Why Does the Left Support Wall Street?

The rhetoric from the Left is intransigent in its denunciation of wealth. As long as someone is wealthy, there is inequality. This is because there has always been and will always be someone who is poor. So the very existence of a rich man serves as a rebuke to the Left’s worldview, and a fly in the social justice ointment.

However, Leftists in power behave differently than their rhetoric would lead us to expect. They enact legislation and regulation which actually helps enrich crony businesses, such as big banks. The common refrain is that these politicians are corrupt, and on the take. Wall Street is simply buying their favor.

While this is true to some extent—certainly Wall Street spends a lot on lobbying—it’s not a satisfying answer. How do we fully explain the seeming anomaly between ideas and action on the Left?

It is no anomaly at all. To see why, look at it from the Left’s point of view. It has to be frustrating when the voters reject the policies of Marxism. Unlike in many other parts of the world, the American people do not hate wealth—not yet. If you were a Leftist, how would you go about changing this?

Even today, many Americans if not most of them, feel at a basic gut level that if you work hard you can get rich, and you deserve it. The Left has to find a way to undermine this. The Left wants to migrate Americans to the attitude held in socialist countries: the feeling that if someone is rich then he must be on the take.

If you wanted to devise a strategy to get the population on board your socialist agenda, I can think of no better way than to create a class of very rich people who get their riches off the backs of the people. Create thousands of real-life fat cats whose villainy is infamous. Show the people that this is what it means to be rich: to be on the take. That the rich do not produce, but amass a fortune at the expense of others, at your expense. Put that in the public spotlight.

Once the voters believe this, deep down in their hearts, it’s over. The free market is done. Stick a fork in it. Support for the rights of property or contract will fade away. Then, the path is paved for some kind of socialist takeover and totalitarianism.

Reflections Over 2015

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. 🙂

Efficient Malpractice

Take the notion of the efficient market. What does that mean? Today, hordes of people are coming out of economics and finance majors believing an absurdity. Yes, I said absurdity. They think that, if the market is efficient, it’s impossible to beat the average investor. This is based on the premise that stock prices (or commodity prices, bond prices, etc.) always incorporate all relevant information.

This means that it’s impossible to know something that others don’t know.

If that were true, then entrepreneurs could not exist, and central planning committees should decide how to best spend the collectivized resources. But it’s not so.

What everyone knows is sometimes false. For example, at one time people thought the world was flat. No matter how unpopular it may be, it’s always possible to discover the truth. When this happens in regards to the value of an asset, the discoverer can make money. This fact should be uncontroversial.

So how did it become controversial?

Part of the answer may be that the philosophy departments have long ago defaulted. It is accepted in the mainstream that knowledge is out there, literally in the universe. In this view, prices are right out there with knowledge.

Information, and more importantly understanding, only incurs in here—in your head. It takes an individual mind to process information, and form an understanding. This means that there is no direct transmission process from information to prices. It is a process of each individual mind coming into contact with the information, deciding for itself whether it even agrees and if so, what importance to ascribe to it. And then, and only then, whether to buy or sell.

Case in point, I can say that the information is out there that all fiat paper currencies eventually collapse. I have put some of that information out there myself. Does that mean that all market participants sell their fiat paper currencies and bid up the price of gold to infinity (or permanent backwardation) instantly? They haven’t done so yet.

Some people know how fiat currencies fail, but most people don’t. Price is set at the margin, so we can say that the marginal gold trader doesn’t know about fiat currencies. Or, it could be that he doesn’t care. The marginal seller could be a gold mining company with a lot of dollar-denominated debt. It will not stop selling gold, no matter what the CEO believes. If he does not sell the majority of the mine’s output, the company will be in default and the creditors will take over. Different actors in the markets have different motivations, let alone different knowledge.

So what on earth could efficiency mean? What could the original intent of this word have been?

There was a time, not too long ago, when a commodity could have a different price in different markets within a city. Communication was slow, and transportation even slower. Economists of the day were aware of this, and concerned about it. If wheat could be had for 4 shillings in the north of London, and 3 shillings in the east end, then many people were making an obvious mistake. Buyers in the north were overpaying, and sellers in the east were accepting too little.

