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China’s Nuclear Option to Sell US Treasurys, Report 19 May

China’s Nuclear Option to Sell US Treasurys, Report 19 May

There is a drumbeat pounding on a monetary issue, which is now rising into a crescendo. The issue is: China might sell its holdings of Treasury bonds—well over $1 trillion—and crash the Treasury bond market. Since the interest rate is inverse to the bond price, a crash of the price would be a skyrocket of the rate. The US government would face spiraling costs of servicing its debt, and quickly collapse into bankruptcy. America could follow the path taken by Venezuela or Zimbabwe.

How serious is this threat?

The Independent Institute wrote (replete with a graphic purportedly showing a “nuclear bomb”) about it:

What would happen if the Chinese government were to weaponize its holdings of U.S. Treasury bonds by suddenly selling off all of them?
That’s an option that has been suggested by Hu Xijin, the editor of the government-controlled Global Times.
Dumping its U.S. national debt holdings is considered to be China’s “nuclear option” for retaliating against the U.S. government in the trade war…

The Financial Time headline says it all: “China dumps US Treasuries at fastest pace in two years”. The body of the article uses that word “weaponise” (British spelling).

Bloomberg warns that, “Trade Feud Has Treasury Investors Eyeing China’s Holdings at Fed”. At least their article does not reiterate “weaponized”.

CNBC adds a new element, that in killing America, China would be destroying itself too. The article uses the word “weapon”, as well as calling it the “nuclear option.”

Capital Outflows

Ambrose Evans-Pritchard at the Telegraph is one of the few voices looking at the “accelerating pace of capital outflows from China”. He provides lots of good analysis that we would say is common sense, except it is presently uncommon (yes, yes, we know that common, here, refers to base logic not ubiquity).

 …click on the above link to read the rest of the article…

One Day the Volcano Will Erupt – Precious Metals Supply and Demand

One Day the Volcano Will Erupt – Precious Metals Supply and Demand

Keynesian Rot

The prices of the monetary metals rose $11 and ¢27 last week. The supply and demand fundamentals is the shortest section of this Report [ed note: we are excerpting the supply-demand section for Acting Man – readers interested in the other part of the report can find it here].

The eruption of Mt. St. Helens in 1980 – prior to the cataclysmic event, numerous small earth quakes and steam venting from fissures warned that something big was about to happen, even if no-one suspected the actual magnitude of the outbreak. The eruption was so powerful that a fairly large chunk of the mountain went missing in the proceedings. There are always accidents waiting to happen out there somewhere, and the modern-day fiat money system is clearly one of them. There will be warning signals before it keels over – in fact, the final cataclysm usually happens fairly quickly, while the period that leads up to it tends to be a drawn-out affair. [PT]

This is because the actual data can be seen in a simple chart for each metal. If central banks were really buying mass quantities of gold in anticipation of a new gold-based global monetary system, or India were really importing all marketable gold, or the mainstream American public were desperately trading its dollars for gold, or China were really buying up all the physical gold to prepare for a gold-backed yuan (while selling paper gold, natch)…

…then the data would show this.

Mount Saint Helens was quiescent for a long time, until all of a sudden in 1980 it went wild with activity. There was an earthquake, then steam venting, then the side of the mountain began to bulge, then a second earthquake triggered that side to collapse. Then the volcano finally exploded.

 …click on the above link to read the rest of the article…

Who Knows the Right Interest Rate

WHO KNOWS THE RIGHT INTEREST RATE

On January 6, we wrote the Surest Way to Overthrow Capitalism. We said:

“In a future article, we will expand on why these two statements are true principles: (1) there is no way a central planner could set the right rate, even if he knew and (2) only a free market can know the right rate.”

Today’s article is part one of that promised article.

Let’s consider how to know the right rate, first. It should not be controversial to say that if the government sets a price cap, say on a loaf of bread, that this harms bakers. So the bakers will seek every possible way out of it. First, they may try shrinking the loaf. But, gotcha! The government regulator anticipated that, and there is a heap of rules dictating the minimum size of a loaf, weight, length, width, depth, density, etc. Next, the bakery industry changes the name. They don’t sell loaves of bread any more, they call them bread cakes. And so on.

There is always a little arms race going on, wherever there are government controls. One recent example is Uber. This company actually illustrates two different workarounds. One, is labor law. Labor law sets not only a minimum price for labor, but also adds many other restrictions that make companies less flexible, and therefore less able to deliver what customers want. So Uber drivers are not employees. Oh no, they are independent contractors.

