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The evidence strongly suggests that a combined interest rate, economic and currency crisis for the US and its western alliance will continue in 2023.

This article focuses on credit, its constraints, and why quantitative easing has already crowded out private sector activity. Adjusting M2 money supply for accumulating QE indicates the degree to which this has driven the US tax base into deep recession. And the wider effects on credit in the economy should not be ignored.

After a brief partial recovery from the covid crisis in US government finances, they are likely to start deteriorating again due to a deepening recession of private sector activity. Funding these deficits depends on foreign inward investment flows, which are faltering. Rising interest rates and an ongoing bear market make funding from this source hard to envisage.

Meanwhile, from his public statements President Putin is fully aware of these difficulties, and a consequence of the western alliance increasing their support and involvement in Ukraine makes it almost certain that Putin will take the opportunity to push the dollar over the edge.

Credit is much more than bank deposits

Economics is about credit, and its balance sheet twin, debt. Debt is either productive, in which case it can extinguish credit in due course, or it is not, and credit must be extended or written off. Money almost never comes into it. Money is distinguished from credit by having no counterparty risk, which credit always has. The role of money is to stabilise the purchasing power of credit. And the only legal form of money is metallic; gold, silver, or copper usually rendered into coin for enhanced fungibility.

…click on the above link to read the rest…

The “Barbarous Relic” Helped Enable a World More Civilized than Today’s

December 12, 2022

The “Barbarous Relic” Helped Enable a World More Civilized than Today’s

One of history’s greatest ironies is that gold detractors refer to the metal as the barbarous relic. In fact, the abandonment of gold has put civilization as we know it at risk of extinction.

The gold coin standard that had served Western economies so brilliantly throughout most of the nineteenth century hit a brick wall in 1914 and was never able to recover, or so the story goes. As the Great War began, Europe turned from prosperity to destruction, or more precisely, toward prosperity for some and destruction for the rest. The gold coin standard had to be ditched for such a prodigious undertaking.

If gold was money, and wars cost money, how was this even possible?

First, people were already in the habit of using money substitutes instead of money itself—banknotes instead of the gold coins they represented. People found it more convenient to carry paper around in their pockets than gold coins. Over time the paper itself came to be regarded as money, while gold became a clunky inconvenience from the old days.

Second, banks had been in the habit of issuing more bank-notes and deposits than the value of the gold in their vaults. On occasion, this practice would arouse public suspicion that the notes were promises the banks could not keep. The courts sided with the banks and allowed them to suspend note redemption while staying in business, thus strengthening the government-bank alliance. Since the courts ruled that deposits belonged to the banks, bankers could not be accused of embezzlement. The occasional bank runs that erupted were interpreted as a self-fulfilling prophecy. If people lined up to withdraw their money because they believed their bank was insolvent, the bank soon would be…

…click on the above link to read the rest…

#238. Money and the end of abundance

September 3, 2022

#238. Money and the end of abundance

A FINANCIAL CRISIS PRIMER

Amongst the world’s decision-makers, French president Emmanuel Macron has come closer than anyone to spelling out the reality of the current economic situation, saying that “we are in the process of living through a tipping point or great upheaval”, and referencing “the end of abundance” (my emphasis).

If his words are taken seriously – as they should be – a major crisis looms. The global financial system is entirely predicated on perpetual economic growth.

As important as what Mr Macron has said is what he didn’t say. He didn’t say that abundance is over ‘for a year or two’, or that we’ll have to live through this ‘until better times return’. He didn’t make fatuous promises of ‘sunlit uplands’ or ‘a new golden age’.

Some of us have long known that an age of abundance made possible by low-cost energy was coming to an end. Until now, though, decision-makers have fought shy of this conclusion, taking refuge in the tarradiddle of ‘infinite growth on a finite planet’ proffered by a deeply flawed economic orthodoxy.

What should concern us now isn’t when, or whether, other leaders will arrive at this same conclusion. The trend of events is going to impose that emerging reality upon them.