Distributors entered the market. They developed ways of knowing the price in different places, and sought to profit by buying where goods were cheaper and selling where they were more expensive. The result of this activity was a price closer to 3 ½ shillings in both north and east London.

Suppose that wheat was trading higher in Scotland, but cheaper in France. This is the same problem, on a larger scale. It’s nothing that can’t be fixed by adding telegraphs, railroads, and boats.

Similarly, one might observe a wide spread in wheat. The bid might be 2 ¼, but at the same time the ask is 3 ¾. The market maker comes into the wheat market, ready to buy at the bid and sell at the ask. In so doing, he and his competitors narrow the spread. It could become a bid of 3 and an ask of 3 ¼.

Another kind of spread occurs across calendar time. Suppose the wheat harvest comes in, on August 1. The price of wheat collapses for a while. But bakers will still want this commodity next month, and every month through July next year. By late Spring, the price of wheat skyrockets. So warehousemen enter the market, able to buy spot wheat and sell forward contracts for future delivery.

Economists of the day might say that the wheat price reflected all available information. This does not mean that 3 ¼ shillings is right in any intrinsic sense. These arbitrageurs are not supposed to be omniscient. In fact, all they are doing is closing the price gaps they find, and earning a small profit to do so.

This is the original idea of efficiency. It had to develop, as these market innovations were occurring. Note that these have nothing to do with the belief that the current price represents the absolute or universally right price for wheat. Perhaps wheat demand will soon drop off due to a new diet. Perhaps the price will rise due to an insect working its way west out of Russia. These vague concerns have nothing to do with the arbitrageurs.

Efficiency in this original sense is a concept pertaining to the losses one will take to trade in and out, to buy at one’s preferred location, to buy when one chooses, etc. Efficiency exists when a variety of arbitrageurs are active in the market, able to close gaps of distance, spread, or even calendar time.

The arbitragers can be said, in an abstract sense, to be using information to impact prices. However, one should look past the abstract idea to the mechanics of where the rubber meets the road. The simple processes of arbitrage cannot provide the sort of guarantees in which today’s efficient market theorist believes.

The modern idea of efficient markets switches to an entirely different kind of actor. The speculator is no arbitrageur. The distinction is important, because arbitrage is a powerful lever than can narrow any spread. Speculation cannot do what arbitrage does. Speculation, subject to uncertainty, overshooting, undershooting, and risk, is a generally weaker and always inconsistent force than the lever of arbitrage.

Suppose Joe the speculator thinks that the price of wheat will collapse, because of the paleo diet. He and his buddies may sell wheat short, taking down the price. At the same time, Jen the speculator thinks that the price will rise due to some insect in Russia which is eating wheat. So when Joe is about done selling wheat down, she and her friends begin buying it up. Perhaps Joe and his buddies get squeezed, and are forced to buy wheat at a higher price, and their buying pushes up the price even further.

The result is that the price moves around chaotically. At no point in this maelstrom can we say that the price incorporates all information. Sure, Joe and his buddies have pushed the price down based on their diet theory. Then Jen and her friends push it up, leading Joe and his friends to (unintentionally!) push it up further. Next, it may be too high and now Bob and company can short wheat once more, to get the price down to what Bob calculates is the point where supply meets demand. Jen and her friends could get stopped out, and so the price undershoots to the downside.

The wheat market is not like a pond coming to equilibrium after you toss in a pebble. It can often be more like a pinball machine, with lots of automatic bumpers and actuators slamming the ball this way and that.

It should be noted that there is an important asymmetry between selling short and buying long. Short sellers have the risk of unlimited price rises, but can only make a finite amount when the price drops. They will therefore tend to be timid, and only enter for short periods of time.

There is no way to say that speculators make prices perfect—or make markets efficient—in according with the information they trade on. Unlike arbitrage, speculation cannot guarantee any particular market outcome. It involves numerous risks (sometimes lopsided), uncertainty, doubt, incomplete understanding, and many other challenges.

