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Inflation from Useless Ingredients

The cause of rising prices is not always monetary. Before Covid, we wrote a lot about mandatory useless ingredients. This is when regulators and taxinators force producers to add things to their products, which buyers do not care about (and often do not know about).

There has been a steady march of added useless ingredients over the decades. But, like watching a child grow taller every day, you may not always think about the big change compared to five years ago (or 50 years ago, in the case of useless ingredients). It would be very difficult to estimate how much useless ingredients have added to the prices of each good.

How much do all the required airbags add to the cost of every new car? How many costs are added by all the emissions gizmos, and safety devices? The same is going on, in the fuel you pump into the car, the tires you drive on, and everything you put in the trunk when you go shopping.

The cost of these useless ingredients is high and rising. Before Covid, this was the biggest driver of inflation.

Image via rte.ie

Inflation from Trade War

For a few years prior to the virus, another driver began to emerge. Trade war. For us, this is a broader term than just tariffs. Though, there have been many tariffs added in recent years. Some readers may assume these are targeted at China due to its military threat, but there have been American tariffs imposed on Scotch whiskey, Canadian lumber, and many other things. Like useless ingredients, the consumer is often unaware of tariffs and how they drive up the price of the 2×4’s they buy. So they assume that the cause is simple money printing.

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

Response: Money and Payments: The US Dollar in the Age of Digital Transformation

January 31, 2022

Response: Money and Payments: The US Dollar in the Age of Digital Transformation

Implications from the Federal Reserve’s Paper

Our first comment is that every monetary change from the Founding of America through present has been to move away from free markets, and to adulterate our currency. An analogy could be made to the Ship of Theseus, with each good plank replaced with an unsound board. A Zombie Ship of Theseus, decaying, but still afloat.

Let’s walk through the Fed’s paper. The very firstparagraphon page 1 says, “The Federal Reserve, as the nation’s central bank, works to maintain the public’s confidence by fostering monetary stability, financial stability…”

Monetary stabilityis defined as2% debasement per annum, an Orwellian twist. Andfinancial stabilityin the Fed’s regime is a myth.Interest rates shot the moon between 1947 and 1981, and since then have been falling—with volatility—into the black hole of zero.Meanwhile debt grows exponentially, and the marginal productivity of debt—how much GDP is added for each new dollar of debt—falls decade after decade. It is not only unstable, but unsustainable, heading towards an ultimate heat death of the economic universe.

“CBDC is defined as a digital liability of a central bank that is widely available to the general public.” In other words, it’s like holding a paper dollar bill except it’s digital. Which implies several things:

The Fed could muscle out the banks from the demand deposits business
The Fed could buy all the assets, which the banks now finance with demand deposits
Thus, money and payment services could become more socialized
The government could declare paper is no longer legal tender, thus forcing everyone into CBDC
The government could track who spends their CBDC, and what they buy
This spending data could be used in a social credit score system

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

The Zombie Ship of Theseus

January 7, 2022

The Zombie Ship of Theseus

The Ship of Theseus is an old philosophical thought experiment. It asks a question about identity. Suppose you replace all of the boards of a ship with new ones—is it still the same ship?

We are not going to try to resolve this millennia-old paradox. Instead, we are going to add one more element, and then tie it to the monetary system. The additional element is what if the replacement boards are adulterated in some way. That is, each new board is warped, or weakened, or otherwise not fit for purpose.

It should be clear that replacing boards with unsound wood does not alter reality, only the ship. It does not remove any constraints such as the need to be watertight. It does not make anything better, only adds new flaws.

Let’s call this new ship, with each original board replaced with these adulterated boards, the Zombie Ship of Theseus. It looks like the Ship of Theseus. However, it does not work like it. It has been corrupted to work in a different way, i.e. to lull sailors into going out to sea, where a storm will drown them.

The History of our Warped Monetary System and Currency

So how does this relate to the monetary system and the currency? There has been a centuries-long process of replacing important boards. Let’s highlight the key changes.

The Original System

At the Founding of America, there was the original Ship of Theseus. One had the right to deposit one’s gold (we will leave out silver, as this complicates the story somewhat) and get a paper bank note in exchange. Or one could keep one’s gold, if one did not like the terms. One had the right to redeem the note, and get one’s gold back…

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

Inflation and Gold: What Gives?

December 23, 2021

Inflation and Gold: What Gives?

