Everybody Has a Plan Not too long ago, we wrote about the so called Modern Monetary so called Theory (MMT). It is not modern, and it is not a theory. We called it a cargo cult. You’d think that everyone would know that donning fake headphones made of coconut shells, and waving tiki torches will not summon airplanes loaded with cargo. At least the people who believe in this have the excuse of being illiterate. A few images documenting cargo cults on the island of Vanuatu. Left: a wooden plane made by the John Frum cargo cult, which is going strong to this day and has actually become a political party. In the middle is a ceremonial cross erected by the John Frum cargo cult. According to one of the cult’s leaders, its members consider John
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Everybody Has a Plan
Not too long ago, we wrote about the so called Modern Monetary so called Theory (MMT). It is not modern, and it is not a theory. We called it a cargo cult. You’d think that everyone would know that donning fake headphones made of coconut shells, and waving tiki torches will not summon airplanes loaded with cargo. At least the people who believe in this have the excuse of being illiterate.
A few images documenting cargo cults on the island of Vanuatu. Left: a wooden plane made by the John Frum cargo cult, which is going strong to this day and has actually become a political party. In the middle is a ceremonial cross erected by the John Frum cargo cult. According to one of the cult’s leaders, its members consider John Frum their Jesus whom they expect to return one day (with a big load of cargo). Even funnier are the guys to the right, who belong to a different Vanuatu-based cargo cult, the Prince Philip Movement, which worships the Duke of Edinburgh whom it considers a divine being. Apparently members of the Yaohnanen tribe in Tanna saw how much respect was paid to Queen Elizabeth during her visits to the island and concluded that her consort had to be a being from their legends, the son of a mountain spirit and a “brother to John Frum”, who is also widely expected to return one day (with cargo). Prince Philip was long unaware that he is revered as a god, but since he has learned about it, he frequently exchanges gifts with the movement (he usually sends them signed photographs of himself, and they send things like traditional pig-killing clubs and other useful implements in return). What the members of the John Frum and Prince Philip cults don’t know: they clearly have what it takes to become modern-day mainstream economists. A second career path is open to them. Your cargo awaits, brothers! [PT]
You’d think that everyone would know that printing fake money and waving bogus theories around will not create new wealth. The excuse is that so called the wealth effect is so pleasant. Like drugs provide a happiness effect.
There is an old joke about a guy who talks to a psychologist about his crazy brother. The guys says, “Doc, my brother thinks he’s a chicken.” The psychologist says, “You should make sure he gets therapy for this delusion.” “I would, but the eggs are good!”
The joke about the egg-laying brother is generally attributed to Groucho Marx… anyway, it is always possible that your brother is a chicken. It should be fairly easy to ascertain that. But even if he is, he may not produce eggs. Also, if indeed he looks like any of the examples shown above, best consult a mirror to see how strong a family resemblance there is. If you come to the conclusion that you too are a chicken, try to remain free-ranging. [PT]
So it is with attempts to make people feel wealthier so they will spend more money (i.e. consume their capital). It is not real wealth, but they don’t know it because their account statements show larger and larger numbers every month.
A central bank cannot create wealth. And the corollary is that it cannot produce anything, neither capital goods nor consumer goods. It can merely alter the incentives offered to people (i.e., pervert them).
Nor can the central bank create money. What it creates is credit. It is a bank; it lends. And it can manipulate the interest rate. That is its one special power. All of its fancy policy tools—including increasing the money supply — amount to manipulating interest rates. It can dictate the overnight interest rate. And because banks can borrow at this rate, to fund their purchase of long-term bonds, the central bank can influence the long-term interest rate too.
The More is Better Theory
Each school has different reasons for what they call printing of what they call money. Variously, these reasons are to counter a downturn, to pay for the welfare state, to employ more of the dumb workers, euthanize the rentier, and to juice up GDP. By the way, it was Janet Yellen who wrote a paper on the bit about printing money so companies can hire more workers, and it’s clear from the paper she regards them as stupid.
And it is the so-called market monetarists who advocate printing to juice up GDP, and make it grow at the rate they deem to be right. They call this idea nGDP targeting (nominal GDP, i.e. not adjusted for the inflation they presume they are causing).
What kind of growth will one get if one lowers the interest rate by government diktat? What activities will grow if credit is mispriced (by definition, and by theory of the government forces the rate to be other than what it would be in the free market, it is mispriced)? No matter, we get more of them! More is always better, isn’t it? The market monetarists believe so, at least up to whatever they feel to be the right amount.
If the Fed’s lower interest allows a bank to borrow to buy Treasury bonds from speculators at higher prices, an AA-rated private equity fund to borrow to buy houses off retiring Baby Boomers, or zombie corporations to keep borrowing to keep their doors open, it all adds to GDP.