When reading any economics work (including mine!) you should strive to understand the meaning, nature, and consequences of the ideas. If something is said to be true, ask how that is so. Who would have to do what in order for it to be so? Look at real markets, and ask yourself is the theory working out in practice, or do you observe the exact opposite of what the theory predicts?

Sometimes a writer may not be as clear as he could be, especially if he thinks a relationship is obvious or takes a word or concept for granted. Other times, the problem may be that his choice of words is imprecise. No matter what, never fail to drill down, ask deeper questions, and look beyond the mere word to the truth of how markets work.

An efficient market is one which maximizes the marketability of the goods or securities traded in it. The higher the marketability, the lower the costs of doing business such as getting into and out of a good. An efficient market is one with the minimum possible spreads: bid-ask, geographic, calendar, brokerage commissions, etc.

An efficient market is not omniscient. The concept is closer to frictionless. A car with frictionless bearings does not guarantee you will drive to the right destination. It simply drives with the lowest possible fuel bill.

Minimum Wage Kills Goodwill

Seattle has imposed a $15/hour minimum wage.

Of course, this will kill jobs. It is basic economics: you cannot pay someone $15 to produce $10 worth of value. However, this essay is not about that. Nor is it about the impact on prices.

This essay is about the impact on goodwill. I am developing a series about the concept of goodwill. America once had lots of it. It is now being dribbled down the drain, dripping away, one drop at a time. This new minimum wage hike helps.


This picture of a card helps explain. This may be just one angry dude, or it could be a big movement. I see it as another notch taken out of goodwill.

min wage

As with the cops and perps I wrote about previously, both sides have a legitimate gripe. Emotions are running high. And no one sees the merit in the other side, only in their own.

It’s the perfect toxic cocktail for killing goodwill all around.

Think on it for a moment. What cultural backdrop is necessary for a whole industry to pay near zero in wages, and workers earn the majority of their compensation from tips given voluntarily by total strangers? It is remarkable how much trust and goodwill must be there. This is not typical in the third world, and it was not typical through most of history.

Will people continue to tip, and tip generously, if they feel workers are overpaid? What if they feel that these workers lobbied the government to mandate their overly rich compensation? And suppose the patron resents that his favorite restaurants have closed, and now in any survivors, he pays a lot more than he used to.

Of course, the workers feel that they are falling farther behind, as real wages are lagging everything else in the economy. They resent their bosses for being too greedy, and they resent politicians for not setting the wage high enough. They are angry and resentful at lots of things, except the root cause: the failing dollar.

What do you get when you cross worker resentment with restaurant patron resentment?

We could be one coercive wage hike away from killing tipping in America.

The Great FreedomFest Debate Was Like Watching Tom and Jerry

With apologies to his fans, Jerry is an evil little mouse who constantly pesters Tom the Cat. Tom tries and tries, but cannot seem to overpower someone who is a fraction of his size and strength.

Watching Stephen Moore attempt to debate Paul Krugman was like that.

The “economics” of Krugman is Keynesian economics. It consists of central planning your life by force, because market failure. And Krugman repeated this phrase “market failure” several times. Of course the solution was always government intervention.

Here is an interesting endorsement about one of Keynes’ books.

“Fascism entirely agrees with Mr. Maynard Keynes, despite the latter’s prominent position as a Liberal. In fact, Mr. Keynes’ excellent little book, The End of Laissez-Faire (l926) might, so far as it goes, serve as a useful introduction to fascist economics. There is scarcely anything to object to in it and there is much to applaud.”

This was said by someone who knows all about fascism, Benito Mussolini. Fascism is a corporatist system. Although it has private ownership in name, it’s all under government control. Krugman is a real economic lightweight who proposed fascism for nearly everything that came up. His debate tactics consisted of context-dropping, asserting simple fallacies, and cherry-picking data.


In the TV cartoon, Jerry would steal something and run into his mouse hole. Tom would be left whacking at the hole with a broom, in vain. At FredomFest, Krugman would say that the government must spend more to get the economy out of recession. Moore disagreed, and Krugman displayed a chart showing government spending and GDP growth rates for many countries around the world. Government spending and growth correlated very well.

