Gold.

[Elihu]

prophecy edition:

Liquidity
By
Melchior Palyi
With an Introduction by Antal E. Fekete

Liquidity was first published by the Minnesota Bankers Association in 1936. The appendix, "Illiquid Central Bank: Graveyard of the Currency" appeared as "Asset Liquidity - A Restatement" in Dr. Palyi's Bulletin #366, August 11, 1958.

About the Author:

Melchior Palyi was born in Budapest in 1892 and died in Chicago in 1970. He was educated in Hungary, Switzerland and Germany and taught in the Business School of the University of Berlin after receiving his Ph.D. from the University of Munich. In 1928 he became chief economist of the Deutsche Bank, then the largest bank in continental Europe. From 1931 to 1933 Dr. Palyi was adviser to the German Central Bank and managing director of its Institute for Monetary Research. He left Germany after Hitler came to power, and after a short stay in London as the guest of the Midland Bank, came to the United States. He served as a visiting professor and research economist at three universities - Chicago, Northwestern and Wisconsin. Dr. Palyi wrote several books, including The Twilight of Gold: Myths and Realities, The Chicago Credit Market, Managed Money at the Crossroads, and An Inflation Primer. He was a frequent contributor to the Commercial and Financial Chronicle of New York and wrote a weekly financial column for the Chicago Tribune.

Antal E. Fekete, Professor of Mathematics and Statistics, Memorial University of Newfoundland, was graduated from the Lorand Eotvos University in Budapest in 1955 and emigrated to Canada after the Hungarian Revolution of 1956. He studied at the University of Ottawa and Columbia University and has been on the Faculty of Memorial University since 1958. Prof. Fekete has been a student of monetary science and banking since 1959. He is a Research Fellow of the Committee for Monetary Research and Education and is the author of two of the Committee's monographs: Borrowing Long and Lending Short: Illiquidity and Credit Collapse (1983) and Resumption of Gold Convertibility of the U.S. Currency (1984).

INTRODUCTION

When does a river cease to be a river? At the moment it descends to sea level. Significant and conspicuous changes occur at that point. The ecology of water changes. Water molecules lose their potential and kinetic energy, which is converted into entropy.

Similarly, the flow of myriad goods from producers to market also undergoes a remarkable metamorphosis when it comes within sight of the consumer. Adam Smith noticed this phenomenon when he formulated the concept of social circulating capital. By this term he described the mass of finished or semi-finished goods which has reached sufficient proximity to the consumer so that its destiny of being consumed can no longer be in doubt.

The analogy between the flow of goods to the market and the river emptying into the ocean can be profitably extended to include economic entropy. The risks and uncertainties, so characteristic of production and processing in their early stages, all but disappear by the time the goods form part and parcel of the social circulating capital. Speculation and risk-taking give way to the automatic processes of distribution. Thus entropy can be conceived of as the reduction or disappearance of uncertainty and risk occurring pan passu with the maturation of goods.

The disappearance of uncertainty and risk, along with the emergence of social circulating capital, i.e., the increase in economic entropy, manifests itself in a most dramatic fashion, namely, in the shape and form of liquidity. To Adam Smith, liquidity was tantamount to the spontaneous circulation of real bills in the Manchester and Lancashire of his time. Today, liquidity is a more elusive concept, because of developments in banking and the prevalence of bank loans which have preempted spontaneous bill circulation. Today, liquidity refers to the marketability of bank assets, including the assets of central banks.

Meichior Palyi, an expert on the theory and practice of modern banking, first published his masterpiece Liquidity in the fateful year of 1936, the year John Maynard Keynes' General Theory of Interest, Employment and Money was published. As a manifesto to stem the incipient tide of "managed money," Palyi's work, Liquidity, did not succeed. Latter-day readers, however, may bear witness to the fact that its clear logic, incisive analysis and sound historical perspective are far superior to anything offered in Keynes' General Theory. To Keynes, "liquidity preference" is the original sin, to be fought with every available means; if necessary, with the strong arm of government. By contrast, to Palyi, liquidity is a pristine virtue, to be protected and preserved at all cost.

In Liquidity, Palyi exposes the inherent fallacy of the quantity theory of money: that velocity of circulation is an independent variable not subject to control by monetary policy. He points out that velocity can be controlled only by a banking policy that respects liquidity. Velocity cannot run away if all bank loans are strictly short term (91 days or less).

Moreover, Palyi explodes the Keynesian edifice of the theory of employment. Banking policy respecting the principles of liquidity promotes employment, whereas monetary policy contemptuous of those principles must ultimately thwart employment. In acquiring assets, a bank acts as an allocator of capital between long-term and short-term uses. A liquid banking structure tends to give preference to labor-intensive applications, rather than those with larger fixed capital requirements per unit of labor. By the same token, a liquid banking structure strengthens medium-sized business as against the mammoth concern, which is favored by an illiquid system. <size:centralization>

Palyi anticipated and refuted the quasi-scientific theorizing of Keynes and his epigoni, who have argued forcefully and persuasively that it is sound economics and constructive government to finance public works, as well as agricultural and industrial subsidies, <add war and empire> through the sale of public securities to the banking system . Palyi notes that such a policy must, in due course, lead to the complete ossification of the assets of the banking system, at which point liquidation of assets no longer is possible except at huge concession in price. <QE>

Palyi explains that if the value of bank assets has been decimated and destabilized, then the collapse of the value of the currency cannot lag far behind. There is no way to divorce one from the other, any more than a mirror image can be divorced from its owner. And there is no salvation in central bank intervention. The central bank can only support market values at the cost of making its own position more illiquid.<QE> While a reasonably liquid central bank can temporarily "lean against the wind," an illiquid central bank will be swept away by the whirlwind. The day which sees the bond market seeking refuge in the Central Bank will also see the demise of the currency. <TBTF> Palyi aptly noted that an illiquid central bank is the graveyard of the currency. Therefore, Keynes' General Theory must be seen as a blueprint for the euthanasia not only of the renter but also of the currency.

This edition of Liquidity incorporates minor editorial changes, as well as an appendix: Illiquid Central Bank: Graveyard of the Currency, written by Palyi in 1958. The latter article clearly shows the author's dismay over the debauchery of the Federal Reserve system in violation of the Federal Reserve Act of 1913. they don't even follow their own rules

Without exaggeration, we may say that our comprehension of the passing economic scene cannot be complete without prior understanding of the dichotomy of liquidity and illiquidity concepts conspicuously missing from the vocabulary of most contemporary writers on money, banking and economics. National leaders in government, banking and industry, who desire to reconstruct vibrant national economies and a sound international financial system, would serve themselves well to study the cogent presentation in Melchior Palyi's Liquidity.

Antal E. Fekete

Memorial University of Newfoundland

St. John's, Newfoundland, Canada

October 1984

PART I

THE LIQUIDITY DOCTRINE OF LIBERALISM............................

http://www.fame.org/HTM/Palyi_Malchor_L ... MP-001.HTM

1984. how sweet.

[JackRiddler]

Nice metaphors in that scripture there, but where are the terms even defined?

http://www.nakedcapitalism.com/2013/03/what-is-modern-monetary-theory-or-mmt.html

Tuesday, March 12, 2013
What is Modern Monetary Theory, or “MMT”?

By Dale Pierce. Cross posted from New Economic Perspectives

Modern Monetary Theory is a way of doing economics that incorporates a clear understanding of the way our present-day monetary system actually works – it emphasizes the frequently misunderstood dynamics of our so-called “fiat-money” economy. Most people are unnerved by the thought that money isn’t “backed” by anything anymore – backed by gold, for example. They’re afraid that this makes money a less reliable store of value. And, of course, it is perfectly true that a poorly managed monetary system, or one which is experiencing something like an oil-price shock, can also experience inflation. But people today simply don’t realize how much bigger a problem the opposite condition can be. Under the gold standard, and largely because of the gold standard, the capitalist world endured eight different deflationary slumps severe enough to be called “depressions.” Since the gold standard was abolished, there have been none – and, as we shall see, this is anything but coincidental.

The great virtue of modern, fiat money is that it can be managed flexibly enough to prevent *both* deflation and also any truly damaging level of inflation – that is, a situation where prices are rising faster than wages, or where both are rising so fast they distort a country’s internal or external markets. Without going into the details prematurely, there are technical reasons why a little bit of inflation is useful and normal. It discourages people from hoarding money and encourages healthy levels of consumption and investment. It promotes growth – provided that a country’s fiscal and monetary authorities manage it properly.

The trick is for the government to spend enough to ensure full employment, but not so much, or in such a way, as to cause shortages or bottlenecks in the real economy. These shortages and bottlenecks are the actual cause of most episodes of excessive inflation. If the mere existence of fiat monetary systems caused runaway inflation, the low, stable rates of consumer-price inflation we have seen over the past thirty-plus years would be pretty difficult to explain.

The essential insight of Modern Monetary Theory (or “MMT”) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.” This doesn’t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.

Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counter-factual. This has led to a public discourse about things like budget deficits and Treasury debt which has become, without exaggeration, utterly detached from reality. Time and time again, these pundits declaim that hyperinflation is imminent, that interest rates are on the verge of an uncontrollable upward spike, and that the jig will be up for sure just as soon as the next T-bond auction fails. But even though, time after time, it is the pundits’ prognostications which fail, no one seems to take any notice. This must change. A reality-based economics is needed to make these things make sense again, and Modern Monetary Theory is here to put everyone on notice that a quite different jig is the one that’s really up.

The gold standard was finally and completely abolished over the course of a two-year period which started in 1971, when Richard Nixon ended the convertibility of the dollar for gold and devalued U.S. currency for the first time since the end of World War II. In 1973, the U.S. stopped trying to peg the dollar to any currency or commodity, instead allowing its value to be set on a freely-floating international currency market. The monetary system we inaugurated then is the one we still have now.

