Venezuela’s currency crumbles

Venezuela’s currency crumbles at dizzying speed

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

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

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

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

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

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

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

In a year, the currency has lost 94 percent.

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

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

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

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

– Salaries decimated –

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

– ‘No limit’ –

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

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

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

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

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

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

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

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

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

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

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

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

MD: Partly? It’s the only thing!

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

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

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

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

by Alexander MARTINEZ

© 2017 AFP

Gold Money: Follow the money.

Follow the money

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

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

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

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

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

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

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

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

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

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

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

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

The seeds of recovery

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Expansion – credit hidden then in plain sight

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

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

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

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

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

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

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

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

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

The crisis develops

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

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

This time could be a little different

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

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

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

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

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

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

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

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

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

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.

Cafe Hayek: And Yet Another Open Letter to Commerce Secretary Wilbur Ross

Wilbur Ross, Secretary
United States Department of Commerce
Washington, DC

Sec. Ross:

In your recent Wall Street Journal op-ed (“Free-Trade is a Two-Way Street”) you complain that “When it comes to trade in goods, our deficits with China and the EU are $347 billion and $146.8 billion, respectively.”  Can you explain what on earth is the relevance of a deficit in our country’s “trade in goods”?  Why should we worry about such a thing?

MD: Probably for the same reason that if you make trading promises assuming X amount of income to delivery … and realize less than that amount of income … you’re going to default on your trading promises. That’s why!

Do you believe that a physician – who earns income by supplying an output classified as a service – suffers economically because, when it comes to trade in goods, he has a “deficit” with supermarkets, department stores, and hardware stores?

MD: Eventually those suppliers suffer … and you can be sure they’re going to try to get a pound of flesh out of him as a result.

Do you believe that a town that is home to many physicians suffers economically because, when it comes to trade in goods, that town has a “deficit” with towns that are home to lots of farmers, carpenters, and welders?

MD: All these questions without defining deficit? When it comes to individual traders we talk about defaults … not deficits. And defaults are bad. Deficits are defaults waiting to happen … but they do no damage until they become defaults.

Assuming that your answer to each question is “no,” why do you assume that the United States – which is overwhelmingly home to people with comparative advantages at service-sector tasks such as IT innovation, pharmaceutical research, higher education, and financial services – suffers economically because, when it comes to trade in goods, we have a “deficit” with countries that are home to people with comparative advantages at producing tangible items such as shoes, shirts, and roofing shingles?

MD: None of that means anything if it doesn’t trade for something. It’s like having a field full of bulldozers. If they’re not moving dirt, they’re not earning their keep.

Asked otherwise, can you tell me the difference between a dollar’s worth of IT innovation and a dollar’s worth of socks?

MD: Really none if both are sitting on the shelf.

When Americans produce and export a dollar’s worth of IT innovation and receive in exchange a dollar’s worth of socks, you must lament this reality because it increases our “deficit” in the trade of goods.

MD: Someone doesn’t understand trade. When you trade something, you get something of equal perceived value in return … done deal.

So would you be happier if Americans instead specialized more in producing socks and left it to others to specialize in IT innovation?

MD: If socks were selling and IT innovators were sitting twiddling their fingers, you bet!

Such a change in production patterns would, after all, result in America having, when it comes to trade in goods, a surplus!  Can you explain how we Americans would be better off with such an outcome than we are today with our “deficit” in the trade of goods?

MD: All macro accounting is fiction. The real accounting is for the traders themselves. Today I traded with the Chinese some dollars (my stored up trading surplus) for some amazing electronic circuits … at an amazingly friendly price. I couldn’t trade for those circuits in the USA. The government can go pound sand.

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

Deviant Investor: Raising the debt ceiling = inflation

Raising the Debt Ceiling = Inflation

Raising the Debt Ceiling = Inflation

MD: People agreeing with the principles presented at this site know: (1) Debt is an “in-process promise”. Money in a “proper” Medium of Exchange (MOE) process is created by traders. They make trading promises spanning time and space and get them certified by the process.  The money “issued” then circulates as the most common object in every simple barter exchange. As the trader delivers, he returns money and it is destroyed. When he has delivered completely all the money has been returned and destroyed. In the process, his “promise” circulates as money representing his “in-process promise to complete a trade”. It is obviously debt … but it does not result in inflation.

