Saturday, July 14, 2018

The Theft Is Now Official Policy

The Federal Reserve has just published a report stating that it will continue to use new policy tools to control interest rates.

As stated in the Wall Street Journal, "The Federal Reserve defended having the flexibility to set interest rates by using relatively new tools that include paying interest to banks, in its semiannual report to Congress on Friday."

For those of you who are subscribed, see the whole article here.

Creating money and inviting the banks to park it at the Fed, with interest, is theft, in my opinion.

[Thanks to gionalepop.it]



Have you any savings at all?  (Hopefully.). Have you noticed the rate of interest you are earning?  (Probably less than 1 percent unless it's in a CD.)  Have you also noted the official (never mind the unofficial) rate of price inflation currently?  (It's creeping towards 3 percent on an annual basis.)

That's a minimum of 2 percent loss of purchasing power per year, when the banks should be competing for our savings.

So who wins in this new Fed game?  The bankers and speculators.  Who loses?  Those who can least afford it, the forgotten men and women of the Western world.

What an embarrassment.

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Wednesday, January 17, 2018

The Vitriol in Today's Politics

Now that the holidays have past, perhaps we can take a moment to think quietly about the changes in our culture. Permit me to ask you two questions:

Do you detest people who voted differently from yourself?

Do you avoid entering into discussions about politics when you are among people who are on the opposite side? Or alternatively, do you make deriding comments about the other side when you are with your friends, without bothering to ask yourself whether you really know how they voted in the last election?

Morris P. Fiorina has written a book entitled Moderate Voters, Polarized Parties, reviewed in the Wall Street Journal on January 6, 2018. The book describes how polarized American political parties have become, and yet how increasingly moderate and independent voters seem to be.

In reality, I would call this the New Charade of Politics, because neither description is accurate. What the author misses is this:

The parties pretend mightily and convincingly that they are pulling back and forth on a public policy tug-of-war, each trying to impress supposed "independents" and "moderates" to tip the scales in the party's favor. But in fact, the majority of Americans seem to want the same thing:  a larger and more intrusive government that benefits the voter at the expense of everyone else.

Rather than agreeing like adults to limit our state, federal, and local governments as the U.S. Constitution advocates–which limited government is meant to preserve our liberties, encourage progress, and increase our standard of living–more and more interest groups are feeding at the public troughs so conveniently provided by larger governments.

Please remember that interest groups are simply groups of people, whether they represent large corporations or themselves.

By Unknown - w:Harper's Weekly available at Library of Congress, Public Domain, https://commons.wikimedia.org/w/index.php?curid=5056033

What riches or powers do those groups of individuals want our government bodies to control, so that the particular group can divide the confiscated goodies or powers among themselves? Here is a sampling, and you can probably identify the interested group yourself:

  • right to choose vs. right to life 
  • a public vs. a private health system
  • drug wars vs. liberalization
  • public land vs. private property
  • environmental protection vs. private stewardship
  • trade barriers vs. free trade
  • public safety nets vs. private charitable assistance
  • Social Security vs. private or public-private-partnership savings accounts
  • federal control of money issuance vs. private issuance
  • federal control of monetary policy vs. private banking with federally-imposed standards and competition-imposed results
  • over-indebtedness and “too big to fail” vs. sound money, realistic credit expansion, and creative destruction through corporate responsibility
  • public vs. private education
  • public utilities vs. private suppliers or public-private partnerships
  • public financing of the arts vs. private and charitable-foundation choice
  • complication vs. simplification of tax codes
  • and perhaps soon, censorship vs. free speech
The list of such issues goes on and on. Just as an example of how big our federal government has become, I'll quote my own comment in response to Mr. Fiorina:

"A Library of Congress web page listing government branch websites says it succinctly: 'With the time we have available, it is not possible to list every department agency.'"

In all cases, people on the left and people on the right have a vested interest in the decisions our governments make on each and every issue. The more subjects within government purview, the more the groups stand to gain. 

So instead of everyone voting to allow each other the freedom to resolve privately the issues that concern each of us to different degrees, people on both sides of the spectrum vote for a government that confiscates our freedom, takes over jurisdiction, and redistributes the power and/or riches to one side or the other. And the side changes every few years, just to keep the party rolling for those bureaucrats who are the most wily participants in this charade, since they win no matter which side is gaining.

The winning side feels vindicated for a while; but over the long term everyone loses. The whole nation becomes increasingly lackluster, unproductive, downtrodden, depressed, repressed, uncreative, and frustrated, no longer master of his or her own destiny. We all become less free and less valuable to our fellow citizens as this unhealthy cancerous growth evolves. 

Voters, take heed.


____________
For those who are interested, here is my reply to Mr. Fiorina:





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Monday, December 18, 2017

What Is Bitcoin?