In the last Supply and Demand update, we discussed some different theories which attempt to explain what causes the gold and silver prices to move. We mentioned the:

“…attempt to hold up a famous buyer of metal, while ignoring the thousands of not-famous sellers who sold the metal to said famous buyer.”

Since then, Ireland has bought gold for the first time in over a decade. And predictably, most voices in the gold community see this as a bullish sign.

By the way, we did not see any data about the prices paid on what dates, but the articles on December 1 mention a series of buys over a few months. Assuming a few means two, it looks like Ireland may have paid more than the current price.

The Different Theories on What Moves Gold and Silver Prices

Back to the common bullish view of Ireland’s wisdom, what of the opinions of the 64,300 people who sold their gold to Ireland (assuming the average seller sold an ounce)? Surely, these people believed the price will go down?

Famous and Anonymous Price Movers

There are two competing theories for how to interpret the conflicting views when one market participant is famous and the other is a bunch of anonymous people. One is the “famous buyer” theory, and the other is the “incompetent bureaucrat” theory. The latter was used to explain the sale of half of Britain’s gold between 1999 and 2002.

How could we have known that the UK government was foolish to sell back then, and the anonymous 12,699,250 buyers were right? Whereas today, the Irish bureaucrats are right, and the 64,300 sellers are wrong?

This is just a bias towards bullishness.

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

Perversity: Thy Name is Dollar

November 17, 2021

Perversity: Thy Name is Dollar

If you ask most people, “what is money?” they will answer that money is the generally accepted medium of exchange. If you ask Google Images, it will show you many pictures of green pieces of paper. Virtually everyone agrees that money means the dollar.

Image credit: Cildo Meireles

Breaking Down the Dollar Monetary System

What does it mean to have a dollar? If you hold a piece of paper with green ink on it, which says “ONE DOLLAR”, you may notice that it also says, at the top, “FEDERAL RESERVE NOTE”. Note is a word for credit. The dollar bill (bill is also a word for a credit instrument) is a credit of some kind, the credit of the Federal Reserve. The paper itself has no value, apart from that it is the obligation of a party whose full faith and credit is beyond question. It would be something like the fallacy of reification, to confuse the green piece of paper with the monetary value it represents.

Banking, Lending and the Fed

Most holders of dollars do not hold them in the form of actual pieces of paper. For reasons of convenience, and safety and security, people deposit them in a bank. That is, they may think of it as having dollars in a bank (just as they think of the paper as the money). But let’s drill down into that. Most people know that the bank does not just put all the green pieces of paper into a vault. The bank holds a small amount of paper cash, based on what it expects to pay during the business day. The rest, well, the bank does something–or–other with them…

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

Rising Fundamentals for Gold and Silver

November 11, 2021

Rising Fundamentals for Gold and Silver

The Different Theories on What Moves Gold and Silver Prices

For example, the Quantity Theory school attempts to relate the quantity (or change in quantity) of dollars, to each commodity. Generally, this theory predicts rising prices based on the reasoning of “more dollars chasing the same or fewer ounces of gold and silver.” The problem is that the new holders of these new dollars are not necessarily bidding up gold and silver (our thorough rebuttal to this is here).

The Conspiracy School thinks that there is a shadowy cabal, a price-manipulation cartel that decides what the gold and silver prices will be (our thorough rebuttal to this is in our Thoughtful Disagreement with Ted Butler).

Other schools attempt to compare mine production with industrial and jewelry demand. Or attempt to hold up a famous buyer of metal, while ignoring the thousands of not-famous sellers who sold the metal to said famous buyer. We should not make too much ado over a move of metal from one corner of the market to another (as we’ll discuss below).

Gold and Silver Fundamental Analysis:Contango, Backwardation and the Basis

None of these schools describes the fundamentals of the gold and silver markets, much less predicts the price moves. To look at the fundamentals, one must look at the gold and silver bases. The basis, to oversimplify slightly, is futures price – spot price. This shows the fundamentals, because a market in scarcity (as oil has been recently) has a lower price for future delivery than for immediate delivery. In other words, buyers prefer their oil now rather than later. And this preference is expressed as a higher price for delivery now, vs. later…

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

Open Letter to Gregory Mankiw From Keith Weiner

December 19, 2020

OPEN LETTER TO GREGORY MANKIW FROM KEITH WEINER

Dear Professor Mankiw:

I am writing in response to your article in the New York Times, “The Puzzle of Low Interest Rates”. I commend you for recognizing two important truths, which are missed by many other observers. One, that there has been a breathtaking drop in the interest rate over 40 years. Too many dismiss this with an airy hand wave, or deny it.