Two, is taxi regulation. Uber is not a taxi. It is a ride-sharing service. Under regulation, definitions determine the difference between life and death. So everyone is forced to play a game of hair-splitting.

 …click on the above link to read the rest of the article…

The Once and Future Unit of Finance – Precious Metals Supply and Demand

The Once and Future Unit of Finance – Precious Metals Supply and Demand

Sally Forth and Speculate on my Behalf!

Last week, the price of gold was down ten bucks and silver four cents. Someone on Twitter demanded if we didn’t find it odd that the biggest sovereign debt bubble has managed to inflate a bubble in virtually every asset price except for gold.

 

Snapshot from a recent Goldbugs Anonymous meeting. Why, oh why have you failed to bubble my asset, dear fellow speculators? [PT]

 

Given that he went on to assert there is a bubble in paper gold claims, he is trying to say that gold has to besuppressed. Otherwise its price would be much higher. We won’t reiterate here the proof that this conspiracy theory is false.

Instead, we want to address two points. One, the term bubble is used quite flexibly. Does it mean the price of something is too high? For example, the S&P Index at nearly 3000. Or does it mean there is too much quantity of something, e.g. debt.

Or that something is being done to unhealthy degree, e.g. sending non-students off to university to get degrees that will not increase their employability? One should use each word with care and precision. Otherwise ambiguity permits one to migrate freely between different concepts.

Clearly, this guy is jealous that the prices of other assets have gone up, making other speculators rich. But the price of gold has not, thus not making him rich. Instead of admitting he was wrong to believe the gold-to-$10,000 story, he blames the world. Also, he is wrong about something else. The price of oil has not exactly gone up;  or real estate in many non-trendy locations.

…click on the above link to read the rest of the article…

A Golden Renaissance – Precious Metals Supply & Demand 

A major theme of my work — and raison d’etre of Monetary Metals — is fighting to prevent collapse. Civilization is under assault on all fronts.

Battling the barbarians at the gate… [PT]

There is the freedom of speech battle, with the forces of darkness advancing all over. For example, in Pakistan, there are killings of journalists. Saudi Arabia apparently had journalist Khashoggi killed. New Zealand now can force travelers to provide the password to their phones so the government can go through all your data, presumably including your gmail, Onedrive, Evernote, and WhatsApp.

China is now developing a “social credit” system, to centrally plan the economy and control citizen behavior. Canada has made it a crime to call someone by the wrong gender pronoun. Even in the US, whose First Amendment has (mostly) stood as a bulwark against censorship now has a president who threatens antitrust action against Amazon, because its CEO Jeff Bezos owns the Washington Post, which prints things he does not like.

On college campuses, professors are harassed if they say one thing that the professional sensitives are sensitive to. If a controversial speaker is invited, he risks an angry mob coming to disrupt his talk (or worse).

Sacrifices on the road to Utopia. [PT]

Then, there is the nearly-over war against patients’ rights to purchase health care services from the provider of their own choosing, and health care professionals’ right to sell services to patients at a price they prefer. In the US, insurance companies are still forced (as under Obamacare) to provide insurance to anyone who applies, even those who have pre-existing conditions. This would be like forcing home insurance companies to issue policies to people whose houses are currently on fire. It is not insurance, but an unfunded welfare program.

…click on the above link to read the rest of the article…

Measures of Value – Precious Metals Supply and Demand

Measures of Value – Precious Metals Supply and Demand

Aiming for Knowledge and Better Decision-Making

The price of yellow metal went up nine bucks last week. And the price of silver three rose cents, which is back to where it was two weeks earlier. We need to rant, and promise to tie it back to the prices of the metals. We have written these past several weeks about the fact that the franc has been rendered useless. Owning a franc does nothing for you, other than to trade to the next person at hopefully a higher price.

When the money of the realm becomes literally useless as money – the charts and data example above shows excerpts of what happened in Germany from WW1 to the hyperinflation blow-out of 1923. In the end, one simply could no longer use the Reichsmark as a medium of exchange. [PT]

This is the state into which gold has been forced, by a series of actions by the US and other governments.

Indeed, so useless has gold become, that we measure its value in terms of the irredeemable fiat dollar. We all love to hate the dollar, we all think the dollar will collapse at some point in the future. Yet so ubiquitous — and useful — is it that we measure even money in terms of dollars!