Rather, we need to be prepared for what happens when market participants arrive at the same conclusion as Mr. Macron.

The nature of the crisis

Preparedness requires clarity, and we need to be in no doubt that what we’re witnessing now is an unfolding affordability crisis. This means two things – and both of them point towards a major financial slump.

First, the ability of consumers to make discretionary (non-essential) purchases is in structural decline. This spells relentless contraction, not just in obvious discretionary sectors like leisure, travel and entertainment, but in ‘tech’ and consumer durables as well.

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

The Most Valuable Form of Money Nobody’s Seen–Yet

July 2, 2022

The Most Valuable Form of Money Nobody’s Seen–Yet

What is “money”? “Money” is a claim on the essentials of life. Ration cards are claims on essentials.

Many people expect “money” will soon be tied to commodities. Agreed. It’s called a ration card that grants the holder the right to buy a specific quantity of essential goods at a specified price.

This right is a form of “money” directly tied to the value of commodities.

Ration cards are the only fair way to distribute essentials in times of chronic scarcity. Markets work fine when there’s a substitute for whatever is scarce, but there are no substitutes for electricity, food, fuel or fresh water, the FEW essentials (Food, energy, water).

Leaving the distribution of scarce, no-substitutes essentials up to the market leads to the rich eating very well indeed and the poor going hungry. This leads to a little thing called the overthrow of the failed status quo and the destruction of a good chunk of its ruling class (Payback’s a witch, etc.). No bread? Let them eat iPhones.

We know ration cards work because a mass experiment in rationing essentials was conducted in World War II. Maybe fairness no longer matters (and if it doesn’t, then prepare for the overthrow of the failed status quo and the destruction of a good chunk of its ruling class), but if fairness matters–or the ruling elite wish to keep all their power and all their goodies–then rationing and the ruthless suppression of price gouging are as good as gold.

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

#231. Short and sharp

June 9, 2022

#231. Short and sharp

A SYNOPSIS OF DETERIORATION AND RISK

Might we very soon face a major financial crisis, at a scale exceeding that of 2008-09?

Are we heading for a global economic slump, or can current problems be explained away in terms of ‘non-recurring events’, such as the war in Ukraine?

Do the authorities have the tools and the understanding required to navigate the current economic storm? And what is the outlook for inflation?

These are valid questions, and I’m well aware that, whilst many visitors to this site are interested in economic principles, theory and detail, others prefer succinct statements of situations and prospects.

That’s understandable – these are deeply worrying times.

The aim with what follows is to (a) set out a brief summary of the economic and financial outlook, as seen through the prism of the SEEDS economic model, followed by (b) a succinct commentary on how these conclusions are reached.

Accordingly, what we might infer from these conditions is left for another day. Like me, you will have your own views on the political and other implications of what’s going on and what is to be expected, but the plan with this discussion is to stick to a strictly objective analysis of economic and financial conditions and prospects.

Data used here by way of illustration is a ‘top-line’ summary at the global level. We might, at a later date, look at some of this material in greater detail, and examine the circumstances of some of the 29 national economies modelled by SEEDS.

Where both the theoretical and the ‘succinctly-practical’ are concerned, urgency is being increased by what we can only call the ‘uncertainties and fears’ generated by current conditions.

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

Running on Empty, Part II

June 2, 2022

Running on Empty, Part II

How the Petrodollar Poisoned Foreign Policy with Financial Profiteering

Welcome to Part II of Running on Empty, my three-part analysis of the Petrodollar system. Part I of this series explained what the petrodollar system is, how it came to be, and what its financial effects have been on the United States. In Part II, I’ll explain the petrodollar’s implications for foreign policy. In Part III, I’ll show how those implications paved the way for the Russo-Ukraine War, and why that’s causing the system to break down.

