Can Central Banks Keep Control of Interest Rates?

MD: I haven’t posted for some time but this article was too pertinent, silly, and misguided to pass up (revealing total cluelessness … and/or corruption … of our current Medium of Exchange (MOE) process.) The article is from the great see-er of all things money oriented … the Wall Street Journal. This is the link to the article which is likely to go away in a short period of time.

Can Central Banks Keep Control of Interest Rates?

 

MD: As usual, the title itself exposes the total lack of understanding of what money is. As anyone knows who has been paying attention here, interest rates are “not” controlled by anyone or anything in a “proper” MOE process. INTEREST collections are perpetually and immediately made to meet DEFAULTs experienced … and if that is under anyone’s control, it is the trader defaulting.

Inflation-adjusted—or ‘real’—rates remain low, lending support to booming , prices for stocks, property and other assets. But some worry that could vanish sooner than markets realize

MD: Actually, what we’re seeing here is the banks farming operation in action. They’ve loaded up the wagon with energized traders’ expectations and resulting risk taking behavior, and they will soon pull the rug out from under them.

By Jon Sindreu
Dec. 26, 2017 7:47 a.m. ET

Investors are elated by a booming global economy and the promise of central banks to tighten monetary policy only gradually. But a question haunts them: Will interest rates develop a mind of their own?

MD: “Will interest rates develop a mind of their own?” Can a stupider question be posed? Interest “rates” are a function of two things. In the numerator, they are a function of continuously accumulated DEFAULT experience. In the denominator they are a function of what someone chooses that denominator to be.  In a “proper” MOE process, the denominator would be related to cumulative defaults for each money-creating class, according to their actuarial propensity to DEFAULT.

While central banks set short-term rates—the 1.5% rate that the Federal Reserve publishes on its website—economists disagree about how much control they have over long-term borrowing costs. These are gauged by government-bond yields, especially those with returns tied to inflation.

MD: These so-called short-term rates are arbitrarily set by our current system. In general, they are about what their target rate of INFLATION is. They target 2%, have historically delivered 4%, while the proper value of inflation is 0%.

Low inflation-indexed—or “real”—rates push money into risky assets, because investors get little extra purchasing power for holding safer securities. According to a new report by BlackRock Inc., the world’s biggest asset manager, subdued real rates have been 2017’s main driver of returns in global infrastructure debt and investment-grade corporate debt. They also boost gold and real estate, analysts say, which don’t pay coupons but don’t lose value when inflation rises.

MD: “Subdued real rates?” What more direct evidence could their be of the banks farming operation? Do these so-called “asset managers” just accept this? Or are they actually part of the farming operation themselves?  “Main driver of returns?” In a “proper” money process, supply/demand ratios for each product and service are the main … and only real … driver of returns. If the ratio is high, the return will be low and vice-versa. Money has nothing to do with it because its perpetual supply/demand ratio is 1.000.

Many markets could climb off record highs if real rates rise. But it is hard to forecast, said Kevin Gardiner, global investment strategist at Rothschild Wealth Management, because “nobody knows exactly what sets interest rates.”

MD: “Climb off?” … don’t they mean “fall off?”.  Interest rates in the current process only benefit the money changers. With their special privilege, a 1% increase in interest rates yields them a 10% increase in return. In a proper process with perpetual 0% inflation, their privilege becomes no privilege at all … ten times zero is zero (10x 0.0000 = 0.0000)

Real rates have often moved in lockstep with central-bank policy—but not always. In the 1970s, runaway inflation pushed real rates down even as the Fed and other central banks increased nominal rates.

MD: With a “proper” process, the only “policy” is that DEFAULTs are immediately met with INTEREST collections of equal amount. That policy never ever changes. A “proper” process cannot be farmed.

Yields on 10-year inflation-linked Treasurys are currently below 0.5%. Before the 2008 financial crisis, they hovered at around 2%. After the Fed unleashed unseen amounts of monetary stimulus, they hit a record-low of minus 0.87% in 2013. Many analysts and investors see it as a sign that policy makers have strong control over real rates.

MD: With a “proper” process there is no such thing as “monetary stimulus”. Money is in perpetual free supply. That supply is perpetually identical to demand for the money yielding perpetual zero inflation.

“We are overweight global indexed bonds,” said Paul Rayner, head of government bonds at Royal London Asset Management. “We’ve done a lot of analysis on this, and ultimately the biggest driver of government bond yields still remains central bank activity, even for [inflation-linked bonds].”

MD: With a proper MOE process, Rayner is out of work. There is no “lot of analysis” to be done. Their worshiped relation  ((1+”i”)^”n”) … they call it the time value of money … is neutered when “i” is perpetually zero.

With a “proper” MOE process, there are no “government bonds”. Governments are simply no different than any other trader. If they are responsible, they create money without any interest load. If they are deadbeats, they pay interest accordingly. And since governments “never” return the money they create (they just roll their trading promises over … which is default), the interest paid by them perpetually equals the money they wish to create. In other words, they “can’t” create money.

But classic economic theory says that central banks can only influence rates at first, as people ultimately see through their meddling. So unless officials set policy to reflect the economy’s long-term economic trends—which is how the Fed’s Janet Yellen and Mark Carney at the Bank of England have justified keeping rates low in recent years—inflation or deflation will follow.

MD: “Classic economic theory?” You mean “classic economic stupidity!” don’t you? People never see through banks meddling. It is the farming operation and it has worked as long as the governments they institute protect the operation. Again, this is an open realization that banks have an enormously profitable farming operation. A competing “proper” MOE process would make that farming operation experience perpetual crop failure and/or market opposition.

According to this view, rates are so low because people are saving a lot and these saved funds can be lent out and used to invest, a copious supply that pulls down the cost of borrowing.

MD: Stupid is as stupid does … or as stupid has been duped to think. In our current process there is the illusion that savings play a role. And the 10x leverage privilege retail banks enjoy is directly affected by that. But in the final analysis, it is the Rothschilds that control everything through their control of all but two central banks in the entire world … and of the Bank of International Settlements. They do whatever they please. With a competing process they would be out of business almost instantaneously, never to raise their ugly head and influence again … ever!

Some money managers and analysts now warn that the tide is about to shift, whether central banks keep policy easy or not. By looking at the share of the population aged between 35 and 64—when people save the most—research firm Gavekal predicts real rates will soon rise as people retire and spend their life savings, eroding gains in stock markets.

MD: Boy … this guy is deluded beyond repair I think. The Rothschilds are in total control. The theoretical mechanisms the writer thinks are at work have been propagandized into his head. Yes, a degree in economics is just buying self imposed propaganda. With a proper MOE process, there are no economics … just trading decisions made on a perfectly static level playing field … i.e. buying and selling and producing decisions.

It “could happen tomorrow or 10 years from now, but I’m not counting on the latter,” said Gavekal analyst Will Denyer.

J.P. Morgan Asset Management argues that aging is already starting to push rates higher, meaning that 10-year real yields will be 0.75 percentage point higher over the next 10 years.

Other investors have a different worry: They fear that yields will stay low even if central banks try to tighten policy because they are concerned a recession may be coming. This year, the Fed has nudged up rates three times and yields on long-term government bonds—both nominal and inflation-linked debt—have stayed unchanged or declined, echoing similar issues that then Fed Chairman Alan Greenspan had in 2005.

MD: Translation: “a recession may be coming” means “harvest time may be coming”. It’s pretty easy to see when it’s time to harvest. You look at how ripe the crop is … i.e. how thoroughly the traders have been sucked in. The farming analogy is near perfect.

Indeed, the yield curve—the yield gap between short and long-term Treasurys—is now at its flattest since 2007, and many investors underscore that, in the past, this has often preceded an economic slowdown in the U.S.

“Unless the evidence is very compelling that’s a false signal, I think the market’s going to be nervous,” said David Riley, head of credit strategy at BlueBay Asset Management, who is now investing more cautiously.

MD: Booga booga … buy gold advises the great see-er.

Still, investors may read too much into what yields say about the economy, said the Bank for International Settlements, a consortium of central banks. In new research looking at 18 countries since 1870, the BIS found no clear link between rates and factors like demographics and productivity—it is mostly central-bank policy that matters.

MD: “A consortium of central banks?”…  Rothschield’s holding company you mean?

Does this mean investors can rest easy because rates won’t creep up on them? Not so fast, said Claudio Borio, head of the monetary and economic department at the BIS, because officials may still raise them to contain market optimism. Central banks in Canada, Sweden, Norway and Thailand are thinking along these lines, analysts said.

MD: “Not so fast” says Rothschild’s weather man. We can do anything to the crop we choose to do … when we choose to do it.

If central banks control real rates, then it is inflation that has a life of its own—it isn’t just a reaction to officials deviating from economic trends—and it could explain why central bankers have failed to stoke it for years. So officials might as well raise rates to quash bubbles instead of “fine-tuning inflation so much,” Mr. Borio said.

MD: Anyone who has followed MoneyDelusions analysis of these ridiculous articles has to be holding their sides in pain from laughing too hard.

Still, Isabelle Mateos y Lago, global macro strategist at BlackRock Investment Institute, thinks investors don’t have to worry about this yet.

“The conversation is moving this way, but I don’t think central bankers have a fully articulated view,” she said.

MD: “Central banks don’t have a fully articulated view?” Dream on. They do control the weather of this farming operation you know. And they control the farmers ability to buy seed and tractors and land. But having dropped the obligatory number of names, the write concludes his nonsense for now.

Write to Jon Sindreu at jon.sindreu@wsj.com
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MD: Please do write Jon as he begs … and send him a link to this exposure of his Money Delusion.

Dollar Cost Averaging (Quora question)

“How can I evaluate returns from a dollar cost averaging (automatic investment) into a leveraged fund (e.g. SSO) over a longer term (10+yrs)?”

(Link to Quora question and answer)

Early in my career I wrote an application for “financial criminals” to move people away from “whole life” insurance to “term” insurance, and investing the premium saved by dollar-cost-averaging into their mutual fund. The “illustrations” I produced for them were dramatic. Basically, the “investment income” goes to you and the mutual fund managers and not to the insurance company.

Well, to do this, the “law” demanded lots of small print. But it also demanded I show the cash flows precisely as if they were done into the mutual fund historically. That meant going back the 30 years (the planning window) and saying “if the next 30 years are exactly the same, this is where you would be”.

But it was really pitching “if you’d done this 30 years ago with our mutual fund, this is where you’d be” … and it was dramatically better than what the whole life scenario delivered (unless you used a poorly performing mutual fund … or had zero inflation).

