Reflections Over 2020

Wow, it has been a heckuva year! One thought leads to another on this sunny-but-cool January 1.

Having watched a few seasons of Forged in Fire, I’ve gained an appreciation of how difficult it is to pound and grind a lump of steel into a blade, even with power tools. There are many ways for it to go wrong. And “wrong” generally means catastrophic failure—a crack in the metal that will cause it to break into pieces when hit.

That led to thoughts regarding an advantage, in Medieval warfare, to using an axe compared to a sword.

 If you could swing your axe against a sword blade, you’d have a good chance to break it and thus disarm your foe. Then I thought about rapiers and foils, which were much lighter and springier. Then I had the first “a-ha” moment.

When guns first came to the battlefield, they weren’t very accurate. However, when a bullet did hit someone, it punched right through his armor. There was no point (pun intended) in wearing heavy steel anymore. And once soldiers were unarmored, there was no point (pun intended again) in carrying big, heavy swords.

So swords evolved into the lightweight poking weapons everyone is familiar with from Princess Bride (and The Three Musketeers). Those weapons could easily put a hole in a man that would take him out of the fight, if not kill.

Battlefield Weapons & The Gold Standard?

And this leads to an interesting thought experiment. Suppose you went to a post-gunpowder battlefield and counted up all the deaths that were caused by thin stabbing weapons vs by bullets, you might find that 90% of them (I am rough-guessing here) were the former. If one tried to interpret this statistic the conventional way, one might conclude that guns and gunpowder were not a significant factor in those battles.

One would be wrong.

Guns may not have dealt the mortal wound in most cases. But the presence of guns caused the absence of steel armor. The absence of steel armor caused the sword to become much lighter, and increasingly specialized for stabbing rather than hacking.

Where would one see this exact sort of error in economics? It comes up in the question of how important is redeemability in the gold standard (to the extent that the gold standard comes up at all, which isn’t often). If one counted up all the holders of gold-redeemable bank notes, one would find a (far) lower percentage of those who redeemed them, than of battlefield casualties caused by gunshot wounds.

Does this mean that redeemability does not matter? Absolutely not.

As the gun caused everyone to change their behavior, so does redeemability. Not everyone redeems his paper for gold. But the fact that everyone has the right to do so, causes the banks to conduct their affairs more conservatively.

The rare bank which gets too greedy and operates without due caution finds that there is a run on its paper. It goes bankrupt. Its shareholders lose everything. Its bondholders may lose something (but if the accounting is honest, it is shut down before the depositors lose a penny).

Economists should take great care in forming conclusions from statistics.

Goodbye, 2020

Wow, it has been a heckuva year, I must say it again!

At the beginning, we scheduled a date for Monetary Metals annual shareholders meeting held in Scottsdale, AZ. I booked travel to Australia and Southeast Asia in February, visiting four countries and returning February 29.

At the time I set these dates, I had not heard of Covid. When I flew out in early February, I thought Covid was a thing only in China. Airports in the US and in Australia were operating normally, and the crowds were normal. Also, in hotels and restaurants in Sydney and Perth. Not so in Asia. Changi airport in Singapore was a ghost town, and the restaurants in the attached mall, Jewell, were devoid of any customers but me.

The airplanes I flew between Singapore, Thailand, and Malaysia were 80% empty. The airports all had temperature scanners that they made everyone walk through. As did the hotels in Singapore and Malaysia.

When I got home, I focused on the shareholders meeting. Other than one investor who lives in China and who could obviously not travel to the US, only one person cancelled. We had about 50% of our investors attend a face-to-face meeting. A good turnout, even without a developing pandemic.

The event was March 7. Saturday.

The following Thursday, March 12, I believe it was, began the first lockdown order in Arizona. If our meeting had been scheduled one week later, it would have been cancelled. And we would have had to scramble to do something on Zoom, lose the money for the restaurant where we had a great dinner party for the investors.

Whew!

Impact on Business

Later that month, two things occurred. First, we experienced a big increase in client accounts and client investment. While we had been growing at a good rate prior, the lockdown served as an accelerator.  Secondly, a key member of our team contracted the virus and was down for almost two months. We held it together—thanks to everyone on the team stepping up!—but it was a tough period.

Since lockdown, I have not travelled. In 2018 and 2019, I was on the road (mostly overseas) more than 50% of the time. I made Executive Platinum on American Airlines and Emerald on Oneworld. In 2020, other than a two-day trip to meet a client in Las Vegas, I’ve at home here in Arizona. Let me just say that Las Vegas is no fun in its current half-lockdown state. There is absolutely no reason to go, unless you’re desperate for a chance to lose some dollars.

I will get the Covid vaccine as soon as our central planners allocate a shot for me (which will be much slower than when companies in a free market would have sold it to me). I will get whatever “vaccine passport” they give out. But I sure hope that international travel does not mean 12-hour or 17-hour flights wearing a mask the whole time!