America’s Chief Export is the US Dollar

As explained in the previous installment, the petrodollar system is based on an agreement between the US and Saudi Arabia. Under the terms of the deal, the US guarantees the security of Saudi Arabia and in exchange, Saudi Arabia guarantees that all petroleum is sold by OPEC for US dollars, with the US dollars re-invested into America via petrodollar recycling. The result: Since everyone needs petroleum, everyone needs US dollars. Oil replaces gold as the hard backing for the dollar. 1

Since the petrodollar system was put in place, the US has enjoyed a comparative advantage in manufacturing currency that no other nation enjoys. Under conditions of free trade, a country produces and exports more of a good for which it a comparative advantage, and produces less and imports more of the goods for which it doesn’t. And that’s what has happened: Since the petrodollar system was put in place in 1973, America has produced more and more dollars and produced less and less of everything else. The dollar is today our nation’s #1 export.

How large is the circulation of US dollars? As of April 2022, the American money supply, which economists call M2, stands at $21,728 Billion Dollars. M2 includes three types of money:

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

Gold As Cheap Today As In 1971 At $35

May 19, 2022

GOLD AS CHEAP TODAY AS IN 1971 AT $35

“Specie (gold and silver coin) is the most perfect medium because it will preserve its own level, because having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.” – Thomas Jefferson

Since no current President or Prime Minister nor any Central Bank Chairman understands what money is or the relevance of gold, we turn above back to history and Thomas Jefferson, America’s third president for a proper definition.

Jefferson also understood that “Paper is Poverty, It is only the Ghost of Money, and not Money itself.”

As the world economy goes towards an inflationary depression exacerbated not only by epic debts and deficits but now also by war, the significance of gold takes on a whole different dimension.

So let’s dissect Jefferson’s statement:

“(GOLD) Will preserve its own level”

Gold is Constant Purchasing Power. As such, gold doesn’t go up in real terms. An ounce of gold today buys a good suit for a man just like it did in Roman times.

The graph below shows gold as constant purchasing power at the 100 line whilst all the currencies are crashing to the bottom.

All currencies are continuing to lose value against real money although it never takes place in a straight line. With higher interest rates & inflation, higher deficits & debts, poverty, cost of wars and increasing pressures in the financial system, the currency debasement will now accelerate.

Gold is not an investment. Gold is eternal money. As such gold maintains its REAL value whereas paper money loses all its value over time. For 5000 years gold has outlived all other forms of money including paper money.

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

Ukraine war: World Bank warns of ‘human catastrophe’ food crisis

April 22, 2022

Ukraine war: World Bank warns of ‘human catastrophe’ food crisis

The world faces a “human catastrophe” from a food crisis arising from Russia’s invasion of Ukraine, World Bank president David Malpass has said.

He told the BBC that record rises in food prices would push hundreds of millions people into poverty and lower nutrition, if the crisis continues.

The World Bank calculates there could be a “huge” 37% jump in food prices.

This would hit the poor hardest, who will “eat less and have less money for anything else such as schooling”.

In an interview with BBC economics editor Faisal Islam, Mr Malpass, who leads the institution charged with global alleviation of poverty, said the impact on the poor made it “an unfair kind of crisis… that was true also of Covid”.

“It’s a human catastrophe, meaning nutrition goes down. But then it also becomes a political challenge for governments who can’t do anything about it, they didn’t cause it and they see the prices going up,” he said on the sidelines of the IMF-World Bank meetings in Washington.

The price rises are broad and deep, he said: “It’s affecting food of all different kinds oils, grains, and then it gets into other crops, corn crops, because they go up when wheat goes up”.

There was enough food in the world to feed everybody, he said, and global stockpiles are large by historical standards, but there will have to be a sharing or sales process to get the food to where it is needed.

Mr Malpass also discouraged countries from subsidising production or capping prices.

Instead, he said, the focus needed to be on increasing supplies across the world of fertilisers and food, alongside targeted assistance for the very poorest people.