And “we” does not refer to Keynesians and their close cousins the Monetarists. “We” refers to many Monetary Metals clients and prospective clients. Yes, truly, the folks that are keen to earn interest on their money paid in money — gold — ask constantly our opinion on the price of money in terms of irredeemable Fed credit notes!

…click on the above link to read the rest of the article…

Why the Fed Denied the Narrow Bank

It’s not every day that a clear example showing the horrors of central planning comes along—the doublethink, the distortions, and the perverse incentives. It’s not every year that such an example occurs for monetary central planning. One came to the national attention this week.

A company called TNB applied for a Master Account with the Federal Reserve Bank of New York. Their application was denied. They have sued.

First, let’s consider TNB. It’s an acronym for The Narrow Bank. A so called narrow bank is a bank that does not engage in most of the activities of a regular bank. It simply takes in deposits and puts them in an account at the Fed. The Fed pays 1.95%, and a narrow bank would have low costs, so it could pass most of this to its depositors. This is pretty attractive, and without the real estate and commercial lending risks—not to mention derivatives exposure—it’s less risky than a regular bank. According to Bloomberg’s Matt Levine, saving accounts for large depositors average only 0.08% interest.

So it’s easy to see why many believe that the Fed’s reason to refuse an account to TNB is unsavory: to protecting the crony too-big-to-fail banks. That is a plausible explanation for sure, but there is much more.

The Bank: Spindled, Folded, and Mutilated

There has been a long, slow process—punctuated by big changes in responses to crises—of perverting the banks. Before the first world war, when a retailer received consumer goods he would sign a bill acknowledging delivery. Typically, he had 90 days to pay, which was enough time to sell the goods through to the consumer. The wholesaler could endorse this and pass it to his creditors. The bill traded at a discount to its face value.

…click on the above link to read the rest of the article…

In Praise of a Genuine Gold (Not Gold-Backed) Bond

Buffet dismissed gold because it pays no interest. But what if there was a genuine gold bond that paid interest in gold?

Keith Weiner at Monetary Metals asks Who Would Invest in a Gold Bond?

Berkshire Hathaway CEO Warren Buffet famously dismissed gold. “Gold has two significant shortcomings, being neither of much use nor procreative.”

Nevada now has legislation pending, to enable the state to issue gold bonds. Not gold-backed bonds, which are a way to sink deeper into debt, to borrow more dollars using gold as collateral. True gold bonds, which are denominated in gold, pay interest in gold, and return investors’ principal in gold.

Interest. That is what Warren Buffet declared that gold has not got. And now an AA-rated state government is close to paying interest on gold. That is an interesting development (permit me my little pun). But there is a challenge.

Although there is no downside, and no special interest groups are harmed, the bill might not pass. The Democrat majority who controls the state legislature could perceive the gold bond as a Republican partisan measure. I can say that this assumption is totally wrong. Most mainstream Republicans are not especially fond of gold. For example, it took Arizona five years to pass its gold legislation, with three vetoes by two Republican governors.

Unfortunately, politics has become hyper-partisan. If Nevada Democrats perceive this as a Republican bill, they will vote it down. Since they are in the majority, they will kill the bill. That must not happen! The decay in our monetary system is at an advanced stage. No one can predict how much time remains, but I can say one thing with absolute certainty. We need to begin developing an alternative. We need to begin remonetizing gold, and that means gold bonds.

…click on the above link to read the rest of the article…

A Dire Warning

A Dire Warning

Let’s return to our ongoing series on the destruction of capital, and how to identify the signs. Steve Saville posted a thoughtful article this week entitled The “Productivity of Debt” Myth. His article provides a good opportunity to add some additional thoughts.

We have written quite a lot on this topic. Indeed, we have a landing page for marginal productivity of debt (MPoD) with four articles so far. Few economists touch this topic, perhaps because MPoD shows that our monetary system is failing. We encourage you to do a Google search, and you will see scant mention other than articles by Keith and Monetary Metals. This is tragic. Every monetary economist should be bellowing from the rooftops about the falling marginal productivity of debt!

So when Lacy Hunt wrote in the Hoisington quarterly letter about Diminishing Returns – Consequences of Excess Debt (p. 4), several readers forwarded the link to us. And this week Steve Saville wrote a response to Lacy’s discussion.