This was 30+ years ago. Back then you had “whole life” insurance salesmen … with a comfortable annual commission stream. It tipped their cart. These insurance salesmen now call themselves “financial analysts”. Follow the money.

None of this would work if we had a “proper” Medium of Exchange (MOE) process … that “guaranteed” zero inflation … all the time and everywhere. If we had that, you could put your surplus money under a rock and do better than either alternative.

Leveraging doesn’t work with zero inflation (i.e. (1+i)^n is always “1.000” for all “n” when “i” is perpetually zero). So don’t expect a “proper” MOE process to be adopted any time soon. It puts the money changers and the governments they institute out of business.

(see http://MoneyDelusions.com (http://MoneyDelusions.com))

Todd Marshall
Plantersville, TX

Are Cryptocurrencies Inflationary? Are they “real” money?

Are Cryptocurrencies Inflationary?

 MD: If you understand money, you know the proper process to enable it “guarantees” perpetual perfect supply/demand balance for the money itself. Thus, it is neither inflationary nor deflationary.

The Bitcoin process thinks (like the gold bugs think) that money needs to be rare to be viable. This is nonsense of course. But Bitcoin is enormously “deflationary” as a consequence of its process. Supply is severely limited and ultimately capped. Demand is exploding because of this (because it is deflationary) … not because Bitcoin is viable money.

Nobody in their right mind owning bitcoins would ever part with them (unless the inevitable collapse was in progress). That’s the nature of a “deflationary” asset. The only appeal to bitcoins is their anonymity. And thus it is illicit trade that is really finding bitcoin useful. Everyone else holding them is gambling … plain and simple.

I have never tried to really understand the underlying process of bitcoin mining. The reason for this is the process is bogus on its face. It has no way of matching supply and demand. If this is a characteristic of all cryptocurrencies (and block chain mechanisms) in general, then all are not viable. However, I see no reason a block chain concept cannot be devised that creates new transparent, unchangeable blocks at zero cost. Then the proper MOE process uses the block chain to deliver the necessary “transparency” attribute of a proper MOE process.

As always, I’ll now intersperse comments as appropriate to highlight these obvious principles and violations thereof.

by John Rubino

There’s a debate raging over what, exactly, bitcoin and the thousand or so other cryptocurrencies actually are. Some heavy-hitters are weighing in with strong, if not always coherent opinions:

MD: Oh really? What is being debated? That they are money?

Jamie Dimon calls bitcoin a ‘fraud’
JPMorgan Chase CEO Jamie Dimon did not mince words when asked about the popularity of virtual currency bitcoin.

Dimon said at an investment conference that the digital currency was a “fraud” and that his firm would fire anyone at the bank that traded it “in a second.” Dimon said he supported blockchain technology for tracking payments but that trading bitcoin itself was against the bank’s rules. He added that bitcoin was “stupid” and “far too dangerous.”

————————

Peter Schiff: Even at $4,000 bitcoin is still a bubble
One of the best-known among the bears, investor Peter Schiff, is now making his case in even stronger terms for why bitcoin has advanced ever farther into bubble territory.

MD: It went into bubble territory right out of the box.

Schiff, who predicted the 2008 mortgage crisis, famously referred to bitcoin as digital fool’s gold and compared the cryptocurrency to the infamous bubble in Beanie Babies.

Moreover, the recent run-up in bitcoin hasn’t softened Schiff’s view: If anything, it’s reinforced his sense of impending doom.

Schiff told CoinDesk:
“There’s certainly a lot of bullishness about bitcoin and cryptocurrency, and that’s the case with bubbles in general. The psychology of bubbles fuels it. You just become more convinced that it’s going to work. And the higher the price goes, the more convinced you become that you’re right. But it’s not going up because it’s going to work. It’s going up because of speculation.”

MD: The fact that it is going up is proof that it “does not work”. Real money never goes up or down. It stays constant over all time and space.

“What it comes down to is that bitcoin ain’t money.”

“Libertarian-minded crypto fans saw this was a way to liberate people from the government,” he said, concluding:

“I think it will have the opposite effect. People are going to lose money. This could really backfire, giving libertarian ideals a bad name by making fiat look good. The downside can be really spectacular.”

MD: Actually, a competitive proper MOE process would give people an alternative to the “improper” MOE process commanded by the money changers and the governments they institute. If instituted  properly  (i.e. guaranteeing zero inflation), and in multiplicative fashion (like credit cards) nobody would continue to use government money, It couldn’t compete. The government would be forced to demand use of government money (for more than just paying taxes) and that would tip their hand … i.e. that they are simply the money confiscation machine instituted by money changers. Right now that machine is confiscating 3/4ths of everything each of us makes.
————————

Hedge fund manager James Altucher: Cryptocurrencies Could Be Worth $200 Trillion One Day
I’m not exaggerating when I say cryptocurrencies are the biggest innovation since the internet. We’re on the ground floor of an enormous trend that’s going to change the world.

Cryptocurrencies are currencies with no government in the middle. No bank in the middle. No organizations in the middle keeping track of all your payments, or taking advantage of your spending so they can invade your privacy, and on and on.

Cryptocurrencies solve trillions of dollars’ worth of problems, which is why they will be worth trillions of dollars one day.

MD: He says about three things that are right and then caps it off by saying something that proves they solve no problems at all.

Consider the potential:

There is currently $200 trillion in cash, money and precious metals used as currencies in the world. Meanwhile, there’s only $200 billion in cryptocurrencies. Cryptocurrencies are eventually replacing traditional currencies.

MD: If he knew what he was talking about … i.e. what money really is … he would also say there are currently $200 trillion in-process trading promises (net of government counterfeiting that is demonstrably about 4%). But of course that isn’t true because government trading promises are always defaulted … i.e. counterfeiting right out of the box.

So that $200 billion will eventually rise to the level of currencies. And probably sooner than we can imagine.

MD: Admitting he is clueless about money. Supply and demand for real money rise and fall in lock step.

Ask yourself, why does the world need multiple currencies? There’s actually no real reason. The only reason we have a U.S. dollar and also a Canadian dollar is that in 1770 the people in Canada decided not to join the U.S. So an artificial border created two currencies. It’s all dictated by artificial borders.

MD: Actually, it’s because “none” of the world’s currencies are from a “proper” MOE process. If we had a proper MOE process that “guaranteed” zero inflation, then there would be no need for multiple currencies (exchange rates would be perpetually constant). However, there always should be multiple processes in operation … just like there should be multiple insurance companies in operation. They’re addressing an identical problem and are disciplined and driven to efficiency by transparency and competition.

In the past, an ounce of gold would be accepted almost anywhere in the world. In that sense, unbacked modern fiat currencies are a step backwards.

MD: As it is today. Gold becomes more acceptable in trade as the MOE process in place becomes more and more “improper” (i.e. tolerates more and more counterfeiting by governments and more and more tribute demands by the money changers. Gold is just a clumsy inefficient stand-in for real money.

But in cryptocurrency world, there are what I call “Use Borders.” Every currency is defined by its use. For instance, Ethereum is like Bitcoin but it makes “smart contracts” easier. Contract Law is a multi-trillion dollar industry so this has a huge use case. Filecoin makes storage easier. It’s a $100 billion industry. And on.

Studying the “use” cases, and the effectiveness of the coin to solve those use cases can help us make investment decisions confidently.

MD: KISS (Keep is Simple Stupid). Money is not about “use cases” … it is about trade over time and space. Block chains may be about use cases, but those cases are not cryptocurrency. They’re not currency at all. Who ever thought of a contract as being currency? Just trapped myself didn’t I … because in a proper MOE process, the money represents a contract … a promise by a trader to the whole trading community that he will deliver on a trade over time and space.

This is the great promise of cryptocurrencies and why they will change the world. It’s just getting started.

No normal non-expert should expect to make sense of the above. So let’s just assume that the cryptocurrency universe will continue to expand for a while and narrow the discussion down to a single question: Are cryptocurrencies inflationary? That is, will their spread lead to higher or lower prices for the average person, and greater or lesser financial instability for the markets, and what does this mean for today’s fiat currencies?

MD: That’s his judge of inflation? Higher (or lower prices)? Prices are just a crude measure of inflation. Inflation can’t be measured. But a proper process can guarantee it to be zero … and thus requires no measurement. No block chain process I have ever seen described attempts to maintain perfect balance between supply and demand for the money (i.e. trading promises) it represents.

MF: I suggest you continue to read this article if you find it interesting. If you do, I suggest you continue to annotate it in your mind knowing the principles of “real” money and how they apply. This article is making me tired.

One common opinion is that cryptocurrencies can’t be inflationary because their owners have to pay for them in fiat currencies. So one bitcoin bought means one dollar, yen, or euro sold, with the net effect on prices being zero.

This makes intuitive sense at first glance, but only holds for the moment of purchase. Consider what happened after someone in, say, 2014 exchanged dollars for bitcoins. The dollars held most of their value, which means the total amount of dollar purchasing power in the world remained constant. But those bitcoins went up by several thousand percent, dramatically increasing the purchasing power – and thus the potential inflationary impact – of the bitcoin complex.

A real world example is Julian Assange:

Julian Assange Says Wikileaks Has Made a 50,000% Return on Bitcoin. Here’s What That Means
Wikileaks has seen an amazing return on investments in bitcoin, founder Julian Assange says, and he is “thanking” the U.S. government for forcing the controversial organization to get into bitcoin in the first place.

In a Tweet on Saturday, Assange said the group’s investment in the cryptocurrency has seen a return greater than 50,000% since 2010. Wikileaks began investing in bitcoin back then because global payment processors like Visa, Mastercard, and Paypal were under pressure by the U.S. government to block the ability of the group to take payments.

In fact, Bitcoin has seen a more-than 9 million percent return over the dates Assange references. In certain periods in 2010, bitcoin was trading for mere pennies. According to coindesk.com, one unit of bitcoin is now worth a record high of roughly $5,700. Anyone buying bitcoin through much of 2011 and 2012, when one unit was sometimes trading below $1 and was often under $10, would indeed see a return on investment of more than 50,000%, assuming they never sold.

The difference between Wikileak’s purchasing power pre and post-bitcoin is immense. If Assange decides to spend his windfall on goods and services he’d have, at the margin, an inflationary impact on the stuff he buys.

So the answer to the question of cryptocurrencies’ impact on price levels depends on how their values change. If they rise after people buy them, then they’re inflationary. If they rise a lot, they’re potentially very inflationary.

