no third solution

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Category Archives: Monetary Policy

What’s Behind the High Price of Gold?

October 8th, 2009

Do not be distracted by headlines touting Gold’s “record high” (closed today at $1054.80).  George Washington (of Washington’s Blog) prudently notes that gold’s nominal high is not quite one-half of it’s inflation adjusted all-time high, and cautions a reversal if the USD strengthens.

Historical price of gold; inflation-adjusted real dollars

So, will the dollar strengthen?  I find this implausible, to say the least (likewise, GW suggests “the dollar will get creamed in the long-run”). I hate to be the bearer of bad news, but this means things might get worse.  Way worse.

Far more important that the elementary observation of a “high” price, is determining why the price is high.  Some analysts now are saying that the nominal increase in the price of gold is due only to a “weak dollar”. Weak currency = lower purchasing power = higher nominal prices. D’uh!

Presently, the dollar is weak because of crazy amounts of inflation and debt being piled up in attempt to sustain the musical-chairs of perpetually rising prices (often misinterpreted as indicators of economic well-being) which phenomenon was itself brought into existence principally by monetary expansion at the hands of the Federal Reserve. Recently, the Fed announced plans to absorb another $1.25 Trillion in (probably toxic) mortgage-backed securities.

Federal Reserve Bank Liabilities

When gold was at its all-time high, the eventual “strengthening” of the USD was brought about by prime rates in the neighborhood of 15%. They got away with it in the early 1980s, but I do not believe that policy makers have the stones to pull out those sort of stops today.

The economy is not recovering.  Unemployment is 10%+ right now. Baby boomers are staring at an extra decade of nine-to-five since their retirement plans got the FUBAR treatment last year. Businesses aren’t hiring, they aren’t developing and they’re not investing; they’re hunkering down and trying to lean it out. Meanwhile, people are being tossed out of their homes because they can’t make the ARM payment.

Now imagine three times worse than that: Soup lines. Hoover blankets. Mortgages at 15% and 20% car notes. One-in-four Americans out of work. Would the people tolerate this? I hope they would not—you couldn’t lead lambs to this sort of slaughter.

So, you can’t but the brakes on it. But you can’t keep it going, either, without ultimately finding yourself neck-deep in hyperinflation, Zimbabwe style. The alternative is to try and avoid a total financial SHTF and economic collapse, by engineering instead a sustained period of economic stagnation, a long and painful restructuring.

Pick your poison.

Hang the Zombieconomy by its Own Rope

September 1st, 2009

Lenin once said that capitalism would ultimately undo itself, because the entrepreneurs would gladly sell the rope with which they would later be hanged; they’d be too busy counting the profits to see the noose tightening around their necks.  Well, somebody is choking right now, but it’s not the “capitalists”.

Instead, like a torture victim, the little guy is being pressed to see just how much he can tolerate, how close they can bring him to the brink of asphyxia… Aside from the obvious swindle, the banks are using trillions of blackmailed dollars, stolen from the people, to strengthen the stranglehold.

Several companies (e.g., Goldman Sachs and American Express) became “bank holding companies” only after the sh*t hit the proverbial fan, for the sole purpose of capitalizing on TARP funds, which they’re now using successfully to buy up the “not too big to fail” banks (the ones that actually failed, or were on the verge of failure) in order to become “too big to fail,” ensuring a limitless source of future bailout funds. And they are now using those stolen funds to earn risk-free profit.

Quoth Mark Zandi, chief economist at Moody’s Economy.com, “The oligopoly has tightened.” The Washington Post emphasizes:

Regulators pushed failing mortgage lenders and Wall Street firms into the arms of even bigger banks and handed out billions of dollars to ensure that the deals would go through

In several metropolitan regions, [J.P. Morgan Chase, Bank of America and Wells Fargo] were permitted to take market share beyond what the Department of Justice’s antitrust guidelines typically allow,

Right now the biggest banks in the world are sitting on the biggest stockpiles of “excess” money ever, and the government is paying interest on these reserves.  And why would bankers lend the money to people who might need it, or might be able to put it to good use, (especially in such turbulent times!) when they can instead earn risk-free profit?  Banks do not need to compete for business when the government guarantees their profits and subsidizes their losses.

That risk-free profit is someone else’s loss.  And that “someone else” is you.

