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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Deviant Investor: War on Cash Backfires

War on Cash Backfires

Guest Post from Clint Siegner, Money Metals Exchange

Indian Prime Minister Narendra Modi launched a surprise attack on cash in late 2016. He gave Indians a few days to convert the two largest denomination bills then circulating to bank deposits, after which point any undeposited notes would become worthless. The move was intensely controversial. Transactions completed using cash represented the vast majority of economic activity in the country.  [Editor: See note below!]

MD: When looking at individual transactions, cash represents the majority of economic activity in any country. When you’re talking about “real” money, “all” transactions are in cash. And all cash transactions are totally anonymous. This is different than saying “money creation” is anonymous. With “real” money, “all” money creation is transparent. This means anyone can see who is creating the money and under what terms and how they are performing on delivering on those terms. And they can see this is real time.

In order to sell the program Modi employed a familiar strategy. He vilified the users of cash as tax cheats and criminals. He promised the measure would punish black marketeers, boost the Indian economy, and increase tax revenues. The latter may be true – forcing transactions onto the grid is good for nosy bureaucrats trying to impose taxes and controls.

But it now appears Modi’s claims about the amount of criminal activity tied to cash and promises of economic growth were nonsense.

 

The official argument was that cash is an indispensable tool for black marketeers. The reform would catch many of these “criminals” with piles of cash they would be unwilling to declare and deposit. That argument fell apart last week when the Indian central bank reported that 99% of the outlawed bills were converted to deposits. Turns out very few “criminals” were punished.

MD: So, did they reverse the policy?

Meanwhile the Indian economy is paying the price. Growth has slowed significantly and some estimate as many as 5 million jobs have been destroyed by the demonetization of cash. More and more Indians are angry.

MD: Why would that be? What transactions that were being done in large denominations quit being done altogether?

They didn’t enjoy the upside promised by Modi. Instead, they suffered massive economic disruption and loss of privacy. Perhaps India’s experience will provide an object lesson elsewhere in the world where bankers and the political elite are waging a similar war on cash.

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, Money Metals Exchange

Note: Voltaire understood the process over two centuries ago. He said, “Paper money eventually returns to its intrinsic value – zero.” (Voltaire, 1694-1778)

MD: And that is correct. It’s only money when the promised delivery is in process. On delivery, the money is returned and destroyed.  And during the delivery process, the money itself never has intrinsic value. It doesn’t need it … just like 1965 when we proved that coins didn’t need silver content to be useful to traders. So what?

Unbacked debt based fiat currencies (dollars, euros, pounds and most others) that possess no intrinsic value are devalued by central bankers and governments.

MD: This is nonsense. When you know what money is, you know “all” money is “fiat” … and that is no issue at all. Governments counterfeit money. They don’t create it with a trading promise on which they intend to deliver. And counterfeit money is obviously not real money and is not tolerated at all in a proper MOE process.

And with “real” money there is no such thing as a central bank. There is no need for one. And with “real” money, the value of the money itself never changes. That is guaranteed by the process itself … a process that maintains perpetual perfect balance between supply and demand for the money itself.

With “real” money, the ideal unit of measure is the HUL (Hour of Unskilled Labor). This unit (like the ounce … and unlike the ounce of gold) has never changed over all time. It has always traded for the same size hole in the ground.

They do it because it benefits the political and financial elite and appears beneficial in the short-term. History shows the supposed benefits of devaluation are nonsense, but they keep trying…..

MD: And they couldn’t keep trying with a “proper” MOE process and “real” money. The process would exclude them from the playing field with its natural negative feedback system … i.e. mitigating defaults immediately with interest collections of like amount.

Fiat paper money and political power do not mix well. The people — not the political or financial elite — pay the price.

MD: Counterfeiting and political power are a “natural” mix. And it is correct: counterfeiting results in inflation … and that hurts responsible traders. The problem is not in the “fiat”ness of the money … it’s in the counterfeiting by the governments.

It has happened before and will happen again. Gold and silver are good alternatives to devaluations by governments and central bankers.

MD: Gold and silver are only good for a very short time when counterfeiting finally results in a reset. In the normal operation of a “real” MOE process, gold and silver play no role whatever. They are just clumsy inefficient stand-ins for real money. They can’t compete with real money except at reset time … which never occurs with a “proper” MOE process … because counterfeiting is not tolerated by a proper MOE process. With our current process (and all historical MOE processes), counterfeiting is not only tolerated, it is required. Governments need the inflation to sustain themselves and the money changers, that institute those governments for their protection, need the fictional “time value of money” to demand tribute and run their farming operation (i.e. business cycle).