In August, Monetary Metals raised $1.3 million in an equity capital raise. We grew our existing gold and silver (and platinum) leases, we added new leases, and we introduced a product that will pivot the monetary system: the first gold bond in 87 years.

Pivoting the Monetary System

And that is a simple way to understand what we are doing: pivoting the monetary system. Our whole approach is based on a simple idea. Pay interest on gold, in gold. And there’s a simple idea behind that. People will prefer gold interest on gold, over paper interest on paper (not to mention the Fed has all but won its War on Interest, and there is not much interest to be earned on paper anyway).

If you had a choice to be paid $190,000 in ten years, or 100 ounces of fine gold, which would you choose? The Fed is promising 2% debasement per year. Assuming they deliver exactly what they promise, that $190,000 would be worth about 81 ounces (admittedly this is an oversimplification). We think most people would make the same choice.

A yield on gold, paid in gold® is our registered trademark, and brand promise. It is a disruptive innovation, not an incremental change.

What Is a Disruptive Innovation?

An ordinary innovation, called by Clayton Christiansen in The Innovator’s Dilemma a “sustaining innovation” is like most product improvements you see in the market every day. For example, flat screens have higher resolution, higher contrast between dark and bright, and higher frame rates. And lower prices. Cars have more features like backup cameras and warnings for lane departure, following too closely, etc.

Sustaining innovations are what the mainstream customer wants more of. And will sometimes pay more to get, such as a bigger screen or more horsepower.

Christiansen defines a “disruptive innovation” as one that incumbent companies in the industry cannot respond to. If an upstart simply cuts cost, the established vendors will cut their cost too. A price war is not a way that a new entrant can win.

A Disruptive Example

Disruption is like judo. It uses the established company’s strength against them. For example, take our business. Clients place their gold in a Monetary Metals account, and we present them with opportunities to lease their gold and earn interest on it, paid in more gold.

Clients have the choice to invest in a particular deal, if they find the return suitable. Or they may choose not to invest their gold, in which case it stays in their account (with no storage cost). Our account statements show balances in ounces, with interest earned in ounces.

Could a mainstream bank do any of this? A few hold gold for select ultra-high net worth clients, but this is not a service they advertise. They want to encourage their clients to invest in equities, bonds, and properties. They don’t encourage clients to question the dollar itself, which gold—especially when it pays a yield—does. They prefer to think of gold as, at best, a volatile commodity. “Sir, would you like to open a futures account? You can bet on the gold price with more than 10:1 leverage.”

Every conventional financial firm denominates its account statement in dollars. To use gold as the unit of account is a paradigm-shift, which is typical of disruptive innovation. And of course, it encourages clients to think of their gold, not in terms of its dollar price but simply how much they’ve accumulated.

Established companies have such a hard time with disruptive innovations, because they perceive them as cannibalizing their existing businesses. It is not just that gold earning 2.5% more gold in a one-year lease competes against a one-year bank CD, in which dollars earn 0.3% more dollars.

It is that thinking of one’s wealth in ounces brings a different perspective than thinking of everything in dollars. Even if one knows that the dollar is designed to lose value, the dollar financial institutions are invested in keeping everyone invested in dollar thinking.

A funny thing happened to this (once) crazy idea. I no longer spend most of my time and energy thinking about how it would work, how to reach people with the idea, and developing abstract theories.

Now, it’s just business execution. Now, we just have to deliver the product, publish the press releases, conduct due diligence, meet investors, etc. And launch a podcast (The Gold Exchange). As any growing business at this stage does. And speaking of which, if you will excuse me, I need to get back to work. Here’s to a fantastic 2021!

Open Letter to Mercatus Center

Patrick Horan
Program Manager for Monetary Policy
Mercatus Center
Via Internet

Dear Mr. Horan and Mercatus:

It just came to my attention that on 20 July you wrote an article prompted by the then-upcoming Senate Banking Committee vote on Judy Shelton for a seat on the Board of Governors of the Federal Reserve. You ask the question: Is a Gold Standard Practical Today? The question is more urgent than ever. But your answer does not really answer the question.

The lede of your article asserts without evidence, “Despite the strengths of a gold standard system, there are better alternatives.” And in the first paragraph, you commit a logical fallacy that you reuse later in the article, “…it would be immensely difficult to implement in today’s world of modern central banks.”

You have reversed the cart and the horse. You take central banks as a fact of nature, and ask if the gold standard would fit. Instead, you should ask if central banks fit the needs of market participants in a free society.

The Soviet Union (also Mao’s China, North Korea, Cuba, and Venezuela) have proved that central planning is impossible. Even something as simple as corn. To grow corn, you just plant seeds in fertile soil, and wait. Yet every country that attempted to centrally plan it, has starved.