The operative relation is: INFLATION = DEFAULT – INTEREST.

Thus, inflation only results if there is a default that is not immediately recovered by an interest collection of like amount.

This article is implicitly addressing one particular type of trader. Specifically, that type is “government”. This particular government is the largest trader the world  has ever seen … and the biggest deadbeat. This trader, the USA government, has never delivered on a trade as promised. They just roll their promises over … and that is open “default”. Further, “interest” of like amount is not collected so the defaults result in inflation. The process is “counterfeiting”.  Note: The debt (trading promise) does not cause inflation. Only defaults can cause inflation … and only when they are not immediately mitigated by interest collections of like amount.

Now, keeping that in mind, lets read the article and expose and dissect the delusion.

Guest Post from Stefan Gleason, Originally Published on
Money Metals Exchange


The dramatic failure of the U.S. Senate’s last-ditch Obamacare repeal effort leaves Republicans so far without a major legislative win since Donald Trump took office. No healthcare reform. No tax reform. No monetary reform. No budgetary reform.

MD: When it comes to government, doing nothing “always” is better than their doing something. What’s not to like about this “dramatic failure”?

The more things change in Washington… the more they stay the same.

Despite an unconventional outsider in the White House, it’s business as usual for entrenched incumbents of both parties. The next major order of business for the bipartisan establishment is to raise the debt ceiling above $20 trillion.

MD: I.e. legitimize their total counterfeiting up to $20 trillion. Since they “always” raise this limit, it “is” no limit. Counterfeiting is how “all” governments sustain themselves. It is their very existence.

Since March, the Treasury Department has been relying on “extraordinary measures” to pay the government’s bills without breaching the statutory debt limit.

By October, according to Treasury officials, the government could begin defaulting on debt if Congress doesn’t approve additional borrowing authority.

MD: Could “begin” defaulting on debt? Government “always” defaults on its trading promise … i.e. its debt. A “rollover” is a default … plain and simple!

Treasury Secretary Steven Mnuchin wants Congress to pass a “clean” debt limit increase. That would entail just signing off on more debt without putting any restraints whatsoever on government spending.

Fiscal conservatives hope to tie the debt ceiling hike to at least some budgetary reforms. But even relatively minor spending concessions will be difficult to obtain from the bipartisan establishment.

MD: A budget is just a financial novel. It does nothing … just as we know a debt ceiling does nothing. The only thing that will stop governments … and the money changers that institute them is a competing MOE process. Articles like this that are deluded by what is actually going on just shield the government from such competition. They inhibit instituting a “proper” MOE process.

Democrats and a few left-leaning Republicans together have an effective majority in the U.S. Senate. They wielded their legislative might by defeating the GOP’s watered-down Obamacare repeal bill, with the decisive “no” vote cast by ailing Republican John McCain.

It was exactly the sort of media spotlight moment Senator McCain has craved throughout his long political career.

The narcissistic Senator’s shtick is to posture as a selfless crusader for noble causes that his fellow Republicans just aren’t high-minded enough to get behind.

Yet for all his sanctimony, McCain is just as politically opportunistic and just as hypocritical as many of his Senate colleagues. The Senator from Arizona ran for re-election last time around on repealing Obamacare. Yet when given the opportunity, he voted to keep it in place.

MD: Why do the people of Arizona keep returning McCain to the Senate? Because democracy involving more than 50 people does not work. It just reduces to a big expensive “ugly” contest. That too needs to change.

He campaigns as a conservative when it suits his political needs and portrays himself as a maverick when he wants media accolades. He legislates as neither a conservative nor a maverick but as an entrenched establishment incumbent. That can also be said of other big-name Republicans.

Trump’s Budget Cut Proposals Declared “Dead on Arrival” by Spending-Drunk Congress

When President Trump’s Budget Director Mick Mulvaney unveiled a proposed budget that, for the first time in decades, asked Congress to make tough cuts to an array of spending programs, establishment Republicans joined Democrats in branding it “dead on arrival.”

Congress didn’t even consider the idea of spending cuts to be on the table for negotiation. That’s how entrenched deep state loyalties are in Congress.