Instead of flailing away with a blunt instrument, I would have said “Seriously, Paul? What a simple fallacy. The definition of GDP includes government spending. You haven’t proven anything. It’s a tautology that if government spending goes up, GDP goes up. This is the flaw in GDP. Sometimes, rising GDP means the people are being impoverished.”

Next, Krugman moved on to one of the central fallacies of Keynesianism. In Krugman’s words, “You just gave the logic for government deficit spending. Your spending is my income. Where is the income supposed to come from, if everyone cuts spending? Government has to make up the difference.”

I would have said, “Seriously Paul. Again?! This is like the Broken Window fallacy [which Krugman said in 2011 “ceased to be a fallacy”]. Not all spending is consumer spending. Investment spending is important. When people slow consumption, it doesn’t mean they hoard dollar bills. They increase their bank deposits. Banks lend to promising companies. You know, that next new product or lifesaving technology? Except you don’t know it, because government spending has crowded them out.”

In an economic downturn, people go on fewer gambling and drinking binges to Las Vegas. Krugman is basically saying that the government has to take up the slack, and go on gambling binges. Because demand shortfall.

Shortly after telling Moore that one cannot cherry-pick one’s data, Krugman showed a graph comparing Jerry Brown’s California to Sam Brownback’s Kansas. For one year. I felt embarrassed for him, as there were sounds of amused laughter from the audience.

Why did it come to Kansas vs. California for the year 2014 (I didn’t write the year in my notes)? It’s because Moore was defending free markets by appeal to aggregate statistics. Moore used red states as examples of freer markets, and blue for less free markets. He showed a few charts in which red states fared better than blue.

Krugman’s cherry-picking got him safely back to his mouse hole, with Moore stuck outside, banging with a floor cleaning tool.

You cannot defend freedom using statistics, as you cannot get a mouse out of the wallboards with a broom.

Both Krugman and Moore were nervous speakers. Krugman was hunched a bit in on himself (though to be fair, he was in hostile territory and he knew it). Both spoke too rapidly and with a jittery character to their voices. Each has a nervous tell, with Moore incessantly taking little sips from his iced tea and Krugman playing with his fingers.

Krugman took the lead on each issue. Moore often respond with a long caveat, which conceded the point to Krugman. For example, Krugman said that some kids are born disadvantaged, so we need to give them each $8,000 to $10,000 (per year, I assume) in free money. He actually said they “choose the wrong parents.”

Someone please tell him that this is only possible by robbing the taxpayers. Maybe add that it will just accelerate America’s collapse into bankruptcy. Trillions in welfare spending do not fix anyone’s problems, and are actually the cause of the disadvantage Krugman discusses.

Moore said he supports a social safety net, because America is rich, we can afford it, and it’s morally right. When the broom failed to defeat the mouse, not even Tom tried singing to Jerry.

The topic moved to healthcare. Moore noted that government involvement has caused costs to spiral. Krugman offered another whopper. It’s because innovation.

This is absurd, and even Krugman knows it. In computers, there’s been decades of both rapid innovation and falling prices.

Krugman moved on to his shining moment, in the Ellsworth Toohey sense of shine. He unshrunk from his hunch, and his voice rang with moral clarity. “Obamacare is a life saver!”

The audience booed.

“I know someone whose life was saved by Obamacare. If you don’t know anyone like that, then I’m sorry for your narrow little world.”

This is a faux-apology and a presumption. Who the heck is this guy to apologize to me for my life not conforming to his ideology? Not to mention, Krugman glosses over the people harmed by it. There ain’t no such thing as a free lunch, even if handout beneficiaries think there is.

Worse yet Krugman implies that, to be moral, you must sacrifice yourself. He is cashing in on the guilt many people feel, at their own success. He’s learned that all he has to do is raise the specter that someone else is suffering, and they will concede him anything he demands.

This being FreedomFest, and not the People’s Workers’ Party, a large majority of the audience supported Moore. However, moderator Mark Skousen asked a very clever question, “If you did not enter this room in agreement with Paul Krugman, did you change your mind as a result of what he said today?” I estimate about 50 people clapped or cheered.

