Libera Voce

Sociologists are always looking for patterns in society to explain phenomenon that is otherwise difficult to find or explain.  The most difficult of the past decade or so is the growing phenomenon in American society of looking to blame someone for……well, just about everything.

Now this is a phenomenon that used to be alien to the American DNA, known as Yankee Ingenuity, an inherent cultural phenomenon to always find a way forward; why look backwards at the problem if you have that? Obviously that would be a waste of time and effort, so move on and win the day!

This growing tendency to seek blame first and solutions afterwards is not just counterproductive but just plain stupid. If you find a solution you also find what should have been done to begin with to avoid the problem at hand. When that happens, who needs to waste time and effort on blame?

This is no longer the case as our DNA has been altered.  Herein then lies the problem of where we find ourselves as a culture.  Everything becomes a crusade to find blame with everything but ourselves.  We have externalized the cause of problems to the extent we no longer find it necessary to accept responsibility for our own actions; we are constantly told in media and politics that everything can be explained as an issue that “others” have caused.  Therefore everyone but ourselves is to blame for whatever we find to be a problem.

So how have we to come to this? Let’s start by being honest and understand that we have created this phenomenon the moment we say that a problem exists outside of ourselves as we cease to take the responsibility for it or to fix it, and we did so the moment we looked to someone else to do so. We as Americans have been doing so for decades now.  We blamed the economy on big corporations, government for stupid wars, Mexico for drug addiction, rock-and-roll for loose morals, China for lost jobs….anything but face reality, always playing the blame game.

Game is up! Look around at the presidential candidates, and ask yourselves who is saying to take responsibility for ourselves?  Most are preaching that government will solve the problems of healthcare, equality, income, debt,….whatever ails you, they tell us that they have the fix, just trust them and put them in charge and they will take care of whatever you find to be a problem because after all, someone else is to blame and they will make sure they pay, and we all know who “they” are, don’t we?

Actually, we don’t have a clue, but apparently politicians always do because they have learned how to play us because we have bought in to the blame game.

So what would happen if we reject the game, take back control and assume responsibility for ourselves, starting with exercising freedom, which includes being masters of ourselves, responsible for our actions, and therefore have no need to blame anyone….except the politicians who are playing us with the blame game. Find those candidates who are not seeking to get you to buy in to blaming others, don’t vote for those that preach parasitical policies like a wealth tax, compulsory national service, denial of choice such as health insurance, denial of free speech…oh the joys of actually having the freedom from blame and back to the positive life view that we are all free to pursue happiness and not get dragged in to the abyss of the blame game!

#BLAMEGAME

Debunking the Myths

From the prior two posts we have the inflation myths that provide cover for monetary manipulation and the gold myths deflecting attention from the basic issue of what money is. Given that both myths deal with money we should consider their relationship to each other.

Let’s start with the bizarre circumstances of negative interest rates that arose during the Great Recession, and apparently is still the case in Europe.  In recent articles in Bloomberg News, the NY Times and the Wall Street Journal, there were discussions about ECB Euro Bonds with a negative yield, meaning you are as the lender paying the borrower to take your money. The ostensible reasoning offered is that the ECB needs to provide liquidity to the market to prevent a recession. Similarly, we hear the same from the Fed as they propose moving the USA in the same direction.

What is not offered is an explanation as to why this requires such an incredible perversion of capital markets, undermining the very incentives that provide for investment. These articles also importantly note that this phenomenon is no longer isolated to sovereign debt, but has also spread to corporate bonds. So why would anyone pay someone to take their money? The answer on the sovereign side is a bit more complex, but on the corporate side the answer is few are; without these investment sources for growth there’s little wonder why Europe is technically if not virtually back in a recession.

On the sovereign side, if you’re a pension fund, you are usually legally obligated to invest in the least risk related investments, such as was the case with sovereign bonds; those that have contributed to the fund are not only losing money on negative yields, but also due to inflation. Little wonder that they are angry about that as the stress in these funds has diminished their future income, and in some cases may eliminate it if there are defaults such as happened in Greece.

These government manipulations are really perversions of capitalism, and in fact not capitalism at all. A basic tenant of free markets is that when you lend money it is a reasonable expectation that by deferring its current use you expect compensation from the borrower in the form of interest, which in the case of investments such as bonds is generally referred to as yield. 

So in order to perpetuate these myths, the first step is to pervert money by eliminating the basis for its actual value, diminishing restrictions on its manipulations. That took time to do and it began with the creation of a central bank.  If there were diversity, it would be difficult to accomplish this, so the Fed was the logical first step. With that you now have the means to expand the money supply with the stroke of a pen, or now with a few strokes on a keyboard.  

But you still have a constraint in that there was a standard. No problem, overtime that was also addressed; simply corrupt the standard, and starting in the late twenties, through to the FDR era, this idea took hold until you have the coup d’etat on the standard itself, i.e. simply make it illegal to own gold and confiscate it.  Brilliant, but not quite there yet.  After a few more perversions of the standard you come to Tricky Dick, and presto you take the standard and kill it altogether.  Ah, relief at last, the USA enters the age of fiat currency, what a game saver!