Economists all know this. Mercatus is articulate when it comes to price-fixing schemes for agricultural commodities, wages, rents, etc. Yet when it comes to money, you say that “there are better alternatives” to a free market.

Here is your next error. “Under a gold standard, a country sets the price of a fixed unit of gold in terms of its own currency…” Actually, in a gold standard, gold is money. Prices are specified in money terms. Money itself does not have a price. To grasp this, think of any of the fundamental units in physics. For example, how many meters long is a meter? To ask what is the price of money, is similarly invalid.

In a free market, there is no doubt that when you deposit money (i.e. gold) in a bank, you have a right to the return of the same amount of money (gold). And it is useful to have a standardized unit of account, so everyone can trade based on the knowledge that a “dollar” is the same amount of gold at Bank A vs at Bank B. This is not a price-fixing scheme, any more than an Internet standard that says long messages should be broken into 256-byte packets is a scheme to limit how much you can say.

Next you object that “exchange rates between countries are fixed.” Let’s drill into this. Suppose one country defines its dollar as 0.05oz gold. And another defines its franc as 0.29g of gold. It is true that people must convert from ounces to grams, to calculate how many francs to a dollar. But this is no problem.

“Most economists, however…” Is appeal to consensus supposed to be a scientific approach? How about appeal to reason?! When the government doles out money to academics, a curious coincidence develops. Most academics promote the party line. I will bet an ounce of fine gold against a soggy dollar bill, that Mercatus has a paper or two in its archive which looks at this kind of bias.

You continue “[economists] are critical of a gold standard precisely because it constrains a central bank’s discretion…” Discretion to do what? To rule. One term for what central banks have done to retirees is “financial repression.” Just ask anyone who is trying to live on his savings, what he thinks of zero interest rate policy.

The government and its cronies love it. Those who speculate on assets, and those whose pay is tied to asset prices such as CEOs and bankers, love it. But there is a lender for every borrower. Those who depend on interest hate it. Keynes called for their euthanasia, and that is what central banks have inflicted.

You continue “…gold standard advocates may believe deflation brought on by a gold standard is desirable…” Speaking of bias, the term brought on carries the baggage of its connotation of being the cause of something bad. Like an illness.

Of course, industry is always becoming more efficient. So if we had a money that was not being debased, prices would fall with the cost of production. In my article for Forbes, I showed that the real resources required to produce a gallon of milk were reduced by about 90% between 1965 and 2012. Isn’t it logical that the price of milk would fall about that same amount?

Yet you use another pejorative term—deflation—to describe this. Improved efficiency and hence prices is not to be feared. Of course, deflation is scary, not because of efficiency improvements, but financial crises. When the banking system is collapsing, and unemployment is skyrocketing, prices fall. The phenomenon of mass credit default should not be confused with the phenomenon of improving productivity. To avoid this confusion, they should not be given the same word.

I wrote for Forbes about the nomination of Janet Yellen as Fed Chair, and outlined her theory of labor:

  1. Disgruntled employees don’t work hard, and may even sabotage machinery.
  2. So companies must overpay to keep them from slacking.
  3. Higher pay per worker means fewer workers, because companies have a finite budget. Yellen concludes—you guessed it:
  4. inflation provides corporations with more money to hire more people.

I characterized this as frivolous. But your article follows the same logic, “Since employers generally tend to avoid cutting workers’ wages because wage cuts can hurt worker morale, companies nevertheless will lay off workers…” Yellen and you both use this to support an inflationary central plan imposed by central banks.

I must say something now, not as economist to economist, but as businessman to economist. Before you publish how businesses behave in your imagination, I encourage you to go out and ask a few how they behave in reality. What you said is not just wrong, but obviously wrong. In the economic lockdown following COVID, I’ve lost count of how many businesses I’ve spoken to, or read about, which cut salaries.

You double down on this error, and illustrate the contradiction in Yellen’s and your argument with, “vicious cycle where prices continue to fall as employment levels and demand for goods and services fall.” In the previous sentence, you said this outcome occurs because businesses were reluctant to cut wages. Now you say that employment is falling, glossing over the fact that when joblessness is up, wages on offer go down. Rising unemployment is the same thing as falling wages (at least if there are not laws that attempt to prevent it).

In economics terms, the marginal employer is the employer who hires more workers on a downtick in wages. In business language, every company wants to hire more people, but price matters.

Next you say, “…former Federal Reserve economist David Wilcox argues that a gold standard prevents a central bank from cutting interest rates to make borrowing easier in order to provide stimulus…” This, sir, is a feature not a bug. And how does David Wilcox know what the right price of borrowing is? The same way that Gosplan knew the right price of corn in the Soviet Union.

I am glad you mentioned that there were different kinds of systems, all of which are referred to by the same term “gold standard” (kind of like referring to credit collapse and efficiency gains by the same term “deflation”).