Exactly where does Bitcoin fit into the monetary scheme of things? Here are some questions and answers.

By Open Source


1. Is Bitcoin a form of money?

Bitcoin is not a physical good such as gold that you can hold in your hands. Nor does it fit into von Mises’s regression theorem. It is not a consumable economic good, or even a piece of paper. It’s frankly just a bunch of numbers in a database. But before we decide whether it is money or not, the first question becomes, “how are you defining money?”

The overly loose use of the word “money,” even among sophisticated economists, has caused much confusion in the field. In my world, I define money as a kind of claim check, which is a kind of contract. (For more on this, see Edward C. Harwood, Cause & Control of the Business Cycle, American Institute for Economic Research, E.E.B., Sept. 1974; and Money, Banking and Inflating, E.E.B., Apr. 1986.)

Sometimes a purchasing transaction is immediate. (I sell you a computer and you give me an ounce of gold in return.) Sometimes a transaction has an element of time. (I sell you a computer and you give me something that I think will buy me an ounce of gold in the future.) In the first transaction, the gold is considered something exchanged for its own value. In the second, the thing exchanged is a kind of contractual promise of stable purchasing power in the future.

Gold itself has both qualities: intrinsic value, and holding value based on contract-like trust. A dollar, although no longer tied to gold, still has value as a contract. So does Bitcoin (in spite of it being wrongly but conveniently classified by the government as a commodity). Neither has intrinsic value; but both have contract value, although to varying degrees, and certainly less than gold.

Bitcoin will have to prove itself to be a trustworthy store of value over the long term. As it stands, there are risks. But there are risks with the dollar, too. We have the habit of accepting the dollar contract even though it loses value at an average rate of 2 percent a year. Bitcoin’s value is very volatile at the moment, and therefore its utility as money is limited. But it may become more stable in the future, in which case its potential for acquiring trustworthiness–and therefore usefulness–accrues.

2. Is Bitcoin too volatile?

Admittedly, much of the current rise in Bitcoin’s exchange value vis-a-vis the dollar is due to speculative activity for a quick buck. But there may come a time when its value stabilizes. Remember that Bitcoin is not something of value in and of itself like gold; it is a contract, just like today’s dollar. The contract medium that is Bitcoin may come to a dollar exchange value that is relatively stable, or at least stable enough, perhaps because of its purportedly limited supply, or because it proves to be reliable, or because some people find it useful somewhere in the world for whatever reason.

If we could take away its speculative volatility, Bitcoin’s price probably would still vary. But the variance would be the same juggling that would go on if the government were to declare that within the next two months the US will return to the gold standard. The “price” of gold would seem to climb in dollars, but in reality it is the dollar that would immediately drop way below the current $1,200/oz and gyrate until it found an equilibrium between dollars in circulation and available ounces of monetary gold.

This is just as true of Bitcoin under what are similar circumstances. For sure, Bitcoin is volatile right now mainly for speculative reasons; but it may also be searching for its exchange value vis-a-vis the dollar and other currencies if and when it were to become more ubiquitous as a purchasing medium.

3. Is Bitcoin nothing more than a speculative bubble?

Possibly. It may just go down in history as today's version of the 16th century Tulip Mania. Some are even calling it a Ponzi scheme because there seems to be nothing behind it. However, once the speculative froth has been beaten out, and if Bitcoin’s utility can be quantified (admittedly a big if), its “price” (i.e. dollar exchange value) will drop to–or rise to–the level it needs to be at to fulfill its contractual duties. That may be zero or it may be many thousands. We just don’t know yet. And it may fluctuate wildly until the market determines whether it is useful as a medium of exchange, and/or as an alternative to other failing monetary units, and/or something else.

4. Are Bitcoin transaction fees too high?

They do seem to be increasing. But keep in mind that credit cards charge an average of 2 percent for every transaction. Think about it: 2 percent of every purchase you make with your credit card goes to the supplier of credit, not the manufacturer or retailer. And this is assuming one does not avail oneself of the credit option. If you do, you will pay up to 20 percent more to the credit supplier just for the privilege of not paying within the month. So apparently, people are willing to fork up transaction fees.  And in some countries the extra cost and/or risk is less than it would be with the local currency.

5. Are Bitcoin transactions irreversible?

This seems to be true, and this is where Ethereum’s smart contracts may come in handy. PayPal already works with the dollar and has established a great system for purchasing safely and efficiently at a distance. It arbitrates disputes and can reverse transactions. Some of the cryptocurrencies like Ethereum are doing this using blockchain technology, and they are even more efficient than PayPal. This could be tremendously useful, and not only in the US but in foreign countries where bank accounts and legal systems are not ubiquitous and/or reliable. Cryptocurrencies, even with all their drawbacks, now permit people around the world to use smartphones and digital units of account that bypass weak local currencies and insecure banking systems.