But not so fast, we’re behind a little as all other countries have had a head start and have manipulated their currencies relative to the dollar.  A grand scheme is devised, making the dollar the reserve currency of the world, some countries even directly linking their currency to the dollar. International trade is conducted in dollars, and currency exchange rates are allowed to “float”. Now you have currency wars wherein various countries blatantly devalue their currencies against the dollar without constraint as after all, fiat literally means “by decree”. Now there are “trade imbalances” as prices are no longer a reflection of market value, only relative value, as in who can make something cheaper than someone else via currency exchange, which now is less a production issue but a monetary one.  The cost of labor is now relative more to what a worker in any country is being paid in that currency rather than a stable market value.

Now I’m all for free trade and I feel that it has done good for the consumers in all countries and has even helped raise many above the poverty level in many third world countries, but with the destruction of sound money and the free float of fiat currencies, it is inevitable that the country with the strongest currency will export the least, in this case the USA as compared to Asia and South America.

This may have happened over time even with policies of real sound money as more advanced economies moved on to higher technological production and away from industrial and agricultural production, but the exasperating issue is that the absence of sound money made the evolution needlessly risky and unstable, causing dislocations in labor and resources that are chaotic and not true market reflections, and inevitably unsustainable.

So when you hear Powell talk about the likelihood of the Fed cutting rates despite record stock evaluations, low unemployment and inflation, compare that to the Fed’s statutory mandate to direct monetary policy in order to provide for maximum employment, stable prices, and moderate long-term interest rates, and you can see why I previously called that mandate in contradiction of itself. If we truly have record unemployment unmatched in 50 years, and stable prices due to little inflation, then why cut interest rates which are at the very least already “moderate”? Pardon me for stating the obvious, but it appears to be a case of liars doing the figuring, and so the figures lie.

Consider last fall when the Fed raised rates and deleveraged its balance sheet and the stock market fell hard; Trump trashed the Fed and Powell caved, stopped the rate hikes and deleveraging, and stocks took off. Here again we see the revolving door between Wall Street and Washington, cronyism at its worst. This again is a perversion of capitalism, but what you hear instead on the political front is a need for more “progressive” policies, yet more myths at work deflecting what any reasonable observation should expose.

The Fed is in a hole that it just can’t stop digging deeper.  If it stops its manipulation, in this case cutting rates further, the lies about unemployment , inflation, growth, etc. will show up as they did in the past as the credit bubble bursts; but that will eventually happen anyway as it has happened in the past, so the trick is how to spin it.

What we hear from our leaders in government and aspiring presidential candidates regarding all this is alarming; raise the debt ceiling, lower interest rates, more military interventions, free health care and education, and other proposals the like of which got us in to this mess to begin with; depending on how this plays out, including the elections, we will get some of that, and the spin will be that those who are not on board with it are to blame.  In politics, when you are caught in a lie, the reaction is to lash out and blame those that expose it. 

When Senator Rand Paul proposes such a common sense bill to balance the budget, a bill actually based on the Senate committee plan to address deficits and the debt crisis, the Republican controlled Senate doesn’t even allow it to get to the floor for debate, denouncing their own idea as “unworkable”.  Keep in mind these are the same Republicans who have criticized previous administrations for this very problem and who tell their constituents back home that they want to stop deficit spending. All this in the face of a record trillion dollar deficit for 2019.

The fact that neither party has the common sense and/or political courage to do the right thing does not provide for much optimism for the future economic health of the USA. Add to this a questionable tax law, a trade war that no one can win, war mongering that will destabilize already shaky markets, growing nationalism and socialism on all political fronts, and you can be forgiven if you see little which would contribute to a positive outlook.

Thoreau once said that “Only that day dawns to which we are awake.” I believe, or at least still hope, that Americans are capable of awakening to the facts, and pull the plug on political regimes that have given us not only a welfare state, but also a warfare state. The alternative is to repeat the failures of the last century where the world was subject to growing authoritarianism, economic chaos, and multiple catastrophic wars; we seem to be already heading down that road.

But why are there so few voices calling us to awake to these realities and change the misguided direction that both major political parties are so bent on pursuing? Sounds like something to discuss in another post.

#DEBUNKING

It was an interesting testimony that Jerome Powel gave Congress recently.  For an institution that supposed to be independent from government, you would never know it reading any of the interchanges with members of the House and Senate.

One of the issues discussed in these hearings was the gold standard. Like the hearings on social media where politicians showed little knowledge, let alone understanding, of technology, likewise was the case with economics, especially when the gold standard came up.  This was compounded by the fact that Powell is the first non-economists to chair the Fed since William Miller, whose short tenure (1979-1981) was such a disaster that it led to his early resignation. In fairness to Powell, many Fed chairpersons prior to Miller were not economists, but if you are going to have a data driven decision process for monetary policy in the modern era of chaotic fiat currencies, it would be helpful to have a strong background in economics.

The Fed’s statutory mandate per the Federal Reserve Act is to direct monetary policy in order to provide for maximum employment, stable prices, and moderate long-term interest rates. This is a mandate in contradiction of itself, an issue which we will address in future posts.