In this sense, it might be helpful to view cryptocurrencies as assets like houses or stocks rather than as money. When they rise relative to fiat currencies they increase the purchasing power of their owners, generate a “wealth effect” in which owners feel richer and more comfortable with splurging, and in that way push up prices. Based on the following chart, a lot of early adopters are feeling a whole lot richer these days.

Which then leads to what might be the major cryptocurrency theme of the coming year: Why would governments allow such an inflationary supernova to explode right in front of them when they presumably have the power to stop it? Here’s one possible — and of course disturbing — answer:

Will cryptocurrencies trash cash? ‘Fedcoin’ could do it
Economist Ed Yardeni of Yardeni Research asks the obvious question: Why would central banks—which derive their power as the centralized gatekeepers of fiat currency creation, check clearing and payment processing—embrace a movement that’s primary motivation has been to usurp this power in a decentralized way?

Part of that, according to St. Louis Federal Reserve president James Bullard, is recognition that the technology has achieved critical mass. Thus, there’s a fear of being left behind as the very foundations of banking and monetary policy—intermediation, funds transfers, transactions—rapidly change, not unlike the way the creation of mortgage-backed securities and credit default swaps changed housing finance in the mid-2000s.

There’s another, more self-serving purpose: Central banks could use their own cryptos to put the squeeze on paper currency. Why? To facilitate the use of negative interest rate policy, which has been deployed in Europe and Japan in recent years in half-baked forms. Currently, in Switzerland, short-term interest rates are at -0.75%.

When another recession hits, especially if one comes soon, a dive to even deeper rates of negative interest would be hampered by the hoarding of cash since banks would charge for deposits (vs. absorbing the cost of negative rates themselves, as they’re doing now). This is known by the economics cognoscenti as the “zero lower bound” in that interest rates cannot go much below negative before the traditional functions of deposits, loans and fractional money creation break down. Mattress stuffing ensues en masse.

The Fed is clearly thinking about it. In testimony to Congress last year, Fed chairman Janet Yellen admitted policymakers “expect to have less scope for interest-rate cuts than we have had historically,” adding she would not completely rule out the use of negative interest rates.

The BIS­—the central bank of central banks—in its latest quarterly review posited that a crypto backed by the Fed “has the potential to relieve the zero lower bound constraint on monetary policy.” Any distinction between regular dollars and this new “Fedcoin” could be removed by establishing a fixed one-to-one valuation. Any competition from the likes of bitcoin could be squashed by regulation; not unlike how the private ownership of gold was outlawed in the 1930s when it threatened the Fed’s ability to ease credit conditions.

At the risk of being repetitious, pretty much all of the above looks good for gold and great for silver.

FT: The virtual currency boom echoes dotcom fever

The virtual currency boom echoes dotcom fever

MD: Remembering what money really is … “an in-process promise to complete a trade over time and space” … that it is only created by traders … and that for any given trading promise, it only exists for the duration of that promise … and that during that interim time, there is perpetual perfect supply/demand (i.e. zero inflation) of that money created … knowing all that, look how silly such articles like this become.

by Izabella Kaminska

In 1999, the actor Whoopi Goldberg made a bold decision. Rather than be paid for an endorsement for a dotcom start-up, she took a 10 per cent stake in the business. It seemed wise. At the time, everyone was investing in internet businesses and a rush of initial public offerings was making early investors into millionaires. I was reminded of this amid a flurry of news about the new boom in cryptocurrencies — and their celebrity backers. Ms Goldberg’s venture, Flooz, was billed as the future of money in a digital world and it hoped one day to rival the dollar.

MD: Let’s see if there is evidence that they had any clue about what money is before starting this venture. Nope!

The way it worked, however, was much less revolutionary. The service resembled a gift certificate: customers paid in dollars and received Flooz balances. These could be redeemed at participating merchants, with the hope that credits would one day circulate as money in their own right.

MD: What’s the point? How were they supposed to work without dollars kicking them off in the first place? When they replaced the dollar, what was going to create them?

The problem for Flooz was that little prevented mass replication of its model. One prominent competitor, Beenz, differed only slightly, by allowing its units to trade at fluctuating market prices.

MD: A “proper” MOE process can have no competitors. A competitor either does the exact same thing as this proper MOE process, or it isn’t competitive. And since there is no money to be made in the process (contrasted to the similar casualty insurance process where money is made on investment income), it’s not going to attract many competitors. It would be the trading commons themselves who would steward the process. We have experience with this. The internet is just such a process example … a technology commons.

Like banking syndicates before them, the ventures decided to club together for mutual benefit by accepting each other’s currencies in their networks. Even so, by 2001 both companies had failed, brought down by a lack of the one ingredient that counts most in finance: trust. Flooz was knocked by security concerns after it transpired that a Russian crime syndicate had taken advantage of its currency, while the fluctuating value of Beenz soon put users off.

MD: Fluctuating value turning users off is a good sign. Users aren’t as clueless as these entrepreneurs.

Their loss turned into PayPal’s gain, the latter succeeding precisely because it had set its aspirations much lower. Rather than replace established currencies, PayPal focused on improving the dollar’s online mobility, notably by creating a secure network that gained public support. This, it turned out, is what people really wanted.

MD: And PayPal missed the real opportunity by not following up. If they had gone ahead and implemented micro-transactions, I would be paying a tiny (what 1 cent; 5 cents?) price for reading this article. That day has to come. Supporting the likes of FT with advertising and subscriptions is just plain nonsense.

Did we learn anything from the failures of the internet boom? Apparently not. In what is looking increasingly like a new incarnation of dotcom fever, celebrities are endorsing virtual currency systems. Heiress and reality TV star Paris Hilton tweeted this week that she would be backing fundraising for LydianCoin, a digital token still at concept stage. It offers redemption against online artificial intelligence-assisted advertising campaigns.

MD: Advertising campaigns “are” artificial intelligence. We know it as propaganda. It’s annoying … and really dangerous when it reaches the minds of the stupid.

Baroness Michelle Mone, a businesswoman, announced she would be accepting bitcoin in exchange for luxury Dubai flats. What is particularly striking about this path to riches is its “growing money on trees” character.

MD: What is “particularly striking” is that someone would part with their bitcoins for one of her flats … knowing the extraordinary deflationary nature of bitcoins.

While the internet boom was dominated by IPOs, linked to a potentially profitable venture to come, this time it is “initial coin offerings” igniting investor fervour. Most ICOs do not aspire to deliver profits or returns. Indeed, from a regulatory standpoint, they cannot — most lawyers agree doing so could classify them as securities, drawing regulatory intervention which would force them into stringent listing processes.

MD: If they knew what real money was, they would know that every trader (like you and me contracting for a house or car with monthly payments) is making an ICO. What in the world is it going to take to get these brilliant idiots to recognize and understand the obvious?

That opinion was substantiated in July when the US Securities and Exchange Commission warned: “Virtual coins or tokens may be securities and subject to the federal securities laws” and that “it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.”

MD: Now isn’t that the pot calling the kettle black. The SEC is itself a scam.

So most ICOs make do by selling tokens for pre-existing virtual currencies for promises of direct redemption against online goods, services or concepts, or simply in the hope the tokens themselves will rocket in value despite offering nothing specific in return.

MD: Stupid is as stupid does. If you know that zero inflation is the right number for any money you don’t go looking for “rocketing” value. An ideal unit for money is the HUL (Hour of Unskilled Labor). We were all a HUL doing summer jobs in high-school so we can relate to them any time in our lives … and to any trade we make. The HUL itself has not changed over all time. It trades for the same size hole in the ground. With median income now at about $50,000 per year, the median person is able to trade his skilled hours for about 3.5 HULs these days.

They still think they can succeed where other parallel currency systems have failed, by bolting into pre- established blockchain-distributed currency systems such as Ethereum or bitcoin.

MD: A proper MOE process is totally transparent when it comes to the money creation/destruction parts of the process. Block-chain techniques (i.e. universally accessible ledger) would be helpful to enhance that transparency. But there would be no mining involved. New blocks would have to be created at any time at zero cost.

These already come with a network of token-owning users. But with the numbers of conventional merchants that will accept these currencies falling rather than rising, these holders need something more compelling to spend their digital wealth on. As it stands, the real economy can only be accessed by cashing out digital currency for conventional money at cryptocurrency exchanges. This comes at some expense.

MD: So far, the expense is insignificant … because of the enormous “guaranteed” continual deflation of the cryptocurrency itself (their ridiculous mining process). It’s kind of like the reverse of our government run lotteries. With government lotteries, you are guaranteed to lose (except for the minuscule chance you win). With cryptocurrency, you are guaranteed to win (until everyone loses as what is essentially a Ponzi scheme … with no Ponzi … comes down).

But with regulators clamping down on how exchanges are governed, token holders who cannot or do not want to pass through know-your-customer and anti-money laundering procedures remain frozen out.

MD: What’s disconcerting is the knowledge that if we instituted a “proper” MOE process, the regulators would clamp down on it too. It would make their current counterfeiting impossible … and it would make it impossible for money changers to demand tribute. That would just not stand. Regulators and governments everywhere are a major part of our problem.

That leaves their holdings good for only three things: virtual currency speculation, which is ultimately a zero-sum game; redemption against dark-market goods or capital control circumvention. It is assumed ICOs offering real goods, services or real estate in exchange for cryptocurrencies can somehow tap into this sizeable, albeit potentially illicit and restricted, wealth pool.

MD: Real estate wants positive inflation. Money changers in real estate do not want real money (there’s no leverage in it … time value of real money is guaranteed to be perpetually 1.0000) … and for sure they don’t want money that is guaranteed deflationary.

Yet if competing unregulated economies really start gaining traction, governments will act. China’s central bank has already branded ICOs an illegal form of crowdfunding and more rulings are expected from other jurisdictions in coming weeks.

Then again, if history teaches us anything, the system’s own propensity to cultivate fraud and unnecessary complexity in the face of more secure and regulated competition may be the more likely thing to bring it down.

MD: Actually, if you crowd the money changers existing con … “they” are likely to bring it down. “Real” money crowds money changers out of existence. That will not stand. Too bad for us traders and producers in society.

When given the choice, people usually opt for security.

MD: Which of course we don’t have … if you call government taking 3/4ths of everything we make …. you can’t call that security. I call it slavery. If you call money changers taking “all” taxes we pay as tribute … leaving governments (which the money changers instituted to protect their con) to sustain themselves by counterfeiting … I call that criminal.

izabella.kaminska@ft.com Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don’t copy articles from FT.com and redistribute by email or post to the web.

