL … with a whopping 4K of memory) in 1977 … but Quicken was better in many ways and I had other things to do.

MD: We’ve now gotten what we’re going to get out of this article. Read on if you have time or still don’t get it.

That means that if you hired a subcontractor in July for $5K and you don’t pay them until September, the expense goes on the books in July versus when it happen versus in September, says Ebenhoeh. “Migrating a client over to that perspective of reviewing their books on an accrual basis and profitability standpoint is step one in having that business become mature.”

Ebenhoeh dives into three cash flow metrics you need to keep in mind as you grow your startup.

Operating Cash Flow

This is money that comes in from day-to-day operations. Basically it’s taking your profit losses on a normal recurring basis and including cash that you may have received from accounts receivable, or past invoices, or paid out in bills or accounts payable. Then you can say, during the month you made X amount of money in operating cash flow. That’s key because those core operations are actually going to sustain your business.

Free Cash Flow

Free cash flow is the operating cash flow minus any investment you made in fixed assets or capital expenditures. That includes investing in equipment, computers, furniture, leasehold improvements on a building, building out a space, rent, or buying a vehicle for the business, if that makes sense for your business model.

Capital expenditures are not recurring or not part of your operations; they’re just assets that you buy for your business to help you support the operations of your business. They are typically one-time in nature or very periodic, so that’s why it’s not included in the operating cash flow.

Net Cash Flow

Your Net Cash Flow is the free cash flow minus or in addition of any money flowing out to investors, money flowing in from investors, as well as money flowing in or out from a long-term liability.

You want to subtract any distribution payments you make to the owners of your business, or dividends, outflows of payments to owners of the business, or inflows of money that you’ve received when you’ve raised capital.

So for example, when a tech startup is operating with $500K in seed capital, that $500K is an increase in net cash flow. It is anything that you receive or pay to owners or stockholders of the company, as well as any long-term liability, or long-term debts that you’ve paid out on receipt.

When tech startups are in the early stages when they’re raising money, often instead of getting common stock or preferred stock, money comes in. A convertible note is long-term liability. That inflow of money that they receive would be within the net cash flow section.

Do you know your startup’s Key Performance Indicators (KPIs)? Here are some to keep in mind during those early stages when impressing investors is top priority.

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Free State Bitcoin Shoppe: Interview With Co-Owner Derrick J. Freeman

EXCLUSIVE INTERVIEW
Free State Bitcoin Shoppe: Interview With Co-Owner Derrick J. Freeman
By Joe Jarvis – August 06, 2017

MD: Knowing what money really is, you know this Bitcoin nonsense was ridiculous from the get-go. But it just keeps getting up and going … just like Charles Ponzi’s stamp arbitrage scheme got up … and predictably finally went … ending not so nicely for lots of people. Let’s review this article and see what Money Delusions it contains.

This guy looks intelligent and thoughtful doesn’t he. Go figure!

Can you give me the rundown on your shop?

Derrick J: Free State Bitcoin Shoppe is a place for people to level up on their cryptocurrency knowledge and trade their digital cash for unique tech and freedom-themed souvenirs. Our mission is to help people use better money.

MD: BitCoins are going up so fast against the dollar, only money launderers and drug dealers can afford to use it (i.e. to spend them). Just think about it. If you have a choice of buying a hamburger today with Bitcoins worth $6.00, but next month the hamburger still costs $6.00 but the Bitcoin trades for $8.00, what are you going to use to buy the burger … dollars or BitCoins?

We’re a long way from the day people use BitCoins in trade. In fact they never will. Just an instant after it quits rising it will drop like a rock. And only the people pulling the strings know when that instant will be … as it will be when “they choose it to be”.

If we instituted a “proper” MOE process, we could at least give them a better alternative than the dollar with it’s 4% inflation leak. They would enjoy a 0% inflation leak. “Real” money does “not” appreciate or depreciate!

And “freedom-themed”? Perhaps he should be doing something about the 3/4ths of the fruits of his labor that is taken routinely by government. That only leaves him with 1/4th of his original freedom! Perhaps he should have some T-Shirts that depict the stupidity in buying government lottery tickets. Perhaps he should have some T-Shirts revealing the government steals 3/4ths of the fruits of everyone’s labor. That would be constructive.

To a backdrop of dance-punk and electronic music, we offer one-on-one assistance to the bit-curious to help spread the crypto-economy in New Hampshire. It’s packed with seditious propaganda like libertarian art and literature, books on programming, and freedom tech like hardware wallets and USB thumb drives with TAILS Linux loaded on them (the operating system Edward Snowden uses to protect his privacy online).

MD: Maybe Snowden needs to be concerned about his on-line privacy. After all, he did poke the NSA in the eye and they don’t take that lightly. But if most people are doing something on-line, they’re probably not that vulnerable. If they are, you can be sure they’re not doing their nefarious deeds on-line.

When we’re not busy teaching tourists and passers by about Bitcoin, the shoppe is an office for [co-owner] Zyler and me: where we do coding, writing, and video production. The Shoppe is right on the edge of New Hampshire at 56 State St in Portsmouth — so close that both the water and Maine’s coast are visible from our front door.

MD: Do they still call it “teaching” when it is known what they are conveying is absolute nonsense and provably a scam. At least with the Charles Ponzi, there was an identifiable scammer to put in jail. When this thing blows up there is nobody to blame. The winners won without being a party to the scam. And the losers will have no-one to blame but themselves. And neither have any control over whether and when they will win or lose.

What do you sell at the shop? Is there specific merchandise you hope to add?

Derrick J: We sell things you won’t find anywhere else: Doge curtains and pillows, 3D-printed combination locks to protect USB keys, Tesla T-Shirts, laser-cut wood boxes with secret compartments, BipCot Licenses, Bitcoin clocks, an Aztec calendar, build-it-yourself 3D-printer kits, and various New Hampshire-themed gifts. Next week, a unique Bitcoin vending machine will arrive at our store, offering the opportunity for people to trade in their Federal Reserve Notes for Bitcoin, Dash, and Monero.

