Rising Interest and Prices, Report

By Keith Weiner

For years, people blamed the global financial crisis on greed. Doesn’t this make you want to scream out, “what, were people not greedy in 2007 or 1997??” Greed utterly fails to explain the phenomenon. It merely serves to reinforce a previously-held belief. Far be it from us to challenge previously-held beliefs (OK, OK, we may engage in some sacred-ox-goring from time to time), but this is not a scientific approach to explaining observed events. To properly understand a crisis, you have to look for the root cause. And if the crisis did not occur previously, your theory needs to explain why not then, and why only now.

Suppose an old company, XYZ, goes out of business. “Times change,” people say, to explain an economic phenomenon. Or, perhaps slightly less imprecisely, “the market changed.” Sometimes they’ll get even closer to saying something. They say, “Company XYZ did not adapt to changes.”

These statements are copouts.

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Surest Way to Overthrow Capitalism, Report

By Keith Weiner

One of the most important problems in economics is: How do we know if an enterprise is creating or destroying wealth? The line between the two is objective, black and white. It should be clear that if business managers can’t tell the difference between a wealth-creating or wealth-destroying activity, then our whole society will be miserably poor.

Any manager will tell you that it’s easy. Just look at the profit and loss statement. Profit is so powerful an incentive for managers, that one could never persuade them to operate based on any other indicator. And it would work—if economists had done their jobs properly.

But have they?

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Rising Rates Falling Assets, Report

By Keith Weiner

Last week, we wrote about the concept of discounting. This is how to assess the value of any asset that generates cash flow. You calculate a present value by discounting earnings for each future year. And the discount rate is the market interest rate. We said:

“If the Fed can manipulate the rate of interest, then it can manipulate the value of everything…

There is no other rate to use, other than the market rate. You don’t know the right rate any better than the people who centrally plan our economy. The problem is not that the wrong people are in the job. The problem is not even that they use the wrong magic formulas to determine what rate to set.”

The Fed cannot make a company more profitable, but it can reduce the discount rate so that market participants are willing to pay more for its shares. We noted that no one knows the right rate any better than the Fed. Thus, the only rate to use is the market rate. But we did not really make the case in favour of using the market rate.

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Are Stocks Overvalued, Report

By Keith Weiner

We could also have entitled this essay How to Measure Your Own Capital Destruction. But this headline would not have set expectations correctly. As always, when looking at the phenomenon of a credit-fueled boom, the destruction does not occur when prices crash. It occurs while they’re rising. But people don’t realize it, then, because rising prices are a lot of fun. They don’t realize their losses until the crash. So we want to look at stocks when they’re high, before people realize what’s happened to them.

How do you value a stock? The classic methodology, proposed by Benjamin Graham and Warren Buffet, is to discount future free cash flows. Let’s leave aside the problem of how to predict future revenues much less cash flows in our crazy resonant system with positive feedback. For purposes of this discussion, we will just assume that a stock generates a known and constant cash flow of, say, $1 per year, in perpetuity.

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Why Do Investors Tolerate It, Report

By Keith Weiner

For the first time since we began publishing this Report, it is a day late. We apologize. Keith has just returned Saturday from two months on the road.

Unlike the rest of the world, we define inflation as monetary counterfeiting. We do not put the emphasis on quantity (and the dollar is not money, it’s a currency). We focus on the quality. An awful lot of our monetary counterfeiting occurs to fuel consumption spending. And much of this, certainly a very visible part of it, is government borrowing to pay for the welfare state that is not supported by taxation.

There are four components to our definition of legitimate credit:

  1. The lender knows that he is lending
  2. The lender agrees to lend
  3. The borrower has the means to repay
  4. The borrower has the intent to repay

It is counterfeit credit, if one or more of these criteria are breached.

If the government cannot pay current expenses out of tax revenues, then obviously it can never amortize its debt. So this shows the Treasury bond itself to be counterfeit credit. But let’s consider the dollar.

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The Prodigal Parent, Report

By Keith Weiner

The Baby Boom generation may be the first generation to leave less to their children than they inherited. Or to leave nothing at all. We hear lots—often from Baby Boomers—about the propensities of their children’s generation. The millennials don’t have good jobs, don’t save, don’t buy houses in the same proportions as their parents, etc.

We have no doubt that attitudes have changed. That the millennials’ financial decision-making process is different. And that millennials don’t see things like their parents (if you’ve ever seen pictures of Woodstock, you may think that’s not a bad thing). However, we believe that the monetary system plays a role in savings and employment. And the elephant that is trumpeting in the monetary room is: the falling interest rate. Interest has been falling since 1981. That’s when the first millennial was born.

By the time the oldest millennial cohort was ready to enter the work force, the dot-com boom was blowing up. What a time to look for a job, eh? Seven years later—when more than half of millennials were still not old enough to work full-time—was an even bigger bust. And what have we had since then? Seven years of interest rates pinned at zero (on the short end of the curve). And then a tepid rise since then.

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Inflation, Report

By Keith Weiner

What is inflation?

Any layman can tell you—and nearly everyone uses it this way in informal speech—that inflation is rising prices. Some will say “due to devaluation of the money.”

Economists will say, no it’s not rising prices per se. That is everywhere and always the effect. The cause, the inflation as such, is an increase in the quantity of money. Which is the same thing as saying devaluation. It is assumed that each unit of money commands a pro rata share of all the goods produced, so if there are more units then that means each unit is worth less. Value = 1 / N (where N is the number of units outstanding).