Instead of working with Trump’s budget, the Republican-controlled Congress promptly began hammering out a spending bill that added billions to what the administration requested – $4.6 billion more for agriculture, $4.3 billion more for interior and environmental programs, $8.6 billion more for the departments of Transportation and Housing and Urban Development.

No cuts to refugee and foreign aid programs. Even the much-maligned National Endowment for the Arts made it through the House Appropriations Committee unscathed.

The bottom line is that there will be no spending restraint in Washington, and therefore no way out of the coming debt crisis. The Congressional Budget Office projects that publicly held federal debt as a percentage of the economy will soon surge past all previous wartime spikes.

MD: Actually we should just get out of the way and let the thing explode as quickly as it naturally will. And quit paying “all” taxes. If just one or two of us quit, we go to jail and they take everything we have. But if we “all” quit, they can’t do anything about it. That’s the only chance we will ever have … and we have always had it

And go to the link to see the missing image below. I’m too lazy to copy it over.

National Debt (Publicly Held) as a Percentage of GDP

Source: Congressional Budget Office

The official national debt of nearly $20 trillion is just the tip of the iceberg. It represents a small proportion of the total unfunded liabilities the political class has racked up over the past few decades (pointedly, after President Richard Nixon repealed the last remnants of gold redeemability for the U.S. dollar and replaced it with pure fiat).

MD: The Deviant Investor is a site brought to you by gold bugs. They claim gold is “honest” money … as if traders promises are not honest. Let’s run the numbers here. Let’s say an ounce of gold is worth $2,000 (costs that much to create a new one).  Divided by say 150 million USA tax payers, that $20 trillion debt comes to $133 per taxpayer. Since there is only 1oz of gold per person in the world, that uses up about 7% of their share of gold. That other 93% has to go for the promises they have in their house, their car, their savings, their checking accounts, their in-process credit card purchases and balances … and on and on and on. If gold was money, the USA taxpayer would quickly find he has no way to obtain the gold he needs to carry on these trading transactions. And of course that puts the “Deviant Investors” who presumably have more than their fair share of gold … it puts them in the cat bird’s seat doesn’t it!

Taxpayers are on the hook for perhaps $100 trillion more in unfunded entitlement and pension IOUs.

MD: Ooops …. that’s 5 times the 7% … that takes each USA taxpayer to 42% of his share of all the gold in the world!

Plus, state and local government pensions are underfunded by several trillion dollars. They haven’t blown up yet because the rising stock market and steady bond market seen over the past several years has enabled pension fund administrators to kick the can further down the road. They are projecting unrealistically high market returns into the future – and still coming up short.

MD: A financial novel is a financial fiction … novels are fictions.

Federal Reserve Makes It All Possible


Trillions upon trillions of dollars have been promised that simply won’t exist… unless the Federal Reserve creates them out of nothing. The Fed’s unlimited power to expand the currency supply enables politicians to commit acts of fiscal malfeasance with political impunity.

MD: And if the dollars won’t exist, any gold that might have been backing them … or being used instead of them … wouldn’t exist either … would it??? It’s not about creating something out of nothing … all traders do that when they create money. It’s about counterfeiting … it’s about defaulting … it’s about breaking trading promises. That’s a whole different ball game. You and I don’t do that. That’s “all” governments do … i.e. default.

A legislator might get voted out of office for raising taxes, but probably not for adding to the budget deficit. Most voters don’t perceive any immediate consequences to a rising national debt or the expansion of the currency supply. That’s why “borrow and print” is a politically convenient way for lawmakers to stealthily raise taxes.

MD: What do you expect from this thing they’re passing off as democracy … which is just a pitiful “ugly” contest. It can’t work with more than 50 people involved … and at the level of our most representative representative, there are over 500,000 people involved.

Government spending extracts resources from the economy regardless of whether that spending is paid for through taxes or through the deceit of borrow and print.

MD: Now that is nonsense. Making trading promises does not extract resources. If anything, it adds them. And it makes a huge difference whether the promise is delivered or defaulted with no mitigating interest collection to recover it. Taxes, if they went to delivering on government trading promises, “would” have zero effect on resources. But we know taxes just go to the money changers for their demanded tribute. They cleverly refer to that as interest.