Gary Christenson

The Deviant Investor

MD: Gary Christenson and the Deviant Investor need to “get a clue” … but they won’t because they’re in the gold selling business.

 

Block chains and real money

MD: Transparency in the “money creation” part of a proper MOE process is crucial to its acceptance, discipline, and efficient and effective operation. Many eyes on the traders making the trading promise and getting them certified … i.e. creating money keeps those traders honest. Many eyes on the traders delivery or the process’ mitigation of defaults is also crucial to the process.
Transparency into the trader’s responsible (or irresponsible) trading history is crucial for provision for efficient mitigation of defaults with immediate interest collections. It’s an actuarial process if it is to be fair.
The universally shared ledger (enabled by block chain technology) will be enormously helpful to any “real” MOE process. The Bitcoin mechanism is nonsense … but that should not cast a shadow on blockchains … only on the ridiculous Bitcoin mining process to create new blocks. New blocks must be created at zero cost to be employed in a real MOE process.

EY teams with Microsoft, Maersk to use blockchain for marine insurance

  • Blockchain will be used to take paper out of the marine insurance equation

MD: A “real” MOE process isn’t so concerned with paper as it is with transparency.

  • EY has worked closely with blockchain developer Guardtime
  • Microsoft and Maersk are among firms to join the collaboration

A crane loads a shipping container branded AP Moller-Maersk A/S onto the freight ship. The company fell victim to a widespread cyberattack on June 27, 2017.

Balint Porneczi | Bloomberg | Getty Images
A crane loads a shipping container branded AP Moller-Maersk A/S onto the freight ship. The company fell victim to a widespread cyberattack on June 27, 2017.

Accounting giant EY said Wednesday that it plans to launch the first blockchain platform for marine insurance, alongside Microsoft, A.P Moller-Maersk and others.

The distributed ledger will be used to capture information about shipments, risk and liability, and to help firms comply with insurance regulations.

MD: I am presuming this distributed ledger is transparent to everyone. That is probably an incorrect presumption. At the very least, it needs to be transparent to all the players.

It will also ensure transparency across an interconnected network of clients, brokers, insurers and other third parties.

EY explained that its decision to secure marine insurance data with blockchain was due to a “complete inefficiency” in the sector.

MD: What makes it so inefficient? How does blockchain make it more efficient? If they have inefficiency problems, they need to fix them first.

“The reason we chose marine (insurance) as the starting point for this sort of market is mainly because of its complete inefficiency,” Shaun Crawford, global insurance leader at EY, told CNBC via phone earlier this week ahead of the announcement.

Crawford said the industry was “over capacity” and that there was “a lot of cost to it.”

MD: I wish he could enumerate the most significant costs.

He added: “It’s facing high administrative burdens of managing and writing claims with a lot of paperwork. All contracts are signed multiple times. They go from ship to ship, port to port, through quite a journey.”

MD: The paperwork could easily be removed without a distributed ledger. Paper doesn’t do anything but impose a requirement for an optical capture of documents for archiving. Most of that is already gone. And if it’s not gone, it needs to go before blockchain can do anything.

Distributed ledgers are groupings of data shared across multiple locations without the need for central administrators and other middle men.

MD: But the real reason is for transparency.

The original blockchain was built to serve as the distributed ledger for bitcoin transactions. But various blockchain experts believe the technology can provide transparency for a multitude of different industries, not just the financial services.

MD: Finally he mentions the operative word: “transparency”. And once they have transparency, they will be all about limiting that transparency.

“We’re not talking about a new currency here, we’re not talking about money. We’re talking about data aggregation,” EY’s Crawford added.

MD: You’re talking about transparency. There may be only two parties and one document in question. That’s not about data aggregation.

Maersk said the blockchain platform would enable the shipping giant to maintain a smoother relationship with the insurance market.

IBM deploys blockchain technology to provide enterprise solutions to food safety: IBM's Brigid McDermott

IBM deploys blockchain technology to provide enterprise solutions to food safety: IBM’s Brigid McDermott  

“It is a priority for us to leverage technology to streamline and automate our interaction with the insurance market,” Lars Henneberg, head of risk and insurance at Maersk said in a statement Wednesday.

“Insurance transactions are currently far too tedious and frictional. The distance between risk and capital is simply too far. Blockchain technology has the potential to facilitate the desired development that is long overdue.”