It is not the same as the one which has been adopted by most of Europe – and this very prominent source of confusion about the role of money in the world today will receive close scrutiny at the proper point. But first, we need to carefully unpack the implications of taking both gold and any sort of “peg” out of the monetary equation in the first place. In 1971, gold-linked money became fiat-money – not for the first time, of course, but for the first time in a long time. And it wasn’t just any currency. It was, by far, the world’s most important currency, economically. It was also the world’s reserve currency – the good-as-gold and backed-by-gold currency which the entire non-communist world used to settle transactions between various countries’ central banks. And yet, what everyone, and especially every American was told at the time was that it really wouldn’t make much difference.

The political emphasis, at the time, was entirely on the importance of making sure that no one panicked. The officials of the Nixon administration acted like cops who had just roped off a fresh crime scene: “Just move right along, folks,” they kept intoning. “Nuthin’ to see here. Nuthin’, to see.” All of the experts and pundits said essentially the same thing – this was just a necessary technical adjustment that was only about complicated international banking rules. It wouldn’t affect domestic-economy transactions at all, or matter to anyone’s individual economic life. And so it didn’t – at least, not right away or in any way that got linked back to the event in later years. The world moved on, and Nixon’s action was mainly just remembered as a typical, high-handed Nixonian move – one which at least carried along with it the virtue of having pissed off Charles De Gaulle.

But what had really happened was epoch-making and paradigm-shattering. It was also, for the rest of the 1970s, polymorphously destabilizing. Because no one had a plan for, or knew, what all of this was going to mean for the reserve currency status of the U.S. dollar. Certainly not Richard Nixon, who was by then embroiled in the early stages of the Watergate scandal. But no one else was in charge of this either. In the moment, other countries and their central banks followed Washington’s line. They wanted to forestall any kind of panic too. But, inevitably, as the real consequences of the new monetary regime kicked in, and as unforeseen and unintended knock-on effects began to be felt, this changed.

The world had a choice to make after the closing of the gold window, but even though it was a very important choice, with very high-stakes outcomes attached to it, there was no international mechanism for making it – it just had to emerge from the chaos. Either the U.S. dollar was going to continue to be the world’s reserve currency or it wasn’t. If it wasn’t, the related but separate question of what to use instead would come to the fore. But, as things unfolded, no other choice could be imposed on the only economic powerhouse-nation, so all the other little nations eventually just had to work out ways to adjust to the new status quo.

Even after Euro-dollar chaos, oil market chaos, inflationary chaos, a ferocious multi-national property crash and a severe, double-dip American recession, the dollar continued to be the reserve currency. And it still wasn’t going to be either backed by gold or exchangeable at any fixed rate for anything else. But while the implications of this were enormous, almost no one understood them at the time, or ever, subsequently, figured them out. For the 1970s was the period during which Keynesianism was decertified as the reigning economic philosophy of the capitalist world – replaced by something which, at least initially, purported to have internalized and improved upon it. This too was a choice that wasn’t so much made as stumbled into. The chaotic, crisis-wracked world we now live in is the one which subsequent versions of this then-new economic perspective have helped to create.

Conventional, so-called “neo-classical” economics pays little or no attention to monetary dynamics, treating money as just a “veil” over the activity of utility-maximizing individual “agents”. And, as hard as this is for non-economists to believe, the models which these ‘mainstream’ economists make do not even try to account for money, banking or debt. This is one big reason why virtually all members of the economics profession failed to see the housing bubble and were then blind-sided by both the 2008 financial collapse and the grinding, on-going Eurozone crisis which has followed in its wake. And the current group-think among ‘mainstream’ economists is yet another case where failure is no obstacle to continued funding – or continued failure. The absence of any sort of professional, intellectual or academic accountability will be a theme here.

The public policy reversal that began with Margaret Thatcher and Ronald Reagan promised that the deregulation of capitalism would lead to greater shared prosperity for everyone. Today, even though the falsehood of this claim is brutally obvious, the same economic nostrums and stupidities that were used to justify it in the first place continue to be trotted out and paid homage to by a class of financial-media personalities who equate making a lot of money with understanding money. It does not seem to occur to them that financial criminals and practitioners of bank-fraud can get rich through sociopathy alone.

What needs to be said is this: Keynesian economics worked before, and the improved version – now generally called “post-Keynesian” – will work again, to deliver what the market-fundamentalism of the past three decades has patently and persistently failed to deliver *anywhere in the world*. Namely – a prosperity which is shared by everyone. The principal purpose of Modern Monetary Theory is to explain, in detail, why this this worked in the past and how it can be made to work again.

Here’s how: start with a 100% payroll tax cut for both workers and employers – one that will only expire (if it does at all) when we have achieved full employment. This will not de-fund Social Security. And yes, we’ll come back to this point and cover it in great detail in due course. But first, stop and think back on the effect which federal revenue-sharing had on the economy in 2009 and 2010. If you’re thinking there were fewer teachers, nurses, policemen and fire-fighters getting laid off, you are correct. If you’re thinking that more roads, dams, bridges and sewer systems were getting repaired, you’re right again. But if you think that adding 800 million dollars to the deficit over two years is a guaranteed way to generate hyper-inflation, double-digit interest rates and bond-auction failures, leading ultimately to a frenzied worldwide rush to dump dollar-denominated financial assets, well, now would be a good time to ask yourself why you believe this.

One more point – one more plank in this three-point program to restore fiscal and monetary sanity: let’s give everyone who wants to work and is able to work some *work to do*. A currency-issuing government can purchase anything that is for sale in its own currency, including the labor of every last unemployed person who is still looking for a job. So, a key policy recommendation of Modern Monetary Theory is the idea of a “Job Guarantee”. The federal government should take the initiative and organize a transitional-job program for people who just can’t find work in the private sector – as it currently exists in real-world America today. Because the smug one-liner that starts and ends with: “Government can’t create jobs – only the private sector can create jobs!” is about the un-funniest joke on the planet right now.

The government creates millions of jobs already. Isn’t soldiering a job? Isn’t flying the President around in Air Force One a job? What about all the doctors and nurses down at the V.A. hospital, and the day-care workers on military bases? They certainly all appear to be employed. When you go into a convenience store to buy some – uh – local-and-organic Brussels sprouts, say, how closely does the clerk examine the bills and coins you tender? Did any clerk or cashier ever squint or turn your five-dollar bill sideways and back and ask, “Hmm.. are you sure this money came from work that was performed in the private sector?” No. They didn’t. Because the money governments pay to public employees is exactly the same money everyone else gets paid in.

A guaranteed transition-job would need to be different from the familiar examples cited above in certain ways. It would be important to make sure that such a program always hired “from the bottom”, not from the top. That’s an important way of making sure that such programs don’t create real-resource bottlenecks by competing with the private sector for highly skilled or specialized labor. Hence, a transition-program job would more closely resemble an entry-level job at a defense plant. Such a job only exists because of Pentagon orders for fighter planes or helmets or dog food for the K-9 units. There is no sort of ambiguity about where the stuff is going or how it is being paid for. And when the people who mow the lawn or sweep the parking lot get paid, they know, without having to think about it, that their wages will spend exactly the same way down at the grocery store as everyone else’s.

Defence spending is actually quite a good analog to the idea of a transitional-job program – one that would provide work to any and every person who wanted it. The only time the American economy ever achieved an extended, years-long period with zero unemployment, low, well-controlled inflation rates and with no significant financial aftershock at the end was the World War II era – broadly defined to include the Lend-Lease buildup of 1940 and 1941. This solution to the problem of mass unemployment worked in the 1940s and it would work today. In the 1940s, of course,the jobs were almost all war-related. But, economically, this makes no difference.

The connection between war and economic prosperity has been noticed before. It led some 19th Century thinkers (and also Jimmy Carter) to wonder whether there could be a “moral equivalent of war”. Well, there can be – by way of the Job Guarantee. The biggest pre-condition has been met, because one result of most wars has been that they forced the combatant countries off the gold standard. Now, all countries have left it. What matters next is whether there are enough real resources available to produce goods and services that are equal in value to the government’s job-guarantee spending. If these resources are available – if they are not already being used to produce something else – then the increased demand that results from the payment of job-guarantee wages will not be inflationary, regardless of what they go to produce.

Money is 100% fungible. Whether the job-guarantee program makes fighter planes or wind turbines makes no economic difference – the workers employed by it will spend their wages on the same things other workers buy. What matters, economically, is whether there are sufficient real resources and labor available to produce these goods and services in line with the increased demand for them. If there are, no additional government intervention is necessary in order to mobilize them. The same private-profit motivation which induces a company to produce one widget can be relied upon to induce the production of another one.

Most popular misconceptions about job-guarantee work as inefficient “make-work” ignore these private-sector dynamics. It is simply assumed that if the publicly-funded workers don’t personally contribute to making shoes or soap, their wages will result in “more money chasing the same goods” – and that this will automatically cause inflation. This is an obvious fallacy which has been empirically falsified many, many times, but most people continue to treat it as an article of economic faith. So, one of MMT’s most pressing tasks today is to make the case that we can, indeed, end mass unemployment without undermining price stability.

There are many other economic problems and challenges in the world today. Modern Monetary Theory is not a panacea for them. Even if its insights and policy recommendations become widely known, and even if they are someday fully implemented, societies will still face challenges such as inequality, regulatory capture and predatory financial behavior, including the kind of predatory mortgage lending that led to the worldwide crash in 2008. In order to understand these additional economic problems and dangers, we need to look at economics in a larger context, and correctly situate Modern Monetary Theory within this wider frame.

Modern Monetary Theory is based on earlier work which also focused on the relationship between the state and its money – ideas which come under the generic designation of “Chartalism”. MMT also remains firmly within the Keynesian tradition of macroeconomnic theorizing, and recognizes an extensive interconnectedness with other economists whose work is categorized as “post-Keynesian”. Some of MMT’s other notable academic progenitors include Hyman Minsky, Abba Lerner and, more recently, the English economist Wynne Godley, whose emphasis on achieving consistency in the analysis of economic stocks and flows presaged the emphasis which MMT-orbit economists put on it today.