MD: Ah … the modern version of the slot machine is coming to this store. They can do this at any convenience store right now … anywhere in the country. It’s called the government lottery … and supposedly supports education, but can’t even un-stupid the students enough not to buy a lottery ticket. People who buy lottery tickets are stupid because it’s a 50% instant loss … and even more if you win. But then these same people work an hour for their wage … and that’s a 75% instant loss to the government. So I guess you could say the lottery looks like a better deal than working for a wage. What’s not to love about government and its scams?

Besides Bitcoin, what forms of payment do you accept?

Derrick J: Monero is preferred. We take all forms of cryptocurrency and offer 20% if you pay for the merchandise with that currency. Yesterday, a customer bought $85 of doge-themed merchandise with Doge-coin.

We don’t take Federal Reserve Notes, credit cards, or metals. (Sorry, silver bugs. Time to realize the silver thing is never going to happen.)

MD: Offers “20% if you pay with cryptocurrency. ” Now what does that tell you? My local convenience store offers me 10% if I pay with cash for my gas instead of using a credit card. The merchants are using the same logic for their behavior. With the credit card, the merchant is being gouged 10% by the credit card company. With the cryptocurrency, the merchant is guaranteed a 20% gain … unless he’s holding it on the day it explodes. In the case with the gas, the merchant is smart. In the case of this shop … he’s a stupid gambler.

And regarding the silver? I was there in 1965 when they took the silver out of the coins. It proved the value of the coins in trade was never about the silver being a precious metal and of intrinsic value. With or without the silver, a quarter still traded for a gallon of gasoline. Today it takes 8 or so quarters to trade for a gallon of gas … again, whether they contain silver or not.

Since the value of Bitcoin fluctuates, how do you set the prices?

Derrick J: It’s easy. We set prices in Bitcoin. The bitcoin wallet on your phone will convert instantly so you can see how much things cost in terms of dollars or any other currency.

MD: You have to have a computer to use Bitcoins. When the exchange rate for dollars for Bitcoins is exponentially increasing noise you have no idea what to pay for anything … ever. Only the computer knows.

How did you choose the location for your shop?

Derrick J: We had been scouting locations for a retail shop for a month or two. While walking downtown in the Portsmouth Pride Parade this June, we passed some empty windows where a small boutique had been.

We said “This would be perfect!!” It’s 100 feet from the biggest park in town, where musical theater and concerts play daily and nightly, visible by the water, plenty of parking across the street, and adorable tourist-trap stores nearby that attract lots of foot traffic from international guests. It’s one of the busiest corners in one of the wealthiest and most happening places in the Shire. It’s the perfect location to draw in people to learn about Bitcoin.

MD: You’re also likely to find people there with their stupidity magnified by mind altering substances.

(go to link to see a picture of the shop)

You have long been a liberty activist. You have committed acts of civil disobedience (Derrick J’s Victimless Crime Spree), challenged unjust laws in court, and even spent some time in jail. Does this shop mark a shift in tactics for gaining individual freedom?

Derrick J: Yes, totally. I’ve learned through trial and error what works and what doesn’t.

Civil disobedience may be moral and make me feel good, but it is ineffective at achieving more freedom unless others participate en masse. Good luck with that — most people aren’t courageous enough to take any risks and would prefer comfortable slavery to dangerous freedom.

MD: If you can’t beat them, join them. Governments only steal 3/4ths of the fruits of your labor. Returns on Bitcoin will exceed 75% annually … until they crash. Heck, Ponzi’s scheme earned 100% … in just two months. Make hay while the sun shines.

Instead, I am taking the entrepreneurial route: offering political art and freedom-enhancing tools in exchange for cryptocurrency. The mission isn’t as much to “make money selling merchandise” as it is to grow the value of my cryptocurrency holdings by growing the network. As more and more people use bitcoin, the value of the crypto-economy grows, and the power of the central banks shrinks.

MD: Proving once more, Bitcoins are not money. The value of money never grows. And you don’t refer to it as a money-economy, so you can’t refer to it as a  crypto-economy. It’s a trading economy … and with the dollar your trading with something that shrinks 4% per year. With the Bitcoin your not trading at all. It is so deflationary, you can’t afford to give them up. I wonder if they’re going to ask this guy if “he” would trade in his own store. By his very statements, he would be foolish to do so.

This is the best way I’ve discovered to empower myself and others, by taking a small, low-risk baby step toward more financial independence (which is the most important type).

MD: … as he creeps over the cliff. Surely he’s not that stupid. He knows exactly what he’s doing. But then again, many religious people look just like him. Stupidity can be hard to recognize by looking at someones face..

Do you consider Bitcoin and other cryptocurrencies the best hope for freeing individuals from the unjust power of the state?

Derrick J: Oh, lord no. Philosophy is the best hope for freeing individuals from the power of the state, because the power and the state only exists in their heads. Without philosophy, people are doomed to continue on whatever path their ancestors’ trajectory put them on.

MD: Philosophy? How about logic? The whole power of the state comes from philosophy. It is that philosophy (brain washing) that has put people on the pied piper’s path in the first place. You just can’t make this stuff up can you!

Fortunately for New Englanders, our ancestors placed us on a slow vector toward ever-increasing respect for property rights, which continues today (in New Hampshire especially).

MD: Massachusetts is in New England isn’t it? It was the first state to cave to the money changers. John Adams (of Salem) was the greatest proponent of making the USA into the image of Great Britain … with himself as king. True, New Hampshire was one of the last to sign on … but they signed on. And now people are migrating there to form critical mass to effect secession from the union.  It is small and has a port.  See the Free State Project.

Bitcoin is packed with philosophy, whether users are aware of it or not. Bitcoin empowers the individual with privacy over their money (if they want it), reduces the power of international central banking cartels with every dollar that exits into the crypto-economy, and ultimately helps end wars as people quickly become accustomed to a deflationary currency (rather than the inflationary currencies used to finance the wars of the 20th century).

MD: A proper MOE process has absolute privacy for everyone who “uses” it. It has absolute transparency to everyone who “creates” it. And that’s as good as you can do.