MD: I am openly violating this request. My comments are far more valuable than anything to be learned in this article. And the fairest way to make my comments is to intersperse them in the disinformation that these articles present.

Deviant Investor: Debt Ceiling Delusions and Dollar Difficulties

Debt Ceiling Delusions and Dollar Difficulties

Read:  Harvey, Irma, Gold and Bad Options

MD: Notice that  Deviant Investor represents himself as a “non-traditional perspective”. And then he rejects us in moderation for being “unorthodox”. Go figure.

Here at MD we have no illusion about what money is. We see all governments as just traders. And we see all governments for the irresponsible traders that they are … they never deliver on their money creating trading promises … they just roll them over … and that’s just plain counterfeiting.

Now let’s point out where the Deviant Investor just plain “doesn’t get it”!

 

Guest Post from Clint Siegner, Money Metals Exchange

Those who paid any attention to the financial press last week saw the following narrative; President Donald Trump betrayed Republicans by cutting a deal with Democrats Nancy Pelosi and Charles Schumer. They agreed to punt on the borrowing cap until December and spend $15 billion for hurricane relief.

MD: So what? The borrowing cap is an illusion. It does not exist in practicality. Every time they pretend it does, it results in a paid holiday for government workers … and them moves right on up.

Americans are supposed to conclude that Trump is flip-flopping, and that Republicans aren’t responsible. Dig just a little, and you’ll find only one of those things is true.

Trump is flip-flopping, no question about that. The president campaigned on promises to honor the borrowing limit. This tweet from 2013 is what candidate Trump had to say on the matter: “I cannot believe the Republicans are extending the debt ceiling — I am a Republican & I am embarrassed!”

MD: Man is this guy deluded! He’s recognizing Republicans (presumably in contrast to Democrats), admitting to be one, and is embarrassed by what Trump is and does? Surely he jests!

But any implication that Republican leaders in Congress actually oppose more borrowing is patently false. Republicans in Congress overwhelmingly supported the deal. It was passed in the House with a vote of 316 to 90. The Senate voted 80 to 17.

MD: Leaving me with “Trump is Flip Flopping” is the truthful statement?

Some who voted in opposition likely only did so for the sake of appearances. Others thought the president and Democrats did not go far enough. GOP leaders Paul Ryan and Mitch McConnell wanted a deal to suspend the borrowing cap for much longer than the 3 months they got.

Make no mistake – lots of Republicans share the commitment to unlimited borrowing with the President and Democrats.

MD: I agree. They should have unlimited “money creation” privileges as should all traders (within principled reason … you shouldn’t be able to create money to build a General Motors from scratch). But, as with all irresponsible traders, they should have an interest load commensurate with their propensity to default. In their case, that is 100%. Therefore, they effectively cannot create money (the borrowing metaphor is a fiction). Institute a proper MOE process in competition with theirs, and the debt ceiling no longer moves in any direction but down … until they prove themselves to be responsible traders … which of course they never will do.

At least the currency markets seem to have gotten it right. Last week’s decline in the dollar may be a recognition the debt ceiling – the final pretense of borrowing restraint – will soon be going away. The sooner investors at large arrive at this conclusion, the better it will likely be for owners of hard assets.

MD: With a proper MOE process (i.e. real money) there is no such thing as a “currency market”. The “real” money (best denominated in HULs … Hours of Unskilled Labor” never declines or increases. In a proper MOE process, money is every bit as hard as gold (but easier to trade with). Gold isn’t money at all … and never has been. It’s just a clumsy and expensive and inefficient stand-in for real money … it’s just stuff like cement blocks are stuff.

 

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

Thanks to Clint Siegner

 

Cafe Hayek: About prices

Bonus Quotation of the Day…

by Don Boudreaux on September 12, 2017

… is from the opening paragraph of Chapter III, section 5, of James Mill‘s 1821 Elements of Political Economy (original emphases):

The benefit which is derived from exchanging one commodity for another, arises, in all cases, from the commodity received, not from the commodity given.  When one country exchanges, in other words, when one country traffics with another, the whole of its advantage consists in the commodities imported.  It benefits by the importation, and by nothing else.

DBx: UPDATE: There is one modification to make to Mill’s statement: when producers – domestic and foreign – are better able to take advantage of economies of scale in production and distribution because of access to larger numbers of consumers, consumers – domestic and foreign – also gain in the form of greater output and lower prices of those goods and services.  That is, by allowing the prices of some domestically produced goods to fall, freer trade that enables domestic producers of those goods to take advantage of the economies of scale that enables production to take place at lower per-unit costs benefits domestic consumers in a way in addition to greater access to imports.

MD: This has always perplexed me about the Mises Monks and their Austrian Economics. Why are they so fixated on prices. Prices are strictly a perception between two parties in a trade. When they have negotiated a trade to the satisfaction of both, that perception is the same for both. It has nothing to do with any other trader or trade (unless the traders themselves choose it to be).

A “proper” MOE process cares absolutely nothing about prices … ever. And by its very process, it guarantees that the money in and of itself has zero influence on prices … perpetually … and everywhere.

Cafe Hayek: Public Interest

From Quotation of the Day

[I]ndividuals within the bureaucratic structure often possess wide discretionary powers to lay down rules of procedure, allocate the funds among the competing demands, or develop standards for performance.

MD: This reveals an obvious flaw in bureaucratic structures. It reveals an obvious reason why governments and their bureaucracy are not the way to address issues.

In each case, the bureaucrat who makes the decision will be motivated to some extent by his own private cost and private benefits rather than those of Congress or those which might be genuinely defined as public interest.

MD: Actually it’s much worse than stated here. Special interests now actively pursue positions in bureaucracies (being subsidized by their special interest) to further those special interests. They become an “attachment” to an existing government … and eventually take it over from within.

Bureaucrats are themselves no different from anyone else, and they will act so as to preserve and to advance their own career prospects.

MD: Actually they are very different from anyone else. They are under-skilled, competitive yet incapable of competing, and they are power hungry. It takes a special personality with a defect to be a government worker. Anyone given a choice of work in the private sector or public sector will choose the private sector … unless they are power hungry.

Hence, unless these prospects are tied directly to the public interest, the inherent inefficiency in bureaucratic process will tend to dissipate, at least to some degree, almost any collective effort to achieve social betterment.

MD: The “public interest” can never be ascertained. All that acting in the public interest does is to declare some individuals as being outside the public domain. Every action taken in one person’s interest is an action against another person’s interest.

Cafe Hayek: An Odd Tic

An Odd Tic

by Don Boudreaux on September 12, 2017

MD: I really don’t have much to add to embrace the concept being discussed here. It is right on. Anyone who has read the Federalist Papers and particularly the Anti-Federalist papers will know the Federalists had two principle reasons for forming a union: (1) To use the union to bully the merchant’s competition. (2) To use the union to protect the merchant’s practices. It was all about what was good for the merchants … not for the people. They only thing they needed the people for was to pay for it.

Government is “never” the solution to such issues. Governments create the problem in the first place and government  applied to the solution just exacerbates the problem … and leads to wars.

One of oddest tics exhibited by protectionists who otherwise have pro-free-market sympathies is to insist that the government of their country (say, the United States) use punitive tariffs and other trade restrictions in order to countervail the market-distorting effects of the policies of foreign governments.  There are many problems with this specific argument for protectionism (again, not least that, in practice, it is aimed only at those policies of foreign governments that are believed to artificially lower the prices of those countries’ exports; it is never aimed at those policies of foreign governments that make the prices of those countries’ exports higher).

But here I note only that it is especially odd for people who allegedly understand and celebrate the virtues of free markets to justify protectionist restrictions on the grounds that these restrictions will allegedly countervail or “adjust for” whatever market distortions are (or are asserted to be) unleashed by the economic interventions of foreign governments.  It is odd because these particular protectionists – in the U.S., many conservatives – generally distrust their government to act wisely, prudently, skillfully, knowledgeably, and apolitically when meddling in the economy.  And yet as soon as the stated particular reason for intervention is foreign-government misdeeds that allegedly distort the American market, these free-market types – these free-market conservatives – lose all of their skepticism of their own governments’ abilities to intervene wisely, prudently, skillfully, knowledgeably, and apoloticially.

Gibson’s paradox has defeated all the mainstream economists

MD: If you start with a false pretense, you’re likely to arrive at a false conclusion. This article deals with prices and interest rates. If you know how a “proper” MOE process operates, you know there is no correlation between the two at all. Prices are determined object by object … trade by trade … trader by trader. Interest is determined trading promise by trading promise … default by default. The two are not related at all. Let’s see if Macleod gets it.

Gibson’s Paradox

Gibson’s paradox has defeated all the mainstream economists who have tried to resolve it, including Irving Fisher, John Maynard Keynes and Milton Friedman.

As Keynes noted, the paradox is that the price level and the nominal interest rate were positively correlated in the two centuries before he examined it in 1930.

MD: Well, duh! The prevailing MOE processes were instituted by the money changers. And they also instituted governments to protect their operations. Money changers require a “time value of money” for their farming operation (business cycle) and tribute demands (interest collections) to work.  They use governments to collect this interest in the form of taxes. Governments sustain themselves through counterfeiting (inflation). Thus, with this process, price levels and interest rates will be positively correlated … over all time, not just the two centuries examined.

Monetary theory posits the correlation should be between changes in the level of price inflation and interest rates. Empirical evidence shows there is no such correlation. The response from the Neo-Keynesian and monetarist schools has been to ignore Gibson’s paradox instead of resolving it, so much so that few economics professors are aware of its existence today.

MD: There is only one kind of inflation … and thus no need for the modifier “price” in describing inflation. Inflation is simply the supply/demand imbalance in the exchange media itself. With “real” money (i.e. money in a “proper” MOE process), there is a guaranteed supply / demand balance and thus perpetual zero inflation.

This paper explains the paradox in sound theoretical terms, and casts doubt on the assumptions behind the quantity theory of money, with important implications for monetary policy.

MD: Money requires no theory … any more than addition and subtraction require theory. If you add and subtract improperly, you’re going to get an improper result.


 

INTRODUCTION

Thomas Tooke in 1844 is generally thought to be the first to observe that the price level and nominal interest rates were positively correlated. It was Keynes who christened it Gibson’s paradox after Alfred Gibson, a British economist who wrote about the correlation in 1923 in an article for Banker’s Magazine. Keynes called it a paradox in 1930, because there was no satisfactory explanation for it.