The label “Modern Monetary Theory” is not particularly apt. It became attached to its advocates through the informal agency of Internet comment-threading, not because anyone considered it either very useful or very descriptive. In other words, it “just stuck”. In fact, the identity of the first person to use the “MMT” label is lost to online history. So, to be clear, MMT is only modern in the broad sense in which virtually everything that got started in the Western world in the 19th Century is called “modern”. It is not exclusively monetary either – it has quite a bit to say about fiscal policy as well. And it was not, initially, theoretical – it started as a body of quite empirical observations about the dynamics of the monetary system and the many ways they are being misunderstood these days. For MMT has a dual pedigree which is itself quite remarkable.

On the one hand, it represents the patient, decades-long academic work of a cadre of perhaps eight or ten working economists (originally there were three or four, plus their students). But MMT was independently co-discovered by a single person. A person who had no specific training or academic background in economics at all – the American businessman and auto-racing enthusiast Warren Mosler. How he came to initially suspect and, ultimately, clearly understand that the spending of sovereign governments had become operationally independent of their taxing and borrowing is recounted in his 2010 book, “The Seven Deadly Innocent Frauds of Economic Policy.” The 1996 publication of an earlier book of his, “Soft-Currency Economics,” launched MMT as a social, intellectual and online movement. And while the academic side of MMT was completely unknown to him at first, it was not long before the two camps discovered each other, and this has led to a very extensive collaboration in the years since.

Today, MMT is being discovered by a rapidly-growing worldwide Internet audience. And the public’s growing interest in MMT is evident in other ways as well. One of the movement’s leading spokespersons, Dr. Stephanie Kelton of the University of Missouri at Kansas City, has been a repeat guest on an MSNBC weekend show. She, and other MMT economists, are frequent guests on a number of popular, mostly-progressive radio programs as well – both in the U.S. and in English-speaking countries around the world. And Warren Mosler’s seminal 2010 book was recently published in Italian.

(For obvious reasons, the stressed and austerity-damaged countries of the Eurozone’s southern tier are places where people are becoming more open to fresh economic ideas. At a 3-day conference in Rimini, Italy in 2012, a panel of four MMT/post-Keynesian speakers lectured to a crowd of over 2,000 people in a packed sports arena. Many in the audience crossed multiple international borders to attend.)

MMT has been mentioned, though not yet accurately described, in several of Paul Krugman’s columns for the New York Times. And certain aspects of it have been noticed even more widely in the media – for MMT is the theoretical basis of the “trillion-dollar coin” approach to fiscal cliffs. (The idea was first proposed and debated on Warren Mosler’s website.) In short, MMT is getting harder and harder to ignore. And since it really does have answers to some of the world’s most urgent and otherwise perplexing questions, it seems likely that MMT will soon become quite impossible to ignore. What follows is written to try to hasten that day.

This will be an intentionally simplified, non-technical exposition of the principal tenets of Modern Monetary Theory. The no-algebra version, in other words. It is intended as a guide for non-economists and other lay people who may have heard the phrase or seen a video clip about MMT and who wish to learn more. It is not a substitute for more complete and, necessarily, much more technical treatments that are available elsewhere, including the MMT Primer here at NEP.

Confining myself to examples and cases so widely known that no one will wonder where they came from accounts for the absence of footnotes in this. And since I make no claim to have learned knowledge of anything, I will just say, up front, that everything I know was thought of first by someone else. But rather than interrupt the narrative or complicate the process by trying to establish who said any particular thing first, I hope it is sufficient for me to just thank the MMT community at large for any material that I have borrowed or re-purposed along the way.

I also depart, here, from MMT’s mostly-neutral stance on contested political and ideological questions. For while MMT principles apply equally, irrespective of things like the size of government or the conceptions and misconceptions of people running governments, it has a policy bias no one can really miss. I choose to emphasize rather than de-emphasize this bias – and I will sometimes even put it front-and-center. I hope no one will mistake this for any sort of rebuke toward those who choose not to do this. We have simply reached a point where practical applications need to be put on an equal footing with their theoretical underpinnings.

For somewhere – maybe somewhere in Italy – and on a day which may not be all that far off now, Modern Monetary Theory is going to start changing the world.

Comments interesting & expose some problems in above.

[seemslikeadream]

Earthquakes make gold veins in an instant
Pressure changes cause precious metal to deposit each time the crust moves.

Richard A. Lovett
17 March 2013

Veins of gold, such as this one trapped in quartz and granite, may deposit when the high-pressure water in which they were dissolved suddenly vaporises during an earthquake.

Scientists have long known that veins of gold are formed by mineral deposition from hot fluids flowing through cracks deep in Earth’s crust. But a study published today in Nature Geoscience1 has found that the process can occur almost instantaneously — possibly within a few tenths of a second.

The process takes place along 'fault jogs' — sideways zigzag cracks that connect the main fault lines in rock, says first author Dion Weatherley, a seismologist at the University of Queensland in Brisbane, Australia.

When an earthquake hits, the sides of the main fault lines slip along the direction of the fault, rubbing against each other. But the fault jogs simply open up. Weatherley and his co-author, geochemist Richard Henley at the Australian National University in Canberra, wondered what happens to fluids circulating through these fault jogs at the time of the earthquake.

What their calculations revealed was stunning: a rapid depressurization that sees the normal high-pressure conditions deep within Earth drop to pressures close to those we experience at the surface.

For example, a magnitude-4 earthquake at a depth of 11 kilometres would cause the pressure in a suddenly opening fault jog to drop from 290 megapascals (MPa) to 0.2 MPa. (By comparison, air pressure at sea level is 0.1 MPa.) “So you’re looking at a 1,000-fold reduction in pressure,” Weatherley says.

When mineral-laden water at around 390 °C is subjected to that kind of pressure drop, Weatherley says, the liquid rapidly vaporizes and the minerals in the now-supersaturated water crystallize almost instantly — a process that engineers call flash vaporization or flash deposition. The effect, he says, “is sufficiently large that quartz and any of its associated minerals and metals will fall out of solution”.

Eventually, more fluid percolates out of the surrounding rocks into the gap, restoring the initial pressure. But that doesn’t occur immediately, and so in the interim a single earthquake can produce an instant (albeit tiny) gold vein.

Big earthquakes will produce bigger pressure drops, but for gold-vein formation, that seems to be overkill. More interesting, Weatherley and Henley found, is that even small earthquakes produce surprisingly big pressure drops along fault jogs.

“We went all the way to magnitude –2,” Weatherley says — an earthquake so small, he adds, that it involves a slip of only about 130 micrometres along a mere 90 centimetres of the fault zone. “You still get a pressure drop of 50%,” he notes.

That, Weatherley adds, might be one of the reasons that the rocks in gold-bearing quartz deposits are often marbled with a spider web of tiny gold veins. “You [can] have thousands to hundreds of thousands of small earthquakes per year in a single fault system,” he says. “Over the course of hundreds of thousands of years, you have the potential to precipitate very large quantities of gold. Small bits add up.”

Weatherley says that prospectors might be able to use remote sensing techniques to find new gold deposits in deeply buried rocks in which fault jogs are common. “Fault systems with lots of jogs can be places where gold can be distributed,” he explains.

But Taka’aki Taira, a seismologist at the University of California, Berkeley, thinks that the finding might have even more scientific value. That’s because, in addition to showing how quartz deposits might form in fault jogs, the study reveals how fluid pressure in the jogs rebounds to its original level — something that could affect how much the ground moves after the initial earthquake.

“As far as I know, we do not yet incorporate fluid-pressure variations into estimates of aftershock probabilities,” Taira says. “Integrating this could improve earthquake forecasting.”

[justdrew]

maybe gold prices fell because some gold owners wanted to free up some munny to switch to copper? Anyway, looks like this copper mine near SLC is out of commission for awhile...


http://www.flickr.com/photos/riotinto-kennecottutahcopper/sets/72157633216160914/with/8643311673/

Inside a mile-deep open-pit copper mine after a catastrophic landslide
By Tim Heffernan on Mon, Apr 22, 2013

For the past few months I’ve been reporting a big story on the copper industry for Pacific Standard. It takes a broad look at how the global economic boom of the past decade, led by China and India, is pushing copper mining into new regions and new enormities of investment and excavation. (It’ll be out in June.) But a few days ago a very local event shook the copper industry, and I thought it would be neat to look at how a crisis at a single mine can ripple through space and time, ultimately affecting just about everyone around the globe.

Above is a picture, from local news channel KSL, of a massive landslide at Bingham Canyon Mine, about 20 miles southwest of Salt Lake City.

Bingham is an open-pit mine—a gigantic hole in the ground. The landslide, in effect, was the collapse of one of the pit walls. (For scale, the pit is a bit less than three miles wide and a bit more than three-quarters of a mile deep, and as you can see, the collapse stretches halfway across it and all the way from top to bottom.) KSL has more pictures here, and Kennecott Utah Copper, the subsidiary of the mining giant Rio Tinto which runs Bingham Canyon, has a spectacular Flickr set here. Check ’em out.

The landslide went off at about 9:30 in the evening on Wednesday, April 11. It was expected: like most modern mines, Bingham has redundant sensor systems (radar, laser, seismic, GPS) that measure ground movement down to the millimeter and give plenty of warning when a collapse is imminent. The mine was evacuated about 12 hours before the landslide, and nobody was hurt.

But the scale of the landslide was a surprise. Approximately 165 million tons of rock shifted, causing a highly localized earthquake measuring 5.1 Richter. It damaged or destroyed roads, power lines, and other infrastructure, and a number of the giant shovels and dump trucks that move ore and waste rock out of the pit. (For gearheads, the shovels are P&H 4100s and the trucks are Komatsu 930Es. Bingham’s fleet includes 13 of the former and 100 or so of the latter. Here’s a fun picture showing the scale of a 4100’s scoop, and here is a picture—not from the Bingham landslide—of a 930E that has taken a stumble.)

The lost equipment was worth tens of millions of dollars, but much more significant is the fact that the landslide has shut Bingham Canyon down for an as-yet undetermined length of time. Much more significant because Bingham Canyon is not just another copper mine. Physically, it is the largest in the world, and it is among the most productive. Each year it supplies about 17 percent of U.S. copper consumption and 1 percent of the world’s. When a cog that big loses its teeth, the whole global economic machine goes clunk.