Unfortunately, you add to the confusion by saying that the “purest” gold standard, prior to 1914, “…required no coordination on the part of central banks.” That is an odd way to put it. As well, one might say that “a seller and buyer of corn require no coordination on the part of Gosplan.”

Instead of calling these various different systems, “classical”, “interwar”, and “Bretton Woods” systems, it is more helpful to call them by names that denote their essential characteristics.

Prior to the creation of the Fed in 1913, the US had a gold coin standard (as did much of the world). This means that people had the right to withdraw their gold coin, if they did not like the rate of interest on offer at the banks (or the risk). This is a vital feature! Imagine a restaurant where you had no choice. You must keep paying every day, no matter what kind of slop they slapped onto your tray. I recall the student dining hall back when I was in college. They were exactly like that. Even the cheapest restaurant has to do better, because its customers have a choice.

This right gives teeth to the savers’ time preference. If the interest rate goes below it, they withdraw their gold coins. Which forces the banks to sell assets, causing a drop in the bond price. Which is the same thing as a rise in the interest rate. Free markets have negative feedback loops (the same as I described in the labor market above). But when a central planner takes over, it is like putting a penny in the fusebox. Sure, it may seem convenient that the TV does not shut off when your daughter uses her hair dryer while your son is cutting wood in the garage—until the house catches on fire.

After WWI, the rest of the world switched to a gold bullion standard. This is a very different animal. Sure, the banks still had gold backing. But the people lost the right to redeem their deposits and take gold coins home. Only if one had enough money to withdraw a 400-ounce bar, could one take the gold home. But 400 ounces then, as now, is a large sum of money. Very few individuals had the cash balance to do it. So the system changed character in a number of obvious ways, and many more not so obvious (for example, in Europe they stopped trading in Real Bills).

In the US, we kept to a gold coin standard but after 1913 we had a centrally banked gold standard. The Fed quickly turned to buying government bonds. In so doing, it destabilized the interest rate.

This so-called gold standard was unsustainable. One by one, each country abandoned it. In 1933, President Roosevelt forced US citizens to turn in their gold and made it a crime to own gold. The dollar became irredeemable to Americans, though it was still redeemable to foreign central banks.

At the end of WWII, the US told its allies how the monetary system would work. Other countries were to treat the US dollar as if it were gold. And their own irredeemable currencies would be pegged to the dollar. This was not at all the same as the gold coin standard, where a currency unit was not a price but a standardized deposit. After WWII, there were no gold deposits, only a price-fixing scheme. Like all price-fixing schemes, this one failed.

In 1971, on the advice of Milton Friedman, President Nixon defaulted on the obligation of the US government to redeem dollars presented by foreign governments. Even Keynesian economist Paul Samuelson thought Nixon would just set a higher price of gold. But Friedman urged Nixon to plunge the world into the regime of irredeemable currency, “in which central banks have full control over the stock of money…”

You say that, “Unless we abolish central banks (an unrealistic proposition)…” and then right after that “it seems unlikely that a current-day version of a gold standard would work well.” I think you need to pick which horse you want to ride. Are you saying that it is realpolitik to advocate for central planning because, hey, go with the flow? Or are you saying it is impractical to have a free market, because it won’t work?

You then assert that nominal GDP targeting will work well. I have written before about some of the frivolous ideas behind this idea.

You conclude with, “…nominal GDP targeting is one realistic way to do the sort of rules-based monetary policy that gold standard advocates want…” But earlier you said, “[economists] are critical of a gold standard precisely because it constrains a central bank’s discretion…”

Pick one. Is a central bank better than the gold standard because it gives central planners the discretion which you assert “is important, especially during times of crisis”? Or is a central bank doing nominal GDP targeting just like a gold standard—i.e. constraining the discretion of the central bank, only it’s just more realistic?

This is a pivot. Two mutually-contradictory arguments offered because both seemingly lead to the desired conclusion.

And a central bank that centrally plans based on rules is a false alternative to a central bank that centrally plans based on discretion is a false alternative. The way cherry-flavored cyanide solution is a false alternative to strawberry-flavored cyanide solution.

Martin Luther King said something important:

“Cowardice asks the question – is it safe? Expediency asks the question – is it politic? Vanity asks the question – is it popular? But conscience asks the question – is it right? And there comes a time when one must take a position that is neither safe, nor politic, nor popular; but one must take it BECAUSE it is right.”

You argue that “it would be better for gold standard supporters to avoid ‘making the perfect the enemy of the good’ and pursue more achievable options such as nominal GDP targeting.” This is what Dr. King characterized as expediency.

Your article ended with a call to action. I, the gold standard advocate, should join you in advocacy of a GDP-targeting central bank because it’s politic.

So I end my letter with my own call to action. You, the advocate of a GDP-targeting central bank, should join me in advocacy of a free market in money and credit, because it’s right.