What excessive borrowing today does is set up political demand for massive inflation of the currency supply down the road. The inflation tax can be just as devastating to a person’s wealth as any tax collected by the IRS.

MD: Poor Stefan. He just doesn’t get it!

Stefan Gleason is President of 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 the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.


Thanks to Stefan Gleason

Gary Christenson

The Deviant Investor


Amazon over valued (draft)

The Amazon Con: Bulls May Be Crying A River One Of These Days




About:, Inc. (AMZN), COST, HD, TGT

Special situations, growth at reasonable price, value, micro-cap


AMZN is a stock one has to believe in to justify its price, yet current quarter results are improbably bad once again.

MD: Anyone who has used Amazon’s services is likely to be a believer. What the richest person in the world is a big holder in the company, doesn’t that say something about “his” belief in the company?

Its acquisition of Whole Foods is a case of a 200X P/E stock buying a 30X P/E stock, showing the former stock is overvalued.

The entire move from mail order (or e-mail order) delivery to stores was done 90 years ago, but there is no first-mover advantage now for AMZN.

MD: Now that is abject nonsense. Amazon began by making it easier and more efficient for buyers to find sellers and vice versa. It was just a “classified advertising” implementation on the WWW … and it wasn’t the only one. Bezos sees business as three days: day one it develops; day two it rides the wave; day three it dies. Bezos will never leave day one if he can help it.

As competition ramps in e-commerce, with big box chains with the advantage of pick up in store, AMZN may see worsening losses in its core retail division.

MD: Pretty amazing someone can see the big box chains with the advantage. “Pick up in store” is no enticement for me. Save me the trip is my enticement. I think there is a middle ground. Deliver to my nearby convenience store and I’ll pick up there … and enjoy lower shipping cost of course.

Thus, while timing is impossible and there are no certainties, risk-reward for AMZN looks poor, while many other stocks trade normally and are therefore priced for positive returns.

MD: This guy would have thought Standard Oil looked poor … and of course Microsoft and Apple and Oracle (both of which were on the ropes at one time) and Google.

Introduction – rationale for another bearish article

When the facts change, I change my mind (per Keynes). But when the facts get stronger, I carry on with a bullish or bearish thesis, and that’s the case in my humble opinion with’s (AMZN) stock price. This article happens to propound a bearish hypothesis, but as an example of sticking with a bullish hypothesis that is not working, on September 15, 2015, Seeking Alpha published my final Apple (AAPL) article. The stock was going nowhere, hanging around a pitiful $100, yet the title of the article was a straightforward:

Mr. Market Errs: Apple Is Unlikely To Be Stopped In Its Rise To Further Heights

In the bullet points, I argued that:

  • … facts suggest that the iPhone (and therefore Apple) may in fact be on the verge of a major, historic victory.
  • Even if that does not occur, AAPL remains an undervalued stock with strong total return potential for patient investors.”

As it happened, 8 months later, AAPL was down another 10%, and as late as July, it was below $100: but look at it now. So – I was early but (so far) basically correct.

MD: I wouldn’t touch Apple with a long stick. How in the world can they compete with a Linux based system? How can they compete with Open Source? They have to keep innovating … or they are killed by commodity providers.

I look at AMZN that way, in reverse. Timing things like this even to the year is impossible. (And, of course, sometimes I am simply wrong.)

MD: I wonder what he thinks about BitCoin. That who concept is laughably wrong on its face … the the price of a BitCoin continues to go up exponentially.

Next, a few introductory clarifications. First, the “con” referred to in the article is about the stock price, more specifically the resurrection of the 1997-2000 con game that eyeballs, or in AMZN’s case, eyeballs plus sales at near-zero profit margins, mattered to the exclusion of earnings.

MD: If you pour all your earnings into building infrastructure, are you creating a worthless company? If you expense everything instead of capitalizing it, are you creating a worthless company? If you only had to look at earnings, a financial statement would be just one line instead of may pages and many many lines.

I’ll end my comments here. This guy is going nowhere! You can read the rest of the article by going to the link at the top … repeated here.



This Money Delusions site is about removing delusions about money … what it is … how it works … how people are deluded about it.

Investopedia is a source of information on money and finance … an authoritative encyclopedia so-to-speak.