First, we should consider what the fundamental requirements are for something to be considered money. These requirements have been defined over a long time ever since methods other than barter were employed by mankind, so they are historically cumulative based on experience as well as economic principles:

1. Durability – something that does not deteriorate over time, but is basically non-reactive to the elements.
2. Portability – not so cumbersome as to be difficult or impossible to carry around enabling ready access and use.
3. Divisibility – a workable commodity that can be fabricated in various measures.
4. Unit of Account – can be used to establish the price of goods and services.
5. Uniformity – the measure of a specific quantity of what is being used as money is consistently the same.
6. Limited Supply – the amount is not unlimited or subject to significant inflation or deflation in circulation.
7. Acceptability – people generally accept the commodity item as a medium of exchange.
8. Medium of Exchange – the commodity used as money is an accepted standard of value.
9. Store of Value – for something to be considered money, it must be able to be saved, retrieved and exchanged at a later time, which means it remains the same at the time it is used in the future as it is now.
10. Means of payment – this is not exclusively an attribute of money as there are others, such as promissory notes, bonds, letters-of-credit, and other financial instruments, but for money it means the colloquial “cash” payment.
11. Numeraire – basically means any commodity that has a measure of value that can be used in currency exchange.

That’s a lot of stuff, but we must appreciate that money has been around a very long time, and so people have come to understand what it means.  Even before Nixon took the dollar off the gold standard, it had been already corrupted by failing the essential test of the above criteria, principally via inflation.  Even when the dollar was under the gold standard, fluctuations in both the printed money and the gold base were manipulated causing inflationary devaluations. 

It is worthwhile considering this point before we even discuss a gold standard.  Take for instance 19^th century silver coinage in use by many countries such as Austria and India.  At one point both these countries over minted coinage to the extent that the currencies fell in value below that of their silver content.  To remedy this inflation they then limited coinage which caused the currencies to rise above the value of their silver content; clearly examples of the corrosive effects of inflated currencies.

Note also that at that time both the US and Great Britain also had silver standards, and in fact the very definition of the British Pound Sterling was a pound of silver, and it issued notes accordingly that could be redeemed in silver, which is what made the British Pound a universal currency of trade in its heyday.  In the US we have the history of silver mostly associated with the Free Silver Movement calling for unlimited silver coinage, mostly as a reaction to Congress doing away with minting silver coins for a period of time.

The point is that it is not enough to have something that meets most of the requirements to be money if you expand circulation to inflationary levels violating the limited supply criteria, which not only devalues a currency, but corrodes confidence in its store of value.  That in turn makes the future of its value questionable.

So when you hear gold bugs say that gold is money, they are correct as it does meet all the requirements of something to be considered money, perhaps more than anything else throughout history, but that does not mean that as money it can’t be inflated.  True, an ounce of gold will always be an ounce of gold, and its value expressed in any currency does not change that.  What actually changes is the currency, not the unit of account of gold. But this does not mean that, even though the amount of gold in the world is approaching its natural limit, we can’t have inflation of it as a currency or a standard for a currency.

From what is stated above we should also note that while there is no currency left with a gold standard, that does not mean that any currency is free from an evaluation comparison to gold because you still have the cost of gold expressed in currencies.  At this time the dollar can be so evaluated by looking at how much gold “costs’ in dollars, which as of this post is approximately $1,400/ounce, about $500 off its all-time high. The ounce of gold has not changed, so compare how much gold cost in dollars in 1973 after Nixon took the dollar off the gold standard and you will see a range (year’s low/high) of $64 – $126/ounce. The ounce of gold is still an ounce of gold, but the dollar by its measure is a shadow of itself.

Based on the above, I am not saying that the gold bugs are wrong; I’m saying that we need to consider all the characteristics of something to be money, and while gold is the best commodity around to be considered money, it is still subject to these criteria.  Why then isn’t silver also money as both historically and by the standards noted has and can serve the same purpose as they did for the examples of Austria and India as noted above?

Can’t argue against that, but there are a few things to consider about silver that are not problematic for gold:

1. Silver is not as durable as gold.  Gold is completely inert, i.e. will not react with the elements, whereas silver tarnishes, which in a crude way can be likened to steel rusting.
2. Silver has significant industrial uses whereas, aside from highly specialized oncological and electronic applications, gold has limited uses; commodity influences are less with gold than silver.
3. Silver is far more plentiful than gold, making it susceptible to instability as currency as seen in the examples above.  Gold is rare, and even with ongoing mining, is becoming even more so.

So with all these virtues of gold, and assuming that its rarity can be a virtue against inflationary tendencies, why then are so many people, including some economists, most politicians, and our Fed chairman so negative about a gold standard?  Well they have plenty of reasons provided by gold bashers to rely on in denouncing those that favor a gold standard.  Consider some of these and also consider the counterpoints the gold bugs offer:

1. Bashers say that gold has no “intrinsic value” whereas as gold bugs say it does.  I think both are wrong. The very concept of intrinsic value is actually a Marxian one regarding labor, and while I don’t subscribe to that at all, it is really not a relevant argument either way regarding gold.  All value is subjective, meaning each individual determines what is of value to them; however, if we consider empirical evidence, history will support the fact that mankind’s consensus is that gold is of value and has been used as money throughout history.
2. Bashers deride gold as a “Barbarous Relic”; bugs say it is the “Noble Metal” because it can’t be corrupted.  Regarding the former, I’ve read numerous articles that use that phrase, but did not identify who to credit for it until recently when I found that it was Keynes.  However, the quote was taken out of the context of his objection to the post Great War gold standard; what is odd is that Keynes was always an advocate of a gold standard, while at the same time he was also an advocate of the idea that governments can spend their way out of economic difficulties.  The contradictory nature of these two concepts is curious but that’s a topic for another time. As to the bugs crowning gold as the “Noble Metal”, the phrase was not used in the monetary sense, but an aesthetic one.
3. Bashers say gold has no yield, and the bugs say it is an excellent investment.  I again disagree with both. Gold, as money, is not supposed to have yield, because if it did, it would lack the characteristics that make it money.  Gold has no risks, which sets it apart from bonds, real estate, stocks, etc. all of which you buy with money, and they can produce yield, but they come with risk as that yield can be negative.  Gold has no risk, so no reward; yes it can be a hedge against currency devaluations, but that is not yield.
4. Bashers say there is not enough gold to support an economy, meaning inadequate circulation for commerce or finance, and/or the actual supply of gold can’t grow fast enough to support currencies for real growth. The bugs correctly point out that there is inherent elasticity with gold because of the mechanism of currency ratios. Current estimates of the world gold supply are about 200,000 metric tons.  Now assuming that people would prefer the convenience of paper currency with a gold standard versus carrying around gold coins and bullion, the issue is what is the correct ratio and how to avoid inflationary problems, and that can be discussed later, but the basher’s argument is just not valid. Neither is the argument regarding real growth.  First of all, if you are referring to real growth, then you are not referring to the false concept that conspicuous consumption is growth at all. Consider the fact that GDP over the last decade has averaged less than 3%, whereas the money supply has just about trebled; the real issue is not gold supply but a massive increase in the fiat money supply, i.e. inflation.  Gold production has more or less kept pace with population growth, so where is the real problem here? Bugs say there’s always mining going on that constantly increases the gold supply; currently, that’s correct, but in the long run most gold production estimates say gold will become increasing scarce with mining sources exhausted in the near future.  There is a very real scientific fact backing this up.  Geologically, most of earth’s gold has always been inaccessible, being so deep within the planet due to its nature and the course of a molten planet cooling over time; most of the gold we have is alien to the planet, literally deposited on earth’s surface from the early universe’s era of meteor and asteroid showers. Those phenomena are thankfully rare now, but that means less and less gold production in the near future. However, that is not really a problem in terms of gold as money as noted above.
5. Bashers say that the Great Depression was caused by the gold standard; bugs say it was the Fed that caused it.  Both are right and wrong.  While it is true that the Fed was inept in handling monetary policy at the time, what the gold standard did in the 1930’s in the short term is restrict the ability of the government and the Fed to basically do what it did in 2008, i.e. massively expand the money supply to shore up the credit market; I’m not saying that would have helped or was even a good idea, but it was a contributing short term factor.  However, that may not have worked for other reasons, principally that the FDR administrations passed huge tax measures, suffocating regulation, restrictive labor policies, and the real and lethal psychological body punch of gold confiscation. While blatantly unconstitutional, FDRs big gold heist coupled with all the other vices of the times shook the economic confidence of the nation to its foundations; no one wanted to borrow, but neither did anyone want to lend.  The result was an economy dead in its tracks.  The gold confiscation has an even more sinister element to it.  When FDR issued the confiscation decree, supposedly to ward off speculators and prevent a rush to the redemption window, gold was fixed at $20/ounce; following the confiscation, the government reset the standard to $35/ounce, in effect boosting its booty in dollar value by 75%.  It’s good to be king!  Only issue is we were supposed to be a republic.

So back to Mr. Powell’s testimony, where he was often asked if he was an advocate of a gold standard, and he repeatedly said no.  At one point he was also asked if he would support the nomination of Judy Shelton, the U.S. Executive Director for the European Bank of Reconstruction and Development, a well-known gold standard advocate, to one of the vacancies coming up at the Fed.  He correctly deflected an obvious politically charged question. He was asked the same regarding Christopher Waller, who is Executive Vice President and Research Director at the Federal Reserve Bank of St. Louis, but gave the same response. Both these nominees face confirmation opposition, even though both are interest rate doves, something the administration and congress both seem to want. Clearly there is great confusion in Congress regarding a consensus on these nominations, but one thing is clear – they want more inflation and no gold standard.

To confound the issue even further we have little consensus on the issue even among free market champions.  Consider what Friedrich A. Hayek, champion of the Austrian School of Economics, published on this issue.  He saw little if any value in a gold standard so much as he sees the need for real money i.e. no inflationary pressure, more feasible if the creation of money was not a government monopoly; so much for bashers maintaining that such libertarian thinkers are all and only about gold.