The Fed has not gotten around to trying nGDP targeting yet – thankfully. The idea is yet another example of armchair planners pretending to have a better central plan than the central planners currently in charge. Since all these plans are ultimately based on money printing and manipulating interest rates, the difference between them is largely cosmetic. They also have in common that they are certain to structurally undermine the economy. [PT]
The sellers of the bonds may spend a bit due to the wealth effect. The sellers of homes can cash out and retire. The money-losing zombies can keep paying employees and suppliers.
There is a little-understood fallacy called Begging the Question. This is when a question presumes what it should be asking. For example: “When did you stop beating your wife?”
nGDP targeting is an alternative means of answering the same Begged Question as all the other schools of money printing: how shall the center planner determine how much money to print and pump into the economy? Their answer whatever amount is necessary to sustain the right amount of growth, which they believe is steady growth.
Eating the seed corn is not growth, though it may cause increases in the amount of employment and the amount of currency changing hands.
This is the meaning of a rising debt—federal government debt, state and local government debts, corporate debt, personal debt, underfunded pensions, unfunded government liabilities, etc. They are all forms of consuming something now, and replacing the consumed goods (i.e. capital goods) with a note that says “I.O.U.” But unless that borrowing financed productive assets that will pay the note with interest, it’s counterfeit credit. It cannot and will not be paid.
US true money supply TMS-2. As of September 2019 it stood at USD 13.7 trillion. In early 2008, it stood at USD 5.25 trillion. Somehow all that money printing since then was still not enough to create a respectable rate of “economic growth”. [PT]
We emphasize that the problem with inflation is not a problem with the quantity of something – or with prices. It is a problem with honesty and integrity. It is the dishonest replacement of a real capital asset, with a dishonorable promise.
If the problem were only that prices are rising, there would be something more important to do than try to help people return to the gold standard. But it isn’t. The problem is that while the monetary system perversely incentivizes people to the perverse outcome of exponentially-accelerating consumption of capital, the economics profession is debating the wrong things: the right rate of this capital consumption, and the best perverse incentives to make it so.
Precious Metals Supply and Demand
Last week the price of gold blipped up by another ten bucks, and that of silver eight cents.
Again this week, the groceries did not coming flooding into gold and silver. We are using the term “increase in groceries” to refer to an increase in the purchasing power of a capital asset. This is how many groceries you could get for liquidating that asset.
The basket is ready for flooding duties. [PT]
Groceries flooded into Treasury bonds. Since 1981, speculators in the government’s favorite Ponzi scheme have been rewarded. They fork over their capital to the government or to the previous speculator who forked over his capital to the government. And the Fed’s cockamamie scheme rewards them. Sooner or later the next speculator forks over even more capital to them, to consume.
Liquidating capital assets to spend capital on groceries – isn’t that the purpose of holding a capital asset in the first place? To consume? If we had a fiat penny every time someone said that, we reckon it would add up to tons of gold.
Alas, bitcoin did not prove to be a store of groceries this week. After last week’s pouring-in of 25 groceries (assuming $100 per grocery), 8 leaked out of the noted store of value notorious two-phase skyrocket.
The point of this pointed commentary is that, though people love to speculate, it is the perverse outcome of the perverse incentives offered by the central banks. When people are handed free groceries, they eat them. This is added to GDP. Thus the central bank appears to perform the miracle of turning irredeemable paper currency into groceries, or water into wine. Mises describes what they actually do:
“And then, very late indeed, even simple people will discover that Keynes did not teach us how to perform the ‘miracle … of turning a stone into bread,’ but the not at all miraculous procedure of eating the seed corn.”
Ludwig von Mises sure had the number of the inflationistas. [PT]
Read on for a look at that the only true picture of the supply and demand fundamentals of gold and silver. But, first, here is the chart of the prices of gold and silver.
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio dropped this week.
Here is the gold graph showing gold basis, co-basis and the price of the dollar in terms of gold price. It rose this week.
The pattern of last week continued: a slight increase in scarcity (i.e., the co-basis) along with a slight increase in price. At least the scarcity indicated by the December contract. More on this below – where the observed effect is stronger.
The Monetary Metals Gold fundamental price, was down $26 this week, to $1,485. This is where it was two weeks ago.
Now let’s look at silver.
In silver, the December co-basis rose sharply, but not the silver basis continuous. We are seeing strong evidence that the banks are not naked short-selling silver futures: as the December contract approaches expiry, there is strong selling pressure.
A naked short-seller would have to buy the December contract, as he cannot deliver the metal – whereas speculators who use futures to bet on the price cannot take delivery, and hence must sell. We see a lot of selling pressure on this contract (but not the farther-out contracts).
The Monetary Metals Silver Fundamental Price fell 22 more cents to $16.65.
© 2019 Monetary Metals
Charts by acting-man, Monetary Metals
Chart and image captions by PT
Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.
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