MD: The reason is obvious. Inflation comes from government counterfeiting (i.e. creating money with no intention of delivering on the promise that is the money they are creating). Defaults (and counterfeiting is just DOA (defaults on arrival)) must be mitigated immediately by interest collections of like amount. If they are not, inflation will result. So it is counterfeiting that causes interest collections. And if these are inadequate, it causes inflation as well. And that is the modus operandi of all (improper) MOE processes we have ever had.

He wrote that “the price level and the nominal interest rate were positively correlated over long periods of economic history”.1 Irving Fisher similarly had difficulties with it: “no problem in economics has been more hotly debated,”2 and even Milton Friedman was defeated: “The Gibson paradox remains an empirical phenomenon without a theoretical explanation”.3 Others also attempted to resolve it, from Knut Wicksel4 to Barsky & Summers.5

MD: But when you know what “real” money is … how it is created … how it is destroyed … and how defaults are immediately mitigated with interest collections of like amount … and if not, inflation results … well, there is “no” paradox at all. The behavior observed is the behavior expected. How can these so-called great economists be so clueless?

Monetary theory would suggest the correlation should have been between changes in the level of price inflation and interest rates. This is the basis upon which central banks determine monetary policy, and now that the gold standard no longer exists, it is probably assumed by those that have looked at the paradox that it is no longer relevant. This appears to be a reasonable explanation for today’s lack of interest in the subject, with many professional economists unaware of it.

MD: With a proper MOE process, there is no such thing as “monetary policy”. The proper MOE process is totally objective and immune to any attempt to influence it with policy. The gold standard never did exist. There was never enough gold for it to exist. It has always been a purposeful illusion … created by those who had the gold.

Those economists who have examined the paradox generally agree that it existed. This paper will not go over their old ground other than to make a few pertinent observations:

• Data over the period covered, other than prices for British Government Consols cannot be deemed wholly reliable for two
reasons. Firstly, price data from 1730 to 1930, the period observed, cannot be rigorous; and secondly any observations of price levels by their nature must be selective and subjective as to their composition.

MD: For price data to be useful, it must be in units that don’t change over time or space. Ounces of gold is not such a unit. A HUL (Hour of Unskilled Labor) is such a unit. It has always traded for the same size hole in the ground. So if prices (which are typically related to ounces of gold) would be translated to HULs at that point in time, the gold measurement distortion could be removed. The way to do this is to first determine the ounce of gold per HUL rate at each point in time.

• Attempts to construct a theory to explain the paradox after the Second World War differ from earlier attempts, because the more recent academic consensus dismisses Say’s Law, otherwise known as the law of the markets. Barsky & Summers in particular resort to mathematical explanations as part of their paper, thereby treating it as a problem of natural science and not a social science.

MD: “According to Say’s Law, when an individual produces a product or service, he or she gets paid for that work, and is then able to use that pay to demand other goods and services.” But what does he get paid with? He gets paid with money. And money is “an in-process promise to complete a trade over time and space”. So Say’s Law has no relevance.

• The economists who have tackled the problem were unaware of the Austrian School’s price and time-preference theories, or have dismissed them in favour of Neo-Keynesian and monetary economics. The silence of the Austrian School on the subject is an apparent anomaly.

MD: The Austrian School is totally clueless about money … what money is, always has been, and always will be. With “real” money, it is proven that its “time-value” is zero. Therefore, any “time-preference theories” are out the window. They only exist with non-zero (and particularly with positive) inflation. With “real” money, inflation is guaranteed to be perpetually zero.

The Author shows that the theoretical reasoning of the Austrian School leads to a satisfactory resolution of the paradox without having recourse to questionable statistics or mathematical method.

MD: If it does that, it does it totally by accident … or by being a paradox itself. Let’s see.

THE PARADOX

Gibson’s paradox is based on the long-run empirical evidence between 1730 and 1930, a period of 200 years, when it was observed by Arthur Gibson that changes in the level of the yield on British Government Consols 2 ½% Stock positively correlated with the wholesale price level. No satisfactory theoretical explanation for this correlation has yet been published. It is shown in Chart 1 (Note: annual price data estimates from the Office for National Statistics are only available from 1750).

CHart1 Gib-01

MD: Where’s the mystery? The stock level is a function of inflation of the money itself. The general price of all objects is a function of inflation. They will always correlate. With a proper MOE process, that correlation curve will be a straight horizontal line.

The quantity theory of money suggests that instead there should be a strong correlation between changes in interest rates and the rate of price inflation. However there is no discernible correlation between the two. Contrast Chart 2 below with Chart 1 above.

CHart2 Gibs-01

MD: That failure to correlate is because of the failure to bring “defaults” into the analysis. If interest collections equal defaults there will be no inflation. To the extent they don’t (i.e. to the extent government counterfeiting is experienced and tolerated) there will be inflation. In a proper MOE process, interest collections are perpetually exactly equal to defaults experienced and inflation is perpetually equal to zero. They are trying to correlate the wrong two values.

If Gibson’s paradox is still relevant it presents a potential challenge to monetary policy. The question arises as to whether it is solely an empirical phenomenon of metallic, or sound money, or whether its validity persists to this day, hidden from us by the expansion of fiat currency and bank credit, and the central banks’ success in substituting pure fiat currency in place of sound money. If the paradox is solely a consequence of metallic, or sound money, it might pose no threat to the modern currency system; otherwise it may have profound implications.

MD: Monetary policy is an oxymoron when you know what real money is and the “proper” MOE process that delivers it. There is no such thing as “sound” money. This is now they refer to gold used as money. But gold represents a trade completed. It has never represented a trade in process and thus has never been money. The fact that they use it as an intermediary object does not make it money.

Modern macroeconomists appear ill-equipped to tackle this issue. The paradox is essentially a market phenomenon and macroeconomics is at odds with markets.

MD: If you’re describing issues that are a function of money and you are clueless about all things regarding money, you’re going to be “ill-equipped”.

An economist who favours macroeconomic theory will acknowledge a primary function of the state is to intervene in markets for a better outcome than a policy of laissez-faire; and that the needs and wants, the purposeful actions of ordinary people, collectively through markets free of exogenous factors, can be improved by government intervention.

MD: A person with two brain cells will recognize that the function of the state is to protect the money changers who instituted it in the first place … for that explicit purpose with the additional purpose of being the collector of the tribute they demand (i.e. taxes which are delivered to the money changers as interest payments).

Yet it is ordinary people and their businesses that were behind the relationship between the interest rate on gold or gold substitutes and wholesale prices during the period the paradox was observed.

MD: This is absolute nonsense. Ordinary people (i.e. traders) invented money. The money changers then co-opted that invention and took control in their own interests. There is no paradox here. There is only corruption. If traders institute a “proper” MOE process to compete with the money changer co-option … poof! The money changers and the governments they institute are out of business. They can’t compete. They can only tie … and they’re not interested in a draw.

For this reason an approach to the problem that is consistent with Say’s law and denies the validity of conventional neo-classical economic theory is more likely to resolve the paradox.

MD: Any economic theory is based on a false premise. When you have a proper premise no theory is called for. What is the theory of addition and subtraction?

WHY SAY’S LAW IS IMPORTANT

Say’s law describes the fundamental framework within which markets work. By implication it holds that each one of us produces a good or service so that we can buy the goods and services we want: 6 we produce to consume so we are both producers and consumers.

MD: Well duh! Is Say the inventor of “trade”. I think not!

Put another way, we cannot acquire the wide range of things we need or want without providing our labour and specialist skills for profit, the profit we require to sustain ourselves.

MD: That is not true. We trade our time, energy, skills, and/or resources for objects (produced by others time, energy, skills, and/or resources). We only profit when we use money to do this and end up with more money than we originally bargained for. If we end up with less money than we bargained for, we must add time, energy, skills, and/or resources to deliver on our original promise that created the money in the first place.

Furthermore, we may choose to defer some of this consumption for future use when it is surplus to our immediate needs. Deferred consumption is saving, the accumulation of wealth, which is either redeployed by the individual to maximise his own productive capacity, or made available to other individuals to enhance their skills for a return. The medium that facilitates all these activities is money, which effectively represents stored labour. It stands to reason that the money used has to be acceptable to all parties.

MD: It is just incredible how they can confuse and distort the obvious!

The primary purpose of money as a transaction medium is to enable all goods and services to be priced, thereby removing the inefficiencies of bartering.

MD: This is “absolutely” wrong. The “only” purpose of money is “to enable simple barter exchange over time and space.” It is created by traders making promises and getting them certified … that certificate record being money. It is destroyed by traders delivering on their promises and destroying the money (cancelling the record) they created. For any given trading promise, no money exists before the promise nor after delivery. Any trades “using” money (as contrasted with those  “creating” money) view the money as the most common object in simple barter exchange.

Money enables a buyer to compare the cost and benefits of one item against another, and for producers to compete and provide what consumers most want.

MD: Not if that money allows open counterfeiting by government. In that case, the trader must estimate the inflation that that counterfeiting causes. And not if money is measured by ounces of gold. In that case, the trader must estimate the supply/demand imbalance in gold itself. An “improper” MOE process makes a trader’s job significantly more difficult … and opens the door for money changer encroachment, manipulation, and tribute demands.

The forum for this competition is the market, a term for an intangible entity, which facilitates the exchange of goods and services between producers and consumers.

MD: Correct. But money is immune to that competition if it is “real” money from a proper MOE process. This is because such a process guarantees perpetual perfect supply/demand balance for the money itself. The money itself is in perpetual free supply (created by responsible traders at will as needed to effect  trading promises over time and space).

Consumers decide how they wish to allocate the fruits of their labour, and it is up to producers to anticipate and respond to these decisions. If someone is not productive and has no savings in order to consume and survive, he or she will require a subsidy, such as welfare or charity, provided from the surplus of other producers. Despite the flexibility money provides these human actions, they cannot be separated.

MD: Wrong. Someone can make a trading promise with no savings at all … and most do. Ideally, all trades would be such. Savings is an inventory control tool … it is safety stock necessary to mitigate uncertainty.

Therefore everyone is both a producer and consumer, or if unemployed, indirectly so. And it is the individual decision of the consumer what proportion of his production profit to put aside, or save for the future.

MD: Again … that is an inventory control concept.

Say’s law describes economic reality, and was generally recognised as the fundamental law of economics until about 1930. But it was an inconvenient truth for some thinkers in the late nineteenth century, most notably for Karl Marx, who advocated state ownership of the means of production, and the national socialists of the early twentieth century who advocated state control of production through regulation.