First to feel the effect (other than the workers at Bingham Canyon, of course, who have been asked to take unpaid leave) was Rio Tinto, Bingham’s owner. Its stock opened lower the morning after the landslide, and its analysts projected that the company’s profits would drop 7 percent for this year, with ripple effects for some years after. Bad for investors, sure. But those losses, in turn, will mean less capital for Rio’s investments in its numerous other ventures, and since Rio is the third-largest mining firm in the world—if you live in anything like an industrialized economy, you use its products every day—the ripple effects spread far beyond Rio’s shareholders. A pinch in Rio’s supply lines will push up metal prices for everyone. (And in fact last Thursday, copper prices jumped up a bit, although the landslide was not the only factor.)

After the landslide, Rio quickly invoked the force majeure protections in its insurance policies, which would allow it to cancel its futures contracts on Bingham copper and have its insurers cover the losses instead. But however those claims are resolved, there is no doubt that the insurers will soon be recalculating their actuarial tables. Landslides are a feature of pit mining (above is a picture I took from the bottom of the Bingham pit last October, looking up at one that happened a few years ago). But now it is clear that even the most advanced sensor systems can’t predict how big a slide will be. That uncertainty means insurers will have to raise their premiums. Again, the price effects will ripple through the mining (and the insurance) industry, and eventually spread out to affect all customers.

And there’s a third dimension to the ripple effects of the landslide: time. Big mines like Bingham run on schedules that extend decades into the future. I was at Bingham to report on a huge development in the operations: a shift from open-pit to underground mining. The prep work, which involves digging more than a hundred kilometers of tunnel beneath the pit, began in 2011 and was expected to continue until 2023. Meantime, a big expansion of the open pit had gotten underway, timed to expose a big batch of new ore in 2017, just as the existing exposed ore ran out. And that new ore would have run out in—you guessed it—2023, just in time for the underground mine to start up. Now all that planning is scrambled. The pit expansion is on hold until the mine reopens. And as for the move underground, Rio Tinto hasn’t released an official statement yet, but all the prep work got buried by the landslide.

The work is mostly invisible, being subterranean, but you can see the aboveground equipment at the bottom of the pit in a picture I took last year (above). Then match the distinctive, pale-grey trapezoid of rock on the pit wall above the equipment to the same trapezoid, visible center-right, in this picture from KSL. As you can see, the bowl-shaped depression where the underground work is based was completely filled in by rubble.

In short, the events of a few seconds on an April evening in 2013 are beginning to move through the economy, and will reverberate for at least a decade. And who will feel the vibrations, if they know what to feel for? Everyone who uses electricity, telecommunicates, gets their water from a tap, or eats food raised by Big Agriculture. Wires, pipes, and fertilizer: that’s what copper is used for.

I think we get too accustomed to abstract things, like changes in the federal interest rate or the pace of Chinese growth, shifting global markets. It’s good to be reminded that sometimes it's still the earth itself that shakes the world.

[JackRiddler]

[Iamwhomiam]

cross-posted from slad's posting here

Peru peasant squads rally against U.S. firm's $5 billion gold mine


By Mitra Taj
CAJAMARCA, Peru | Fri Jun 28, 2013 3:12pm EDT
(Reuters) - Forty years ago, peasants in rural Peru banded together as "ronderos" - Spanish for "people who make the rounds" - to curb cattle rustling.

Today, squads of these ronderos are working toward a different aim - thwarting an American mining company's planned $5 billion gold mining project that they contend would spoil lakes vital to the local population high in the Andes.

Operating according to Andean customs, the squads act as a de facto judicial system in places where public institutions are weak and policing is scant. They have become potent political players in remote provinces, weighing in on disputes over natural resources and causing headaches for the central government.

In the northern region of Cajamarca, they helped stall U.S.-based Newmont Mining Corp's proposed Conga gold mine last year by summoning thousands of people from Andean villages to protest. Now ronderos are making a new push to demand that President Ollanta Humala scrap the project, which has obtained a series of government permits and would create thousands of jobs.

Humala has broadly backed Conga, potentially the most expensive mine in Peruvian history, since taking office in 2011. The dispute has rattled his government. He reshuffled his cabinet twice after violent protests - first to crack down on Conga opponents and then to promote dialogue after five deaths.

"The government doesn't represent us anymore," Cesar Angel, a member of one of the squads, said last week at a rally against the mine near Lake Perol, one of several Andean lakes that would be displaced to mine ore. "But we're strong and will fight this until death."

Angel stood by his horse chewing a wad of coca leaves overlooking riot police near the lake.

The rally was the biggest since Newmont and its Peruvian partner, Buenaventura, put construction of the mine on hold nearly a year ago. At the time, the companies tried to defuse tensions by starting work on a series of large reservoirs to guarantee water supplies for local communities.

The companies plan to transfer water from the lakes to four reservoirs that they say would end seasonal shortages and guarantee year-round water supplies to local towns and farmers.

But many peasants who have crops and livestock near the mine still say they fear it would dry up or pollute lakes and rivers, despite the firms' lengthy environmental remediation plan.

Conga, which holds 6.5 million ounces of gold and 1.7 billion pounds of copper, would essentially extend the life of the two companies' nearby Yanacocha gold mine.

'GUARDIANS OF THE LAKES'

Ronderos calling themselves "the guardians of the lakes" say they are camping out at Lake Perol to keep Newmont from eventually moving its water to a new reservoir - thus snarling any attempt in the future to build the mine.

"The peasant squads used to be worried about petty crimes - a stolen cow and things like that - but now they are defending our land and water from multinational companies," said Milton Sanchez, an activist who works closely with ronderos.

The project's most high-profile opponent, Cajamarca Regional President Gregorio Santos, rose to power through the ranks of Cajamarca's squads of ronderos and is now seen as a long-shot candidate for the national presidency in 2016.

Santos, a member of Peru's communist Patria Roja party, often accuses Humala of putting foreign firms ahead of local people.

"We still see him more as a rondero than a politician," said Roger Ponce, a provincial head of the peasant squads, referring to Santos.

The attorney general's office said there are more than 200,000 ronderos in Cajamarca - vastly outnumbering police.

"They're one of the few organizations that really work in this country," said Tomas Galvez, an official in the national attorney general's office. "They blow their whistle and the entire community gathers. They make a decision and it's executed. The problem is their objectives are not clear."

'REAL POWER'

Speaking in May, Buenaventura Chief Executive Roque Benavides said ronderos can complicate mining in Peru.

"You go to the top of a mountain and ask yourself: who should I talk to - the democratically elected mayor or the head of the peasant squad?" Benavides said. "And often it is the peasant squad that holds the real power."

Omar Jabara, a Newmont spokesman, urged dialogue among all sides, saying by email last week: "We respect all of the social institutions in Cajamarca, including the Ronderos."

Ronderos have had an on-again, off-again relationship with the national government. In the 1990s, former President Alberto Fujimori armed many of them to help fight Maoist Shining Path rebels. Peru's truth commission recognized their role in helping defeat the guerrillas, but also blamed them for human rights abuses like those committed by insurgents and the military.

Subsequent governments have encouraged them to focus on fighting petty crime, but Peruvian law guarantees ronderos considerable autonomy in rural areas.

This month, Peru's attorney general forged a cooperation pact with representatives of Cajamarca's ronderos - aiming to limit their occasional excesses by having them promise to protect human rights, report crimes and undergo training.

Some ronderos supported the pact but key ronderos squad leaders who are against the Conga project refused to sign it.

"The government wants to domesticate the peasant squads because we oppose Conga," said Ydelso Hernandez, a close ally of Santos and the head of a national group of ronderos.

The attorney general's office, which operates independently of the national government, denied that it aims to sideline Conga foes.

There are no statistics on crimes committed by members of the peasant squads, but local media from the provinces often describe their involvement in violent incidents.

"We are trying to teach them what their role is and how to respect human rights," said Luis Alberto Pacheco, an official in the attorney general's office who handles training.

"This is not the Middle Ages when people run around solving their problems with torches and lynchings," he said.

Ronderos in Cajamarca say they stopped carrying guns years ago. Punishments they mete out draw on traditional Andean practices, ranging from push-ups to lashings with cow whips.

One of the most severe sentences is the "rondero chain" that requires offenders to toil in fields by day and parade barefoot through frigid villages by night, some ronderos said. It can go on for days or weeks as people are handed off from one village squad to another.

Referring to Mines and Energy Minister Jorge Merino, a laughing Ponce said: "We would make Merino carry out a rondero chain for three or four months. Humala would get six months."

[Elihu]

WHY GOLD STANDARD?
Antal E. Fekete
New Austrian School of Economics

In this article I would like to enter into a friendly debate with Richard Ebeling of
the American Institute for Economic Research on the subject why the gold
standard is needed. The opportunity to present my views arose when the Daily Bell
published two interviews with him recently, on February 11 and 14, 2014 in which
Ebeling goes on record in saying that “the advantage of a monetary system based
on a commodity like gold s that it makes it more difficult for a government to
arbitrarily change the quantity and therefore the value of the money used within a
country.”

My purpose is to focus on the difference of perception between the post-
Mises Austrian School and my own New Austrian School of Economics (NASOE)
and why talking about this is important. In particular I will explain why I think
Ebeling’s perception represents a major departure from Carl Menger (1840-1921),
the founder of the Austrian School.

In the second interview Ebeling talks about his book Political Economy,
Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian
Tradition (Routlege, 2010). He elaborates on the advantage of a monetary system
based on a commodity like gold. Ebeling summarizes this advantage as follows:
”the gold standard makes it more difficult for a government to arbitrarily change
the quantity and therefore the value of money used within a country.”

It is of course well known that Mises made a case for the gold standard
along these lines. His stand already represented a deviation from Menger,
according to whom gold was not just ‘a commodity’, but it was ‘the most
marketable commodity’, the marginal utility of which was declining more slowly
than that of any other. Alternatively, the most marketable commodity could be
characterized as one for which the spread between the asked price and the bid price
increases more slowly than that for any other as ever larger quantities of it are
offered in the markets. Menger preferred the former because he wanted to define
the concept of ‘price’ as the exchange ratio between the good in question and gold,
but that would have opened the latter formulation to charges of circularity. To
Menger, gold was the unit of value par excellence.