MD: They have lots of issues to resolve before they can apply blockchain to the problem.

Blockchain could benefit wider insurance industry

Marine insurance has traditionally relied on physical contracts being shipped to and fro, from one port to another, in order to be eventually signed, according to EY.

MD: So how does blockchain effect a signature? If blockchain can do that, any electronic medium can do that. Signatures haven’t been a problem for a very long time. And the method for protecting them (i.e. the notary system ) has always been a pitiful joke.

The global research firm has worked closely with software security company Guardtime to develop the blockchain platform.

Guardtime said it expects to roll out blockchain to the wider insurance industry after its initial marine insurance deployment.

MD: Does it have to mine to create its blocks? Does “proof of work” enter the concept as Bitcoin claims it needs to?

“Initially, we focused on marine insurance as it is well-suited to a blockchain solution as it has a complex international ecosystem, with multiple parties, multiple jurisdictions, high transaction volumes and significant levels of reconciliation,” Guardtime CEO Mike Gault told CNBC in an emailed note prior to the announcement.

MD: Not compared to normal internet email it doesn’t. These problems have already been solved. Transparency is the issue. Insulation from forgeries and mitigation is the issue. Insulation from fraud and mitigation is the issue.

“But down the line we expect it to be rolled out across other areas of insurance markets — as there are clearly shared benefits and attributes. In fact, blockchain can be applied to any commercial or specialty line of business with high-value assets.”

MD: This is really pretty silly. It’s kind of like if they were developing an email system and thinking … hey, other industries might use email too? Ridiculous!

Blockchain built on Microsoft Azure

The blockchain solution was built on Microsoft’s cloud platform, Microsoft Azure.

MD: A true blockchain solution is not built on any platform. The ledger is distributed on any platform and on all platforms. It’s no different conceptually than the internet we have been using since the early 1990’s. This is silly. This is like a long long time ago when we got direct access disk drives. We ditched batch processing with zillions of tape mounts and went to real time data acquisition and access. What blockchain does is make all the disk drives transparent simultaneously.

Cloud technology allows firms to store data and software via the internet rather than locally on a hard drive.

MD: So what? They would be stupid to be using cloud technology. The internet already allows them to access their servers from anywhere in the world. Putting those servers in someone elses building does nothing for them.

A proof of concept for EY’s digital ledger was completed in March.

What is Blockchain?  

“When we built the proof of concept, we built a prototype on Azure to make sure the whole thing worked and is secure, and now what we’re doing is building it,” EY’s Crawford noted.

MD: They have to be joking!They proved security? You don’t prove security until you put yourself out among the thieves and the murderers … and it’s a continual battle ever after.

“We provide that cloud service which we believe is one of the strongest ones on the market, and that’s why we chose Microsoft to work with.”

MD: With a proper blockchain solution, your need for strength goes down geometrically. That’s what blockchain brings to the party. There are guaranteed to me innumerable instances of every record and they are guaranteed to be identical and authentic. That’s what a shared ledger does.

Guardtime said Microsoft’s cloud offered a secure network on which to build the blockchain.

“For any new system to be implemented it needs to be built using the right model, one that is robust, scalable and can co-exist with existing IT infrastructure or systems,” Guardtime’s Gault said.

MD: Then they aren’t building a blockchain process … they’re building a secure multi-hosting process. We’ve had that for a few decades now.

“That’s what Azure and the cloud technology enables us to do, without comprising performance or flexibility, which is why it was so important to partner with Microsoft.”

Mark Russinovish, chief technology officer at Microsoft Azure, said that blockchain had the potential to be “transformational.”

MD: If that transformation takes place, from this description, Russinovish is out of a job … and Azure goes into the bit bucket. And that will be the case when the obvious becomes apparent to them and everyone else. Blockchain obviates the need for the cloud concept completely. In fact, there never was a need for the cloud concept.

“Microsoft believes blockchain is a transformational technology with the ability to significantly reduce the friction of doing business, especially streamlining business processes shared across multiple organizations,” he said.

He added: “Marine insurance is a prime example of a complex business process that can be optimized with blockchain.”

MD: Looks like they cut and pasted twice. Are they going to say it three times … like they do telephone numbers in advertisements?

Insurers MS Amlin and XL Catlin also collaborated with EY on the project, as well as insurance industry body ACORD (Association for Cooperative Operations Research and Development).

The blockchain solution is set to be implemented from January 2018 onwards.