Would you say a “proper” MOE process is backed by philosophy … logic … or plain ole’ common sense (we have to say ole’ because there doesn’t seem to be any common sense these days … it’s been government educated out of us). A proper MOE process guarantees zero inflation. You can’t do better than that. It guarantees free supply of money (and thus no restriction to trade). You can’t do better than that. Responsible traders enjoy zero interest load. You can’t do better than that.

A proper MOE removes “all” the power of central bank cartels by employing simple competition … which destroys their criminal business model. Crypto currency really doesn’t offer any competition at all. It’s trying to solve the wrong problem … the problem of privacy. The problem with the dollar is inflation. Crypto currency swerves in the other direction by guaranteeing trade killing deflation. It does this because of the nonsensical belief that “sound and honest” money is “rare”. It is not!

A mug depicting Bitcoin smashing the Fed.

Do you have any advice for people who want to be free, but feel it is impossible? What can people do to free themselves in your opinion?

Derrick J: Read books that inspire you. Fill your brain with ideas that energize you. Pursue happiness through a virtuous life. Challenge yourself. No matter my current situation, behind bars or on a deserted island, my journey to freedom has been one of personal growth.

MD: I wonder if I filled Derrick’s brain with the simple truth of a proper MOE process he would change his opinion. I predict he would not. Just like showing people the mysterious collapse of WTC7 does not make them question the government’s 9/11 fairy tale about the 19 cavemen with box cutters flying 767’s like they were fighter planes when they couldn’t even land a Cessna. Cognitive dissonance is a tough nut to crack.

So far, what is your favorite part of running the shop?

Derrick J: My favorite part of running the shop is seeing libertarians walk in and watching their faces light up as they realize what the store is. They see Ayn Rand, Ron Paul, and Ludvig Von Mises, a Bitcoin symbol, Gandhi, Thomas Jefferson, and “Live Free Or Die” signs plastered everywhere, and they all say some variation of “I’ve never seen a store like this before!”

MD: But they can’t (won’t) be buying his goods. He’s only accepting crypto-currency. Only really stupid people would be giving up the perpetually deflating crypto for his goods. It won’t be long before he’ll have to resort to accepting dollars and credit cards … just to liquidate his inventory. Mark my words.

Those interactions make my day.

MD: Pretty soon he’s going to realize interactions don’t make his day … trade makes his day. There aren’t enough stupid people to make his day. He has to change his model. He’s trapped, because when he changes his model, he abandons his philosophy. You just can’t make this stuff up!

Thanks so much for sharing your experience!

Derrick J: Thank you for asking!

MD: I’ll bet the interviewer didn’t trade for anything in his shop. What do you think?
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Cafe Hayek: Public choice economics (2017-08-06)

Cafe Hayek: Public choice economics (2017-08-06)

MD: When it comes to money, economists seem to want to complicate everything. Let’s see what Money Delusion complications this article brings.

Sacrificing immediate self-interest for long-term environmental interest has been the message of activists, academics and politicians since the first “Earth Day” celebration in 1970.  Enormous amounts of attention and resources are devoted annually to “saving” the environment, reducing pollution, preserving wildlife, creating more environmental amenities, keeping fit, vacationing in the wilderness and purchasing fashionable hiking shoes, backpacks, bicycles, and ski equipment.  

MD: I think “iterative secession” is the biggest threat to the globalists. They have slowly ratcheted a world of myriad separate cultures into a tiny handful of cultures … with the ultimate goal of a single culture … with them as its keeper.

I, for one, don’t want to be in their space. I don’t think you solve conflicts between people of different culture by forcing them into the same culture. If you read the Federalist Papers, that was one of the main arguments for forming a Union. If the states remained separate they would fight with each other. Well, look at Chicago and Baltimore.

With iterative secession, states would secede from the United States. Then counties would secede from the States. Then, if people in the county were still culturally incompatible, townships could secede from the county. The real issue is government. It is unstable. It grows to a point of self destruction. Government solutions are the first choice when problems come up. Yet they are always the worst choice. In fact, if you are left with a government solution, you have “no” solution and need to keep looking.

Well, this kind of attitude won’t work for the globalists. When you serve up the argument: “Ok, have it your way … in your space … and leave me out of it in my space … we’ll use the commonly accepted principle of the “golden rule” to leave each other alone.” … serve up that argument and they balk. Knowing that would work find if we could confine ourselves to “our” space, they bring up the issue that “we cannot confine ourselves to our space”.

For example, if a river runs through our space, we must cooperate with the culture from which the river comes … and the culture to which the river goes. The globalists want everything to become this kind of choice. That’s the reason for ridiculous concepts like “man made global warming” … now “climate change” when they saw things getting colder.

It is the camel’s nose under the tent for the globalists. As opportunities present themselves, I will explore these concepts further … along with alternatives to democracy … since democracy doesn’t work with more than 50 people involved.

Let’s see if this impacts this article.

Morally enraged attacks on industrial polluters and obscene profiteers are fashionable in dinner table conversations.  Humans, we are told, do not live on bread alone; poetry, the mind, and environmental amenities must also be cultivated in civilized societies.  In short, what economists label as externalities, social costs, or neighborhood effects have become a staple of daily conversation.

MD: I have always found it odd that complete hicks who drill for oil, get lucky, and make enormous amounts of money, become patrons of the arts. Does that mean they become civilized? I wonder if that would happen to me. Right now, things like ballet and opera are not the least bit interesting to me. Orchestra performances are. If the arts are so important, why can’t they economically support themselves? Why don’t they sell?

This concern over the amenities of life is made possible, paradoxically, because of the tremendous economic growth engendered by capitalism.  

MD: They always use the term capitalism in this way as if everyone implicitly knows what it is. I would suggest that “no-one” seems to know what it is … just like they don’t seem to know what money is.

I define a capitalist as “two years”. Take a person with $1M and grant them the elite privilege of a government protected bank charter. This gives them 10x leverage (a privilege you and I don’t have … well actually with a proper MOE process we “all” have infinite leverage and their privilege is no privilege at all).