Krugman won because he appealed to people’s sense of right and wrong. Morality trumps economics any day of the week. Moore didn’t even respond to Krugman’s economic errors, much less smack down his phony judgmentalism.

How Could the Fed Protect Us from Economic Waves?

Mainstream economists tell us that the Federal Reserve protects us from economic waves, indeed from the business cycle itself. In their view, people naturally tend to go overboard and cause wild swings in both directions. Thus, we need an economic central planner to alternatively stimulate us and then take away the punch bowl.

Prior to the global financial crisis of 2008, a popular term described the supposed benefits created by the Fed. The Great Moderation referred to the reduced volatility of the business cycle. For example, I have written before about economist Marvin Goodfriend, who asserted that the Fed does better than the gold standard.

Fed Whale Cartoon
(Credit: Greg Ziegerson and Keith Weiner)
This belief is inherent in the Fed’s very mandate from Congress. The Fed states its three statutory objectives as, “maximum employment, stable prices, and moderate long-term interest rates.” These terms are Orwellian. Maximum employment means five percent of able-bodied adults can’t find work. Stable prices are actually rising relentlessly, at two percent per year. The meaning of moderate long-term interest rates must be changing, because rates have been falling for a third of a century.

That aside, the basic idea is that the Fed has both the power and the knowledge to somehow deliver an economic miracle. However, we know that central planning never works, even for simple things such as wheat production. Communist states have invariably failed to produce the food to keep their people alive. Stalin, Mao, and other communist dictators have deliberately starved off segments of their populations that they couldn’t feed.

The business cycle is vastly more complicated than the crop cycle. It plays out over decades. It involves every participant in the economy. It affects every price, including, especially, the price of money. It causes changes in how people coordinate in the present and how they plan for the future. And, there are feedback loops. Changes in one variable cause changes in others, which come back to affect the first variable. The very idea of centrally planning money and credit boggles the mind.

This should not be controversial. Yet, even those who know why government food planners fail, somehow retain their faith in central planning of the economy as a whole. Marvin Goodfriend—who spoke in favor of free markets, by the way—called his faith in central banking, “optimism.”

Is it true that the Fed is actually somehow providing stability, or even improving on a free market? Let’s look to the interest rate on the 10-year Treasury bond. The rate of interest is a key economic indicator.

Fed Stability without shading
(sources: National Bureau of Economic Research 1800-2001, US Treasury 2002-2014)

With that giant peak on the right side of the graph, we can immediately reject all claims to Fed-imposed stability. Now let’s label a few key dates.

Fed Stability

The pre-Fed period is pretty stable. Two spikes occur due to wars that we know disrupted the economy—and they’re pretty small, considering. Interest declines to a lower level when the government was paying down its war debt. Things remain stable until the creation of the Fed.

After that, we get a rise, a protracted fall, an incredible and truly massive rise, and an endless freefall. Both rising and falling interest make it more difficult to run a business that depends on credit, such as manufacturing, banking, or insurance. The post-Fed period is a lot less stable than the pre-Fed.

A feature of the free market and its gold standard is interest rate stability. The rate can vary between the marginal time preference and marginal productivity. This tends to be a stable and narrow range.

Fed apologists argue that the economy would be even more unstable, if we had no monetary central planner. However, the fact is that it became a lot less stable after the Fed was created.


This article is from my weekly column, The Gold Standard, at the Swiss National Bank and Swiss Franc Blog SNBCHF.com. I encourage readers who are interested to subscribe there, as I don’t plan to regularly post these articles here.

Securities Regulation Harms Businesses

I attended a panel discussion yesterday on the problems startups have in raising capital caused by securities regulation. Startups have to hire a lawyer before they raise the first dollar of capital. It’s a real catch-22.

Entrepreneurs are often surprised to find that raising capital means selling securities. They cannot legally sell securities to just anyone. They are restricted to Accredited Investors (basically people with high income or high net worth). Most young entrepreneurs don’t have a rolodex full of such investors. There are other restrictions, for example, they can’t hire someone to help them raise capital unless he has a license to sell securities.