We have our own concerns with Lacy’s approach. One is his statement:

“In addition to capital, output is a function of labor, natural resources and technology. Thus, one of these latter three factors must accelerate in order to offset the overuse of debt…”

Unless one considers entrepreneurial innovation to be just a type of “technology”, this formulation is missing something even on its own stated terms. But more broadly, it does not address the problem of interest rates. If companies can borrow at 2%, then there will be scant business opportunities that generate more than about 3%. The marginal productivity of the entrepreneur is brought down by the falling interest rate. The same “inputs” of labor, resources, and technology will yield different results at different interest rates.

Marginal Productivity of Debt

However, today we want to address the points raised by Steve. All indented quotes below are his.

…click on the above link to read the rest of the article…

Wealth-Destroying Zombies

The hot topic in monetary economics today (hah, if it’s not an oxymoron to say these terms together!) is whither interest rates. The Fed in its recent statement said the risk is balanced (the debunked notion of a tradeoff between unemployment and rising consumer prices should have been tossed on the ash heap of history in the 1970’s). The gold community certainly expects rapidly rising prices, and hence gold to go up, of course.

Will interest rates rise? We don’t think it’s so obvious. Before we discuss this, we want to make a few observations. Rates have been falling for well over three decades. During that time, there have been many corrections (i.e. countertrend moves, where rates rose a bit before falling even further). Each of those corrections was viewed by many at the time as a trend change.

They had good reason to think so (if the mainstream theory can be called good reasoning). Armed with the Quantity Theory of Money, they thought that rising quantity of dollars causes rising prices. And as all know, rising prices cause rising inflation expectations. And if people expect inflation to rise, they will demand higher interest rates to compensate them for it.

The quantity of dollars certainly rose during all those years (with some little dips along the way). Yet the rate of increase of prices slowed. Nowadays, the Fed is struggling to get a 2% increase and that’s with all the “help” they get from tax and regulatory policies, which drive up costs to consumers but has nothing to do with monetary policy. Nevertheless interest rates fell. And fell and fell.

Why Have Interest Rates Been Falling?

It seems obvious that if one wishes to say that a trend has changed, after enduring for well over three decades, one needs to explain why.

…click on the above link to read the rest of the article…

Getting High on Bubbles

Getting High on Bubbles

Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD). We will no doubt generate some hate mail for saying this, but we don’t believe that anyone ever attained that goal. The perfect drug-induced high does not exist. Even if it seems fun while it lasts, the problem is that the consequences spill over into the real world.

Today, drunk on falling interest rates, people look for the perfect speculation. Good speculations generally begin with a story. For example dollar-collapse. And then an asset gets bid up to infinity and beyond (to quote Buzz Lightyear, who is not so close a friend as our buddy Aragorn). It happened in silver in 2010-2011. It happened more recently in bitcoin.

Most speculators don’t care about the economic causes and effects of bubbles. They just want to buy an asset as the bubble begins inflating, and sell just before it pops. But bitcoin and many gold proponents are different. They promise that their favorite asset will cure many social ills, fix many intractable problems, and increase liberty. Oh yeah and get-rich-quick.

We been pounding the table for going on a decade, sometimes even bellowing from the rooftops, that gold does not go up. Even the gold bugs claim that the dollar is collapsing. Our point—which has so far gone unanswered—is that you cannot use something which is collapsing to measure other things. Especially not the economic constant (gold). Either the dollar is collapsing, in which case if gold is going up then the dollar could not be used to measure this. Or else it’s not collapsing, in which case maybe it could measure gold—but then remind us why these folks are buying gold.

…click on the above link to read the rest of the article…

Slaves to Government Debt Paper, Report 25 Mar 2018

Slaves to Government Debt Paper, Report 25 Mar 2018

Picture, if you will, a group of slaves owned by a cruel man. Most of them are content, but one says to the others, “I will defy the Master.” While his statement would superficially appear to yearn towards freedom, it does not. It betrays that this slave, just like the others, thinks of the man who beats them as their “Master” (note the capital M). This slave does not seek freedom, but merely a small gesture of disloyalty. Of course, he will not get his liberty (but maybe a beating).

Today we do not have slavery, but we are shackled nevertheless. Savers are forced to use the government’s debt paper as if it were money. Most are content, but one says “gold will go up.” He does not expect a beating (but maybe a price suppression).