It turns out that Investopedia, by describing “what is” rather than “what should be” becomes an excellent platform for the process of removing delusions. What better place to begin removing delusions about money than with the “keeper of the delusions”.

The style of this site is to begin with copies of articles and essays and present them complete and with full attribution. I peel off lots of the gook, but I leave the meat. I then annotate the work “in-line”. This removes any chance of my misstating what they are writing … I show you what they are writing. It removes any chance of my taking something out of context … I show you their context. But it does open me to attack for plagiarism.

If you think I’m plagiarizing your work, just let me know. I’ll address the issue with you. Otherwise, I know of no better or fairer way to approach this controversial subject.

Don Boudreaux quoting his St. James Buchanan

Re: 2017/07/31:

Don Boudreaux seems to be a Mises Monk. He, and the other acolytes, have gone apoplectic over comments by a Nancy MacLean that evidently wrote a book that took some shots at one of their saints … a James Buchanan.

This quote is typical of the type presentations you get from these people. Saint James Buchanan is said to have written:

The abiding genius of Karl Marx lies precisely here, in his acute understanding of the possible reaction of the ignorant intellectual to the workings of the capitalist or market order.

Now there is nothing mystical about a capitalist. A capitalist is easily defined as “two years”. That’s what it takes for a person with elite connections, and thus privileged under banking laws granting them 10x leverage, to double the “capital” they put into a bank … assuming they make a conservative 4% spread (which x10 is 40%/year on “their” money) on the so-called “loans” they make.

After that, they can take “their” money off the table, and leave the other half to ride forever. In a 30 year career, their con of compound interest turns their money into over 24,000 times what they “put in” for just that “two years”. It’s infinite when you consider they had zero capital at risk over the other 28 years.

Pretty slick deal isn’t it. What’s not to like about capitalism. And of course, anyone who takes a shot at capitalism must be a “communist”. That’s the only other alternative, right? That’s what they would have you believe, yet they repeatedly qualify their “capitalism” with the adjective “crony” when they don’t think it’s pure … i.e. when it is mostly communism and corruption and what they like to call “corporatism” (they never seem to run out of “isms”) as it is in the USA … and everywhere else capitalism is claimed to be found.

Here at Money Delusions, we talk about “traderism”. We know and we prove that “money” is created only by traders ( … oh, and of course counterfeiters … these being easily and quickly mitigated in a proper process). Money is “not” created by banks. It is “not” created by the governments banks institute to protect their con.

So, putting so-called capitalism aside for now (i.e. ignoring everything we read about it herein), let’s keep our eye on their other subject … that being “market order” … something we here know at MD is not “order-able” … it is free to do what it pleases … and if not, it is “rigged” and is not a market at all. Of course all markets are rigged because money is rigged.

Just keep that in mind as you read these annotated excerpts of some of Don Boudreaux’s nonsense:

From Bourreaux’s Essay/

… is from page 167 of Vol. 19 (Ideas, Persons, and Events [2001]) of The Collected Works of James M. Buchanan; specifically, it’s from Jim’s 1986 paper “Liberty, Market and the State”:

The abiding genius of Karl Marx lies precisely here, in his acute understanding of the possible reaction of the ignorant intellectual to the workings of the capitalist or market order.

DBx: Fancying themselves to be unusually insightful, thoughtful, and knowledgeable, a great many intellectuals are, in fact, mindless pack animals.


MD: When challenged to disprove the definition and proof of what money is as given by this MD site (see side panel), Boudreaux responded like a “mindless pack animal”. He said he doesn’t feel compelled to address my “unorthadox” treatment of the subject. I reminded him that Columbus and Copernicus also presented unorthodox views on subjects we take today as being obvious.

And here’s some more of the Boudreaux pot calling the kettle black:

They mistake their slogans – which sound fine to the ears of intelligent second-graders – for insight and knowledge.  Never bothering to learn economics, and also never bothering to think realistically about politics or to study history with care, they criticize without careful reflection, condemn without sound judgment, and propose without information, insight, or wisdom.

MD: Now, I have not found a single economist that knows what money is. How in the world can you teach a subject like economics without knowing what money is? So anyone who has “never bothered to learn economics” really has a leg up on those who have. They don’t have to unlearn any of that nonsense.