Welcome to compliance hell. It’s perfectly legal to fail, to lose your own money and even your house. It’s fine by the law if your dream dies, your marriage fails, and all of the other negative consequences occur when a business does not succeed. But if you raise money, you better be fully compliant. Where’s the concern for people?

The stated purpose of regulation is to protect investors from fraud and bad actors. However, fraud was illegal even before regulation. It is already a crime to lie to someone to take his money. Regulation does not change that. It does not make crime more illegal.

Regulation offers a tantalizing promise. We don’t have to wait for criminals to strike their victims. We can make it impossible for them to commit the crime in the first place. We just force them to comply with regulations. No matter how many Enrons and Bernie Madoffs happen, few stop to ask if the theory is even valid. Can regulators proactively prevent bad things from happening?

Nor do people ask if investors deserve to be treated as children. It used to be (before the Nanny State) that once you reached the age of 18, your majority, you were able to enter into any contract or do anything that any adult could legally do. Now 18 is just one milestone. Until you have a million dollars net worth, you aren’t an adult investor and cannot invest in startups. It’s for your own good, you understand. You might make a bad investment.

While we’re at it, we should also ask the age old question: qui bono–who benefits? Lawyers are one obvious group. More importantly, it protects big and wealthy incumbents. Wall Street can easily afford compliance, unlike its small would-be competitors. More insidiously, regulation implicitly supports Wall Street’s model and makes it more difficult or impossible to develop a new one. This is why no one has done the Uber or AirBnB of the stock market yet.

I found it odd that when several speakers on that panel began with apologies, “of course, we want to protect investors.” They began with total capitulation, saying in effect, “I can’t be trusted without a government minder.” Any reform based on this will be little more than deck chair rearrangement on the Titanic. There is a real solution, and it’s simple. The law should treat adults like adults. Let entrepreneurs raise capital without having to get permission at each step, so they can build new products to offer us, make money for themselves, and create jobs.

Quack Economic Doctors

Suppose you go to a doctor. You are in pain and you tell him that you feel like you are going to die. He takes your temperature, and sees that it is a perfectly normal 98.6F. He tells you to go home, you must be fine. He does not seem to be aware of any problem that can cause pain but not a fever (e.g. a broken vertebra, cancer, or bleeding). He is a quack.

It’s a good thing that real doctors have many diagnostics and indicators. They are not limited to just body temperature.

Let’s turn our attention to the monetary system. The quacks focus their attention on prices. The rate of change of prices—which they improperly define as inflation—is the monetary equivalent of body temperature in medicine. In some cases, it’s an important part of making a diagnosis.

And it is far from the only indicator.

If prices are like temperature, then what is analogous to the patient’s pulse? Interest rates. And interest rates have been falling for 34 years.

Is there a doctor in the house? Should we be worried?

Reflections Over 2014

Happy New Year. This is my annual reflections article, which is my chance to write with less structure and formality, share my thoughts and look back over a busy year. This is an informal, unstructured, and personal post.

Let me start by sharing a bit of my story. In January, the Nortel bankruptcy estate finally paid a debt Nortel owed since 2010. Let me provide a little bit of history. In 1994, I started a software company called DiamondWare. Over 14 years, I poured in my blood, and sweat, and grew the business. I did that without a penny of outside capital. In August 2008, I sold it to Nortel Networks. It was a cash deal, but there was an escrow and other holdbacks. Nortel filed for bankruptcy a few months later. Needless to say, bankruptcy called into question which debts they would pay, and at what discount. I am glad they settled up on this one.

The point of this is not my personal finances, but this story is archetypical of our era. Everyone (including my advisors and me!) thought Nortel was a stable company even in 2008. Nortel had been a massive company, and was once the largest company listed on the Toronto Stock Exchange. Its bankruptcy is, so far as I know, the largest in corporate history.

And what was the cause? Using short-term borrowing to fund long-term and illiquid assets. When the credit markets froze in 2008, Nortel had some big bond payments that were coming due. With no way to sell new bonds to pay the old ones, it was forced to default.