6. Are Bitcoin transactions anonymous?

Quite the contrary. Every transaction is traceable. The only thing keeping it semi-private is the password or wallet key feature that is tied to each user. Other forms of money are much more anonymous (e.g., cash, certain kinds of paper assets, gold), though not as convenient. In the US, it won’t be long before the government starts forcing Bitcoin and other cryptocurrency dealers to hand over records and/or to file reports to the IRS. Remember that all Bitcoin users owe capital gains taxes (and perhaps even sales taxes) on every transaction, for example if the value of a seller’s digital currency has risen between acquisition and sale. (Talk about a wrench in the works!)

7. Could Bitcoin replace the dollar and other currencies?

I believe Bitcoin will never replace the dollar because of this taxation feature. It is what has prevented gold from being used more widely as a purchasing medium. As it stands, governments have three choices if they want to retain their monopoly on money: Reduce Bitcoin to a crawl through taxation; make it illegal; or create a parallel system that would out-compete it. The last would be expensive and the second would be unpopular, so I will bet they will choose the first.

8. The dollar is backed by debt. What is behind Bitcoin?

In fact, Bitcoin is backed by nothing, at least not in the traditional sense. But first, let’s clear up one point: The dollar is not backed by much either. Some say it is backed by debt. More accurately, it is backed (and only to a percentage) by US creditworthiness, which in turn is backed by the country’s potential source of payment of its debts, i.e. the American taxpayers and the relative strength of its political-economic system. This is certainly better than nothing, but it’s not something to crow about, especially since the US came very close to a dollar collapse in the late 1970s and almost did again in 2008. What will the next showdown look like?

Today, the Fed is putting us in even greater peril of another dollar collapse, so in fact the dollar isn’t much better than Bitcoin with regard to what’s backing it. In fact, it is this current dollar fragility that explains, in part, the interest in Bitcoin, because Bitcoin and others like it are outside the dollar system and therefore might preserve and even increase in purchasing power if the dollar (or another currency) were to collapse.

9. Is Bitcoin just a ledger of unbacked liabilities?

This seems inaccurate. There are no liabilities behind Bitcoin, backed or unbacked. It is a ledger of a series of contract terms in the form of exchange transactions. The whole notion of assets and liabilities is avoided by Bitcoin’s structure. In fact, that’s the beauty of it. Bitcoin is a set of records of contracts on a medium that is not paper but rather digital memory, and it is allegedly permanent and inalterable.

The contract can be verified and preserved in a way that is unique to the modern world: electronically. Because it is (purportedly) un-inflatable, Bitcoin completely avoids the whole idea of assets and liabilities “behind” each unit. It seems to completely obviate the need for something of trusted value (gold or paper dollar) altogether, since the contract itself is said to be 100 percent reliable.

That is, until the lights go out.

Bitcoins (computer records) have not yet been proven to be permanent and stable. To that degree and up to now, they are fragile. Bitcoin creators can decide to create more, or fork, or cause some other deterioration of its current qualities; or dealers can go broke, or get hacked, wiping out all the Bitcoins they are holding; or a war could damage the electrical infrastructure. Then what?  But today, that is also true of all accepted monies.

Today, money is all about trust. Much of the advancement of western civilization came about because of trust among contracting parties. Before banks, the money used between contracting parties was often a commodity such as gold. As banks evolved, as trust in bankers evolved, and as stability evolved, money evolved as well to include paper instruments promising to pay gold, such as a bank note. With further evolution, banks began creating credit backed by real bills, which is a type of short-term loan contract based on things coming to market. In this case, the borrower reimbursed the loaned credit in a timely fashion as the things were sold, and the trustworthy banks retired it from circulation as promised. (For more details, see the above-linked books by Edward C. Harwood.)

This tried-and-true banking system based on a promise to pay gold or gold-equivalent instruments broke down during the 20th century, and along with it trust has eroded. During those years we allowed our government to replace gold and real bills with Treasury debt. We have become accustomed to using dollars as money based on the value of Treasury bonds that purportedly back it; but ever since we gave the government this power, the dollar has lost around 2 percent purchasing power every year. Over time this is something like a 98 percent loss in value. Some people believe the system will hold up anyway, but since debased currencies tend to fail over time, some monetary historians (and I) are worried about the dollar. So are some Bitcoin investors, apparently.

Only patience will reveal if this technological version of money will take hold in the world economy. Personally, I would prefer gold and gold-backed money, but we don’t have that option, do we? We use dollars every day, all the time, even though these dollars might collapse within our lifetime.


So, in your opinion, which will be first? Bitcoin or the dollar?