They make a 4% spread borrowing money and lending it back out … starting with their $1M. In less than two years this 40% return (4% x 10x leverage) doubles their money. They can then take their $1M out of the game and leave the $1M return ride forever after … “Look mom … I’m a capitalists … and I’ve got no skin in the game at all”.

Thus “all” capitalists are “crony” capitalists. And capitalism is nothing but an illusion. But what an illusion it is. To the lucky banker it means in a 30 year career, his $1M compounds to over $24 Billion. What’s not to love about capitalism. But where is the “tremendous economic growth”?

As material goods have become more plentiful, their marginal value has, as the law [of diminishing marginal utility] says, diminished; at the same time, the “quality of life” attributes have increased in value, posing further allocative choices.  The problem becomes one of determining what combination of material and quality of life goods we wish to consume.  

MD: Why is that a problem … and whose problem is it? Free and fair trade addresses that problem in a totally natural fashion. What’s the issue?

For example, poor people place higher values on scarce material things, while richer people seek scarce, more costly amenities.  But, any sacrifices from preserving environmental amenities are expected to be shared by all, rich and poor alike.

MD: Sometimes I’m asked (especially by the mysticists when they learn I’m an atheist) “what is the purpose of life?” To me, the answer is obvious: As long as one engages in life, they have only one purpose … to “be of value”. If they are not of value, they won’t engage in life for long. The state of being rich or poor has much to do with your “cumulative being of value”. It’s just that simple.

Some whole cultures seem to be of greater value than others. And some whole cultures find a way of stealing other’s value rather than being of value themselves. A particular tribe comes to mind. They do it primarily through money changing. They control both capitalism and communism … which are actually on the same team, just like the Harlem Globe Trotters and the Washington Generals work for the same company.

DBx: A basic understanding of economics – including of public choice – goes a long way toward preventing someone from committing the common error of mistaking his or her moral fervor for reasoned analysis.  Here are just a few of the insights conveyed by such an understanding:

MD: I have yet to find an economist that knows what money is. So what in the world can it mean to “understand economics”.? Let’s see if the “golden rule” comes into play. To me, that is the “first principle” and can be used to decide most issues.

DBx:– Because different individuals have different preferences, because those preferences change over time, and because the costs of supplying the goods, services, and amenities that satisfy those preferences differ from place to place and (like the preferences themselves) change over time, there is no one ‘correct’ amount of any good, service, or amenity.

MD: So far, so good.

DBx: – Because individuals’ preferences are subjective – and because, ultimately, the costs of satisfying any and all preferences are also subjective – preferences and costs are not directly observable; they are revealed (and in many cases actually discovered by each chooser) only in the process of actually choosing; therefore, even if preferences were far more uniform than they are in reality and even if they never changed, there is no way for any politician, bureaucrat, professor, priest, or pundit, no matter how brilliant and filled with public spirit, to determine independently of actual choosing processes what is the ‘correct’ or ‘optimal’ mix of goods, services, and amenities.

MD: Every individual makes individual choices. But it’s a large average of people’s choices that determines that array of choices each individual has. Miners will create gold for about $2,000 per ounce. But people won’t pay that for gold if it is of no use to them (for myself, it’s only value is on the electrical contacts of my electronic circuits … and there are substitutes nearly as good for a fraction of the cost of gold). Further, if it is artificial use is great (i.e. by edict it is declared to be money), people will pay much more for it.

The easiest way to analyze it (i.e. what people will pay … i.e. trade) is in units of HULs (Hours of Unskilled Labor). The HUL is the ideal unit for money. It never changes over time and space. It has always traded for the same size hole in the ground … and always will. We were all a HUL at one point in our lives (usually in a high school summer job), so we can all put it in perspective when gauging values measured in HULs.

On average, a person values their hours at about 3.5 HULs. Here’s how: The average person makes about $50,000/year … or about $25 per hour. McDonalds pays about $7 for a HUL (in my high school days it was $1.50 per HUL). Thus, the average person’s value is 3.5 HULs per hour. And that never changes. At my career peak my factor was about 30x … established in actual free trade. A HUL “always” trades for the same size hole in the ground. You need a unit of measure that doesn’t change over time and space. The dollar isn’t such a measure. The ounce is … but the ounce of gold is not.

So an ounce of gold is “now” worth about 300 HULs. Claim that it’s worth more (like claiming it’s money when there’s only 1oz per person on Earth) and demand and the mining activity goes up … fast, dramatically … and wastefully. Find people not willing to trade 300 HULs for it, and the miners quit mining. It’s just that simple.

DBx: – The attention of those who truly wish for outcomes that, as closely as possible, satisfy as many as possible of the preferences of as many as possible of the people is focused not on the attainment of particular outcomes but on a comparison of alternative institutions within which choosing takes place.

MD: It’s not about those “who truly wish for outcomes”. It’s about “those who position themselves to profit from outcomes”. It’s their way of “being of value”. And it’s artificial … but HULs move into their purse just the same. 3/4ths of every HUL a person in the USA makes goes to government. That’s a really big parasite. What does that load need to be for us to call it slavery?

DBx: – Collective choice – both when it is considered to be necessary (as for deciding on the provision of pure public goods, such as national defense) and when it is used even though it isn’t necessary (as when government assumes the power to set ‘minimum’ conditions in labor contracts) – inevitably forces some individuals to consume a particular bundle of goods, services, and amenities that, given the cost that each of these individuals must bear to help supply this bundle, these individuals would prefer not to consume.

MD: First, take the “national defense” case. You have at least two choices. You can make yourself so powerful that no one will attack you. Or you can make an attacker gain nothing by attacking you. The first choice is enormously expensive … and results in becoming an empire … i.e. plays into the globalists hands.

But if you choose to have each individual arm and train themselves in the  effective use of those arms, then if attacked, occupation is impossible. There is nothing to be gained for the attacker. And each person is also capable of defending themselves from attacks within … so little police protection is needed. It works against the globalists and the elitists. It is “my” choice.