Two, you see that the cause is not the Federal Reserve, at least not directly. As you note, the Fed aims to set the interest rate at levels determined by “deeper market forces.” In my theory of interest and prices, I show how the Fed sets up a dynamic which is bigger than the central bank itself. Once set in motion, this dynamic moves in one direction for a long time, with positive feedback loops that act like a ratchet. Since 1980, we are in a powerful falling trend.

However, you commit some big blunders too. One is that old saw that rates are falling because of falling inflation expectations. If the Treasury had a penny for every time someone repeated this error, it would have enough to pay off the debt (well, it could—if there were a mechanism to extinguish debt using irredeemable currency).

You cite Irving Fisher for this, but Fisher wrote during the gold standard and virtually all of his work was done prior to when FDR made the dollar irredeemable to American citizens. In the gold standard, of course, people may invest their gold if they like the terms (including the interest rate). Or they can choose not to invest. Gold under the mattress is better than gold committed to a long investment at too-low interest rates.

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

Silver “Scarcifies” – Precious Metals Supply and Demand

July 31, 2020

Silver “Scarcifies” – Precious Metals Supply and Demand

On Monday, Silver got Scarcer – and Simpler

On 23 July, we said:

“Well, it’s complicated.”

The action on 27 July was not.

Silver spot price vs. September basis

Notice the big drop in the basis starting around midnight (London time). It falls from over 7% to under 2%.

To refresh: Basis = Future(bid) – Spot(ask)

For the first two and half hours, the spot price is not moving. So, the only way the basis can drop is if the price of the September silver future is dropping. In other words, selling of futures. But while that was going on, there was enough buying of spot to keep it steady.

Then, perhaps some market participants became aware of the buying of spot. Or perhaps some other buyers got excited. Somebody was buying in size, because between around 2:30 and 3:00am, the price shot up from around $23.10 to $24.40. +$1.30.

After that, the price jitters sideways but ends up to about $24.65. And the basis ends up around 3%. There are periods when the basis correlates with price, e.g. from 10:00 to 14:00. During these periods, the price was driven by speculators in the futures markets positioning and repositioning.

And there are also times when they move in opposite directions, e.g. from 6:00 to 7:30. This means that price was driven by buying and selling of physical metal.

Receding Abundance

It is important to note that the price of silver went up, a lot, while the abundance of the metal to the market went down a lot. The Monetary Metals silver basis reading for Friday was 5.3%.

We have written a lot in recent months about the absence of the market makers. This is why the basis has been so high. If the market makers came back, we would expect the basis to be pulled in quite a bit.

We do not believe that this occurred, suddenly, between midnight and 3:00AM Monday morning in London.

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

How to Maintain a Bull Market After Coronavirus

May 15, 2020

HOW TO MAINTAIN A BULL MARKET AFTER CORONAVIRUS

Everyone thinks they know the cause and effect of the Federal Reserve’s response to crises such as 2008 and 2020. The Fed prints money to buy assets. This increases the quantity of money. And this causes prices to rise. The Fed wants this, because it thinks that inflation eases the burden on debtors. The mainstream wants this, because they have been brainwashed into thinking that inflation causes good effects such as employment. The critics decry this, because they see inflation as a tax.

This view is not even wrong.

The dollar is not money. It is just credit. And it’s not printed. It’s borrowed. An increase in the quantity of it does not necessarily cause commodity and consumer prices to rise. Just look at not one, but two drops in the price of oil. And not small drops, but epic collapses. Starting in June 2014, the price began to fall from $108. By January 2016, it had dropped to $26, a crash of 76%. Then it rose for a whole, hitting $77 by October 2018. It has been downward since then, to $66 this January, or -14%. It’s now $25, which is a further loss of 62%. This is not counting the brief plunge to -$38 on April 20—yes, those who had oil were obliged to pay someone to take it off their hands (thus debunking the notion that oil is like gold).

In other words, this not-even-wrong theory predicts a didn’t-even-happen price hike.

When a bank, pension fund, or investor sells a bond to the Fed, they do not go out and buy consumer goods. They buy another asset. This is why the result is not rising consumer prices, but rising asset prices.