Good thing the corporate and banking world has learned this lesson, and now no one uses short-term bonds. Indeed, everyone has income to amortize their debts… </sarcasm>

There are two ways to look at the world. One is to cry. I know people who have become bitter and depressed. They seem paralyzed, and they often lash out at their friends and family. The other is to laugh. Find the irony, poke at it, and tell your friends—nothing will change unless enough people care—but don’t take it personally. Remember a lesson from Professor J.R.R. Tolkien. No one knows the future. Despair is not only a sin in traditional religion, it is also a mistake. All is not lost, not yet, not by a long shot!

In February, I began writing regularly for Forbes. They had published half a dozen of my articles previously, including my most widely read and one of my favorites on how wages have been falling since at least 1965. But now I have my own page as a regular Forbes Contributor. It is a lot of work, and takes tons of discipline to put out a quality article every week. It is also gratifying, and a great way to learn a lot about your topic and yourself. I am honored that Steve Forbes, and my editors John Tamny and Avik Roy trust me with this responsibility. Steve himself has long been a gold standard advocate, and he made it a plank in his presidential campaign.

In the spring, a major project of Monetary Metals came to the end, and not in a good way. We had drafted a patent application, raised capital, assembled a team, developed software, designed and built a website, planned a marketing campaign, and were putting together the legal docs. What was it? I can’t disclose the details as I am working on a plan B, but it was a consumer offering. I was pretty excited.. Unfortunately, the lawyers determined that we would be under a major area of regulation. Initial compliance could have cost near a million bucks, and there would be ongoing compliance costs too. There was no way for a startup to go there. Project nixed. Time and money lost. What a bummer.

Partly due to this, my business partner wanted to move on to other opportunities. I bought him out this summer, and now I am the sole proprietor of Monetary Metals. This lets me pursue my vision: offering investors a gold yield on their gold. If gold is money, then it should be possible to invest it to earn more money. Well, gold is money…

In June, I got my new 2014 911 turbo. It has better balance, more power, a stiffer frame, less overhang in front and rear, and more gears (dual clutch computer-controlled 7-speed gearbox). And WOW is it fast. Pull the skin off your face fast. 0 to 60 in 2.9s fast. It has a built-in G force meter in the dash. The car has achieved 1.09g both braking and accelerating. This is so the right car for me, I am still grinning ear to ear and this is 6 months later!

What does this have to do with economics? How does anyone pay for something like a high end sports car? I sold a business that I spent a decade and a half building. This is part added value, and part credit boom (which is how the valuation got to be as high as it did). Today, I trade markets. The volatility that makes trading possible is inherent to fiat money. Trading gains are a wealth transfer.

Hate the game, not the players.

For a long time, I have been saying silver will go down in gold terms (i.e. a rising gold to silver ratio) and likely dollar terms. When the ratio was 50, the gold bugs said another leg up was coming and the ratio would fall back to 31 (its low in spring 2011). I said nothing doing. I said it will go to 60 and maybe 70. Later I extended that, and said 70 and maybe 80. For a long time, it just didn’t seem to want to go higher but in September, the silver price broke down and the ratio spiked up. It has closed over 76 (not counting one Sunday even when it briefly hit over 80). It is 75.5 as I write this. My prediction was big, highly contrarian—I don’t know anyone else in the gold community who took this position—and right. That got a lot of people following my work. Now I am sure they are all wondering if I will call the turn when it happens. To which I can offer lots of economics, theory, model, analysis, blah blah blah. Or I can just say keep reading. 😉

This fall, translations of my articles and publication in European media accelerated. I am super excited that they went up on the site of Formiche (Italy) in Italian, onto the front page of the print edition of L’Agefi (France) in French, finews.ch (Switzerland) and goldseiten.de (Germany) in German, the blog of the Swiss National Bank in English, and Quamnet (China) in English. The Truman Factor continued to publish some of my articles in Spanish. I do not think it is pretentious to say that there is a serious worldwide movement to recognize gold as money.