There are different ways that the quantity of money can expand. It depends on what kind of monetary system you have. For example, the miners increase the quantity of gold. In free banking, the banks increase the quantity of gold-redeemable notes. In our irredeemable monetary system, the Fed increases the quantity of dollars.

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A Golden Renaissance, Report

By Keith Weiner

A major theme of Keith’s work—and raison d’etre of Monetary Metals—is fighting to prevent collapse. Civilization is under assault on all fronts.

The Battles for Civilization

There is the freedom of speech battle, with the forces of darkness advancing all over. For example, in Pakistan, there are killings of journalists. Saudi Arabia apparently had journalist Khashoggi killed. New Zealand now can force travellers to provide the password to their phones so the government can go through all your data, presumably including your gmail, Onedrive, Evernote, and WhatsApp. China is now developing a “social credit” system, to centrally plan the economy and control citizen behavior. Canada has made it a crime to call someone by the wrong gender pronoun. Even in the US, whose First Amendment has (mostly) stood as a bulwark against censorship now has a president who threatens antitrust action against Amazon, because its CEO Jeff Bezos owns the Washington Post, which prints things he does not like. On college campuses, professors are harassed if they say one thing that the professional sensitives are sensitive to. If a controversial speaker is invited, he risks an angry mob coming to disrupt his talk (or worse).

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The Ultimate Stablecoin, Report

By Keith Weiner

A long time ago in a galaxy far, far away we wrote a series of articles arguing that bitcoin is not money and is not sound. Bitcoin was skyrocketing at the time, as we wrote most of them between July 30 and Oct 1 last year.

Back in those halcyon days, volatility was deemed to be a feature. That is, volatility in the upward direction was loved by everyone who said that bitcoin is money, in their desire to make money. In the first instance of the word, the term money refers to bitcoin. In the second, it refers to the dollar. The same problem we see with gold:

  1. bitcoin is money
  2. bitcoin is going up
  3. buy bitcoin now
  4. sell bitcoin later at a higher price
  5. to make money

From what we remember from a logic class in the philosophy department back in university (in the halcyon days long before the halcyon days of bitcoin skyrocketing), there may be a fallacy or two in here that have Latin names.

Anyways, in our bitcoin articles, we were careful not to get into the game of setting price targets. We didn’t know (and no one else did either, as it turned out) where the price would go. Other than, we did say that bitcoin has no firm bid and its price will drop when the speculators turn. Bitcoin had just hit $3000 when our series began. We were careful to say that the price could go a lot higher, and we made no prediction as to how high or when it would turn.

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The Failure of a Gold Refinery, Report

By Keith Weiner

So this happened: Republic Metals, a gold refiner, filed bankruptcy on November 2. The company had found a discrepancy in its inventory of around $90 million, while preparing its financial statements.

We are not going to point the Finger of Blame at Republic or its management, as we do not know if this was honest error or theft. If it was theft, then we would not expect it to be a simple matter of employees or management walking out the door with the gold. $90 million is about 2.6 tons. Unless it happened very slowly, over many years, that seems like a lot of gold to disappear. And if it occurred over years, why didn’t regular audits and other internal controls catch the discrepancy until now?

We want to make a different point altogether. We define inflation as the counterfeiting of credit. Legitimate credit has four criteria. Most of the focus is on the latter two: the borrower has both the means and intent to repay. Did Republic have the means to repay? They had a good business for 38 years, so we will assume yes. Did they have the intent? Well, unless this was a simple theft and theft by the owners, then we have to answer yes again (with one quibble which we will get to, in a moment).

The other two criteria are often overlooked. Does the lender know he is extending credit, and does the lender agree to do so?

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Wizard’s First Rule

By Keith Weiner

Terry Goodkind wrote an epic fantasy series. The first book in the series is entitled Wizard’s First Rule. We recommend the book highly, if you’re into that sort of thing. However, for purposes of this essay, the important part is the rule itself:

“Wizard’s First Rule: people are stupid.”

“People are stupid; given proper motivation, almost anyone will believe almost anything. Because people are stupid, they will believe a lie because they want to believe it’s true, or because they are afraid it might be true. People’s heads are full of knowledge, facts, and beliefs, and most of it is false, yet they think it all true. People are stupid; they can only rarely tell the difference between a lie and the truth, and yet they are confident they can, and so are all the easier to fool.”

Does this not aptly describe the belief that the dollar will lose its reserve status, will collapse relative to other paper currencies, and is facing imminent hyperinflation with a skyrocketing gold price?

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What Can Kill a Useless Currency

By Keith Weiner

There is a popular notion, at least among American libertarians and gold bugs. The idea is that people will one day “get woke”, and suddenly realize that the dollar is bad / unbacked / fiat / unsound / Ponzi / other countries don’t like it / <insert favorite bugaboo here>. When they do, they will repudiate it. That is, sell all their dollars to buy consumer goods (i.e. hyperinflation), gold, and/or whatever other currency.

Redemptions Balanced With Deposits

No national currency is gold-backed today. In a gold backed currency, each currency unit begins life with someone who chooses to deposit his gold coin in exchange for the paper currency. And it ends life with someone redeeming the paper to get back the gold coin. A good analogy is bone in the human body. One process is constantly removing bone material. And another process is growing more. What seems to be a static bone, with fixed length and mass, is constantly being torn down and rebuilt. The seemingly stable bone is actually in equilibrium between two opposing forces.

So it is with the gold standard. Some people are redeeming paper to get the gold coin. Others are depositing gold coins to get paper. The seemingly stable gold standard is actually in equilibrium between two opposing processes.

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