This has become an annual tradition of mine, to blog about my year. My reflections posts are longer than most, and less structured. They are offered for those who may be interested. Let me begin this year’s musing with a story which I’ll then tie into my observations over the course of the year.
There are two sides to the Fed debate. One side wants to centrally plan our dollar with discretion. The other wants central planning based on a policy rule, such as a steady rate of inflation or GDP. I have an observation: this is a false alternative. The real debate should be central planning vs. free markets.
Both sides of that false alternative commit the same simple error.
It likely begins, in the second or third semester of undergraduate economics. Picture a student, all full of himself, armed with just enough knowledge to be dangerous. Failing to grasp what motivates market participants, he thinks in simplistic, aggregate terms. He sees two men and two steak dinners and writes an equation about “maximizing dinner utility”. He cannot even imagine that one is fat and eating two meals, while the other goes hungry. He treats economic statistics as if they constituted reality.
Failing to understand cause and effect, he thinks the government can achieve an effect by manipulating anything that correlates with it. For example, credit correlates with economic growth. Our sophomoric sophomore has no understanding of the economy, economic actors, growth, or even the difference between money and credit. He just feels that the government can make growth if it increases the quantity of dollars.
In a proper economics course, the professor would spend 10 minutes showing this young fool the folly of his foolish notions. But, alas, the young fool spends the remainder of his four years in college hardening his views. He goes on to write a dissertation, formalizing his errors. And he gradually becomes an old fool, dedicating his career trying to impose his foolery on everyone else.
I saw this false alternative again and again over the course of the year. It played out in the Jackson Hole Summit (at which I spoke, using the analogy of cherry flavored cyanide vs. strawberry flavored cyanide). It was the focus of the Cato Monetary Conference, which I attended in November.
It’s bizarre that the most strident critics of the statist central banking regime agree with its propagandists. Yet in monetary matters, that’s what we see: two schools competing on how to advise the central bank to centrally plan credit, and hence the economy.
And nearly everyone passively accepts that the chief danger is rising prices. Since we don’t have inflation now, the critics have effectively conceded to the regime the right to continue monetary planning. Hey, it’s not doing the one harm that they can understand.
Somewhere down in Hell, Marx (who included a central bank in his ten planks) is looking up at the world and smiling.
Meanwhile, back in reality, the debt goes on rising exponentially. The interest rate is falling worldwide (notwithstanding Yellen’s attempt to hike rates in the US, which I predict will be in vain). Falling interest is causing all manner of problems such as falling wages, rising asset prices, and falling profits. And it’s forcing the economy into liquidation mode. But hey, prices aren’t rising, so it’s all good right?
I am sure that the bondholders of commodity producers (and some commodity trading firms) might quibble.
Do I sound pissed off? Hell yeah!
The biggest obstacles to rediscovery of the gold standard are, in no particular order, the gold bugs, the gold conspiracy advocates, the gold standard advocates, and the sound money economists. The gold bugs show that what they really want is a high price for gold, so they can make profits—more of the dollars they earnestly tell you will be worthless by tomorrow morning. The conspiracy theorists repel normal people with their tinfoil hats. Many gold standard advocates want central planning based on the price of gold. Others want to prohibit banking as such, which is also central planning. The sound money economists teach that the value of a currency goes down as quantity goes up, and measure the value of a currency in terms of prices. In effect, they give the dollar a clean bill of health, a false sense of security.
A lot happened this year.
In January, I published a paper The Swiss Franc will Collapse. Amazingly, for a 6500-word economics paper based on balance sheet analysis, it went viral and was read by hundreds of thousands of people. It was well received in Switzerland. It generated some backlash here in America, though nothing substantive. I did not say the collapse would occur in 2016, but instead warned that the Swiss negative interest rate is irredeemable, and also lethal.
I also realized that we, the gold standard movement, need to reach out to constituencies that have not traditionally supported gold. For example, Democrats.
In February, I testified before the AZ House Federalism and States’ Rights Committee in support of HB 2173. This bill would have established gold and silver as legal tender, and removed capital gains taxes on the metals (which is just a tax on the falling dollar). It passed both Republican-majority houses, only to be vetoed by Republican governor Doug Ducey. Are you paying attention, Democrats? Gold is not exactly well loved by the Republicans.
In March I moved my column from Forbes, where it had been for a year and a half, to the Swiss National Bank and Swiss Franc blog. It has helped grow my audience internationally, and bring my work to the attention of central bankers in Switzerland and in many other countries. For example, my open letter to Greek Prime Minister Tsipras was translated into both Greek and Russian, and published in those countries.
In April, I introduced the concept of Yield Purchasing Power. I think this is one of the most important ideas I have had. I would like to see it become a household term as purchasing power is. Though I have as much ego as the next public intellectual, I say this because I think it’s that important. The epic collapse of yield purchasing power is unnoticed, a tragedy given the destruction it’s wreaking.
I also went to Texas to testify on behalf of their gold legal tender bill. Unfortunately, the bill did not make it out of committee.