In measuring length we choose platinum as the material out of which the
measuring rod is to be made because this choice minimizes the variation in length
in response to changes in temperature. We line up rods made of various materials
and pick the one whose variation in length in response to changes in temperature is
smaller than that of any other. Likewise, in measuring value we choose gold as the
material out of which the standard coin is to be made because this choice
minimizes the variation in value in response to market wear and tear. We line up
coins made of various metals and pick the one whose variation in value in response
to market wear and tear is smaller than that of any other.

Yes, one can measure length, Mises notwithstanding. The subjective theory
of value stipulates that values in the absence of a measure can still be compared.
But this does not prevent one from measuring if, after the introduction of the
concept of marketability, a unit of value can be established.

It is not well-known but Menger was not a devotee of the Quantity Theory
of Money (QTM) and, for him, to keep the quantity of money in circulation
constant was certainly not a desideratum. Rather, he was willing to accept Adam
Smith’s position that the amount of trade showed seasonal variations and it was
fine for the quantity of money in circulation to vary together with it. Menger would
most certainly have challenged the statement that changing the quantity of money
in circulation would necessarily change the value of money. This, of course, is not
a criticism of Hayek’s point that governments are not to be trusted as they are
prone to yield to pressure groups and other political forces to tamper with the
quantity of money in circulation for their own benefit.

It is peculiar that post-Mises Austrians shy away from Menger’s theory of
marketability in favor of the QTM. In doing so they deprive themselves of a most
efficient analytical tool. The concept of marketability easily extends to financial
instruments as well, including irredeemable paper money. This analytic tool is far
superior to any furnished by the QTM. Strictly speaking QTM is not a theory. It is
hardly more than a clever metaphor.
* * *
Ebeling is in favor of the so-called 100 percent gold standard (although in these
interviews he does not use the term). He states that “a gold standard works on the
‘rule’ that any currency outstanding is meant to be a circulating substitute [for] and
claim to a quantity of gold deposited in a bank or other financial institution for
safekeeping. Any additions to the paper currency in circulation (or other deposits
representing that currency in exchange) are only supposed to come about as a
result of net additional deposits of gold into the banks of that country. And any net
withdrawals of gold deposits are to be accompanied by a [commensurate] decrease
… in the currency notes in circulation. Money substitutes in the form of checking
and other similar banking accounts are [also] to expand and contract only … as a
reflection of changes in the quantity of gold (or silver) money kept in the banking
system.”

Not only is this a major departure from Adam Smith’s Gold Bills
Doctrine, but from Menger’s position as well. Furthermore, it flies in the face of
historical evidence showing that bills of exchange drawn on merchandise moving
apace to the ultimate gold-paying consumer, maturing and payable in gold coin in
91 days (the length of the seasons) or less, herein called gold bills do enter into
monetary circulation spontaneously. Evidence is also available that exiling gold
bills from circulation causes an undue stress in the monetary system, especially at
the time of the year when crops are moved after harvest. The stress can in some
cases threaten the stability of the monetary system. All in all, such a restriction
would be a fetter upon technical improvements in the productive apparatus of
society as it would discourage further refinement in division of labor. Ebeling’s
position, which reflects a slavish dependence on the QTM, is untenable. It is very
questionable that commercial banks ever existed for any considerable length of
time which answered Ebeling’s description.

Menger makes it very clear that only a minor part of the reserves of a
commercial bank is kept in gold coins; the major part consists of gold bills
maturing apace as time passes. This fact does not make it a ‘fractional reserve
bank’. In Menger’s view gold bills are fully admissible as reserves against the note
and deposit liability. Loose talk about fractional banking when referring to honest
to goodness commercial banks holding impeccable gold bills in addition to gold
coins against their note and deposit liabilities does not do credit to the quality of
research done by post-Mises Austrian economists.

At issue is the nature of the market for gold bills. Gold bills are the best
earning assets a commercial bank can have. Their marketability is second only to
that of gold itself. If the bank runs into unusually high demand for cash, it can
easily sell gold bills from reserves without any danger of a loss. There will always
be commercial banks out there with excess cash that want to exchange it for
earning assets. But the market for gold bills is not limited to commercial banks.
Many other economic entities do face large payment obligations falling due at a
certain date in the future. For example, the issuer of outstanding gold bonds has to
prepare for the day when his bonds mature. So does the purchaser of real estate
preparing for the close-out day. None of these entities hoard gold coins to meet
their obligations. What they do is this: they go into the market and buy gold bills
with maturity matching that of their obligations. The demand for gold bills is
virtually unlimited.
* * *
Ebeling alleges that “the old gold standard in its heydays before World War I was
still a government-managed monetary system through a series of national central
banks.” This remark does not do justice to the international gold standard as it
existed as recently as one hundred years ago. It worked as Adam Smith’s wagon-
way-in-the-sky metaphor described it should. Gold bills drawn on London financed
world trade even though the boats carrying cargo may have never came close to
British shores. Enormous amounts of gold were freed up and subsequently invested
in long-term projects such as building transcontinental railways and developing
transoceanic shipping. And we have not even mentioned the prodigious amenities
conferred upon the world by advances in therapeutics, also financed by gold bills.
Wagon ways on the ground could be ploughed up and the land put to better use in
producing crops. The ‘highway-in-the-sky’ (read: gold-bill financing of world
trade) has taken over the task of carrying goods from producer to consumer,
sometimes half-a-world apart. Even with a much larger stock of monetary gold it
would not have been possible to achieve the same degree of progress, if gold bills
had been banned as Ebeling would, presumably under the authority of an autocratic
world government, have done. We would be very lucky indeed if we could just
erase the past one hundred years from memory and pick up where the world left off
in 1914. We would have no Babelian Debt Tower, no threat of wars because the
U.S. wanted to protect its turf for the irredeemable dollar circulating
internationally. Gold coins would be in circulation domestically as well as across
the border. The euro would pop up only in one’s nightmare. There would be no
loss of purchasing power for currencies. A dollar losing 90 percent of its
purchasing power in one generation (as it did between 1971 and 2000) would be
the stuff of science fiction.
* * *
Ebeling’s bitter feelings about central banking are understandable. But one should
preserve one’s objectivity. Central banks in 1914 were not the malevolent Moloch
with unlimited power they are today. Most of them were operated as regular profit-
making business without special privileges. They did not take the initiative to
create credit to feed the money markets with arbitrary bond-purchases and they did
not foist their credit on society as they do today. According to the mandate laid
down in their charter, they stated the terms on which they were willing to do
business (read: they posted their discount rate) and stood back, letting the
commercial banks do the rest.

If they had stayed innocent, then they would not have become the elephant
in the china-shop. Contrary to the bad press it is now receiving, the Federal
Reserve (F.R.) Act of 1913 was not an out-and-out bad document. The F.R. banks
it envisaged were commercial banks with reserves 40 percent in gold and the rest
in gold bills. Government bills, notes or bonds were not eligible as collateral for
F.R. credit. If any of the F.R. banks were caught short of eligible reserves, then it
had to pay a stiff penalty on a steeply progressive scale. Open market operations
were in effect outlawed.
* * *
‘Something funny happened on the way to the forum’. World War I broke out just
a few days after the Federal Reserve banks opened their door for business.
Although officially the United States was neutral in the conflict, President W.
Wilson immediately put Federal Reserve credit at the disposal of the Entente
powers to finance purchases of war material. Since selling war material was
lucrative business, nobody complained that the Neutrality Act and the F.R. of 1913
Act had been violated. Notes and bonds of the Entente crowded out gold bills in
the balance sheets of the F.R. banks. By the end of the war gold bills were
conspicuous only by their absence, while the portfolios of the F.R. banks were
bulging with Liberty Bonds (read: War Bonds) that was justified on the strength of
a patriotic considerations. All this was in contemptuous violation of the F.R. Act of
1913.

So it came to pass that in 1921 a bubble popped up in the government bond
market. Hard upon its heels other bubbles followed: in 1925 the bubble in Florida
real estate and, in 1929, the infamous stock market bubble. When the bond bubble
collapsed, the F.R. banks were found short of eligible reserves. The U.S. Treasury
that was entrusted with the task to enforce the law just ‘forgot’ to collect the
penalty. Why should it? It was nice to have the Fed around to buy government
bonds when selling them became tough – never mind the law of the land.

It was in the ruins caused by the collapse of the government bond market
where the policy of open market operations was conceived. By 1922 most of the
member banks of the F.R. system (Fed) had impaired capital and all the F.R. banks
were in delinquency. In the meantime interest rates reached unprecedented heights.
Officials at the Fed took the law into their own hands. They started a large scale
bond purchasing program illegally and without any public discussion of the
dangers of such a course. The details are still shrouded in secrecy. The minutes
have been either stone-walled or destroyed. As a result we don’t know for sure
whether these Fed officials were aware of the broader implications of their breach
of the law.

The fly in the ointment was that the policy of open market operations made
bond speculation risk-free. The smartest speculators, knowing that they can always
unload their bond purchases at a profit, pre-empted the Fed in buying the bonds
first. Other speculators joined the bidding contest, emboldened by the sweet smell
of risk-free profits. This lifted the price of the government bonds alright, but only
at the cost of making the interest-rate structure to fall. The Great Depression of the
1930’s was caused squarely by the Fed through its illegal policy of open market
operations as it triggered a prolonged rush of speculators into bonds. The upshot of
the orgy in the bond matket was that the rate of interest kept falling, causing capital
erosion and destruction indiscriminately. Capital loss across the board is a
manifestation of deflation.

It is very likely that people in charge of the open market bond-purchase policy
of the Fed, when they saw the danger, tried to rein in the runaway bond market.
But it was too late. The momentum of speculative bond purchases continued and
interest rates kept falling. The situation was a replica of the story of the Sorcerer’s
Apprentice who stole the secret word from the manual of his master and uttered it
in an effort to get something for nothing. When enough was enough, he wanted to
stop the charade. He could not. He has forgotten to steal the other secret word
needed to do it.