MD: Why would traders want the state involved at all when the state is obviously instituted by the money changers and is sustained totally by counterfeiting (which enables the money changers fiction of the “time value of money” … and creates the inflation that delivers that illusion … or more properly, delusion).

Both socialism and fascism were attempts by the state to subvert the free market process that allowed producers to have the freedom to respond to consumer demands, so both creeds contravened Say’s law. Finally, Keynes began in the 1930s to work up a proposition to separate production from consumption and to dismantle the relationship between current and deferred consumption, which culminated in his General Theory, published in 1936.6

MD: Keynes did nothing that wasn’t already being done. He just started twisting the money changer’s inflation knobs more drastically. More uncertainty (though it isn’t uncertain to the money changers at all … they’re driving the bus) serves the money changers farming operation … they call it the business cycle.

Keynes’s influence on modern economics is fundamental to today’s macroeconomic theories and has led to a widespread academic denial of Say’s law. Modern academics, including Keynes himself, were therefore unsympathetic with the theoretical framework required to address the paradox, if only on the basis that it was commonly accepted over the period being considered. It is also an anomaly that the subject seems to have escaped the attention of London-based economists of the Austrian School, such as Robbins and Hayek for whom Say’s law remained a fundamental basis of economic theory.

MD: What we have here is a failure to think. In this case “all” economists are provably and laughably wrong beyond belief. And the proof that they are wrong is simple beyond their wildest comprehension.

THE FINANCIAL AND ECONOMIC BACKGROUND TO 1730-1930

Gibson’s paradox was recorded in Britain, so we must first examine the social and economic conditions that pertained in order to understand the circumstances behind the paradox, and to eliminate the possibility it was the result of circumstances rather than evidence of sound theory yet to be explained.

The increase in the above-ground stock of gold, which was the foundation of money and all money substitutes for much of the time, was a potential factor over the period observed.

MD: So they’re using ounces of gold and what it trades for as their measuring stick. They’re using a rubber ruler. Is it any surprise they get spurious readings?

Uses for gold included jewellery and other adornments as well as money mostly in the form of coin, so it is not possible to establish accurately the money quantity.

MD: Which was its fallacy. Money, to be “real” needs it to be in perfectly free, unrestrained supply. Use of gold obviously constrained trade when it was confused with (i.e. used as an inefficient and ineffective substitute for) real money.

The observation was of British prices and bond yields, so it is the quantity of gold in circulation as money in Britain which matters, though there is the secondary consideration of gold in circulation in the hands of Britain’s trading partners.

MD: Make an incorrect rule and have an incorrect perception or premise, and you’re going to get an incorrect result. Gold is not money. Never has been. Never will be.

During the whole period with the exception of the 8 disruption caused by the Napoleonic wars, the quantity of gold was regulated between Britain and her trading partners solely by the demands of trade.

MD: Oh really? How about when the Spanish plundered the Aztecs? How about when new discoveries were made in California and Alaska? How about when a ship carrying a large amout of gold went to the bottom of the ocean and could not be recovered? The only way you can use gold as money is by edict … and that’s what is being explained and justified here.

Given the low level of peacetime intervention by governments in free markets at that time, differences in prices between countries were arbitraged through gold movements.

MD: It’s not a low level of “intervention”. It is a “higher” amount of counterfeiting by government in times of war. That’s why the money changers call for (and manipulate the people into) a war in the first place. The people have nothing against the people they are forced to fight.

We can therefore reasonably take the global quantity of aboveground gold stocks as indicative of the quantity of money in circulation regulated only by the market’s requirements; though bank credit or the over-issue of unbacked money became an increasing cyclical factor following the Bank Charter Act of 1844.

MD: And that is “reasonably” stupid. Stupid is as stupid does. Bank credit is a hoax brought to you by the money changers. Only traders create money … and only traders (well traders and counterfeiting governments) ever have created money.

Prior to the Napoleonic Wars, Britain began to build herself into the most powerful trading economy in history, aided by her overseas possessions and influence, together with the declining influence of Spain after the War of the Spanish Succession.

MD: Actually, it was aided by their “force”. They called it mercantilism. They just used force to limit trade to their companies. That’s why they had to have such a big and powerful navy.

The development of trade with India in the eighteenth century will have increased British demand for gold.

MD: Why? This is nonsense. It increased their demand for force. What did the Indians care about gold?

The wars against France following the French Revolution were costly both socially, involving nearly half a million men in the army and navy, and financially leading to a drain on gold reserves. Prices rose, driven by the increase in unbacked money substitutes issued by the country banks, and by the diversion of financial resources to support the war effort.

MD: Oh my! How self delusional can these writers be? When you have a false premise, you going to make false statements.

This led to the suspension of specie payments on demand against bank notes in 1797. By that time the public had become used to accepting bank notes as a valid substitute for gold, so it continued to accept them in lieu of specie.

MD: Well duh? Do you not know how the money changers farming operation works?

Following the Napoleonic wars, the economy had to adjust to peacetime. The Bullion Committee, which had been formed in 1810, recommended a resumption of specie payments to address the problem of rising prices, a recommendation rejected by the government.

MD: Right. And today we have LIBOR.

It was not until 1819, when the war had been over for four years that a second committee under the chairmanship of Robert Peel again recommended a return to specie payments, and from 1821 onwards a gradual resumption of cash payments for banknotes resumed.

MD: The money changers farming operation is maintained by jerking traders around … and front running the disruptions.

The over-issue of notes by the banks during the Napoleonic wars led to the failure of eighty country banks in 1825.

MD: And what is a bank failure? Its the bank “stiffing” the depositors. Failure is in the eyes of the beholder.

This was followed by two Acts of Parliament: in 1826 restricting the Bank of England’s monopoly to a radius sixty-five miles from London but permitting it to compete with branches in the provincial towns; and in 1833 withdrawing the Bank of England’s monopoly altogether. Banks were then free as a consequence to expand from single-office operations into branch networks through a process of expansion and mergers. The foundation of today’s British banks dates from this time.

MD: With a proper MOE process, no manipulation of any kind is possible.

During this period the debate about the future of money and banking intensified, with the banking school arguing that banks should be free to issue notes as they saw fit, so long as they were prepared to meet all demands for encashment into specie.

MD: But how were banks to put those notes into circulation as money? Answer: Traders (like you and me) put them into circulation. It has always been traders who create the money and put it into circulation. The bankers have just co-opted the process.

The currency school argued instead for bank note issues to be tied strictly to specie held in reserves. The controversy between these two schools ended with the Bank Charter Act of 1844, which required the Bank of England to back its note issue with gold, with the exception of £14,000,000 of unbacked notes already in circulation. The intention was for Bank of England notes to gradually replace those issued by other banks in England and Wales (Scottish banks still issue their own notes to this day).

MD: This is all again just manipulation by the money changers. They will accumulate gold and then dictate that it is money. When traders assimilate, they will say gold is not money and begin to counterfeit. And they will just continue the cycle.

Thus it was that the Bank Charter Act of 1844 sided with the currency school, so far as the note issue was concerned; but by neglecting the issuance of credit, modern fractional reserve banking was born.

MD: What does a charter mean when it is granted by a government to money changers … the very money changers who instituted the government to give them their monopoly and protect them from encroachment? If there was a “proper” MOE process producing “real” money, they couldn’t compete. Their monopoly would go totally unused.

It can be seen that Gibson’s paradox had to survive substantial variations of economic and monetary conditions likely to disrupt any correlation between the level of wholesale prices and interest rates.

MD: Nothing like adding irrelevant variables and noise to complicate an analysis and make prediction impossible.

If there was a common factor over the two centuries, it was that the domestic UK economy expanded rapidly, facilitated initially by a developing network of canals, which in addition to river and sea navigation enabled the transport of goods throughout the country for the first time.

MD: And such expansion would have zero impact on a “proper” MOE process. This is because money creation by responsible traders (those who don’t default) is totally unrestricted.

As the industrial revolution progressed, the new science of thermodynamics led to the development of steam power, fuelled by coal which was found and mined in abundance. The mechanisation of factories and mills together with the subsequent development of railways rapidly increased both productivity and the speed of transport and communications.

MD: And again, none of that would have been affected nor would have had an effect on “real” money. It is immune to such changes.

Her position as an important global power gave Britain access to raw materials and overseas markets to fuel economic and technological progress. Britain was so successful that before the First World War eighty per cent of all shipping afloat at that time had been built in Britain. d

MD: And that wasn’t by accident. Britain has always been a bad world citizen. They have always used force to beat down their competitors. And they have always leveraged that force by getting their competitors to fight among themselves … divide and conquer.

Finally, in the post-war decade to 1930 Britain underwent massive social and political changes, which were generally destructive to the accumulated wealth of the previous century.

MD: Wrong. They just transferred the influence to their colony … the USA. Britain never gave up colonial control of the USA.

GOLD SUPPLY

Without an increase in the quantities of gold available the expansion of economic activity brought about by the industrial revolution would have been expected to lead to a trend of falling prices.

MD: In other words, gold is “deflationary”. There is never enough of it so it becomes more dear when traders, by edict, must use it as money to effect their trading promises over time and space.

As it was, new mines were discovered, notably in California, the Klondike, South and West Africa, and Australia. By 1730 the estimated aboveground stocks accumulated through history were about 2,400 tonnes, and by 1930 they had increased to 33,000 tonnes.7 Britain’s population increased from roughly seven million to forty-five million. In other words, the quantity of gold available for money increased at roughly double the rate of the British population over the two centuries.

MD: By that data, the supply of gold would have roughly exceeded the demand for gold by double … so prices should have gone up. The price of gold should have gone down. Regardless, this just shows why you can’t use a commodity for money. It just unnecessarily complicates trades over time and space. And if the trades were being measured in units of HULs, there would be no confusion.

Other things being equal, the net monetary effect from the increase in the quantity of above-ground gold stocks can be expected to reduce its purchasing power relative to goods; but it is an historical fact that the rapid industrialisation over the period raised the standard of living and life expectancy for the average person considerably, thereby offsetting the inflationary price effects of increased above-ground stocks, so much so that prices appear to have fallen by 20% between 1820 and 1900 according to the ONS figures used in Chart 1.

MD: Again, none of that cause and effect would have bothered a “proper” MOE process at all. Injecting a commodity into the mix (and a specific commodity at that) just complicates things … unnecessarily.

THE QUANTITY THEORY OF MONEY

MD: We will know this topic to be total nonsense without even reading it. We know that with “real” money the supply is perpetually exactly equal to the demand.