Saturday, December 02, 2017

Trump Wins One

Trump probably stayed up until 1:50 a.m. last night (this morning) to hear that the Senate passed the tax reform bill, 51 to 49.  For a businessman, the government workings must be trying, to say the least.  Here's my imagination's thinking about the moment.

Trump's late night TV thoughts
(Click on the image for a larger version.)

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Friday, April 21, 2017

Finally! Gold-backed currency is arriving

Edward C. Harwood predicted that some day the world would see a currency based on metric units of gold.  He didn't know what form it would take, but he felt certain that it would happen.  (Read about his Institute here.)

Now please read this piece of news.

I can't wait until this new currency is available to the public.

Then we'll have to see how governments react.  Will they allow them to exist if they become popular?  I suspect not.  They depend too much on controlling the fiat money we now use.  If this type of currency were to replace dollars or other currencies in many transactions, they will certainly do something to put a wrench in the works.

From petewarden.com

Saturday, July 30, 2016

Richard Duncan's Solution to our Current Worldwide Debt Crisis

Richard Duncan is an interesting fellow.  His eyesight seems 20/20 when it comes to analyzing how we got where we are today.  Yet his solution is unthinkable to me.

If you are curious, please listen to this hour-long interview.  It will get you thinking and you will learn a lot about many aspects of today's economic conundrum. However, in my opinion, Mr. Duncan errs in believing that it is possible to stave off catastrophe.

Here is the interview:

Richard Duncan interview

He is basically recommending that the developed world throw gasoline on the fire of fiat money creation.  He says we must maintain the current level of world GDP through enormous debt creation (i.e. more QEs) and through government investment in infrastructure and technological projects. By doing this he hopes that the resulting advances will somehow allow us to avoid a worldwide crisis that would take the form of either a world war or a global depression like none we have ever seen.

His solution completely flies against all of my own economic theories–indeed against common sense itself. He sounds to me like Louis XV with his "après moi le déluge" (after me the deluge).

[Thanks to Wikipedia]
Surely, these credit/debt bubbles must burst. I believe that the longer we put it off, the worse it will be, and that we've already gotten to the stage where the war or depression or both are inevitable.

Yet he seems to think catastrophe can be staved off, and that the politicians will try this because they have no other choice. About that he is surely right, but is he right that the times have changed and we must modify our thinking? Or is this just putting off judgment day?

Please let me have your thoughts.

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Friday, February 12, 2016

Fiat Money Versus Gold

Thanks to halloween-masks.com




No one can deny that current markets are scary, so I have opined in an article at Seeking Alpha. 


We all share the malaise as this unfolds in front of our eyes.

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Monday, December 07, 2015

Hubris at Its Best - Central Bankers

In last weekend's Wall Street Journal I read yet another ridiculous statement by a member of that elite group called Central Bankers.  They make me chuckle every time they open their mouth. 

How many times do we have to hear that Madame Yellen or Monsieur Draghi has everything under complete control?  Take this for example from the latter:

"There is no doubt that if we had to intensify the use of our instruments to ensure that we achieve our price stability mandate, we would."

Right.  All Europe's economy needs is a little tweak here and a little monetary push there.  Especially after Japan and the U.S. have done this so "successfully"–which, by the way, was after completely missing the Great Recession even when it was staring them in the face. 

In fact the U.S. has been so "successful" that now they can't figure out when and how to turn it off. 

I can't help but wonder about the ending of this charade.  So I allowed my imagination to wander.  Here's the result.  (Click on the image for a larger version.)




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Tuesday, November 03, 2015

Fed Dots - Tea Leaves By Another Name? or alternatively, The Dot Plot Thickens

My previous post mentions tea leaves as a way for the Fed to determine policy.  I bet you thought I was kidding.  Well, watch this video to see what Fed-watchers are watching.  And just in case you're wondering, it's not a comedy sketch.

[Screen capture from Bloomberg]
[Thanks to J.B. for the neat alternate headline.]

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Tuesday, October 27, 2015

Advice for Ms. Yellen

I looked at the first page of the Wall Street Journal today, there to find an article about our favorite gurus, the Federal Reserve Board.  Most market players are predicting that the Federal Reserve Board will do nothing this year about interest rates.

The article contains a really fascinating exchange between William Dudley, president of the New York Fed bank, and John Taylor, an economist of extraordinary common sense, judging from the exchange:

Dudley:  "I don't really understand what is unclear right now."

Taylor:  "Are you kidding?  No one knows what you are doing."

In fact, I would conjecture that the Board itself does not know what it is doing.

Therefore, I suggest that Ms. Yellen and her co-gurus take counsel from the following page:

Tasseomancy

Surely reading tea leaves will be more accurate than relying on the pseudoscience of econometrics.

From rebloggy.com