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Measures of Value – Precious Metals Supply and Demand

October 25, 2018

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!

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What Causes the Acceptance of Paper Money?

August 21, 2018

WHAT CAUSES THE ACCEPTANCE OF PAPER MONEY?

Demand for a good arises because of its perceived benefit. For instance, people demand food because of the nourishment it offers them. This is however not so, with regard to the pieces of paper we call money – why do we accept them?

Following the view of Plato and Aristotle, economists regard the acceptance of money as an historical fact introduced by the government decree[1]. It is government decree, so it is argued, that makes a particular thing accepted as the general medium of the exchange i.e. money.

In his writings, Carl Menger raised doubts about the soundness of the view that the origin of money is a government proclamation. According to Menger,

An event of such high and universal significance and of notoriety so inevitable, as the establishment by law or convention of a universal medium of exchange, would certainly have been retained in the memory of man, the more certainly inasmuch as it would have had to be performed in a great number of places. Yet no historical monument gives us trustworthy tidings of any transactions either conferring  distinct recognition on media of exchange already in use, or referring to their adoption by peoples of comparatively recent culture, much less testifying to an initiation of the earliest ages of economic civilization in the use of money[2].

Why conventional demand – supply analysis fails explaining the price of money

So how does a thing that the government proclaims will become the medium of the exchange, acquire purchasing power or a price? We know that the price of a good is the result of the inter-action between demand and supply. From this, we could reach a conclusion that the price of money is also set by the law of demand-supply.

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The Path to the Final Crisis

April 1, 2016

The Path to the Final Crisis 

Reader Questions on Negative Interest Rates

Our reader L from Mumbai has mailed us a number of questions about the negative interest rate regime and its possible consequences. Since these questions are probably of general interest, we have decided to reply to them in this post.

1-key-negative-interest-rates-02192016-LGThe NIRP club – negative central bank deposit rates – click to enlarge.

Before we get to the questions, a few general remarks: negative interest rates could not exist in an unhampered free market. They are an entirely artificial result of central bank intervention. The so-called natural interest rate is actually a non-monetary phenomenon – it simply reflects time preferences. Time preferences are an inviolable category of human action and are always positive.

Market interest rates consist of the natural interest rate plus two additional components: a price (or inflation) premium that reflects the expected decline in money’s purchasing power, and a risk premium or entrepreneurial profit premium that reflects the perceptions of lenders of a borrower’s creditworthiness and generates an entrepreneurial profit for those engaged in lending.

One often reads that interest is the “price” of money, but that is actually not quite correct. It is really a price ratio, the difference between the valuation of present against that of future goods. An apple one can obtain today will always be worth more than a similar apple one can obtain at some point in the future. If time preferences were to decline to zero, people would stop consuming altogether. All efforts would be directed toward providing for the future, but they would never see that future, because they would starve to death before it arrives.

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Olduvai IV: Courage
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Olduvai II: Exodus
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