Regarding individuals choices … well, they’re their choices. The best we can do is help each other learn what propaganda is so we don’t make false choices. This thing “they” call democracy is just an enormously expensive “ugly” contest where the elites choose among themselves by spending advertising dollars to make the people think they are making the choice.

Any time you introduce the word “public” into an issue, you are getting into trouble. There is no such thing as a “public”. There is just an average, and a median, and a distribution … and at the limit, the individual.

DBx:  A well-to-do resident of San Jose or of Brussels might value an extra increment of carbon-emissions-reduction enough to pay his or her share of the cost of supplying this increment of reduction.  But the not-so-well-to-do resident of Stockton or of Rio de Janeiro might prefer to forego that increment of carbon-emissions reduction and instead get the extra gallon of orange juice or the extra increment of automobile safety that is made impossible because that increment of carbon-emissions reduction is supplied.

MD: And regarding that “carbon-emission”, the propaganda can be changed so that it is a good thing, not a bad thing. And bammo … everything changes overnight. It is just their latest scam and is no real issue at all.

I can guarantee you there is no-one on the planet with a smaller carbon footprint than mine (certainly not Al Gore). And if they all had the same small footprint nothing would change. Things like smog are just as predictable as what you experience when soiling your own nest. If your nest is big enough, you can soil different parts of it in rotation and nature will naturally take care of it. If your nest is small, you need to take special measures to accommodate your waste … and dumping it on your neighbor violates the first principle … the golden rule.

DBx: – Well-to-do people are often very clever at using democratic processes as mechanisms for transferring wealth to themselves from people who are poorer than they are.

MD: There’s nothing democratic about those processes. There are always more than 50 people involved so they are propaganda processes. Big difference. Democracy cannot work with more than 50 people involved. It ceases to be democracy at that point. For democracy to work, “all” voters must have the same information and knowledge.

DBx:  And part of this cleverness lies in creating the false appearance that the democratic processes are being used to promote the public good.  Because so many intellectuals never bother to look beyond or beneath superficial appearances, intellectuals leap to the conclusion that those who oppose policies that superficially appear to genuinely promote the public interest necessarily are enemies of the public interest.  Too many intellectuals are too lazy or too stubborn to do the hard work of looking past appearances.

MD: The root word of “intellectual” is “intellect”. And intellect means “the faculty of reasoning and understanding objectively, especially with regard to abstract or academic matters.” We all have intellect … and I don’t agree with the “abstract or academic matters” qualification. These so-called intellectuals would be of zero value in a simple hunter/gatherer society … i.e. after the giant reset. They would quickly die off because their “real” value is zero. They can’t even change a tire on their car.

DBx. Too many intellectuals become, therefore, unwitting dupes for private interests who abuse collective-choice mechanisms for ends that these intellectuals would be horrified to learn that they – these intellectuals – in fact help to further by their taking so much government activity at face value.

MD: They’re not “unwitting dupes”. Their co-conspirators. If there were any real intellectuals out there, “everyone” would know about WTC7 falling down. But less than 6% know about it.

Netting it out: Government is never the answer. And all the issues this article deals with come about because government solutions are adopted … i.e. the worst possible solutions are adopted. But look how many people among us are proven to be of zero value when we eliminate government and adopt more appropriate (efficient) solutions to issues. With 3/4ths of the people in government or dependent on government you have lots and lots of people of zero value. And very few people creating the value they have to steal.

Embrace the right principles (beginning with the golden rule) and you don’t need 40,000 new laws every year. You see “non-government” solutions to issues … and you see few issues.

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IWB: Greenspan says bond bubble about to burst

MD: Bonds are a form of trading promise spanning time and space. However, they are not money?

Why? Because they are not “trader created promises certified under “any” Medium of Exchange (MOE) process”. Rather, they are a promise between one trader and a list of subscribing traders. They “always” have a face value, a term, and an interest component. That interest component is constant over the term of the bond. And the face value of the bond is constant over the term of the bond. And the term is fixed.

However, the risk of default on the trading promises varies over time. Since the face value, the interest, and the term of the bond don’t change over its entire life, if someone wants to sell one (or buy one) before maturity, an adjustment for current risk must be considered. This is called the “discount”. It is negotiated between the holder of the bond and the purchaser of the bond. It is a trade of money for the bond and as such is a simple barter exchange “using” money in the here-and-now. However, a trader could “create” money to buy the bond.

If the bond is for $1,000 and the interest is 5% per year and the term is 10 years, the bond will pay $50 every year for 10 years … and then will pay $1,000. But new bonds sold by the company could be selling for 2% per year. That automatically makes the existing bonds worth 2% per year also. The discount is calculated such that the 3% difference considered over the remaining term is reflected in the trading price.

The bond does not circulate as money. No one will accept the bond in trade for their HULs (i.e. Hours of Unskilled Labor units). If they did, they wouldn’t be able to get someone to accept it as payment on something like a car or a house … or groceries. They are said to be “non negotiable”. There is the special case of the “bearer” bond where if you have the bond in your physical possession, you “own” the bond and can sell it physically. If you lose it or it gets burned up it is “physically lost” as far as you are concerned.

For most bonds you must go through some clearing house to trade the bond and “turn it into money”. Further, if it is lost or destroyed, there is a mechanism for recreating it.

Knowing that,  let’s study this article and see if it contains Money Delusions.

Former Fed Chairman Alan Greenspan Ominously Warns That The Biggest Bond Bubble In History Is About To Burst

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By Michael Snyder

Are we right on the verge of one of the greatest financial collapses in American history?

MD: Yes. And we have been my entire 70 year life time … and that of my father and grandfather. It’s just a question of when the government and the banking system admit they are dead. In France in the late 1700’s they never did. Rather the people declared them dead … and cut off their heads and started over under a new corrupt scheme. Only a “proper” MOE process can avert this. And if one is instituted, it will “never” collapse as long as there are traders willing to make trades spanning time and space and as long the the process remains operative and transparent … i.e. as long as the government and the money changers have no role to play in “money”.

In a CNBC interview, the longtime central bank chief said the prolonged period of low interest rates is about to end and, with it, a bull market in fixed income that has lasted more than three decades.