The race to create large distributed ledger network has become increasingly competitive.

MD: Why? To be truly distributed, it needs to be replicated across multiple competitors. They all have to be on the same playing field.

IBM for instance announced it would partner with food giants like Nestle and Unilever in August, and use blockchain technology to trace the movements of food to avoid tackle contamination faster.

MD: Blockchain doesn’t do that any faster than they can do it right now. In fact, they probably don’t want transparency in that case … but when customers learn such transparency is possible (probably introduced by competitors), they will have to comply … or leave the business. If food can be contaminated, customers want the transparency to see it and protect themselves. They don’t want it hidden from them.

EY told CNBC that its decision to make the announcement ahead of time was due to a host of other players making similar moves.

Cafe Hayek: in Complexity & Emergence, Economics, Hayek, Philosophy of Freedom

 

MD: This article illustrates how poorly the Mises Monks write. It also illustrates how they analyze a problem to death … totally failing to recognize that the problem they are analyzing is totally irrelevant.

Quotation of the Day…

by Don Boudreaux on September 4, 2017

in Complexity & Emergence, Economics, Hayek, Philosophy of Freedom

… is from page 60 of one of F.A. Hayek’s greatest essays, his 1945 lecture “Individualism: True and False,” as this essay is reprinted in Studies on the Abuse & Decline of Reason, Bruce Caldwell, ed. (2010), which is volume 13 of the Collected Works of F.A. Hayek (original emphases):

To the accepted Christian tradition that man must be free to follow his conscience in moral matters if his actions are to be of any merit, the economists added the further argument that he should be free to make full use of his knowledge and skill, that he must be allowed to be guided by his concern for the particular things of which he knows and for which he cares, if he is to make as great a contribution to the common purposes of society as he is capable of making.  

MD: One sentence … 91 words … no concepts … no coherent thesis … and he mixes two fictions … religion and economics. What’s not to love about the Mises Monks. What it does seem to properly say is: A society must be very advanced for an economist to be perceived of value. No society can get large enough for an economist to “really” be of value.

Their main problem was how these limited concerns, which did in fact determine people’s actions, could be made effective inducements to cause them voluntarily to contribute as much as possible to needs which lay outside the range of their vision.  

MD: See what I mean about analyzing a problem to death … a problem that is irrelevant? I guarantee you, in the olden days before anyone could even say “economist” or “christian”, someone struggling with a tree branch too large for them to place would immediately get help from another human standing by. No instruction manual, advanced inbred degree, or analysis required.

What the economists understood for the first time was that the market as it had grown up was an effective way of making man take part in a process more complex and extended than he could comprehend and that it was through the market that he was made to contribute ‘to ends which were no part of his purpose’.

MD: I wonder if the Mises Monks ever stand back and realize: It takes a very very large society indeed to find anything about the Mises Monks to be of redeeming value. If you need sand poured out of a boot, you’re sure not going to go to a Mises Monk … even in an advanced society.

DBx: Here’s Sheldon Richman on “Individualism: True and False.

Cafe Hayek: How much government … how much force.

 

Quotation of the day …

by Don Boudreaux on September 3, 2017

in Reality Is Not Optional

MD: To the “gold is money” folks, reality sure seems to be optional.

… is from page 719 of the 2007 Liberty Fund edition (Bettina Bien Greaves, ed.) of Ludwig von Mises’s 1949 treatise, Human Action:

MD: Mises Monks quoting from their bible.

The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning.  Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.

DBx: You might believe, as Mises himself believed, that a peaceful and prosperous society requires some minimum amount of government.

MD: And you might believe that the camel requires some minimum amount of his head under the tent.

Or you might believe, as most people believe, that a peaceful and prosperous society requires a great deal of government.  Or you might be a comrade who longs for complete and detailed government design of, and control over, all of our economic activities.  Wherever you stand on the spectrum of “minimum, nightwatchman government to Soviet-style state control,” you must never forget that the ultimate distinguishing feature of the state is its ability to issue dictates that are enforced with coercion.  And this reality does not disappear when state decisions are made democratically.

Every state erects statues to its most successful operatives, flies its flags gloriously high in the sky, conducts its business in imposing buildings, adorns its officials with impressive titles and honorifics, and – above all – assures its subjects that it possesses a superhuman capacity to know and to care, and that it uses this capacity always and only in ways that make the state an indispensable boon to everyone over whom it reigns.  Yet behind all this pomp and fine display are iron fists and spiked boots.

MD: … and money that is not real.