In July, I spoke at FreedomFest. In August, I published my first article in the American Spectator, on the deadly intersection of securities regulation and drug regulation. I also spoke at the Jackson Hole Summit, an alternative to the Fed’s conference also taking place at the same time in the same town. The Summit was a bit more oriented towards free markets than the Fed event.
In September, I spoke in New York City, presenting for the first time in a lecture format my theory of interest and prices. I also presented it in London, Zurich, Sydney, and Auckland. It should be obvious that our times are not anything like the 1970’s, but it would be hard to tell that from the main criticism of the Fed’s post-2008 policies.
I also talked about Monetary Metals’ idea to offer interest on gold, paid in gold. Interest (no pun intended) was strong.
Also in Sydney, I gave a keynote at the Precious Metals Symposium. My topic was Yield Purchasing Power. I think I hit a note, as other speakers who followed me referenced my talk. I received some invitations to speak in Asia next year, and will announce these when details are firmed up.
After returning home from my around-the-world trip, I helped put on two events in what we hope will be a series. The first Monetary Innovation Conference was in Washington DC in November, and the second was in Phoenix. The latter will hopefully influence and inform the discussion of gold legal tender the state of Arizona going forward.
In December, I helped draft legislation that will (knock on wood) be introduced before the legislature in 2016, and soon after (knock on wood some more) be enacted into law. Stay tuned!
As I write this, I am working on plans for several new products for Monetary Metals.
2016 is looking like it will be an exciting year. 🙂
In going back through monetary history, a large part of the problem has been government intervention or (I should say “and eventually” after they have destroyed the entire banking system) nationalization of the banking industry. If we were to rid ourselves of a central bank, and managed to return risk to the system (eliminate FDIC) and the “Fed put”, and place no restrictions on bank reserve assets (banks could choose whatever they deemed beneficial from a risk/reward standpoint and state or federal governments would not be permitted to require their bonds act as primary or 100% of the reserves), would a “gold standard” be necessary? Would it be counter-productive? What is your opinion with regards to redemption requirements (in gold or silver)?
It seems to me fixing the price of gold or silver for redemption is a problem waiting to happen. Government would be held in check not by gold, but by the risk of banks, or the public for that matter, discarding treasuries in favor of gold, silver, corporate debt, etc. Banks would be held in check through loss of reserves and ultimately their capital if they do not act prudently.
Agreed, when the government interferes it causes disaster.
I am not for a price-fixing scheme. I am for the people having the right, but not the obligation, to hold, save, and spend gold and silver coins. They also have the right, but not obligation, to deposit coin in a bank. It should go without saying that if you deposit 10oz gold, then you are entitled to get 10oz back (plus the agreed interest). This is not price fixing, but simply honoring the deposit, and a prerequisite to attracting any deposits in the first place!
Totally agree. In this post http://miltonchurchill.com/2015/09/08/should-we-go-back-to-a-gold-standard/ I stated this:
“In a free and open gold market, yes, it is true that government would need to participate with other buyers and sellers and the ultimate price of gold would be based on the market, not government policies. In this case, money would need to be denominated in ounces (for example, 1/16, 1/8, 1/4, 1/2 and 1 ounce, etc.), or, fixed currency units (dollars in the US) would have to be redeemable “at the current (gold) price”. So, in the US, if I had an ounce of gold, and deposited it in to a bank, in exchange for dollars, and then returned one month later to redeem my dollars for gold, the amount gold I received back might be quite different. Then, a month later, if I returned the gold to the bank again, in exchange for dollars, I (most likely, as the value would fluctuate based on market price) would have received a different amount of dollars per ounce of gold than I had received on my initial trip to the bank. I’m not saying this is good or bad, this is simply how it would have worked. But, that is NOT how it worked under the Gold Standards that were prevalent in the 19th and early 20th centuries, time periods often referenced by gold money advocates. During that time period, government FIXED the price of gold! Government, for all intents and purposes, became the market. Fixing the price of anything, let alone the commodity that backs a national currency, hardly seems like a concept that limited government, free-market Capitalists, should be advocating.”
Hope your legislative efforts and free markets succeed!
No, government did not fix the gold price, because the price of gold is always 1.
Government standardized how much gold (or silver, depending on when we’re talking about) was one unit for purposes of bookkeeping and making deposits fungible.
Btw, if you give the bank gold and get back a different amount later, that is not a deposit and that is not redeeming. It is buying and selling at the market price.
If the price of gold is always 1 that seems like it’s fixed, but if everything else is revolving around, or priced in gold then yes, I think I see your distinction. They fixed the unit at 23.22 grains of pure gold, not necessarily the price of gold. But under a policy of full redemption at say an ounce for $20.67 were they not fixing the price?
Agree, when depositing there is nothing in return. I think what I was saying was if you gave the bank gold, for dollars, and returned with those same dollars expecting the same amount of gold back, you would be disappointed.
They did the equivalent of the bureau of weights and measures. They standardized on the definition of one dollar or unit.
I dont think the government should be in the business of setting standards, but of all the things the government could do, this is the most benign.
That’s for sure. Thanks for responding Keith!