I have been repeatedly warning that our ridiculously over-inflated stock market bubble could burst at any time, but former Federal Reserve Chairman Alan Greenspan believes that the bond bubble actually presents an even greater danger.

MD: They always know when it is “over inflated” but they can never tell you when it is “correctly inflated”. We here at Money Delusions know when it is correctly inflated. It is when inflation is zero. By experience it is “always over inflated”. Under a proper MOE process, it is never over inflated. Inflation of the money itself is guaranteed to be perpetually zero.

When you look at the long-term charts, you will see that an epic bond bubble has been growing since the early 1980s, and when it finally collapses the financial carnage is going to be unlike anything we have ever seen before.

MD: What were the charts saying in the late 1970’s in the USA when the prevailing interest rates were approaching 20%. The whole process is a con … a fiction … a theatrical show.

Since the last financial crisis, global central banks have purchased trillions of dollars worth of bonds, and this has pushed interest rates to absurdly low levels.

MD: Purchased them with what? They had nothing to purchase them with. So they made trading promises spanning time and space (i.e. created money) and purchased them like any other trader. What were the terms of those trading promises? We don’t know. The process isn’t transparent. It is a con. That money will turn out to be counterfeited; interest will never reclaim that default; and thus inflation will result. A proper MOE process would never allow such central bank purchases. It would not even allow a central bank … there would be no need for one.

But of course this state of affairs cannot go on indefinitely, and Greenspan is extremely concerned about what will happen when interest rates start going in the other direction…

MD: It not only “can” go on indefinitely, it is designed “to” go on indefinitely.

Former Federal Reserve Chairman Alan Greenspan issued a bold warning Friday that the bond market is on the cusp of a collapse that also will threaten stock prices.

In a CNBC interview, the longtime central bank chief said the prolonged period of low interest rates is about to end and, with it, a bull market in fixed income that has lasted more than three decades.

MD: What’s keeping it from collapsing right now? People are able to sell bonds because people are willing to buy them. What’s going to make them unwilling to buy them? With a proper MOE process, people would be willing to buy bonds, but responsible traders would have little motivation to sell them. The only ones selling bonds would be those who have a propensity to default … that makes creating money too expensive (i.e. they pay too much interest) to do so. The interest they would have to pay to a bond purchaser would be even higher … i.e. greater than 100% of the amount they are trying to create.

“The current level of interest rates is abnormally low and there’s only one direction in which they can go, and when they start they will be rather rapid,” Greenspan said on “Squawk Box.”

MD: Here they are again with their subjective “abnormally low”. What is the right interest rate? A proper MOE process doesn’t think of interest as a rate at all. It is the mechanism for reclaiming money orphaned by defaults. It is perpetually and cumulatively equal to cumulative defaults.

And of course Greenspan is far from alone.  In recent months there have been a whole host of prominent voices warning about the devastation that will take place when the bond market begins to shift.  For example, the following comes from Nasdaq.com…

Advisors and investors beware, the long-swelling bubble in the bond market looks set to pop. Major bond investors are as worried as they have ever been, mostly because of the reduction in easing that is finally coming to markets. Central banks are letting off the gas pedal for the first time in almost a decade, which could have a devastating effect on the bond market. According to the head of fixed income at JP Morgan Asset Management, who oversees almost half a trillion in AUM, “The next 18 months are going to be incredibly challenging. I am not an equity investor, but I can just imagine how equity investors felt in 1999, during the dotcom bubble”. He continued, “Right now, central banks are printing money at a rate of around $1.5tn per year. That is a lot of money going into bonds. By this time next year, we think this will turn negative”.

MD: There’s no point in further comment from Money Delusions. When you’re working with a wrong premise, you’re going to write nonsense … as we see here. Read their article further at your own risk.

So how will we know when a crisis is imminent?

Some analysts are telling us to watch the 30-year yield.  When it finally moves above its “mega moving average” and stays there, that will be a major red flag…

It’s still too soon to tell, but this could be the beginning of a realignment with both rates getting in sync again. This will not be confirmed, however, until the 30-year yield rises and stays above its mega moving average, currently at 3.18%.

As you know, this moving average is super important.

It’s identified and confirmed the mega downtrend in long-term interest rates ever since the 1980s. In other words, it doesn’t change often. So, if this trend were to change and turn up, it would be a huge deal.

Today, the 30-year yield moved up to 2.83 percent, and so we aren’t too far away.

There are so many prominent voices that are warning of imminent financial disaster, but there are others that believe that we have absolutely nothing to be concerned about.  In fact, Jim Paulsen just told CNBC that he believes that this current bull market “could continue to forever”…

The stock market “has an awful good gig going,” with the economic recovery reaching all corners of the globe and U.S. inflation and interest rates still at historic lows, Leuthold Chief Investment Strategist Jim Paulsen told CNBC on Friday.

“We’ve got a fully employed economy, rising real wages. We restarted the corporate earnings cycle. We’ve got strong confidence among business and consumers,” he said on “Squawk Box.”

“The kick is we can do all of this without aggravating inflation and interest rates,” he said. “If that’s going to continue, I think the bull market could continue to forever.”

I think that Paulsen will end up deeply regretting those words.

No bull market lasts forever, and analysts at Goldman Sachs are warning that there is a 99 percent chance that stock market returns will be sub-optimal over the next decade.

But most people believe what they want to believe no matter what the facts may say, and Paulsen apparently wants to believe that things will never be bad for the financial markets ever again.

In the aftermath of the financial crisis of 2008, the powers that be decided to patch the old system up.  Instead of addressing the root causes of the crisis, they chose to paper over our problems instead, and now we are in the terminal phase of the biggest financial bubble in history.

This time around, it is absolutely imperative that we do things differently.  The Federal Reserve is the primary reason why our economy is on an endless roller coaster ride.  We have had 18 distinct recessions or depressions since 1913, and now another one is about to begin.  By endlessly manipulating the system, they have caused these cycles of booms and busts, and it is time to get off of this roller coaster once and for all.