On a rainy day in November, the Gold Standard Institute sponsored its first event. In New York City, Andy Bernstein spoke about capitalism and I spoke about our failing dollar. From a content and number of attendees perspective, it was a big success.

This year, I have had the opportunity to develop many great and mutually beneficial relationships. One, which started to bear fruit in December, is the Cobden Centre in the UK. Named for Richard Cobden, a noted 19th century industrialist and free trade advocate, its mission is to promote freedom, private property rights, and honest money.

Finally, over my holiday “break” I began putting keyboard to word processor (or alternatively, electrons to file) on my book. My working title is: The Dollar Cancer and the Gold Cure. More soon…

I hope you have a great year in 2015!

The Most Common Error in Economic Debates

Have you ever been in an argument about whether we should raise taxes and then someone tosses out a real whopper? “The top tax rate for decades after World War II was over 90% and look how the economy boomed!”

Or perhaps you read a Paul Krugman column where he said that, “there’s a big problem with the claim that monetary policy has been too loose: where’s the inflation [he means rising prices]?”

Both the Internet troll and Professor Krugman are making the same mistake. Let me explain.

Economists love to use the Latin phrase ceteris paribus. It means all else being equal. It’s great in a thought experiment. For example, what would happen if we made a change in America today? Suppose we criminalized all use of fossil fuels. We can’t really do that (I hope!) but it can serve a pedagogic purpose.

It should be pretty obvious that the consequence of shutting off the motors is to shut off production, and people will soon starve. If this isn’t obvious, then you don’t need my blog entry on economic argumentation. You need The Moral Case for Fossil Fuels by Alex Epstein.

Every economist is aware that in comparing a historical time to the present, or comparing two different countries all else is not equal. There is not one difference between the immediate postwar period and today. There are innumerable differences. You can’t just assume that the one difference you’re debating is the only one that matters.

To say explicitly, “The postwar prosperity was solely due to its over-90% marginal tax bracket,” makes the error clear. I propose we call this the fallacy of assuming only one variable, or in Latin (as elegantly as I could make it with Google Translate) argumentum ad variabilis*.

Krugman is perpetrating the same fallacy. He assumes that the only force that moves prices is monetary policy. It’s not a bad gambit, actually, if he wants to Gruber his reader into supporting disastrous Fed policies. Most people, including Krugman’s critics, assume that prices rise as a direct result of increases in the money supply.

In the 1970’s there was perhaps a tripling of the money supply, depending on how you measure it. According to the Consumer Price Index, prices doubled. But so what? If there is one take-away I hope everyone gets from my theory of interest and prices, it is that prices are set in a system driven by positive feedback loops and resonance. Prices have anything but a simple linear relationship to the quantity of dollars.

It just isn’t possible to compare the rate of money supply growth today to the rate in the 1970’s and predict what will happen to prices. Well, you can try but then you may go bankrupt. Here is my comparison of the two time periods, looking at some startling differences.

Krugman commits an additional, similar, fallacy. He assumes that the Fed’s quantitative easing policy only affects one variable (perhaps this should be called argumentum ad effectum*?) Or least, there’s only one bad effect: rising prices. If prices aren’t rising, then he thinks that’s all there is to say. As I have been writing in my Forbes column, there are many other ways that QE harms us. Rising consumer prices is the least of it.

There are many reasons why economics does not work like physics. In physics you can measure the acceleration when you apply a force to a mass. Then you can increase the mass and measure the acceleration again. If you design and execute your experiments carefully, you can be sure that your result is caused by one variable. A doubling of mass causes acceleration to halve, ceteris paribus.

However, even the simplest economic system has thousands, if not millions of people, with unknown (to the economist) relationships between them. It has various productive enterprises with changing methods of production, entrepreneurs and inventors, etc. You cannot isolate any one of them, in order to conduct an experiment. You can only observe two different economies. If you focus on only one variable and exclude all others, it is not the controlled experiment that you’d like it to be, at all.

You’re just putting blinders on.


*I am no Latin scholar. My guesses as to the proper Latin names for these fallacies are crude. I would welcome anyone who is an expert in this language to suggest better names.