So where does this leave us regarding the myths about gold and how to get sound money back in our pockets.  Well here are my thoughts:

1. Going back to a gold standard before addressing the dangerously inflated dollar, and the resulting debt and asset bubbles, is not productive. You can’t cure a disease until the patient’s symptoms are addressed so they can withstand the results of the cure.
2. Hayek makes enormous sense when he says that inflation is the main and immediate problem, not the absence of an underlying standard.
3. However, assuming we have the courage to address monetary inflation, and that’s a big assumption, a gold standard would be a great restriction on the government’s malignant tendency to constantly corrupt money for its purposes of expanding itself ad infinitum. This is not only in regards to the Welfare State, but also the Warfare State.  If left unchecked, the cycle of inflationary policies will eventually mute the government’s attempts to control the economy, providing it with the self-proclaimed necessity of further expanding authoritarian policies, such as wage and price controls.
4. It is also noteworthy to go back to Hayek’s idea of ending the government’s monopoly on the creation of money. In reality there is no extant law against this as evidenced by the advent of cryptocurrencies such as Bitcoin.

Now on that last point for a moment, I need to clarify that the volatility of cryptocurrencies is more to do with its failure to meet the standards of money than the technology behind it.  In fact, that technology, known as block chain, is a beacon of light for the freedom that technology can provide on many fronts, including the possibility of sound money, not to mention an unhackable system keeping out criminal and governmental elements from our financial transactions, and facilitating business operations exponentially.

The next post will discuss what the effects of both the inflation myths from the prior post and the gold myths of this post are having on the economy and people’s perception on who and or what to blame for that.

#GOLDMYTHS

You can’t avoid all the news about inflation, interest rates, slowing economy, debt crises, trade wars, currency problems, etc. These items should be in the news, but are we getting the facts from all the talking heads, or are the issues being talked around to avoid what’s really going on?

Consider the following:

1.    The government’s calculation of inflation, with some exceptions, relies on the Core CPI only, currently reported around 2.1%.

2.    The Core CPI excludes food and energy, two essential elements of life that have increased substantially, even during the Great Recession.

3.    The Standard CPI includes food and energy, and is used for instance by the SSA in calculating benefit rates. According to the US Government, the Standard CPI inflation rate is 2.4%, which would lead us to believe that food and energy contribute only .3%.

4.   In 2011 food prices were up 4.5%, and in 2014 up 3.3%, and for all other years from 2008 to 2018 varied from 1.1% to 1.8% annually. Similarly energy costs have inflated an average of 1.7% annually in this same period.

5.    The CPI is offered as a measure of price inflation, a reflection of supply and demand, taxes, tariffs and other regulatory interventions.

6.    The government’s inflation calculations for CPI do not consider monetary inflation, which is a measure of the increase in the money supply.

7.    From 2008 – 2018 there are so many varying reports that most economists are at a loss to estimate monetary inflation accurately; given the trillions of dollars created by the Fed and the US Treasury under QE out of thin air, the common consensus is that during this period the money supply at least tripled. Consider for example that before the Great Recession, the Feds balance sheet was about $1T; by 2016 it rose to $4.5T, and then came down to about $3.8T in 2019.  Most of that was due to QE, a creation of liquidity (i.e. money supply) literally by decree.

8.    Prior to 1959 inflation calculation was primarily focused on monetary inflation as it was assumed that price inflation was simply a market driven phenomenon which varied up and down over time due to supply and demand; subsequently inflation insistently rose on an annual basis, leading to a differentiation in calculations of price and monetary inflation.

9.    Monetary inflation has a lag time effect as there are many variables that can affect the timing of its impacts such as expanded credit, asset bubbles, currency devaluation, apparent growth, conspicuous consumption, etc.

These are just some of the common facts and data available that, when viewed in the context of what we hear and read in the news, should cause us to ask some apparent questions:

1.    If inflation is so stubbornly holding at 2.1% or lower, which the Fed sees as a problem, and except for the last 18 months average income growth remained about the same rate as inflation, why is it the news and political campaigns lament that wages and salaries can’t keep pace with the cost of living?

2.    Why isn’t the government, the news and political campaigns not talking more about monetary inflation, which compared to price inflation is the 800 pound gorilla in the room?

3.    What is the correlation between price and monetary inflation; does the latter have some impact on the former?

4.    If the Fed and UST have combined their efforts to triple the money supply under QE, where did it all go?

5.    With such an expansion of the money supply, which usually results in ready credit, why isn’t there a real expansion of plant and industry, traditionally a measure of real growth?

6.    Also with such an expansion of the money supply, there should be a good spread between short term and long term interest rates, but why are these two near an inversion?

8.    Why does the Fed consider inflation to be a good thing?

So, my thought process tells me that we are not getting the full story when you connect all the dots on the above. Let’s use some common sense and basic economics to decipher some of this stuff:

1. Obviously, just looking at what we paid for something a decade ago compared to today tells us that we have had about 20% inflation over that time.
2. Average wages and salaries increased hardly at all over that same period.  Based on this, I see little benefit with inflation.
3. We have not had any meaningful shortages of supply to our demand, so I see little real market forces creating simple price inflation. What is readily apparent is that the dollar simply does not buy what it used to, so it is devalued, and that is a reflection of monetary inflation. That’s the correlation between the two, i.e. prices went up because we inflated the money supply and made the dollar worth less. We should not convolute that fact with comparisons to other currencies that have fared worse than the dollar; while it’s true that a strong dollar means we can buy imported goods at a lesser cost, the bottom line is still that we are paying more on an absolute basis than we did a decade ago.
4. Interest is a reflection of a time preference on the money we have.  If we have more than enough to sustain ourselves, we have excess money in hand, i.e. capital.
5. Now we have the decision of what to do with this excess money; we can spend and consume, or save for future benefits.  Thankfully we find ourselves in this position and welcome the decision process we need to go through. We look at our options and decide if we invest in our company, buy stocks or bonds, deposit in savings accounts, buy a new car…etc.  OK, but all of these choices are influenced by the cost-benefit of our options.
6. The stock market is volatile, bonds provide record low yield and savings accounts have near meaningless interest rates all thanks to the UST and Fed manipulation; given this situation we are likely to spend and consume.
7. If you don’t have any excess money, and credit is so plentiful and cheap, you barrow, and then spend and consume.
8. The fact is most Americans have not saved, have little excess money to do so, but have continued to accumulate debt with ever constant borrowing in an artificially created credit market; this occurs on the corporate, government and personal level.

The UST and Fed justify this manipulation of both interest rates and the money supply because the thought process is that consumption is growth. However, if we simply look back just a short time in history, we would see that this thought process is obviously flawed as it led to the Dot Com Bubble of the nineties and the Housing Bubble of 2008 that caused the Great Recession.  There was no real growth, just inflated bubbles that burst with catastrophic results.

When these bubbles burst, they had a deflationary effect by drying up credit, depressing spending, increasing unemployment, but at the same time the monetary inflation had devalued the dollar. Monetary inflation has been an issue throughout history.  I’m sure you all remember the Stagflation of the Carter years, and the tough measures Fed Chairman Volker famously employed tightening the money supply to drive down rampant inflation.  I say tough because while it worked it did in turn cause interest rates to soar, tightening credit and slowing growth; it is here that we see the interest rate relationship become evident between price and monetary inflation, but note that the Fed did not dictate interest rates at that time but instead tightened the money supply as an effective tool against inflation. Subsequent to the Volker years, including the Greenspan years, the Fed started to manipulate short term interest rates as another tool to supposedly “control” the economy.

The Fed understandably calculates the money supply in the most broad sense, i.e. more than just the M1 that accounts for basically actual cash, but other monetary assets that are convertible on demand to cash at any time or at a certain time, such as UST 2 or 10 year bonds; for the sake of discussion we simply understand that monetary inflation devalues currencies which in turn raises costs, expands credit, and fuels a false growth better looked on as conspicuous consumption, all of which causes price inflation. 

The fact that this has not had the inflationary effect the Fed had hoped for is curious, but can be explained as a false flag, because the metric used is flawed because the focus has been primarily on the issue as price inflation.

So putting all this altogether we should have a healthy skepticism about the officially reported rate of inflation, and its relationship to manipulated money supply and  interest rates – clearly a case that either the figures lie or liars figure……but why? Consider the following:

1. We already noted that the UST and Fed justify this manipulation of both interest rates and the money supply because the thought process is that consumption is growth.
2. Falsely reporting that inflation is low means the government pays less on benefits that are based on the CPI alone; ask SSA recipients and others on entitlement programs or on government salaries how that’s working for them?
3. I asked earlier that given the fact that the Fed and UST have combined their efforts to triple the money supply under QE, where did it all go?  The velocity of the movement of money through the economy starts with its creation, which in the case of QE was by decree, a real problem with fiat currencies, but as it came out of the UST and Fed, its first stop was the big banks who are the primary members of the Fed system, but also the primary source of funding for investments; one result we have seen with this is all the financial engineering in stock evaluations via buy backs, which is a benefit to certain elites such as the power brokers in government and Wall Street, but not real growth that creates good jobs.
4. We are told that low interest rates help both companies grow and consumers spend; what it really creates is an enormous debt bubble, such to a degree that many Americans are incapable of ever paying off that debt; so what happens if interest rates go up or when the credit bubble bursts? Consider the growth in American business of what has become known as “Zombie” companies; so called because they are the walking dead, i.e. their profits are less than the interest due on their debt.  They currently represent about 20% of American business, even more globally.
5. Keeping inflation rates low hides the problem that the government, including the obviously politicized Fed, is running out of options when another recession hits and also in their attempt to maintain a fiat currency and the US Dollar as a reserve currency. 
6. The false premise that a lower dollar helps our trade balance contradicts the government’s policy that the rising trade imbalance is a justification for tariffs, the reality of which is not only inflationary but also a tax on the people it’s supposed to benefit.

It has been said by some historians that it is in the nature of myths that if enough people believe them, they become accepted as facts, a phenomenon that often underlies the causes for disasters. Apparently our government believes Americans are dumb enough to believe myths; after all, it worked in the assassination of JFK, the Vietnam and Iraq Wars, so why not with our money?

It does not take a Nobel Prize in economics to connect the dots here; objectively, meaning without allowing your politics to bend logic, anyone should see that what we are told just doesn’t add up. To have Jerome Powell in front of Congress the last couple of days actually talking about the likelihood of even lower rates because the Fed is now “data sensitive” should cause a real crisis in the Fed’s credibility. How about some sensitivity to common sense and basic economics?  In my view, we should all use both of these virtues and question why we need the Fed at all.