Sincerely,
Keith Weiner, PhD

What’s Behind the Mask?

The response to COVID-19 has been breathtaking. Both sides of the political spectrum quickly agreed to shut down and suffocate the economy. And even before that, countless homeowner’s associations, condominium boards, retailers, and corporate employers beat the rush and shut down their facilities voluntarily.

We quickly ended up in a world that no one has thought much about, and few would want. People were forced into isolation. They were not allowed to go to work, or to bars and restaurants, much less sporting events or concerts. They were discouraged from even going to backyard barbeques.

When we are allowed/required to go out in public, we are told to maintain social distancing. This is a NewSpeak word if ever there was one. There is nothing social about maintaining the kind of fear of others that forces one to keep one’s distance at all costs. For example, people now walk the long way around aisles in grocery stores. And notable where I live in the hot desert, they stand in the blazing Arizona summer sun, waiting for permission to enter a store.

We have also done away with handshakes, much less hugs, and kissing on the cheek.

So called social distancing is un-social, anti-social. It is further isolating people. Isolation is lonely, depressing, and alienating.

People were encouraged to think of their friends as potentially lethal threats (if they aren’t, then why must we avoid them at all costs?) But this causes a psychological dilemma. How can anyone simultaneously look at his neighbors as a threat, and at the same time turn to his neighbor for help or collaboration? These two views are almost impossible to hold in one brain.

If others are deadly threats… then they are bad. We saw this with each time one state had a rising count of COVID cases. There was a palpable sense of fear-and-loathing of New Yorkers. Some states talked of prohibiting New Yorkers from entering. An otherwise-peaceful person I know recently lamented the fact that the US did not have a mechanism for checking where someone came from, when they drove across “the border” into another state. I said yeah, well, that mechanism is characteristic of the Soviet Union and Mao’s China. This person was a bit uncomfortable, but did not back away from wishing for it to come here.

It’s a lethal but compelling thought progression. It encourages everyone to regard everyone else they meet as a threat. Which leads to distrust. Which leads to fear.

Of course, not all businesses were locked down. Some were defined by government order as essential. This, in effect, tells everyone that owns or works in other kinds of businesses, “We don’t need you.” Such non-essential people (or non-people for short) could ponder their own uselessness while they were forced to watch their businesses and livelihoods ruined, their savings wiped out. While they drowned, held under by a government posturing as doing good to the health of the people.

Most governments have unlocked to varying degrees, though many are regressing back towards lockdown again.

And they have held out wearing masks as the one thing we can do, if not to avoid getting sick with COVID, to avoid more lockdown. There are problems with masks, such as they are uncomfortable, they make people touch their faces more (which they should not do, if they are concerned about catching a disease), and for some people make it hard to breathe.

Interestingly, I had a conversation with someone I know. He is a doctor and extremely physically fit. He said he wears an N95 mask in his practice all day. I asked if was professionally fitted. He said no, that one makes it too hard to breathe to wear all day. The one he (and everyone else) is using, even if N95, is easy enough to breathe in because of the huge gaps, especially on the sides of the nose. It’s easier to breathe because the air is moving through the path of least resistance—around the filter, and not through it.

More to my point today, masks have a universal negative. Wearing them makes people less recognizable, less relatable. Less human.

So we are isolated from most human contact, and when we are forced to be with other people we are given reason to fear them. And we cannot see their faces. They are literally masked.

This brings us to the communist view of man: people are faceless, interchangeable automatons. They are stripped of their individual identity. And they know it. They cannot turn to their neighbors as they did for centuries. They can turn only to the government.

Is this the world you want to live in? Even if masks could prevent people from ever catching the disease (and not merely slowing down the rate of spread) it would be better to risk the complications of COVID than to live in the kind of society that this kind of fear is leading us towards.

Postmodernism Corrupts Everything

According to Encyclopaedia Britannica:

“Postmodernism, … a late 20th-century movement characterized by broad skepticism, subjectivism, or relativism; a general suspicion of reason; and an acute sensitivity to the role of ideology in asserting and maintaining political and economic power.”

Its roots go back long before the late 20th century phenomenon. Consider quantum physics. The Copenhagen interpretation (developed in the 1920’s) holds that, “physical systems generally do not have definite properties prior to being measured.” The most infamous and absurd example of this is Schrodinger’s Cat: it is neither alive nor dead until a human consciousness observes the radiation detector. This is obviously “broad skepticism and subjectivism”. And a general suspicion of reason (perhaps less obvious).

Next, consider the historical revisionism of Howard Zinn. His People’s History of the United States began with the belief that there is something wrong with America, going back to prior to its Founding. His scholarship was shoddy, but that is rather the point. He puts the history profession at the service of the Marxist class warfare narrative. History can jettison the fact of what happened, in service to socialist political ends.