Because of the illegal nature of open market operations a public discussion
of the policy was never held, nor was an evaluation of the results ever conducted.
Instead, the policy was retroactively legalized in 1935. In the meantime central
banks abroad started aping the practice. ‘Quantitative Easing’ (Q.E.) in the 21st
century repeats the same charade. Worse still, nowadays the timing and the exact
size of the bond purchasing program is advertised far and wide in advance that
makes it even easier for bond speculators to outbid one another. It can be
confidently predicted that in due course QE will lead to an even more devastating
deflation and depression than the bond-purchasing policy of the Fed did in the
1930’s.
* * *
Let me repeat my argument, first proposed more than a decade ago, why there is a
causal relation between a falling interest rate structure and the erosion (destruction)
of capital. Falling interest rates are tantamount to rising bond prices. The capital of
an enterprise is a liability, typically subject to periodic disbursements as is debt. It
must be listed in the liability column of the balance sheet along with other debt.
Therefore rising bond prices are no good news as some may think. They are very
bad news indeed. The message is that productive capital is being vaporized.

This is why, under a falling interest rate structure, the capital of all firms is
subject to erosion, a fact stubbornly denied by the Keynesians. It is also ignored by
the policy of open market operations. Incredible as it may be, this ignorance (and
not the gold standard per se) was responsible for the deflationary wave that overran
the world economy after World War I. The erosion of capital is vicious in that it is
well hidden and may become obvious only when it is already too late to do
anything about it. The process of destruction of capital is a direct consequence of
the falling interest rate structure. Those who argue that low interest rates are
salutary to business confuse a low but stable interest rate structure with a falling
one. The latter, to be sure, is lethal to business – wishful thinking notwithstanding.
* * *
Ebeling has this to say on the theory of interest. “In the late 19th century the
Austrian economist, Eugene von Böhm-Bawerk explained that the true origin of
interest was in the differing time valuations among men. Some men value more
highly the use of goods in the present than in the future, and are willing to pay a
premium (interest) in the future for access to a greater quantity of goods than their
own income enables them to command, while others are willing to forego the use
of goods which they could command today in exchange for a premium (interest)
over the principal at some point in the future when the borrowed [good] will be
returned to him by the borrower. Goods in the present are exchanged …for goods
in the future through the medium of money. The rate of interest is simply the
exchange ratio [between] goods in the present [and the same] goods in the future
expressed in terms of … money.” This is known as the time preference theory of
interest. Note that it fails to reveal the nexus between gold and interest.

However, Böhm-Bawerk who wrote a two-volume treatise with the title
Capital and Interest, also presented another theory known as the productivity
theory of interest according to which the cause of interest is to be found in the
productivity of capital. A fratricidal war between the two schools trying to explain
the theory of interest ensued.

I have resolved the conflict in the spirit of Menger who put the dichotomy of
the asked and bid price right in the center of economics, to supplant the
supply/demand equilibrium theory of price. The rate of interest is defined as the
rate at which the lump sum payment of the (fixed) face value of the bond at
maturity plus the payments stream of interest amortize the (variable) market value
of the bond. The time preference theory explains how the (higher) asked price and
the productivity theory explains how the (lower) bid price of the bond is formed.
Thus the conflict is ended in a happy synthesis between the two warring factions.
* * *
Interest is better understood if we look at the exchange of wealth and income
instead of the exchange of present and future goods. The bond is a means of
exchanging wealth and income. The seller of the bond gives up income in
exchange for wealth, while the buyer gives up wealth in exchange for income.

But the bond is not the only way to convert income into wealth and wealth
into income. A more ancient but still prevalent method, especially at times of great
disturbances in currency values, of converting income into wealth and wealth into
income is hoarding and dishoarding. The man who is hoarding converts income
into wealth while the man who is dishoarding converts wealth into income. The
trouble is that there are substantial losses involved in these conversions. To
minimize these losses one has to hoard and dishoard the most marketable good,
gold. It is for this reason that you cannot have a theory of interest without
reference to gold − a point that was lost on Ricardo, Mises, and a host of lesser
known economists – but was implicit in Menger’s opus through his emphasis on
marketability.

In the absence of institutional, legal or moral obstruction individuals will
exchange a stream of gold payments for a lump sum payment of gold routinely in
order to provide for old age or for the education of their children. But the amount
of gold so exchanged is not the same: the present value of the gold stream is
higher. The difference is interest, and the (annual) rate of interest is the present
value of gold paid out during a one-year period as a percentage of the lump sum.

Converting income into wealth through hoarding gold is equivalent to
exchanging income for the wealth at zero interest. Likewise, converting wealth into
income through dishoarding gold is equivalent to exchanging wealth for income at
zero interest. The bargaining powers of the lender and borrower are asymmetric.
The former can fall back on conversion if exchange fails. The latter cannot. For
him conversion would yield the desired wealth only after a several-year-long
waiting period. If this is unjust, nature is to blame, not usury. The rate of interest is
the price of efficiency of exchanging wealth and income over that of converting
one into the other through hoarding and dishoarding gold.
* * *
To recapitulate, Ebeling has a very narrow view of the gold standard. He
completely ignores the role of gold in the formation of the rate of interest, in spite
of the fact that this role is even more important than the role of gold in the
formation of prices for the reason that the gold standard is fully capable to
stabilize interest rates and, hence, bond prices but it cannot stabilize the prices of
goods (which is neither desirable nor possible).

In economics and, more generally, in human affairs one has to grab every
chance as they come to stabilize, as they are few and far in between. Only the
enemies of peaceful and voluntary cooperation under the system of division of
labor with an agenda, such as Keynesians and Friedman’s monetarists have an
interest in destabilization. The rate of interest is one of only a very few things that
can be stabilized. Being mortal, humans vitally depend on the stabilization of
interest rates.

Our theory of interest is inspired by Carl Menger. It avoids the use of
contorted examples such as exchanging one apple today for a fraction of one apple
several years later. Exchanging present apples for future apples only occurs in
one’s imagination, never in real life. By contrast, exchanging income and wealth
occurs in the life of everyone, as one makes provision for the education of one’s
children, or for old age.
* * *
Post-Mises Austrian economists following Mises reject the idea that there is a
distinction to be made between interest and discount, or between a bond and a bill
beyond the technical difference that interest is payable retroactively while discount
is payable in advance. This is a major error with far-reaching consequences. The
root of the error is the belief that there is loan involved in extending commercial
credit as a semi-finished good is passed along from the producer of higher to that
of lower-order goods, and also when the finished good is passed along from the
wholesale to the retail merchant.

It is a grave mistake to assert that the producer of a higher-order good is
lending and the producer of the lower-order good is borrowing. Once again, post-
Mises Austrian economists erred because they deviated from Menger. The fact that
the transaction of passing along semi-finished goods involves no loan transaction is
clearly shown by the fact that the producer of higher-order goods handles goods
with lower marketability, while the producer of lower-order goods handles goods
with higher marketability. The former is farther down in the line waiting for his
share of the gold coin disbursed by the ultimate consumer. Similarly, the finished
good in the hand of the wholesale merchant is less marketable than the same good
in the hand of the retail merchant. The latter is the one who gets the gold coin first.
It is preposterous to suggest that the wholesale merchant extends a loan to the retail
merchant when in effect it is the retail merchant who has the gold.

The confusion in the minds of the post-Mises Austrians is that of confusing
lending with clearing. Commercial credit is a manifestation of clearing, not of
lending. It is an inseparable part of the movement of semifinished goods through
the various stages of production. Take it away and production will cease. Likewise,
commercial credit is an inseparable part of the movement of the finished good
from the wholesale to the retail merchant. The former bills the latter. The gold bill
is always ’90 days net’. There is simply no precedent for a gold coin, as opposed to
a gold bill, to have ever been involved in the passing of a semifinished good from
the producer of higher to the producer of lower order goods, or in the passing of a
finished good from the wholesale merchant to the retail merchant. These men are
cooperating in the task of supplying goods in urgent demand to the ultimate
consumer. It is grotesque to suggest that this, rather than being an instance of
cooperation is an instance of a loan contract between creditor and debtor.

Interest and discount are very different both in their origin and in their
function in the constellation of economics. The origin of interest is in savings
whereas the origin of discount is in consumption. Accordingly, the rate of interest
measures the propensity to save and the rate of discount measures the propensity to
consume. In both cases the relationship is inverse: the higher is the propensity, the
lower the rate will be.

The function of interest is to regulate financing long-term projects; the
function of discount is to regulate financing the movement of merchandise to the
ultimate consumer most expeditiously. This movement must not be slowed down.
If it is for any reason, typically, for reasons of slackening consumer demand, then
using the lower discount rate loses its justification. The higher interest rate must
apply. Conversely, if consumer demand picks up, then drawing gold bills to
finance the last stages of the movement of merchandise to the ultimate gold-paying
consumer may be justified. Such switches back-and-forth between interest and
discount occur all the time as the propensity to consume varies from high to low
and back. The sign of a fading propensity to consume is that gold bills drawn on
some merchandise will stop circulating. Conversely, the sign of the propensity to
consume getting more robust is that gold bills drawn on some merchandise will
start circulating spontaneously.
* * *

It is interesting to observe how the discount rate is formed. What we have to watch
is the demand for prepaying gold bills by the acceptor, typically the retail
merchant. As gold coins keep accumulating in his till and reach the point of hid
‘normal cash balance’, he will have the urge to prepay his gold bills. Suppose he
knows the person who holds the gold bill he has accepted (of course, it need not be
the wholesale merchant who drew the bill in the first place when delivering the
goods). The retail merchant will then make an offer to prepay his bill. The question
is how much he should offer in prepayment. Clearly, he won’t pay the full face
value if it the gold bill still has some time to go before maturity. His offer is to
discount the gold bill. In the haggling over the rate that follows the retail merchant
is guided by the prevailing propensity to consume. If it is high, then the marginal
item on his shelf, say a bottle of sauerkraut, is moving fast. It has a high marginal
productivity. This prompts him to settle for a lower discount. Holding out for a
higher discount would make no sense in view of the fact that the marginal
productivity of his circulating capital is higher.