#INFLATIONMYTHS

It is interesting seeing the various labels that many of the current presidential candidates cloak themselves with, the dominant being “Progressive”; that is not very helpful as it could mean anything a candidate wishes it to mean, or a misdirection of what they really mean, or just a way to say they are superior to anyone who does not think “progressively”, which with political elitism is a consistent problem.

There were three principal instances when the USA had a “Progressive Party”, the first in 1912 with Teddy Roosevelt, 1924 with Robert La Folette and 1948 with Henry Wallace; all three were a product of a split in the Republican Party, all had anti-corruption, anti-tariff, and anti-trust platforms; all ran presidential campaigns, all lost, and all three faded away soon thereafter, but at least then there was a forthright idea of what progressive meant.

Consider a political label example in the past from Norman Thomas, a six time Socialist Party candidate for president; in 1944 he announced his withdrawal from the campaign in a speech in which he stated, “The American people will never adopt socialism. But under the name of liberalism they will adopt every fragment of the socialist program, until one day America will be a socialist nation without knowing how it happened. I no longer need to run as a presidential candidate for the Socialist Party. The Democratic Party has adopted our platform.”.

I dispute one thing about his statement – it is not just the Democratic Party at issue here as the Republicans, though labeling themselves as champions of the free market, are as responsible in many regards as the Democrats for what Norman Thomas says. Also, I assume he uses the word “liberalism” in the 20th Century and not the classical 18th Century sense.

If there is one current candidate that honestly embraces who and what he is, it’s Bernie Sanders, who not only promotes socialism, but cloaks himself in its label….well, almost since he uses the oxymoronic title of a “Democratic Socialist”,whatever that’s supposed to mean; at least he doesn’t try to hide what he’s really about. I’m just not sure if the prefix is meant to align with his DNC affiliation or is meant to soften the label to convey a more acceptable “brand”.

Consider what the leading fund raiser in this huge pack of Democratic candidates, Pete Buttigieg, promotes as a “progressive” approach to help cure the disharmony in America today, i.e. mandatory national service; he clarifies that this could be non-military in nature, but that does not make it any less a form of enslavement than the draft of times past. Baby boomers should remember the Federal Commission hearings on the draft during the late stages of the Viet Nam War in the early 70’s. In one famous interchange, General Westmoreland defended compulsory service against an all-volunteer army that he said would result in “….mere mercenaries…”; Milton Friedman, who served on that commission that helped end the draft, replied, “General, would you rather command an army of slaves?”. The same logic applies to mandatory non-military national service. Let’s remember that it was the Republicans who supported the draft, and the Democrats who were against it; my how things have changed, but at least Mr. Buttigieg provides us with some insight about what the current progressive label means.

Another peek into this progressive label is provided by Senator Kamala Harris, who in 2010 as District Attorney for San Francisco and again in 2011 as Attorney General for California, supported truancy laws that provided for the prosecution and incarceration of parents of children who had in excess of three unaccounted absences of 30 minutes or more during a school year; and yes, there are parents who suffered jail time as a “progressive” approach to truancy. She now claims that the incarcerations were an “unintended” consequence, but the laws she pushed for explicitly provided for that.

This progressive label is beginning to get some definition, but perhaps some of the candidates who embrace it may not really want to have that out there….with the exception of Bernie, who again, if nothing else is at least forthright.

There are so many other examples of bad labels in modern politics, including definitions of political actions. Take for example the recently released Mueller report which raises a lot of questions, but I have yet to hear anyone mouth the word “treason”. There are two instances where that could apply, i.e. levying war against your own country and/or giving aid and comfort to our enemies. I can’t see Trump et al guilty of the former, but couldn’t colluding (or conspiring) with foreign governments apply under the latter, regardless of their intentions? The punishments for treason can no longer include the death penalty as was the 1953 case of Julius and Ethel Rosenberg for conspiracy with the Russians, but if we are to believe that Trump and his staff worked with Russia during the 2016 campaign to undermine our electoral process, is this not treason?

It has been suggested by some politicians that we face an existential moment in our national history; perhaps that should read as “another” such moment, but if this is so, how do we find the right leaders if all we have are meaningless and/or misleading labels? How can we understand who we are dealing with if we can’t get beyond those labels? We do not appear to have made any “progress” in this regard, so I fear that we could wind up with something even worse than what we now have without really knowing how, as Norman Thomas said; we should not think for a minute that isn’t possible as who ever thought that Trump would be elected?

#POLITICALLABELS

We hear so much about “income inequality” and the “wealth gap” today, especially as the field of Democratic Presidential candidates gets ever more crowded and the political spinning accelerates.  What I wonder is will any of these candidates talk to the underlying issues and connect the dots for the American people, or just do the old Potomac Two Step and spin, spin, spin…..? I would add Republican candidates also but we already know who that likely candidate is, and we can surely count on spinning there.