This is not an accident, not misfortune, not due to “animal spirits” or any other academic gobbledygook. Economic depressions are built into the system, by design:

[T]he booms and busts of State-capitalism are coordinated. …[T]hey are coordinated in the sense that, failure to coordinate them results in the complete dissolution of State capitalism’s power structure. Business Cycles then, are not so much engineered by policy makers, as they are tolerated as a necessary evil.

— Engineering a Depression: Monetary Policy 101

Because the zombieconomy feeds on the flesh of the living, at some point the torturer has to relax his grip, has to let go.

So they give us—the victims—a brief reprieve, allowing us to catch our collective breaths just long enough to beg for mercy. At which point they will offer to advance us our own labor and our own credit and our own belongings that were stripped from us in our previous attempts to satisfy their new demands (plus interest). Failing to learn from our mistakes and the mistakes of our forefathers, many will likely accept the terms of whatever new bondage they can devise.  History is doomed to repeat.

How much more suffering at their hands will it take to learn the lesson? We do not need them. But like any parasite, they need us.

I used to doubt whether the “capitalists” were stupid enough to sell the rope, but I confess now that I grow less doubtful each day.  Whether the rest of us are wise enough to tie the hangman’s knot, is another story.

We can control our fates if only we stand and take back what’s ours.

What’s Better Than Mild Inflation?

May 14th, 2009

In response to A Belated Reply on Fractional Reserve Banking, Neverfox asked,

If everyone agrees to trust the third-party (bank) and “subscribe” to the token system (“I’ll accept tokens from you as a wage if you agree to sell me stuff with those tokens later”), where is the fraud and where is the need for a commodity money?

It begs the question to assume that money must be commodity money to be a legitimate medium (consequentialist considerations aside).

Does it really beg the question?  Surely, we should be able to point to historical examples of monetary evolution culminating in irredeemable token substitutes. For starters, this argument assumes money as the intentional product of human design, which suffice to say, is contradicted by the facts of history.

The very notion of token substitutes presumes that they are a substitute for something else, in the same manner that a check, deposit-slip, or warehouse receipt are substitutes for, not replacements for, physical goods. Instead what we see in the history of the world is that, except where governments have been able to intervene, commodity money of some form or another has been pretty much standard.

As to the token-money hypothetical put forth above, what do they say?  If ifs and buts were candy and nuts…  Of course we can frame a hypothetical in such a manner as to preclude the possibility that fraud might occur: “I’m going to define a situation where fraud is inconceivable, and then ask you, ‘where is the fraud?'”, but I’d be tilting at straw men.

My father used to say, “You can ‘what if?’ yourself to death.”  Dealing with “what ifs” is stupid, because the other guy can always pull a “27 Ninjas” on you.  No matter what you say, they can always come up with some fantastic “what if” statement that apparently validates their position.  But what the heck, I suppose I’ll play along for a moment.

Considering that in such a scenario, someone has contributed real, economic-value-added work, in exchange for tokens under an implicit assumption that he would be able to redeem those worthless tokens for something else of real, economic value, sometime in the future, even this cleverly constructed straw-man raises some interesting questions:

  1. What happens when the person who agreed to sell you stuff in exchange for those tokens decides he’s no longer interested in tokens?
  2. What happens when the person who created those tokens mints a Trillion more of them, overnight?
  3. Haven’t you been definitely injured?
  4. Would you have agreed to play the game if you knew the other party could change the rules on a lark?

Under a commodity standard, money is the product of human action but not of human design.

  1. Accordingly, no promises as to future value are made express, or implied.  No matter what happens to the subjective value of the monetary commodity, your banknotes are always redeemable for a fixed quantity.  The token system is a shell game.
  2. With fake money, you get totally screwed.  With commodity money, it’s impossible to mint a trillion dollars overnight to bail out special interests or to pay for imperialism, etc.
  3. Production buys production — and although from time to time a new product will emerge, reducing the market value of some of your assets or skills, it is terribly unlikely to happen with money in the first place, and furthermore can onlyhappen as the result of an actual increase in the total amount of wealth in the world.
  4. The rules are the rules, they can’t be changed, and they can only be circumvented by fraud, counterfeit, or theft — all properly condemnable behaviors.

Whether it takes the form of “debasement” or “coin-clipping” or “seignorage” or “inflation” is beside the point. If you condemn inflation when the government does it, why stand on your head to defend “private” inflation, if for any other reason than to argue that it will be less bad?

News flash: you know what’s even less bad than mild inflation?

No fucking inflation. Period.

no third solution

Blogging about liberty, anarchy, economics and politics