It is very different if the propensity to consume is low. In this case the retail
merchant has an alternative. The marginal item on his self, which we may assume
to be the bottle of sauerkraut, is moving slowly, so sowly in fact that he is thinking
of phasing it out by not reordering . It then appears more attractive to him to use
his excess gold coins to buy the gold bills drawn on goods handled by his
colleagues operating with a higher productivity at a better discount. Accordingly,
he will insist on a higher discount in buying back his own bill.

In the foregoing we assumed that the retail merchant was able to locate the
holder of the bills he had accepted. In practice this is unlikely. Probably he won’t
even try. But this does not affect the merit of our reasoning. It makes no economic
difference whether he prepays gold bills of his own, or he buys the gold bill of
another merchant. In either case he is offering to discount a bill at a rate
determined by the propensity to consume. In phasing out the slow-moving
sauerkraut his inventory shrinks, but he now participates in the earnings of another
retail merchant operating with higher productivity.

Our description of the formation of the discount rate also shows the role that
gold plays in the mechanism of supplying the ultimate consumer with
merchandise, beyond merely being a means of exchange – a role in which it is not
indispensable. But gold is indispensible in its role of helping to format the discount
rate whereby the task of supplying the consumer with merchandise is made most
efficient. The discount rate is the price of this efficiency. The scope of the gold
standard goes far beyond browbeating the government for its inflationary
proclivities.
* * *
One instance showing that post-Mises Austrian economists make a mistake in
ignoring the distinction between interest and discount is the business cycle theory.
In Ebeling’s description: “…the depression has its origin in a preceding
inflationary boom that was set off by government and central bank manipulation of
the money supply and interest rates. This set off a chain of events in which
investment was thrown out of balance with savings, resources were misdirected
and capital was mal-invested. It is the prior manipulation of money and credit and
below market-based interest rates that create the distortions and imbalances that
finally result in a ‘break’ in the economy followed by economic downturn,
depression or recession.”

I have written critically about the business cycle theory of Mises and Hayek,
which is still the standard fare in the post-Mises Austrian school as manifested by
the quotation above. My criticism is that it assigns a very low IQ to businessmen
who fall again and again for the deception of the government and the banks
pushing the rate of interest below the rate of marginal time preference. “If you
cheat me once, shame on you; if you cheat me twice, shame on me.“ Businessmen
are among the smartest people in the world and should be able to learn how to
avoid previous pitfalls. But if you distinguish between the rate of interest and the
rate of discount, then you can come up with an improved business cycle theory as
follows.

The positive spread between the rate of interest and the rate of discount is a
temptation for doing what I call ‘illicit interest arbitrage’. People looking for risk-
free profits will sell bills in the bill market at the lower discount rate to invest the
proceeds in the bond market at the higher interest rate. They expect to pocket the
difference. In doing so they ignore the danger of borrowing short and lending long.
The short leg of the straddle matures before the long and it may not be possible to
move it forward without a loss. However, they trust to luck and do it anyway. Here
is the rub: their very arbitrage will cause the spread between the rate of interest and
the rate of discount to narrow. When it closes, there is panic in the money markets
and the house of cards collapses. Falling firms cause a domino-effect doing great
damage to the economy. Illicit interest arbitrage in particular has created a falling
trend in the rate of interest. This has caused erosion of capital across the board,
making firms more vulnerable. Some healthy firms may struggle by cutting prices
but, at any rate, they can do nothing about the erosion of capital that affects
everybody. Large scale unemployment that follows the wholesale collapse of firms
will make global demand shrink, reinforcing the trend of prices to fall.
* * *
In summary: the gold standard is much more than a restraint on governments to
refrain from inflation as suggested by Ebeling. It is an integral part of the
mechanism to improve the efficiency of supplying the consumer with merchandise,
through its influence on the discount rate. It is also part of the mechanism to
allocate capital through its influence on the discount rate. It is protecting the young
lest savings to provide for their education may not be pilfered. It is protecting the
elderly lest the funds to provide for their old age may not be plundered.


It is important to talk about these issues now. We are at a critical juncture
when the dismal failure of the global experiment with irredeemable currency is
becoming manifest. There is a chance that the gold standard may be rehabilitated
and collapse of world trade avoided. The rehabilitation of the gold standard must
be done right. The so-called 100 percent gold standard would render the monetary
system prone to squeezes and give scope to agitation against it that could culminate
in a collapse. Should that happen, schadefreude in the opposition camp would
know no bounds: “We have told you so!” The cause of sound money would suffer
a setback. That outcome could be easily avoided if the post-Mises Austrian school
and NASOE with the participation of all other interested parties met to hammer out
a platform through a high-level open debate. Science has always moved forward
through open debates and was retarded by opposition to them.

March 1, 2014

[Elihu]

...."Most traders focus on price. They think that silver at $19.40 is cheap because it’s at the low end of a trading range. They think a gold to silver ratio at 66 is high because it’s at the high end of the ratio.

It’s a little scary that the low in the silver price, and high on the ratio occurs in a market with such strong speculative interest in silver. If speculators should capitulate for any reason, watch out. We might not go so far as to say it’s a bug in search in a windshield, but it’s at least dry tinder awaiting a spark.

We could see $16 silver and a 76 gold to silver ratio."

[Elihu]

100% of Mainstream Interest Rate Theory is Wrong

by Keith Weiner on October 21, 2014 in Core Economic Concepts, Currencies and Banking, Sovereign Debt Crisis

An interesting article on MarketWatch today caught my attention. The subhead is the money quote, “Back in April every economist in a survey thought yields would rise. Guess what they did next.”

Every? The article refers to 67 economists polled by Bloomberg, all of whom would seem to believe in the quantity theory of money. This means they believe a rising money supply causes rising prices. That means they think the bond market expects inflation. Which means they expect the interest rate to rise, because investors will somehow demand more.

It didn’t happen because every assumption in that chain is false.

Many people also expect interest rates to rise after the Fed’s bond buying program—quantitative easing—ends. Let’s take a look at the yield on the 10-year US Treasury bond from 1981 through today. This graph is courtesy of Yahoo Finance, though I have labeled it as carefully as I could for the three rounds of QE so far.

check link 4 graph http://monetary-metals.com/100-of-mains ... -is-wrong/

By zooming out to capture the entire time period of the bull market in bonds—i.e. the period of the falling interest rate—we can put QE in perspective.

The 10-year US Treasury bond now yields 2.21%. For reference, the 10-year German bund is 0.87% and the 10-year Japanese government bond is 0.48%.

It’s obvious from the chart, that QE is not the cause of today’s interest rate near 2%.

MarketWatch implicitly acknowledges that the conventional theory is 100% wrong. I have published an alternative, The Theory of Interest and Prices in a Paper Currency. It’s a long read in seven parts, but I have tried to keep it accessible to the layman.

Spoiler alert: I think interest rates will keep falling to zero, though of course there can be corrections.

The interest rate is pathological. It’s like an object that gets too close to a black hole. Once it falls below the event horizon, then a crash into the singularity of zero is inevitable.



You are cordially invited to The Gold Standard: Both Good and Necessary, in New York on Nov 1. There hasn’t been a real recovery from the crisis of 2008, and there won’t be until we return to the use of gold as money. Please come to this event to hear Andy Bernstein present the moral case for capitalism, and Keith Weiner present the case for the gold standard as the monetary system of capitalism.

[Elihu]

Why is the Gold Standard Urgent?

by Keith Weiner on October 14, 2014 in Core Economic Concepts, Gold


*************************************************, many people have advocated a return to the gold standard. One argument has been repeated: consumer prices are rising. While this is true, it wasn’t compelling in the 1970’s and it certainly doesn’t fire people up today. Rising prices—what most people think of as inflation—is a dead-end, politically. People care about rising prices, but not that much.

There is a greater danger to fixating on this one argument. What if you make a really bad prediction? The Fed did massively increase the money supply in response to the crisis of 2008. Many gold advocates predicted skyrocketing prices—even hyperinflation. Obviously, this has failed to materialize so far.

Preachers of imminent dollar collapse have lost credibility. Worse yet, they have poisoned the well. People who were once receptive to the benefits of gold have lost interest (their selling has exacerbated and extended the falling gold price trend). And why shouldn’t they walk away? They can see that some Armageddon peddlers have a conflict of interest, as they are also gold and silver bullion dealers.

The gold standard has nothing to do with buying gold in the hopes that its price will go up. It has little to do with the price of anything—gold or consumer goods.

urgent

There’s no doubt that the fiat dollar harms us in many ways. However, the chronic rise of prices is the least of the wounds it inflicts. If prices could rise for a hundred years, then there’s no reason they couldn’t go on rising for another century—or a millennium. There is no finite endpoint for rising prices.

There is a finite limit to the abuse of credit, before the dollar will fail.

The interest rate is a prime driver of systemic failure. Interest has been falling for 33 years, since its peak in 1981. What happens when it hits zero? I don’t refer to the Fed funds rate, discount rate, or any short-term rate. I mean the 10-year bond or even the 30-year bond. In the U.S., the 10-year bond pays 2.3%. In Germany, it has already fallen to 0.91% (not a typo, 91 basis points). In Japan, it’s close to half of that, at 0.5%.

Naturally, the cheaper the rate, the more it encourages borrowing. When the rate keeps falling, the borrowing keeps rising. Is there a failure point for debt?

Along with encouraging borrowing, low and falling interest discourages savings. Isn’t that perverse, to discourage saving? What happens when an entire society doesn’t save?

Our financial system has suffered an escalating series of crises. Each crisis has grown out of the fix applied to the previous one.

The crisis of 2008 was different. No matter what the Fed has attempted, they have not been able to create even the temporary appearance of recovery (other than in asset prices). It’s not merely that growth will be slow, or slower than it should be in some theoretical ideal economic world.