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

#225. Gravitational pull

April 3, 2022

#225. Gravitational pull

MANAGING THE REALITY OF ‘LIFE AFTER ORTHODOXY’

A new ‘heavenly body’ has entered the cosmology of political and corporate decision. This new influence is the emerging reality that the economy is turning out, after all, to be an energy system, and that long-accepted ideas to the contrary are fallacious.

The concept of limits is replacing the paradigm of ‘infinite growth’.

Where decision-making is concerned, this emerging reality isn’t likely to have an immediately transformational effect. Established nostrums can have a tenacity that long out-lasts the demonstration of their falsity.

We’re not, then, about to see sudden, open and actioned acceptance of the fact that the economy is an energy rather than a monetary system.

Rather, we can expect to see energy reality exert an increasing gravitational pull on the tide of decisions and planning, most obviously in government and business. Policy statements may not change, but the thinking that informs planning and strategy undoubtedly will.

This gravitational effect is starting, as of now, to re-shape perceptions of the present, change ensuing “narratives” of the future, and trigger a process of realignment towards the implications of a world with meaningful constraints.

The aim here is to examine the practical consequences of a contest of interpretations which, whilst it has already been decided at the theoretical level, leaves ‘everything to play for’ in political and commercial practice.

And then there was one

There are, essentially, two ways in which we can seek to explain the working of the economy.

One of these is the conventional or orthodox school of thought, which presents economics as a process determined by the behaviour of money, and acknowledges no limits to the potential for growth.

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

What War in Ukraine Means for Energy and Money

April 3, 2022

What War in Ukraine Means for Energy and Money

The Ins and Outs of Whose Money is it Anyway?

March 14, 2022

The Ins and Outs of Whose Money is it Anyway?

“Inside, Outside…. Leave me alone!
Inside, Outside … Nowhere is home!
Inside, Outside … Where have I been?
Out of my brain on the 5:15…”
— The Who

There’s been a massive reaction to Credit Suisse analyst Zoltan Poszar’s note about the birth of a new Bretton Woods agreement.

Every investor in the world should read it. Zerohedge posted (behind their paywall) a lengthy analysis of Poszar’s musing along with some reactions from Wall St. It is well worth your time.

The people most freaked out about this note are the Keynesians who worship at the altar of what Poszar calls Inside Money — money that only exists inside the financial system, bonds, credit, dollars, euros, etc.

Austrians, like myself, have always understood that eventually Inside Money fails because it is ultimately nothing more than a Ponzi Scheme built on top of Outside Money — money that exists outside the financial system, like commodities and bitcoin.

Poszar makes his early case and then goes through the mechanics of what is happening in the financial plumbing of the world economy right now to prove the stresses are real and building quickly towards an implosion of Inside Money and an explosion of Outside Money.

Again, anyone with a passing acquaintance with Austrian business cycle theory and Mises’ Theory of Money and Credit always knew this day was coming.

Today’s “Inside Money” standard, known colloquially as the Dollar Reserve standard, is actually what I like to call “Milton Friedman’s Nightmare.” It is nothing more than a system of competitively devalued and inflated debt-based scrips running around drinking each other’s milkshakes until everyone’s glass is empty.

FYI, there are a lot of empty glasses around the world right now and more are being created everyday as the financial system turned predatory after the Lehman Bros. collapse in 2008.

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

What War in Ukraine Means for Energy and Money

March 14, 2022

What War in Ukraine Means for Energy and Money

Here’s Why Our Monetary System is a Giant Ponzi Scheme

March 1, 2022

Here’s Why Our Monetary System is a Giant Ponzi Scheme

Ponzi schemes keep going until the perpetrator is stopped from the outside. They never stop by of their own volition. Bernie Madoff kept going until it all blew up.

In the year 2000 the Nasdaq composite exceeded a P/E of 200 before collapsing 78% by October 2002. The more successful a Ponzi the more egregious the bubble and resultant pain. The granddaddy of Ponzi — far greater than anything we’ve seen before — is our monetary system.

Let’s consider what money is. It is a technology that allows us to produce and consume not just in the present but across time.