The quantity theory as it is generally understood today dates back to David Ricardo, who ignored the transient effects of changes in the 11 quantity of money on prices in favour of a long-run equilibrium outcome.

MD: In electronic control systems we call this “low pass filtering”. We deal with averages and thus can ignore the noise. And it doesn’t work in electronic control systems either, if the noise and the signal appear indistinguishable.

In 1809 Ricardo took the position that the reason for the increase in prices at that time was due to the Bank of England’s over-issue of notes. His interest in this respect glossed over the short-run distortions identified by Cantillon and Hume. In the Ricardian version an increase in the quantity of money would simply result in a corresponding rise in prices.

MD: The issuance of a note is the documentation of a trader making a delivery promise that spans time and space. If note issuances increased, it meant traders increased or trading promises increased or both. If trading promises were delivered, there is no issue.

While this relationship is intuitive, it makes the mistake of dividing money from commodities and putting it into a separate category.

MD: What is that supposed to mean?

An alternative view, consistent with the theories of the Austrian School, is to regard money as a commodity whose special purpose is to act as a fungible medium of exchange, retaining value between exchanges.

MD: But it can only do that by maintaining perfect supply/demand balance of the exchange media itself… and no commodity can do that. The Austrian’s theory precludes them from using any commodity as the exchange media. And they just don’t get that!

This being the case, it must be questioned whether or not it is right to put money on one side of an equation and the price level on the other.

MD: But they’re using a “unit” of measure which is actually two units of measure combined. One unit is the “ounce”. The other unit is the “value” (i.e. supply/demand balance) of gold. That variable gold balance is the problem.

This is not to deny that a change in the quantity of money for a given quantity of goods affects prices.

MD: It should. Quantity of money doesn’t affect prices if its balance against demand for money remains constant.

That it is likely to do so is consistent with the relationship between the relative quantities of any exchangeable commodities.

MD: Supplies of exchangeable commodities are never in constant balance with the demand for those commodities … especially if those commodities are declared to be money.

Furthermore, there is an issue of preferences changing between the relative ownership of one commodity compared with another; in this case between an indexed basket of goods and money.

MD: All the more reason to reject commodities for use as money.

Changes in the general level of cash liquidity can have a disproportionate effect on prices, irrespective of changes in the quantity of money in issue at the time.

MD: With a “proper” MOE process and “real” money, cash is always perfectly liquid. Prices don’t change due to this characteristic of real money because all the money created is later destroyed by a like amount. It’s a zero sum game over time.

By ignoring these considerations it is possible to conclude that changes in the quantity of money in circulation are sufficient to control the price level.

MD: But you don’t want to “control the price level”.

It is this assumption that Gibson’s paradox challenges. To modern macroeconomists the price of money is its rate of interest, though to followers of the Austrian school, this is a gross error.

MD: It is a gross error. But Austrian school followers are in error too … in the opposite direction.

To them, the price of money is not the rate of interest, but the reciprocal of the price of a good bought or sold with it.

MD: It doesn’t get much stupider than that. With “real” money, there is no “price of money”. What’s the “price” of a HUL? It’s just a unit … an unvarying unit of measure.

Furthermore, under this logic money has several prices for each good or service, which will differ between different buyers and sellers depending on all the circumstances specific to a transaction.

MD: That’s like saying an ounce of carrots is different than an ounce of beef. It’s like saying the value of one is different than the value of the other. So what?

This is consistent with the Austrian school’s observation that prices are 12 entirely subjective and they cannot be determined by formula.

MD: Correct. But what the Austrian school fails to say is that the units used to measure those value differences must be constant over all time and space … and an ounce of gold does not come close to meeting that requirement.

Macroeconomics does not recognise this approach, and averages prices to arrive at an indexed price level. Austrian school economists argue that mathematical methods are wholly inappropriate applied to the real world. Apples cannot be averaged with gin, nor can gin be averaged even with another brand of gin. Averaging the money-values of different products cannot escape this reality.

MD: And “real” money has no interest in prices whatever. They are strictly a perception of the traders for specific trades.

The rate of interest on money is its time-preference; and again, depending on what the money is intended to be exchanged for its time-preference must match inversely that of the individual good.

MD: And this is provably wrong. Presuming the divisor is the amount of money created and the numerator is the amount of money taken to mitigate defaults ( interest collected), this has nothing to do with “time-preference” at all. If there are no defaults, a non-zero interest collection is just wrong regardless of the time span … and not allowed in a proper MOE process.

In other words, by deferring the delivery of a good and paying for it up-front it should be possible to acquire it at a discount.

MD: Why? If I supply you food, shelter, and other stuff while you build a house for me, is one of us entitled to a discount while the other is not when it comes to this trade? Of course not!

There is the possession of the money foregone, the uncertainty of the contract being fulfilled and the scarcity of the good, which all combine into a time-preference for a particular deferred transaction.

MD: Correct. But that is not the concern of the MOE process. If the MOE process detects a default, it immediately meets it with an interest collection of like amount. If it collected interest in anticipation of a larger default, it must return the difference … and vice versa. It works just like casualty insurance where PREMIUMS = CLAIMS in aggregate.

The quantity theory of money ignores this temporal element in the exchange of money for goods.

MD: And properly so with a proper MOE process where inflation of the money itself is guaranteed to be perpetually zero.

In doing so, it fails to account for the fact that in free markets demand for money, reflected in its time-preference, must correlate with demand for goods.

MD: And it does. A trader is making a trade spanning time and space. He must recover all the money he creates in delivering on that trade.

The quantity theory, by putting money on one side of an equation and goods on another suggests the relationship is otherwise. This gives us an insight into why the quantity theory of money is flawed, and when we explore the Gibsonian relationship between interest rates and the price level it will become obvious why interest rates do not correlate with the rate of price inflation.

MD: It may explain why quantity theory is flawed. Let’s see if an unflawed theory is revealed. We know the flawless process … and it’s not theoretical at all. It’s just outright obvious!

THE SOLUTION TO GIBSON’S PARADOX

In the discussion covering the flaws in the quantity theory of money in the previous section clues were given as to how the paradox might be resolved. The starting point is to recognise that money is simply a commodity, albeit with a special function, to act as the temporary store of labour between production and consumption.

MD: If you recognize money is a commodity, you are provably wrong right out of the box. Money “must” maintain perpetual perfect balance between supply and demand for the money itself … and obviously no commodity can do that. And you can make no argument for relaxing or removing this constraint. Here’s an example where the incorrect premise is revealed immediately so no further pursuit along these lines is valid. It’s not about “temporarily storing labor”. It’s about keeping score and maintain perpetual perfect balance … by detecting defaults as they occur and immediately mitigating them with equaling interest collections.

We can see that including money, commodities necessary for human progress were in demand during a period of unprecedented economic expansion over the two centuries between 1730 and 1930.

MD: There are very few commodities necessary for human progress. Water and protein … that’s pretty much it. They are not money.

In some cases, such as in exchange for harvested grains, the price of gold would have varied from season to season, often wildly.

MD: Which precludes it from being money.

But with all the individual goods, there will have been a match with their time-preferences between manufactured goods and gold and gold substitutes.

MD: Nonsense! Prove it!

Therefore, the interest rate on money offered by banks is the other side of the time-preferences of the goods produced by their borrowers, who were predominantly manufacturers and merchants seeking trade finance.

MD: Banks don’t “offer interest rates”. They “demand tribute”. With a proper MOE process, banks don’t exist at all. What in the world would they do with inflation of the money itself guaranteed to be perpetually zero.

The reason interest rates are set by the demands for money by manufacturers is they have to expend capital in order to produce. Capital becomes one of two essential elements of the price of a future good, the other essential being profit. The capital value of an asset used in production is the sum of the value of output it generates discounted to its present value.

MD: Capital is just another figment of a capitalist’s (i.e. money changer’s) imagination. A HUL delivering a hole by just scraping with flat rocks will deliver a smaller hole than one delivering a hole with the use of a shovel. But the capital cost of that shovel is huge for just a one HUL hole. And it’s minuscule for 1,000 HULs of holes.

But when you put the concept of capital in the money changers’ hands … well, it’s simply “two years”. Making a 4% spread, a money changer with a 10x leverage privilege will double his so-called capital in two years, will pull it off the table, and have no skin in the game from thereafterv … yet his so-called capital will continue to “work?” in the marketplace.

If prices of goods are rising, the producer can increase his time-preference in the expectation of higher end-prices for his production. Alternatively, if prices are not rising, or even falling he is limited in his time-preference.

MD: If prices of “all” goods are rising, you have a money problem. That doesn’t happen with “real” money.

This explains why when prices generally rose, bond yields, as proxy for term interest rates paid by borrowers, also rose.

MD: Here’s an alternate explanation. The money changers had already co-opted the traders money process. Traders seeing prices rise saw an opportunity to supply what was rising in prices. They made trading promises spanning time and space to do that … i.e. they created money. The money changers, controlling their ability to create money, charged higher and higher interest (they were opportunist). Conversely, if prices were falling, traders didn’t want to make time spanning trading promises. They hunkered down and the money changers had no opportunity. They couldn’t collect tribute for something traders didn’t want … i.e. money. But you see you get different results. when what is going on is vastly different than what “should be going on … i.e. proper MOE process”.

Equally, when prices fell, a producer was less able to bid up his time preferences, so term interest rates fell. In other words, before central banks took upon themselves to control interest rates, interest rates simply correlated to demand for capital from producers.

MD: When you artificially put yourself in the supply chain … as bankers do … you can extract tribute … if that chain is active.

This analysis of the relationship between prices is wholly in accordance with Carl Menger’s insight, that a price only exists for commodities and goods for which supply is limited to less than potential demand.8

MD: A price exists regardless of supply/demand balance for the object being traded. A price of “1.000” exists in units of HULs for all money used to effect those trades over time and space. Menger is the blind leading the blind.

POST-1930

After 1930 the paradox was still observed until the 1970s, when the relationship appeared to break down.

chart three and four gibsons-01

In the 1970s price inflation according to the ONS accelerated from 5.4% in 1969, to 17.1% in 1974.

MD: Again, there’s only one kind of inflation … supply/demand imbalance for money itself. It only arises out of an “improper” MOE process. If inflation tripled in that period, it is because counterfeiting and defaults as related to interest collections tripled in that same period.

During that time the Bank of England only increased interest rates under pressure from the markets.