Like Ron Paul, I believe that we need to shut down the Federal Reserve and get our banks under control.  I also believe that we should abolish the federal income tax and go to a much fairer system.  From 1872 to 1913, there was no central bank and no federal income tax, and it was the greatest period of economic growth in U.S. history.  If we rebuild our financial system on sound principles, we could actually have a shot at a prosperous future.  If not, the long-term future for our economy looks exceedingly bleak.

If you believe in what I am trying to do, I would like to ask for your help.  I am running for Congress in Idaho’s First Congressional District, and since there is no incumbent running for this seat the race is completely wide open.  Every time I share my message, more voters are coming over to my side, and if I am able to get my message out to every voter in this district I will win.

And I would like to encourage like-minded people to run for positions all over the country on the federal, state and local levels.  Individually, there is a limit to what we can do, but if we work together we can build a movement which could turn this nation completely upside down.

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Cafe Hayek: Buchanan accurate and concise summary

Cafe Hayek: Buchanan accurate and concise summary.

MD: This is more of the Saint Buchanan worship coming from Cafe Hayek and Don Boudreaux. When you know what money really is, the quote and the comment are silly on their face.

…. is from page 465 of my late colleague Jim Buchanan‘s 1986 Nobel Prize lecture, “The Constitution of Economic Policy,” as it is reprinted in volume 1 of The Collected Works of James M. Buchanan: The Logical Foundations of Constitutional Liberty:

But the political economist may, cautiously, suggest changes in procedures, in rules, that may come to command general assent.  Any suggested change must be offered only in the provisional sense, and, importantly, it must be accompanied by a responsible recognition of political reality.  Those rules and rules changes worthy of consideration are those that are predicted to be workable within the politics inhabited by ordinary men and women, and not those that are appropriate only for idealized, omniscient, and benevolent beings.  Policy options must remain within the realm of the feasible, and the interests of political agents must be recognized as constraints on the possible.

MD: First: As is typical, this is a wordy Mises Monk assertion. Four sentences … 125 words … 26 words per sentence. Let’s examine each of them.

(1) But the political economist may, cautiously, suggest changes in procedures, in rules, that may come to command general assent.

“Political economist”? If you know what money is, you know it is “not” political in any way. “Changes in procedures, in rules”. If you know what money is you know there is only one rule: The money a trader creates he must return and destroy … or it must be immediately reclaimed by interest collection of like amount. “May come to command general assent”. This isn’t something you vote on. It’s how a “proper” MOE process works.

 (2) Any suggested change must be offered only in the provisional sense, and, importantly, it must be accompanied by a responsible recognition of political reality.

A proper MOE process is not open to suggestions or manipulation. In practice, the certification of traders promises would be federated. Each entity with the franchise is bound to (a) authenticate all traders he certifies; (b) make all transactions transparent to all; (c) immediately mitigate all defaults he incurs with interest collections of like amount. That’s it. Other than that, he can run the franchise any way he pleases. If his franchise fails, it must be assumed by the remaining franchises … along with the interest collection deficit that causes the failure. An interest collection deficit is the only thing that can cause a failure and the process detects it immediately. If it is present, that is  counterfeiting. Counterfeiting isn’t tolerated, even for an instant. And again, politics plays no role in the proper MOE process at all.

(3)Those rules and rules changes worthy of consideration are those that are predicted to be workable within the politics inhabited by ordinary men and women, and not those that are appropriate only for idealized, omniscient, and benevolent beings.

See how a proper MOE process simplifies things? Since the process is immune to all political influences, it has no provisions for adapting to them … and has no need for such provisions. It has no need for idealizing (it is ideal). It has no need for being omniscient (it is instantaneously responsive to defaults and anticipates them actuarially and conservatively). It knows there is no such thing as altruism and doesn’t have any way of being altruistic (i.e. benevolent). Some flawed alternate moneys (e.g. Ithaca Hours and Baltimore Green) do try to be altruistic … they think they have a social (political) role to play. They are wrong. They could not compete with a “proper” MOE process.

 (4) Policy options must remain within the realm of the feasible, and the interests of political agents must be recognized as constraints on the possible.

There are no policy options with a proper MOE process. It is a process that enables traders to make simple barter exchanges over time and space. There are no political agents nor constraints. Reliable traders pay zero interest to make time and space spanning trades. Deadbeat traders pay interest commensurate with their propensity to default. That’s it! There is “no monetary policy” involved … or even possible. That is its beauty. That is what makes it the ultimate MOE process.

DBx: These four sentences are about as accurate and concise a summary as is available of the politics of Jim Buchanan.

MD: The Mises Monk saint worship continues.

Posted on

Venezuela’s currency crumbles

Venezuela’s currency crumbles at dizzying speed

© AFP/File / by Alexander MARTINEZ | In one year, Venezuela’s currency, the bolivar, has lost 94 percent of its value

MD: Currencies cannot and do not crumble under a “proper” MOE process. Let’s see what delusion this writer is under as he blindly leads the blind.

CARACAS (AFP) – Venezuela’s money, the bolivar, is sinking faster and faster under an intensifying political and economic crisis that has left citizens destitute and increasingly desperate.

MD: You can be sure it has already sunk. People in Venezuela are already getting what they need through barter and theft. Money can’t be involved at all at this point.

Its depreciation accelerated this week, after a disputed vote electing an all-powerful “Constituent Assembly” filled with allies of President Nicolas Maduro, which the opposition and dozens of countries have called illegitimate.

MD: Democracy with more than 50 people involved doesn’t work. The people are not involved. And Maduro is working in a democracy containing less than 50 people, you can be sure. But those 50 people are really endangered now by the masses. Soon, Maduro will be standing alone … as he gets out of Dodge himself. And then the people will sort this all out for themselves in small groups … of 50 people or less.

On Thursday alone, the bolivar slumped nearly 15 percent on the black market, to be worth 17,000 to one US dollar.

In a year, the currency has lost 94 percent.

The decline has been dizzying — yet largely ignored by the government, which uses an official rate fixed weekly that is currently 2,870 to the dollar.