Zinn’s effort bore its ultimate fruit in the New York Times so called 1619 Project, which–with rotten scholarship–asserts that slavery is essential to capitalism. Yeah, and war is peace and ignorance is bliss, too.

What other field comes to mind, at the mention of disregarding the facts in service to the goal of political power?

“Each of us has to decide what the right balance is between being effective and being honest,” said global warming activist Stephen Schneider

Yes, I am aware of the supposed nuance of his comments and his stance. But no amount of nuance can defend the false alternative of effectiveness vs. honesty. And no one would dare defend this view (or claim nuance), if not for the pervasive poison of postmodernism.

Postmodernism has also had its impact on the law. In the 17th century, John Locke and others were developing the idea that law does not simply mean whatever the government forces you to do.  Locke said that people have rights such as their life, liberty, and property. Law is supposed to be written to protect these rights, not to give a veneer of respectability to the so called “divine right of kings”, otherwise known as Might Makes Right.

But starting in the late 19th century, this understanding was abandoned. The Sherman Antitrust Act stands as an awful example of a postmodern approach to law. Loosely worded, it makes a crime out of restraint of trade. A proper law written to protect individual rights must be clear, so that everyone can know in advance what is legal and what is illegal. A postmodern law is not intended to protect rights, but to give the government the power to violate someone’s rights.

Unfortunately, the trend accelerated after 1890. People (and the Supreme Court, see the opinions written by Justice Oliver Wendell Holmes) moved away from the principle that the government has enumerated powers, and the concept of individual rights. The Constitution, they said, was a “living, breathing” document. In other words, it means precisely what they want it to mean, subject to change based on convenience.

Today, virtually every productive enterprise is subject to regulation. This means, in practice, that a government agency writes, judges, and enforces a set of broad but not clear laws. Businesses are under a presumption of guilt, and have the burden of proof to show that they are innocent.

Next, let’s look at money. The postmodernists attempt to get away with adulterating and perverting money, to the point where people are forced to use debt as if it were money. This is no random economists’ confusion. It’s done in service to the leviathan state. In the words of Benito Mussolini, “Everything within the state, nothing outside the state, nothing against the state.”

Today, the government has seemingly unlimited capacity to dole out free goodies. The cargo cult of so called “Modern Monetary Theory” pugnaciously asserts that the limit is only when the “bathroom sink overflows”—i.e. when they create too much of this debt-money. So far in response to the coronavirus, the government has bestowed on us $2.8 trillion of loot. This was on top of a baseline budget deficit of $1.7 trillion in the 12 months ending March 21. The US government will likely run a deficit over $6 trillion.

There is a limit to this. There is a point in any postmodernist deviation from reality, when the consequences hit at high velocity. It’s just that the US government’s capacity to consume our accumulated capital is higher than anyone thought.

And this brings us to epidemiology. What had been an obscure field that studies disease vectors, how now catapulted onto center stage with its call to lockdown the people and shutdown the economy.  So far, in America, over 33 million people have filed for unemployment. And that understates the reality because state unemployment offices are unable to keep up, because some companies keep making payroll out of accumulated capital, because of the 2-month payroll subsidy in the so called CARES Act, etc, and because the self-employed and business owners are generally not eligible to collect an unemployment check.

This stupefying ruin occurred because postmodern epidemiology attempted to find the “balance is between being effective and being honest”. Professor Neil Ferguson published his projections of mass death, based on a pathetic buggy computer model. And, because an early paper claimed that the virus can be transmitted by asymptomatic people. This claim was based on a since-retracted story of a Chinese woman in Germany. She did indeed transmit the virus to a German colleague, but it turns out that she had symptoms. They just did not bother to call her to ask, before going to print with a story that fueled the momentum to lockdown everyone worldwide. They were highly “effective”, if not balanced with honesty.

The government laid waste to the economy and people’s lives because postmodern lawmaking puts the power to lockdown 300 million innocent Americans into the hands of the governors (and postmodern ethics sets up the false alternative of saving lives vs. the economy), who listen to postmodern epidemiologists who rely on postmodern software.

Unfortunately, the people will respond with even more “broad skepticism, subjectivism, or relativism.” All scientists will be lumped together, under a “a general suspicion of reason.” If a proper scientist develops something real (e.g. a vaccine for COVID-19), millions will not avail themselves of it, out of belief in conspiracy theories. This trend, of skepticism towards science as such, began with the postmodern global warming scare (which also featured bogus computer code that the developer refused to publish so the scientific community could review it).

Staggering Job Losses

So far, about 20% of the people who had jobs 6 weeks ago, are unemployed. This is in addition to the 96,000,000 who had no job even before the lockdown, but who aren’t counted as being in the workforce.

And the reality is worse than even this, for three reasons. One, unemployment offices are not able to keep up. More people are being added to the rolls who already lost their jobs.