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

It’s Only Paper

May 10, 2020

IT’S ONLY PAPER

The response to the virus has added a new mechanism of capital consumption to the many we have documented over the years. Businesses are shut down, yet they continue to incur expenses. There is a popular misconception out there that this is merely a paper loss. One can almost picture a neutron bomb that somehow wipes out only paper, leaving all the physical assets and plant unscathed. It’s a pleasant fantasy. And it’s quite a popular one—not only amongst all the usual suspects, but even an Austrian school economist of our acquaintance asserted it.

As an aside, this illustrates that, too often, economists are unfamiliar with business. The economist looks at a closed restaurant and thinks there’s no reason why this restaurant can’t be mothballed for a day, a week, a month, or a year. The owner of the restaurant would object that he’s still paying certain expenses, even if he’s laid off all of his staff. And the economist retorts, “That’s just paper!”

The economist—and politicians—are tempted to think that the government and its central bank can restore the lost paper capital by extending a loan, or even doling out free money. This is simply not true.

One thing should be bloody clear: whatever expenses this restaurant pays, is a transfer of real resources from the restaurant to the recipients. Those recipients are buying food, fuel, clothing, shelter, etc. It’s not just paper.

Looking deeper into the restaurant, we see that, even when it’s closed, it’s still burning some electricity (even if not as much as when it’s operating). There’s insurance premiums. And building maintenance. Over time, exposure to sun, wind, rain, and snow damages the roof, windows, and even the walls.

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

Curious Events in Risk-Free Collateral-Land – Precious Metals Supply and Demand

September 25, 2019

Curious Events in Risk-Free Collateral-Land – Precious Metals Supply and Demand

Liquidity Shortage

Last week the price of gold rose $28, and silver $0.53. But the prices of the metals was not the big news last week. The price of repo — a repurchase agreement, to sell and repurchase a treasuries — skyrocketed. Banks were thirsty for liquidity, and only cash can quench it.

Last week’s “oops” moment in repo land as the overnight general collateral rate briefly soared to 10% (we will soon publish a detailed summary of the sequence of events that has led to this hicc-up). [PT]

Just another day in the fool’s paradise of centrally planning an irredeemable currency and its interest rate. Just another crisis, to be tamped down by the central planner. Keep Calm and Carry On.

This is a curious phenomenon, where the market is offering a risk-free trade to give up one’s dollars and get them back tomorrow plus a return. Yet no bank or other trader is taking the bait. The problem was not a shortage of trust, but of liquidity.

When trust in the system collapses, then gold will withdraw its bid on the dollar (which most people will wrongly perceive as the disappearance of offers to sell gold). This will be permanent gold backwardation.

So the question that should be on everyone’s mind is: did gold drop into backwardation this week? Or silver? Read on to see graphs of the gold and silver co-basis (backwardation is strictly when the co-basis > 0).

Fundamental Developments

Let us look at the only true picture of the supply and demand fundamentals. But, first, here is the chart of the prices of gold and silver.

Gold and silver priced in USD

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

How Is Negative Interest Possible?

September 13, 2019

HOW IS NEGATIVE INTEREST POSSIBLE?

Germany has recently joined Switzerland in the dubious All Negative Club. The interest rate on every government bond, from short to 30 years, is now negative. Many would say “congratulations”, in the belief that this proves their credit risk is … well … umm … negative(?) And anyways, it will let them borrow more to spend on consumption which will stimulate … umm… well… all of the wasteful consumption for which governments are rightly infamous.

While those who are about to borrow may find cause to cheer (as opposed to those who have already borrowed, at higher rates, who are now disadvantaged by this move), the savers are harmed. How can anyone save in an environment where savings has a cost?

John Maynard Keynes called for the “euthanasia of the rentier”. Congratulations, Germany, we say in all sarcastic seriousness. You have gone even beyond Keynes vicious idea. Your rate is now negative!

The Preference of the Savers

Instead of writing more on the destructiveness of this, we want to tackle a different question today. How is this possible? What are the mechanics? Why don’t savers rebel?

We wrote about the Crime of ’33 a few months ago, and it’s worth re-reading before going on. 1933 is when President Roosevelt made the dollar irredeemable. Prior to that, if you didn’t like the interest rate, you could sell the bond and hold gold coins instead. The gold coin has no default risk. And, back then—in the gold standard–it had no price risk.

Today one can own gold, to avoid default risk. This is a big part of why gold is now $1,500. But one takes price risk. And price volatility to be is considered a feature, not a bug, by the gold bugs!

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

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

May 21, 2019

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

March 29, 2019

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

February 22, 2019

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…

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