MD: i.e. their interest collections were less than defaults (mostly in the form of government counterfeiting) resulting in inflation by the relation: INFLATION = DEFAULT – INTEREST in aggregate terms. Use whatever denominator suits you if you want it in terms of rates.

Interest rate policy fed a growing preference for hoarding goods and reducing personal cash balances. In this case, the correlation between bond yields and the price level reflected a shift in public confidence in the future purchasing power of the currency, which drove the time-preferences in the market, instead of widespread demand for capital investment.

MD: And there’s the fallacy. They think interest collections come out of policy. That puts them either behind or ahead of the game … and perpetually wrong.

Bond yields topped out in autumn 1974 before declining; but interest rates finally peaked in 1979/80. This is not fully reflected in the bond yield shown in Chart 4, because the yield curve was sharply negative at that time.

MD: How do you expect to analyze what’s going on when you have manipulators turning knobs like little kids turning steering wheels on a carnival car ride that’s taking them around in a circle.

Since that tumultuous decade correlation ceased, and the Bank of England appears to have gained control over interest rates from markets.

It is hardly surprising that when central banks implement monetary policies to ensure that the price level never falls, the normal relationship between the price level and interest rates is interrupted. The relationship between savers and investing producers, which is the basis of the Gibson observation, becomes impaired.

MD: Conclusion: Don’t let anyone “implement monetary policy”.

CONCLUSION

The following question was raised earlier in this paper:

If Gibson’s paradox is still relevant it presents a potential challenge to monetary policy.

MD: Monetary policy is an oxymoron and should be challenged everywhere it raises its ugly manipulatory head.

The question arises as to whether it is solely an empirical phenomenon of metallic, or sound money, or whether its validity persists to this day, hidden from us by the expansion of fiat currency and bank credit, and the central banks’ success in substituting pure fiat currency in place of sound money.

MD: If metallic money is sound money, then they have corrupted the meaning of “sound”. Metallic money can never be “real” money … and real money always easily out compete metallic money. Well, that’s not exactly true. In 1964 we had metallic coins with 90% silver. In 1965 we had metallic coins with 0% silver. In both years those coins traded for the same amount of “stuff”. Thus, the silver (intrinsic value) played no role in the trades at all.

If the Paradox is solely a consequence of metallic or sound money it might pose no threat to the modern currency system; otherwise it may have profound implications.

It is clear that the difference between markets historically and those of today is that interest rates were set by the demand for savings to invest in production, while today they are set by monetary policy.

MD: Evidence they were not determined by defaults experienced and thus they were improperly set in both instances … and achieving predictably different but improper results.

Monetary policy is not consistent with the basic function of interest rates, which is to reflect a market rate between savers and borrowers to balance supply and demand. Instead, monetarists believe otherwise, that interest rates can be used to regulate the quantity of money.

MD: Interest collections is not a policy variable. In a proper MOE process, they perpetually equal defaults experienced … just like in insurance PERMIUMS perpetually equal CLAIMS.

Gibson’s paradox is not dependent on metallic or sound money so much as it is dependent on free markets distributing savings in accordance with demand from borrowers investing in their businesses. We must therefore conclude that monetary policies intended to suppress this effect do have profound implications.

MD: A proper MOE process cares noting about savings. They have no effect on the process at all. Further, it doesn’t use the term “borrowing” or “loan” or “borrower”. It is “always” traders “creating” money which represents their in-process promise to complete a trade over time and space”… period!

Keynes in his General Theory in 1936 wrote the following in his concluding notes:

“I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.”9

MD: Taking that unreadable paragraph and making some sense of it is pretty tough. But have you noticed that this article, and that paragraph, make no mention of the trader … the trader which is always the principal player … the trader without which the rentier or the functionless investor can do nothing at all?

The long, slow euthanasia of Keynes’s rentier class is what has changed. Businesses obtain the funds for investment from other sources directed by the financial system.

MD: That’s a flaw in the thinking. Investors (and funds from them) are only needed by deadbeats (those who can’t create money because they are not responsible traders) in a process of “real” money. Deadbeats are the exception … not the rule. That is, unless you are talking about governments … then they are the rule, not the exception.

Savers are channelled increasingly into stock markets, where they participate in businesses as co-owners, instead of lending to them indirectly through the banking system. The banks provide working capital, mainly through the expansion of bank credit, at rates primarily determined not by supply and demand for savings, but set by central banks.

MD: Businesses have a risk. The “individuals” running the business may create money … but they risk their responsible trader status if they fail. So they may choose to spread that risk among other traders. It’s a choice. With a “proper” MOE process, only real trading “persons” can create money. Businesses can’t do it. So when operating as a business they must resort to stocks or bonds to meet their trading needs over time and space. In so doing, they are using “existing” money created by traders with a persona.

Central banks’ insistence on monetary solutions to economic problems have not only buried the Say’s law relationship between savers and investing entrepreneurs, they have turned the principal objective of entrepreneurs from patient wealth creation through the accumulation of profits into ephemeral wealth creation through the accumulation of debt.

MD: So recognize central banks for what they are: the creation of money changers … who are the institutors of governments … who are the keepers of the central banks … who protect the money changers farming operation and demands for tribute. It’s just that simple to dissect folks! It’s a scam!

They have been caught up in a credit cycle created by central banks and are no longer borrowing genuine savings from savers who expect to be repaid. If Gibson’s paradox had been satisfactorily explained by Tooke or Gibson, the assumptions behind the quantity theory of money and its derivatives would have been thrown into doubt before they became central to monetary policy.

MD: “Credit cycle”… read “farming operation”. With “real” money, savers would do their saving by putting their money under a rock. It is always safer there than with a bank … and banks would charge them (not pay them) if they convinced the savers otherwise. They did when they held gold dust for the prospectors’ safekeeping … and were proven unsafe when they “loaned” it out and couldn’t get it back.

This is a dramatic claim perhaps, but it might have demolished the suppositions behind the quantity theory of money, which became Fisher’s equation of exchange, and the brand of monetarism followed by the Chicago school under Milton Friedman.

MD: There’s plenty of demolition to go around in this article. Both the “pot” and the “kettle” are black … and are wrong.

Misleading ideas, such as velocity of circulation in the equation of exchange would have not been taken as meaningful economic indicators. As it is Gibson’s paradox is unknown to the majority of economists today, who assume the quantity theory of money is unchallengeable.

MD: If you believe in “money supply” you have to believe in “velocity of circulation”.  It is a multiplier (just like the 10x leverage bankers give themselves). But to believe in “money supply” is to have a false belief.

So, to put the explanation of Gibson’s paradox at its simplest,

If the prices of goods are expected to rise, then their time preferences are bound to increase, and if they are expected to fall, their time preferences are bound to fall. That is why interest rates correlate with the price level.

MD: If the prices of “a good” rises, then the supply/demand balance for the good has decreased … and vice versa. If time preference compacts that demand (e.g. people wanting to see the movie in its first run rather than waiting for the DVD, that’s their choice). It’s a compaction of demand though … it’s not a time preference. It doesn’t result from money having time value.

And as George W. Bush observed, this was a scholarly article … even though it is easily proven to be totally misguided and misguiding. It has footnotes.

Click here to view the entire Whitepaper as a PDF…

1 J M KEYNES, A TREATISE ON MONEY, VOL.2 P.1981930
2 IRVING FISHER, THE THEORY OF INTEREST, 1930.
3 FRIEDMAN AND SCHWARTZ, FROM GIBSON TO FISHER, EXPLORATIONS IN ECONOMIC RESEARCH NBER VOL. 3,2 (SPRING)
4 KNUT WICKSEL, INTEREST AND PRICES, 1936, TRANSLATED FROM THE GERMAN, GELDZINS UND GUTERPREISER, 1898.
5 NBER WORKING PAPER SERIES NO. 1680 GIBSON’S PARADOX AND THE GOLD STANDARD, 1985.
6 J M KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY, 1936.
7 JAMES TURK, THE ABOVEGROUND GOLD STOCK: ITS IMPORTANCE AND ITS SIZE SEPT 2012 HTTPS://WWW.GOLDMONEY.COM/IMAGES/MEDIA/FILES/GMYF/THEABOVEGROUNDGOLDSTOCK.PDF (ACCESSED JULY 2015)
8 CARL MENGER: GRUNDSÄTZE DER VOLKSWIRTSCHAFTSLEHRE (PRINCIPLES OF ECONOMICS)1871.
9 JM KEYNES: THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY PP 376 OF THE 1936 EDITION.

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

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Cafe Hayek: Should There Also Be “Queue Controls”?

MD: What Cafe Hayek says in this article is so obviously true it is scary that they even have to say it. But then Cafe Hayek doesn’t know what “real” money is either … and that is scary too.

Should There Also Be “Queue Controls”?

by Don Boudreaux on September 7, 2017

in Prices, Reality Is Not Optional, Seen and Unseen

Here’s a letter to another person who caught a radio interview with me this morning:

Mr. Kasim Wagner

Mr. Wagner:

Thanks for your e-mail.

You write that “it plainly is wrong for anyone to force people to pay higher prices for supplies in disaster areas” and, therefore, “government’s duty is to protect people from this greed.”

First, I agree that it’s wrong to force people to pay higher prices.  But we’re not talking about forcing people to pay higher prices.  Every buyer is free not to pay higher prices.  Of course, those people who don’t pay higher prices don’t get the goods.  Yet people are no more forced to pay whatever prices they pay because of natural disasters than they were forced to pay whatever prices they paid before any natural disaster became a reality.  All of those prices are paid voluntarily – a fact that is both economically and ethically relevant.

Second, if you truly believe that it’s unethical for anyone self-interestedly to cause consumers’ costs of acquiring much-needed goods to rise significantly, then you must believe that it’s unethical for people to rush into, and to stand in, the long lines that occur whenever there are shortages of goods.  Every person standing in front of Jones in a line of consumers hoping to buy, say, bottled water self-interestedly puts his or her own welfare ahead of that of Jones.  Each of those persons standing in front of Jones – both by increasing the chance that the store will run out of bottled water by the time Jones reaches the front of the line, and by increasing the amount of time that Jones waits in line – raises Jones’s cost of acquiring bottled water.

Do you believe that the individuals standing in line in front of Jones are unethical?  Should government, in addition to imposing a ceiling on the monetary price that people pay for bottled water, also impose a “queue ceiling” on the number of people who stand in line to buy bottled water?  If, as I suspect, your answer to each of these questions is “no,” why do you believe that government should prohibit only those increases in the costs of acquiring a good that take the form of increases in the monetary price of the good?

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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