The slave cannot escape from his bondage, until he stops thinking of the brute as “Master” with a capital M. Freedom does not come from a little show of resentment. So long as malcontent slaves are content to limit themselves to petty disobedience, the Master is content that his rule is absolute. Freedom first takes an act of thinking. One must see the brute for what he is.

Today’s investor cannot escape from the bondage of the Federal Reserve, until he stops thinking of the dollar as “Money” with a capital M. So long as malcontent investors are content to limit themselves to betting on the dollar-price of gold, the Federal Reserve is content that its rule is absolute. Freedom takes an act of thinking. One must see the dollar for what it is.

The slave must stop using the brute’s whip to tell him what’s good and what’s bad. The investor must stop using the Fed’s credit paper to tell him what’s up and what’s down.

…click on the above link to read the rest of the article…

Inflation and Gold – Precious Metals Supply and Demand

Reasons to Buy Gold

The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.

File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the communists couldn’t be stopped, they frantically tried exchange their government-issued paper money for gold. In preparation for its exodus to Taiwan, the Kuomintang regime had forced everyone to exchange their gold, silver and foreign exchange for a new paper currency, the Jingyuanquan in 1948 (“golden yuan”) which it promptly inflated with gay abandon, belying its name. It then tried to combat rising prices with price controls – a strategy that has reliably failed since at least the times of the Roman Empire. It reversed the policy a few months later, as even its main supporters became thoroughly fed up. The people in the picture above were among those who had clearly waited too long to take advantage of this policy reversal. [PT]

But first, we want to clarify something in light of our ongoing commentary about the struggles of the debtors and the lack of drivers for rising consumer prices. Just because farmers and restaurateurs are frantically producing and selling like mad, which results in soft prices, does not mean that people cannot begin to buy gold in earnest again.

…click on the above link to read the rest of the article…

Falling Interest Rates

Amassing Unproductive Debt

Last week, we discussed the marginal productivity of debt. This is how much each newly-borrowed dollar adds to GDP. And ever since the interest rate began its falling trend in 1981, marginal productivity of debt has tightly correlated with interest. The lower the interest rate, the less productive additional borrowing has in fact become.

Left: the first IKEA store located in Älmhult in Sweden, near the residence of the company’s founder (nowadays the store is a museum); right: a Task Rabbit car. Given the valuations at which TaskRabbit was able to raise funds recently, it is a good bet IKEA paid a small fortune to take it over (waiting for the QE-induced bubble to burst may have been cheaper). [PT]

Let’s look at a recent event: the Ikea acquisition of TaskRabbit. You might wonder, why does a home goods company need to own a freelance labor company? Superficially, it seems to makes sense. Ikea products notoriously come in flat packs, but consumers don’t want to fuss with all the little parts. They just want finished furniture. Ikea has been using TaskRabbit to hire people to assemble it in their homes.

Isn’t this like that caricature of the billionaire who buys, say, the Planters Peanut company because he likes to eat salted nuts? Ikea could be a customer of TaskRabbit, hiring its temporary workers as needed, without owning the company. In fact, it had been doing that for years.

The acquisition price was not disclosed, however, we can guess that it was high. TaskRabbit was a Silicon Valley darling with a bright future. Its value proposition is right for this economy. It had raised $50 million, presumably at rich valuation multiples.

…click on the above link to read the rest of the article…

The Falling Productivity of Debt

Discounting the Present Value of Future Income

Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.

We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article). This is a very simple ratio chart, which focuses on non-financial corporate debt in particular, as neither consumer debt nor government debt can be considered “productive” by their very nature – the latter types of debt are used for consumption, which they “pull forward” (as an aside, we don’t believe there is anything wrong with consumer debt per se, but it is not “productive”). As the recommendations of Keynesians on combating economic downturns indicate, they have a slight problem with the sequencing of production and consumption. They favor measures aimed at boosting demand, i.e., they want to encourage consumption, which is tantamount to putting the cart before the horse. The chart above shows the ratio of GDP to total non-financial corporate debt – and obviously, GDP is not really an ideal measure for this purpose, as Keith also mentions below (GDP has many flaws, and its greatest flaw is the underlying idea that “spending” is what drives economic growth; not to mention that it seems not to matter what the spending actually entails – even Keynesian ditch digging or pyramid building would “add to GDP”, but would it represent economic growth? That seems a rather audacious assumption – in fact, it should be obvious that such activities would diminish rather than enhance society-wide prosperity).

…click on the above link to read the rest of the article…

 

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