It is, for this reason, that it needs to provide both a medium of exchange as well as a store of value. If for example a transaction needs to be made over a crop cycle then the value of the money needs to remain sufficiently stable over that time frame to allow the participants to make an exchange and not come out underwater. This benefits neither party to the transaction because, while in the short term party A may get an excellent deal from party B, if the deal is so “excellent” as to bankrupt party B, then no future commerce will be done and overall production declines causing less supply and a fall in the overall standard of living.

The money needs to be useful to both parties. In prisons they use cigarettes. Even if you don’t smoke enough inmates do and the cigarettes don’t change (consistency) and so they form a money.

Of course, over time we’ve used all sorts of things used as money: gold, silver, copper, even slaves. At primary school I used to use marbles and Garbage Pail Kids (ah, those were the days).

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

Inflation Lowered By Investment In “Intangible Goods”

February 16, 2022

Inflation Lowered By Investment In “Intangible Goods”

Inflation ahead will be contained in certain sectors of the economy. How much inflation we see is still up in the air. From a Main Street perspective, people and businesses are saying that inflation is here to stay and is not a short-lived or transient issue. Still, it is also important to remember that as supply and demand have taught us, what goes up can and often does come down. I contend and envision most of the inflation that takes place will be in hard assets and it will be the result of people losing faith in fiat currencies.When money is created or printed it has to go somewhere, and it has been fueling the “everything bubble.” While feeding the “wealth effect” and inequality, a bubble is not necessarily inflationary. All this can be a difficult concept to grasp. The important point to remember is that everything is relevant and values and prices change. Up until now, much of the newly created money has not resulted in massive inflation. This is because it has been diverted from goods everyone needs to live and into intangible assets not included in the consumer price index.

The way people view fiat currencies way be about to change in a big way, they are generally a poor place to store wealth. To be clear, I view the dollar as the best of the four fiat currencies, however, I expect all of them to come under more pressure in the near future with the yen and euro being the biggest losers. The amount of interest in cryptocurrencies and other inflation hedges is an indication many investors are losing faith in the central banks and fiat currencies. The result may be a monetary crisis and chaos that shifts people into tangibles and a self-feeding inflation loop.

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

Inflation Is The Kryptonite That Will End Our Decades-Long Monetary Policy Ponzi Scheme

January 27, 2022

Inflation Is The Kryptonite That Will End Our Decades-Long Monetary Policy Ponzi Scheme

“It means buckle your seatbelt Dorothy, because Kansas is going bye-bye.”

The linchpin that allows the world’s nefarious central banking model to be so effective is that the commonfolk – the plumber, the electrician, the teacher, the bartender, bus driver or barber – don’t understand it.

Countless times, I have reminded my readers and listeners that the inflationary “machinery of night” blankets the most regressive tax possible upon the people who can least afford it, and does so in an extraordinarily convenient way for elites, politicians, central bankers and central planners whose titles and “jobs” hinge upon nobody questioning them and/or figuring out how the system works in the first place.

Today, the fabric of our modern banking world is held together by a logical fallacy of a system, wherein central banks are afforded the asinine luxury of being able to print infinite amounts of “money”, which is then disproportionately distributed toward the ruling class, billionaires, and elites, instead of the people who need it the most.

This shows up, literally, as a widening gap between the “haves” and the “have nots” that has widened consistently since the late 1970’s.

As a result of the most recent re-distribution of purchasing power disguised as “monetary stimulus” during the Covid-19 “crisis”, billionaires amassed an additional $4.1 trillion of wealth during a period of time in which the World Bank estimates that “some 100 million people have fallen into extreme poverty,” Bloomberg reported, in conjunction with the World Inequality Report, in December.

As I have asked many times, when the Fed considers stimulating by printing trillions: why not just divide up the money evenly amongst everybody in the country? Why must it be re-balanced and then deployed in a fashion that benefits those who already own financial assets?

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

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