• In 1982, in an effort to rein in inflation, Congress passed a lot of legislation; aside from changes to the tax code, monetary policy, etc. it passed a law that for the first time in American history made it legal for public companies to buy back their own stock (in the SEC it is Rule 10b-18); previously, to do so was justifiably considered a stock market manipulation.  Stock prices at the time, like most prices, were grossly inflated and the fear was a bubble.
• In 1991, in an effort to rein in corporate executive pay, which was considered a symptom of income inequality, Congress passed a law limiting the corporate tax deduction for executive pay to $1M (it is Sect. 162m in the IRS Code); executive benefits like stock options were exempt, principally because an option is not ownership until exercised, and not money until the stock is sold and becomes either capital gains or loses.
• In an effort to create liquidity during the Great Recession, the Fed and the UST went on a binge euphemistically called QE.  The result was huge inflation of the monetary supply (economists refer to it as M1) and record low to non-existent interest rates.
• If we judge the effect of all the above solely on Wall Street, we have a record Bull Market; if we judge the effect on Main Street, i.e. jobs and wages, not so much.  I’ll note the job thing more later.

So where and how did this issue start?  It is not new as American History is loaded with examples, but too much to go through all that here, so let’s focus on some recent events:

• In 1982, in an effort to rein in inflation, Congress passed a lot of legislation; aside from changes to the tax code, monetary policy, etc. it passed a law that for the first time in American history made it legal for public companies to buy back their own stock (in the SEC it is Rule 10b-18); previously, to do so was justifiably considered a stock market manipulation.  Stock prices at the time, like most prices, were grossly inflated and the fear was a bubble.
• In 1991, in an effort to rein in corporate executive pay, which was considered a symptom of income inequality, Congress passed a law limiting the corporate tax deduction for executive pay to $1M (it is Sect. 162m in the IRS Code); executive benefits like stock options were exempt, principally because an option is not ownership until exercised, and not money until the stock is sold and becomes either capital gains or loses.
• In an effort to create liquidity during the Great Recession, the Fed and the UST went on a binge euphemistically called QE.  The result was huge inflation of the monetary supply (economists refer to it as M1) and record low to non-existent interest rates.
• If we judge the effect of all the above solely on Wall Street, we have a record Bull Market; if we judge the effect on Main Street, i.e. jobs and wages, not so much.  I’ll note the job thing more later.

So how are these dots connected, and what does it mean for these issues today?  Well, here goes:

1. I believe the government and the SEC were wrong in making public company stock buy-backs legal; while there may have been good intentions, it is such an apparent vehicle for manipulation of markets that any benefits are clearly gained at enormous risks.
2. Wage and price controls simply don’t work and create huge distortions.  By attempting to limit executive pay, the government put corporations, who constantly compete for top talent, looking for other ways to stay competitive; many took a huge risk and offered stock options.  Executive talent had no choice as the baseline compensation was legislatively set.
3. Now there is no legislation that effectively controls greed in a free society, and most attempts compound the vice, and this was no exception.  The market awards performance, stock markets included. Performance in stock markets is measured by EPS, i.e. earnings-per-share.  If you are a top corporate executive (CEO, CFO, COO, CIO….) you had better make sure the EPS is good, or the market will hammer your stock price, and you’ll be shown the door.
4. Couple the above with stock options in compensation and these execs see a win for corporate profits, shareholders, and of course themselves.
5. So the easy play is to direct corporate profits to buy-backs, and away from capital investment in plant, staff, etc., i.e. real growth. In 2018 US corporations as a whole actually spent more on buy-backs than capital investment.
6. Now add to all this really cheap money, and you get the volatile mix of debt and greed gone viral. The corporate debt issue is huge, but greed turns a blind eye, until someone raises rates; another time for that problem.
7. So we have capital directed to stock manipulations at the expense of real economic growth, creating more for the top and little opportunity for decent jobs and wages

……..and so here we are where the rich get really, really rich on what we would consider a giant Ponzi scheme if practiced by private citizens.  Even if we assume that the Government’s interventions in 1982 and 1991 were made with “good intentions”, we have the classical case of unintended consequences because they did not think thoroughly enough about how these ideas would play out if they put them into law.  If we assume otherwise, we have to think not so very nice thoughts about who were the real intended beneficiaries.

So before either party, or an independent, talks about government solutions to this issue, they need to look at history and find a better way….and considering the looming private, corporate and government debt crisis, maybe not wait until 2020.

#EASYMONEY

Thanks for joining me! While I am still working on setting up the blog, I would like to tell you a little about it and why I’m doing this. As most of you may guess, the English translation of the Latin title means “Free Voice”. It derives from the early Roman Republic concept of “Civitas”, meaning a citizen’s rights.

It is alarming to hear the ever increasing attacks on free speech under such dangerous concepts as the fight against hate speech, holding internet companies responsible for whatever is judged to be objectionable postings by third parties, or even more alarming, the growing intolerance for free speech in our academic institutions, and of course in our politics.

When I read an article by Fleming Rose some years ago about the attack on the journalist who published cartoons showing Mohammed with a bomb in his turban, he said something that really struck a nerve about what free speech is all about – “The only right we do not and should not have in a liberal democracy is the right not to be offended.”

This blog is not just about the right of free speech, but an exercise in free speech. The values and judgements that will be published in this blog are not meant to offend, but to create a civil discourse about issues current or past. While we are all free to agree or disagree with what will be said, no one has the right to repress what is said, even if they are offended.

#LIBERTY