Two, government at all levels has not begun laying off yet (if they ever will). So these people were laid off almost entirely from the productive sector.

Three, many businesses are still paying salaries hoping for a quick resolution. But every day, they drop, depleted of capital. No one knows how many there are, or how many workers still receive paychecks from such businesses.

This is really bad. Really really bad. Worse than 1930’s bad. And it comes at a time of record high leverage. Deleveraging has hardly even begun.

How Wide is the Margin?

Economics discusses the margin, and the concept of marginal all the time. For example, the marginal worker is the one who loses his job, at a downtick in revenue.

Well, since the government response to the virus, over 26,000,000 people have lost their job.

It is not just one worker who occupied the role of marginal worker. It was over 26M workers (and counting).

The concept of margin also implies the concept of width: how wide is the margin? All those included within this finite space are at risk of loss of their job, business, etc.

And due to a number of factors, including decades of falling interest and margins, with rising net present value of all liabilities including debt and wages, the margin has grown quite wide indeed. And of course a months-long shutdown widens the margin much more than a week-long shutdown.

Perhaps 30% of the US economy (we shall see how big it is) was included in this wide margin. The fallout will be felt for many decades.

When Government Has All the Powers

I wrote only one paper that was rejected by Professor Antal Fekete. It was nominally about duration mismatch. He asked me to write it as a guide for a course at his New Austrian School of Economics in 2012.

I argued that when banks borrow short to lend long, they harm themselves and their clients. This is in accord with what Fekete taught. However, I made an additional point with which he did not agree. I said that government should not have the power to ban everything that every special science lobbied to prohibit.

Today, the special science most in the public spotlight is epidemiology. Like in economics, controversy sometimes splits epidemiology on certain issues. That does not prevent it from calling for bans on behaviors that epidemiologists don’t like, including those related to the spread of contagious disease.

Little did I know, back in 2012, that this side point to my paper would become so important. Based on the work of certain epidemiologists, the government has shut down our economy.

Unfortunately, the government has taken for itself and the people have willingly given it, a terrible power. Government can now ban all the things. In 2012, I was focused on a potential ban of a banking practice. But I argued that a government which has the power to ban one thing, in fact, has the power to ban all the things. If you doubt me, just ask those who sell food in restaurants, clothing in clothing-only stores, haircuts in salons, and much more.

Today, every practitioner of every special science has taken note.

Whatever the threat of coronavirus may be, history surely teaches us of the dire threat of a government with unlimited power. A government with unlimited power is a totalitarian government. Whatever your view of coronavirus, I hope we can at least agree that government must be limited.

I have never asked anyone to call their legislators or governors, but now I implore you to call and ask them to honor the limits placed on government power by some wise men in 1776.

Flattening the Curve is Central Planning

It may be getting lost in the noise now, but there was a principle behind locking down most of the people (except those deemed “essential”). It was not to “fight” the coronavirus. The locker-downers conceded that everyone will be exposed to this virus sooner or later, anyways. They just wanted to *slow* the spread of the virus.

Got that? We are laying off millions (or tens of millions) of people, ruining hundreds of thousands of businesses, wiping out trillions in capital, impoverishing the people. Not to stop the virus. Just to SLOW it.

And why is slowing it so important that we cause this much harm to so many people? It is important, we are told, because the hospitals have too few beds. Worse, they are inflexible and unable to expand capacity due to shortages of everything from doctors to ventilators.

This harm is inflicted to manage demand at hospitals.

The reason why the health care industry is so brittle is the countless regulations that require permitting, licensure, Certificates of Need, armies of bureaucrats that can approval of anything. Such as the manufacturing of masks. It would not be exaggerating by much to say that everything which isn’t mandatory is prohibited.

In other words, the central planners have managed the supply at hospitals. And now their managed supply is insufficient, so they seek to manage the demand. Your job, your life savings, your business, your dreams and goals–are just collateral damage.

Flattening the Economy Because, Virus

I write this on March 18, now having watched a 180-degree reversal of how we think about contagious disease. Formerly, we would put sick people in quarantine and respect the right of healthy people to go about their lives. Today (March 18, 2020), we are now on the brink of martial law. In our zeal to fight the corona virus, we are shutting down travel, public gatherings, restaurants, etc.
This is what a mass panic looks like.
Not to mention it is already wreaking massive economic damage. The economy was already faltering. The false boom stimulated by a decade of monetary meth was likely turning to bust, even before the virus. And then the government began to shut down whole industries: air travel, hotels, sports, bars, restaurants, etc. And likely more to come.
I write extensively at Monetary Metals about the risk of debt defaults cascading like Dominoes, so I will not further address that here. I will only say that whole industries are laying off (with much more to come) whole workforces in one giant dump. That is a lot of people who will suddenly experience hardship, not to mention stop spending on everything from clothes to computers, phones to tunes (never mind restaurants and bars, they wouldn’t be allowed even if they still had their paychecks). As always in a downturn, mainstream financial and economic analysis is useless. I think right now, they are predicting “slower growth.” Yeah, and if you slam the brakes in your car, it is “slower acceleration,” too.
Any why this draconian response? There is now a new technical expression, among the newly-minted tens of millions of experts who inhabit social media platforms. They seek to “flatten the curve.” That is, they say, it is inevitable that this virus will sweep the population. But if we can just slow its progress, then our health care system will be able to respond, there will be enough beds, ventilators, and health care professionals to care for the case load. If we allow it to progress at full speed, then the hospitals will be overwhelmed, and America will look like Cuba.
If you think that the govt must outlaw public gatherings, close the restaurants, and shut down half the economy … to “flatten the curve” … then you–yes YOU–are attempting to be a central planner.
 