MD: Remember when our USA government used an official rate for the dollar at $35 per ounce of gold. The real world knew for some time it was really above $70. They only delude themselves. France wasn’t deluded.

Ordinary Venezuelans, however, refer only to the black market rate they have access to, which they call the “dolar negro,” or “black dollar.”

“Every time the black dollar goes up, you’re poorer,” resignedly said Juan Zabala, an executive in a reinsurance business in Caracas.

– Salaries decimated –

His salary is 800,000 bolivares per month. On Thursday, that was worth $47 at the parallel rate. A year ago, it was $200.

MD: Yet he still goes to work? I think I would be looking for someone besides my employer to trade with long before this. I’d walk out into the country side and offer my services to help defend some farmer and harvest his crop.

The inexorable dive of the money was one of the most-discussed signs of the “uncertainty” created by the appointment of the Constituent Assembly, which starts work Friday.

As a result, those Venezuelans who are able to are hoarding dollars.

MD: What are they going to think when the USA, suffering from the same delusions as Venezuela, has their dollars go up in smoke.

“People are protecting the little they have left,” an economics expert, Asdrubal Oliveros of the Ecoanalitica firm, told AFP.

MD: How are they protecting it? How can they protect it? They should apply everything they have to becoming more skillful traders … traders who don’t use money. It’s too much to hope for them to institute a “proper” MOE process at this point. Maybe after the reset, one or more of the small groups will see the light and implement a proper MOE process for their own use … and that “will” spread.

But Zabala — who is considered comparatively well-off — and other Venezuelans struggling with their evaporating money said they now spent all they earned on food. A kilo (two pounds) of rice, for instance, cost 17,000 bolivares.

MD: Better go make a relation with a farmer. Help him with his crop … and in protecting his property … in exchange for food.

The crisis biting into Venezuela since 2014 came from a slide in the global prices for oil — exports of which account for 96 percent of its revenues.

MD: It came from an attack by USA money changers. They bought debt for pennies on the dollar. Now they’re using the power of the USA to turn those pennies back into dollars.

The government has sought to monopolize dollars in the country through strict currency controls that have been in place for the past 14 years. Access to them have become restricted for the private sector, with the consequence that food, medicines and basic items — all imported — have become scarce.

MD: Institute a proper MOE process to compete with the others and you are the guaranteed winner.

According to the International Monetary Fund, inflation in Venezuela is expected to soar above 700 percent this year.

MD: That’s meaningless. At 700% or 1500 % or anything close makes money a fiction. They are paying people with nothing. The people are trading their HULs (Hours of Unskilled Labor) to the employers for nothing. They would be better off taking that time and setting up barter trading agreements in their own neighborhoods.

In June, Maduro tried to clamp down on the black market trade in dollars through auctions of greenbacks at the weekly fixed rate, known as Dicom. There is also another official rate, of 10 bolivars per dollar, reserved for food and medicine imports.

MD: Some clueless economist recommended this. There is only one thing that can fix Venezuela. Institute a proper MOE process to compete with international bankers, and release “all” government employees. The resulting chaos with be less devastating that taking these nonsensical steps. The people will work it all out themselves. They will slowly re-institute governments democratically (i.e. with less than 50 people involved).

“Things are going up in price faster than salaries,” noted Zabala, who spends 10 percent of his income on diabetes treatment, when he can.

MD: When you have inflation this is always the case. When inflation is guaranteed to be zero, salaries and prices are in perpetual lock step. They don’t change. Salaries are paid in units of HULs. The skill factor (the number of equivalent HULs a person trades for … on average about 3.5x in the USA … thus making about $50,000 per year) is also constant … unless their skill changes.

– ‘No limit’ –

Maduro has vowed that a new constitution the Constituent Assembly is tasked with writing will wean Venezuela off its oil dependency and restart industry, which is operating at only 30 percent of capacity.

MD: It needs to wean itself off the money changers. If oil is what you have to trade, trade it?

But the president, who links the “black dollar” with an “economic war” allegedly waged by the opposition in collaboration with the US, has not given details on what would be implemented.

On Thursday, Maduro promised “speculators” setting their prices in line with “the terrorist criminal dollar in Miami” would go to jail.

MD: That will change nothing. Institute a proper MOE process and those same speculators die on the vine. Unfortunately for Maduro, so does government. But it “is” the fix to the problem for the people.

For the past four months, Maduro has been the target of protests which have been forcefully confronted by security units, resulting in a toll of more than 125 deaths.

 MD: Ultimately, they weren’t able to control the French revolution. This is at the same stage as that was. The security units will fear for their own lives. They won’t have time to secure Maduro.

The opposition says the new Constituent Assembly is an effort to create a “dictatorship” along the lines of Communist Cuba.

MD: So stop it. Don’t pay taxes to it. Find a way to do without government entirely. It will just blow itself up again and again and again.

Against that backdrop of tensions, “there is no limit on how far the black dollar can go,” according to Ecoanalitica.

But a director of the firm, Henkel Garcia said he believed the current black market rate “didn’t make sense” and he noted that in the past currency declines weren’t linear.

Oliveros said increased printing of bolivares by the government was partly the reason for the black dollar’s rise.

MD: Partly? It’s the only thing!

“When you inject bolivares into the market, that means that companies, individuals go looking for dollars, which are scarce,” he said, estimating that the shortfall of dollars this year was some $11 billion.

MD: It’s not about scarcity. It’s about being static. If your exchange media changes, you must make it stop doing that. That media should “never” be scarce. It must always be in free supply. But defaults must be immediately mitigated by interest collections of like amount.

The horizon is darkened further with big debt repayments Venezuela has to make, for instance $3.4 billion the state oil company PDVSA has to reimburse in October. That debt is denominated in dollars.

MD: Reimburse to whom? Declare bankruptcy. Fold your tent. Then shoot the bill collectors when they come after you. It’s called a reset.

by Alexander MARTINEZ

© 2017 AFP

Posted on

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

By Alasdair Macleod

Alasdair Macleod August 03, 2017

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.

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.