It all begins with knowing what money is. At this site we will repeatedly bring up their confusion and shine light on it. Remember … Boudreaux says the obvious truths explained here are “unorthodox” … what a properly religious term he uses to explain his own behavior.

What is money?


Definition: Money is an “in-process promise to complete a trade over time and space”


Examine trade: (1) Negotiation; (2) Promise to deliver; (3) Delivery.

In simple barter exchange in the “here-and-now”, (2) and (3) happen simultaneously, on the spot. Any exchange of “value for value” (e.g.corn for piglets;  gold or gold backed exchange for other stuff; etc.) is in this category and does not involve money.

Money enables simple barter exchange over time and space. Thus, money is obviously “a promise to deliver”. It can be nothing else. It doesn’t exist before the promise is made nor after delivery is made”.

Money is only created by traders (like you and me buying things over time). It is not created by banks nor the governments they institute. In fact, “all” governments are just traders. But unlike you and me, they never deliver on their trading promises which create money. They just roll them over. And that is DEFAULT. And purposeful DEFAULT is COUNTERFEITING.

Banks sustain themselves on tribute collections (and all your tax payments go to the banks as tribute collections). Governments sustain themselves on counterfeiting. You give them sustenance through the INFLATION their counterfeiting generates.

We have never had a proper Medium of Exchange (MOE) process. But it is trivial to institute one. And anyone, or any group of traders, can create a “proper” MOE process. And multiple processes can co-exist and compete (by minimizing costs).


The trader sees clear to make a trade over time and space and chooses to create “money” to effect the trade. For example, you or I choose to trade 360 monthly payments for a house, which we can take possession of and live in now and over the whole term of the promise and beyond.

The trader gets his promise “certified” (now bankers make you come hat-in-hand begging for what they fictitiously call a loan “of their capital” … that’s the scam). “Certification” means the trader’s identity and the terms of his promise are recorded and performance on the promise are transparently displayed to all lookers.

The certificates … first in the form of a simple ledger entry that creates the money and then transfers it to the seller … then circulate as the most common object in “virtually” every simple barter exchange. We know it as money (it may be a ledger entry; coin; or currency … but only one at a time).

The dollars we use everyday come from a “nearly proper” MOE process run by the banks and their “association”, the Federal Reserve. It has a leakage goal (i.e. INFLATION) of 2% and delivers 4% INFLATION on average. It gives it’s members privilege to create 10x as much money as they have … earning 4%x10 or 40% annual return … doubling “their” money in less than two years. Thus “a capitalist is simply two years”.

“A proper” process monitors performance on the promise (e.g.: did the trader make his monthly payment). If he did, all is well in paradise. If he didn’t, the process “immediately” makes an INTEREST collection of an amount equal to his DEFAULT … reclaiming the money as if he paid it back.  This guarantees perpetual perfect balance of the supply and demand for the money … it guarantees perpetual zero INFLATION.

The operative relation is: INFLATION = DEFAULT – INTEREST = zero.

Who pays the interest? Non-responsible traders do.  An existing well known model is the Mutual Casualty Insurance Company. Here INCOME = PREMIUMS – CLAIMS = zero. The money is made on the investment income and works to reduce premiums actuarially. Another distinction with the money process is that “all” members of the insurance group pay PREMIUMS. With a proper MOE process, responsible traders  (i.e. traders like you and me who never DEFAULT) experience zero INTEREST load over the duration of their promise.

Note: For any given money creating trade, no money exists “before” the trading promise is certified, nor “after” final delivery (delivery returning the money which is then destroyed). And since “all” money is created in this way, “all” money in circulation is an “in-process promise to complete a trade over time and space”.

With a “proper” MOE process, banks are “competed” out of existence. A “proper” MOE process could be instituted right now (unless the governments they institute outlaw it) and banks would have to change or go out of business. And since INFLATION is perpetually zero, the governments “must” sustain themselves only on tax and fee collections. They cannot counterfeit. Irresponsible traders are drummed out of the marketplace.

What could be simpler and more obvious?

What hoax could be larger than that leveled on virtually all of us by the banks and the governments they institute?

Why did WTC7 fall down?