In capitalism, people and industries are resilient. The reason is simple. They are free to act on their reason, and to seek a profit.
 
In socialism and central planning, there is no resiliency. The people starve if the crop yield is below quota, they drown if the tide rises, they suffer in darkness if an oil shipment is delayed. The reason is simple. They are not allowed to act, but must wait for orders from a central planner. And Mises proved that socialist planning is impossible, even if the planner is a wise, honest, caring genius. 
 
If it is indeed true that American hospitals are soon to be overwhelmed by virus patients then this is not a recommendation for more central planning, enforced by redirecting scant law enforcement resources to enforcing martial law.
 
It is a damning indictment of just how socialist–and hence sclerotic, rigid, and brittle–our health care industry has been forced to become under the degree of socialized medicine we already have. We are not fully socialist yet. Hence we are not Cuba yet.
I fear the kind of government that can shut down public gatherings and centrally plan healthcare and everything else. I fear it much more than a virus.

Distortion Due to Minimum Wage Law

In an attempt to raise wages, the government imposes a minimum wage by law. Socialists imagine that this increases wages paid. But the fact is that it increases, not the wage paid to a given worker, but the threshold. That is, it raises the bar on what employment is legally permissible. This is well understood (at least by those who don’t substitute their notion of morality for economics).
Today I write about a different problem: what happens when there is a layoff.
In a free market, a layoff causes a downtick in the bid for labor. Recall that the bid is set by the competition among sellers. Most of the newly-unemployed workers who are seeking a job will take the bid price on their labor. So the bid is depressed a bit. That is, they choose to take a lower wage rather than no wage. In a free market, there is no such thing as structural unemployment.
As an aside, if this seems bad, you may be substituting moral notions for economics. Economics works the way it works, and doesn’t work the way it doesn’t work (e.g. the way socialists feel it should work).
Anyways, each laid-off worker finds a job. His new employer is able to employ him, because the worker accepted the employer’s bid. Over time, the employer may increase its efficiency or the value of its product, and be able to pay more. This employer would not have had the opportunity, if it had to match the wage of the established company.
And this leads us to the problem with minimum wage law which I want to focus on today. Prices move in a free market. Each and every move is for a reason, even if the observer—or central planner—does not know what that reason is. If allowed to move—i.e. not fixated by a central planner—the new price is a signal. If the bid is pressed down, it tells buyers to increase their volume. If the offer is lifted, it tells sellers to bring more goods to market.
Of course, the very response of buyers stepping up will tend to push the price up, and sellers bringing goods will tend to push the price down!
To the untrained eye, it may seem like the price is stable. Or stable with a bit of noise in the signal. This seeming-stability is the effect caused by the actions of the buyers and sellers. And their inactions, as in the case of the layoff, when they stop buying or selling.
A price fixing scheme like minimum wage is based on the idea that stasis is a goal. That there is a magically right wage—nowadays called “living” in an attempt to mobilize those moral notions. And the government, of course, has the job to ensure it is paid. Of course, the government cannot guarantee any such thing. What it does is deliver the stasis that people imagine is the ideal condition.
However, it is a stasis of price only. Not of outcomes achieved by participants in the market. On one side, there are people who go without work. They suffer the hardships of poverty (not counting that the government may dole out free goodies to them, like pouring food onto a wound). On the other side, there are entrepreneurs who go without workers. They suffer hardships too, including they may be out of business entirely.
By fixing price, they think to fix the economic outcomes. But the reality is the opposite. The claim to to good to the workers. But they actually inflict harm on them. And the employer. And everyone else, who does not have the goods and services that the would-be workers are not producing for the companies who are not allowed to hire them.
And (I discuss this in much greater length in my dissertation), notice how government intrusion into the market causes discoordination. There are people who lack for work, and at the same time companies who lack for workers. This is an extraordinary thing, for all that we take it for granted and accept it as if it were normal.
That downtick is necessary. It is moving off a local maxima to get to a higher point. A free market delivers generally-rising wages, but not monotonically rising.