There will be no recovery while our monetary cancer rages, unchecked. We must rediscover the gold standard, which is the only cure.

Our ancient ancestors adopted money to enable them to coordinate their productive activities in their economies. They could only go so far using barter, but money made possible the division of labor and hence specialization. Lubricated by money, there is no limit to economic growth and the development of wondrous products. For example, today we have access to the Internet on a thin handheld device.

The dollar still does perform this function, which is why it hasn’t collapsed yet. However, it is slowly failing. It is increasingly imposing perverse incentives. The dollar is hurting us by encouraging us to destroy precious capital in numerous ways.

The Gold Standard Institute is sponsoring an event in New York City on November 1. I will be speaking about the destruction being wrought by the dollar, including a detailed discussion of the problems mentioned above. I will also propose a practical transition path to the gold standard.

You are cordially invited to join us for a presentation of ideas you won’t get anywhere else. Here is the link to the conference page and registration.

[Iamwhomiam]

No Links, elihu?

EPA Requires Nevada Gold Mining Company to Correct Reporting Violations

Release Date: 09/25/2014
Contact Information: Margot Perez-Sullivan, (415) 947-4149, perezsullivan.margot@epa.gov

SAN FRANCISCO – The U.S. Environmental Protection Agency settled with Veris Gold USA, Inc. for failing to correctly report toxic chemical releases and waste management activities as required by the Emergency Planning and Community Right-to-Know Act. The company agreed to a civil penalty of $182,000.

The violations involved late and incorrect reporting for ten chemical compounds including arsenic, cobalt, copper, cyanide, lead, mercury, nickel, propylene and zinc at Veris Gold USA’s Jerritt Canyon mine located fifty miles north of Eureka in Elko County. Veris Gold USA is the wholly-owned subsidiary of Veris Gold Corp., a Canadian corporation.

Under the Emergency Planning and Community Right-to-Know Act, facilities that manufacture, process, or use toxic chemicals over certain quantities must file annual reports estimating the amounts released to the environment, treated or recycled on-site, or transferred off-site for waste management. These reports are submitted to EPA and the State or Tribe with jurisdiction over the facility. EPA compiles this information into a national Toxics Release Inventory database and makes it available to the public.

The action is part of the EPA’s National Mineral Processing Enforcement Initiative which aims to minimize risks to drinking water and other resources posed by hazardous waste operations at mineral processing facilities.

More information on the Toxics Release Inventory: http://www.epa.gov/tri

EPA's environmental databases, including TRI data, can be accessed at: http://www.epa.gov/enviro

http://tinyurl.com/lwa833d
~~~~~~

EPA Reaches Settlement with Alaska Gold near Nome, Alaska for Improperly Managing Hazardous Waste

Release Date: 04/25/2014
Contact Information: Mark MacIntyre / EPA-Seattle / 206-553-7302 / macintyre.mark@epa.gov

Today’s settlement also carries a penalty of $72,000. According to Ed Kowalski, Director of EPA’s Enforcement and Compliance office in Seattle, “Poor hazardous waste handling at facilities can leave a toxic legacy of pollution and lead to costly clean up, Kowalski said. “In this case, numerous containers of hazardous waste were abandoned and illegally stored - in some cases for several years - without the necessary permits.”

Violations noted at the time of the inspection include:

· Failure to make a hazardous waste determination
· Storing hazardous waste without a permit
· Failure to clearly label used oil storage units
· Failure to store used oil in good, proper containers
· Shipping “off-specification” used oil to prohibited used oil burners
· Failure to properly respond to a used oil release


Alaska Gold neither admits nor denies the factual claims made in the settlement. The Penalty of $72,000 will be made payable to the U.S. Treasury and transmitted within 30 days of the April 17, 2014 settlement.

http://tinyurl.com/lzq2yuo

~~~~~~~

much more here.

Anyone who might take a few moments reviewing the above link's listed actions taken by the EPA against the gold industry will notice the agency's lax enforcement of laws and their own regulations and the paltry penalties imposed upon violators (of air emissions and water intake & discharge and of waste handling of regulated chemicals and land discharges of same, all limited by EPA permits) and that true enforcement is lax or lacking and corrections ordered are stubbornly delayed and most reluctantly, if ever complied with perhaps years after the initial corrective action is ordered.

Words do have impact. What if we renamed the
Environmental Protection Agency
the
Environmental Pollution Agency,
because that's their function, to permit industry to pollute our environment.

Now substitute the word "Poison" for "Pollution."

Because that's what pollution is: Pollution is Poison.

The Environmental Poison Agency

'cause that's what they permit and regurgitate.

Tomorrow we'll examine the ever- popular phrase, "Better Living Through Chemistry."

[Elihu]

Greg Jaxon July 24, 2015 at 11:45 am #
10 years ago, when the resurrection of the gold price once again put it on peoples’ radar screen, The Quantity Theory (of money) camp fixated on that “reciprocal” relationship and too-confidently predicted hyperinflation. It was at that juncture that Fekete caught my attention when he made the case that the QE to come would be deflationary, instead. And here I have to inject the interpretive note that to Fekete, (in,de)flation is indicated by commodity prices (vs. financial asset prices).

As we now face that commodity price deflation, we also see the backwardation he’s warned us about for over a decade. The question to ask is whether his simple explanation (that all commodity trades ultimately appeal to the gold trade) represents Reality. Fekete’s (Menger’s) view – that gold is the best-evolved monetary Good which leads directly to the prediction that gold vs dollar backwardation spells the end of all other commodities’ dollar pricing as well – depends on that purely rational reading of the economy.

In explaining money elsewhere this week, I summarized the difference between dollars and gold by quipping that “a dollar is a unit of force, whereas gold is a unit of value”. Not to make too much of one flippant remark, but it goes to the key economic roles they play. Because the force behind a dollar is the huge political will of very powerful agents, it can (& has) distorted the subjective-consensus (cum Objective) valuations of everything, gold included. It is this unintended “distorting” effect that the government economists find so confounding. I feel that Fekete gave those of us, who (like Keith) have some computer science background, an important clue when he talked about Economic Entropy – referring to Shannon’s Information Theory definition where low entropy corresponds to high Certainty about a system’s state. I see that even George Gilder has picked up on this in a superficial way. If there is anything coherent to this “Entropic Theory of Money”, then the fiat money supplies are in deep trouble. The debt-pyramids in each central bank’s reserve vault are open to very high entropy revaluations by far more actors and agents than just the FOMC and company. That rising uncertainty will eventually price the fiats out of the market for the commodities needed for life. That is the thesis behind Fekete’s dread vision of “negative basis” backwardation. Keith’s “positive co-basis” definition is just the actionable way this fact gathers market force in opposition to fiat.

The battle over what axioms truly hold sway will be profound

LOG IN TO RE

[Nordic]

Deflation? Bullshit. Inflation is almost driving me to ruin. The cost of food, gasoline, housing? It's insane. Where I live since 2010 rents have increased by 60- 70 percent!!!

100 bucks barely buys any groceries. Gas is 4.29 a gallon right now. My car insurance is almost 300 a month.

Fuck these fuckers who talk about deflation. Lying fucks.

[Elihu]

Greg Jaxon July 24, 2015 at 11:45 am #

I also want to link you to George Gilder’s intriguing 79 page tract on the the Entropy of money. I found it to be more incomplete than outright flawed: too breezy in spots where we know there are far better arguments. Maybe a bit too biased toward the ideas in Bitcoin, but nonetheless echoing many New Austrian core ideas!

For a detailed synopsis of the book, including key quotes, click here.

excerpts:


... Gilder
argues that a 21st century case for gold rests upon a new foundation: the new information
theory of economics that sheds light on the ongoing economic stagnation..
. . . A new
information theory of economic growth leads to new insight into monetary policy. . .
It is not that knowledge creates wealth—wealth, in its deepest form, is knowledge. The
Neanderthals had every natural resource we have. Wealth is created by the learning curves
that result from a million falsifiable experiments in entrepreneurship by economic actors in
mostly free market economies. . . . The most important role of money is as the measure of
that learning. Money is the channel that carries the information to investors, workers, small
businessmen, major corporations and entrepreneurs. All need to gauge the success or failure
of their attempts at growth.”

“Manipulating the value of money, whether by printing currency or artificially suppressing
interest rates, does not create wealth. Instead it is the equivalent of manipulating the data of
a scientific experiment after it takes place, distorting the information economic actors need
to create new wealth.”

..“Today the established theories of top-down money face serious challenges from digital
alternatives on the Internet and from the perennial appeal of the case for gold. Both of
these forms of money offer escape from the centralized regime of monetarism. Both offer
monetary systems that affirm Friedman’s cogent theories of freedom, rather than his
erroneous ideas of control.”

The economy is not fundamentally an incentive system, it is an information system.
Manipulating money cannot create growth, and it distorts the information economic actors
need to acquire the learning that alone is wealth-creation.

“Growth in wealth stems . . . from the progress of learning. It is accomplished by
entrepreneurs conducting falsifiable experiments of enterprise, with the outcomes
measurable by reliable money.”

Claude Shannon “resolved that all information is most essentially surprise. Unless messages
are unexpected, they do not convey new information.” But “[i]f a carrier is to bear surprising
contents, it must itself be unsurprising.” That is what makes it possible to distinguish the
signal from the noise.

“In economics money is part of the conduit or carrier. If money is to foster learning and
knowledge, it cannot itself be surprising. . . . money must be the measure, rather than what is
measured.”

“Muddling much of economics is a mirage of money itself as power, as if the supply of
money itself can impel economic activity. Monetarism (control of money), Keynesianism
(control of spending), and Mercantilism (control of trade) all foster the illusion that
government power can drive economic growth and wealth creation. What government can
do (and does do) under this illusion is redistribute wealth, usually to the already rich and
other politically favored inside players.”

“Interest rates, for example, register the average expected returns across the economy. With
a near zero interest rate policy, the Fed falsely zeroes out the cost of time. This deception
retards economic growth. Rather than creating new assets, low-cost money borrowed from
tomorrow bids up existing assets today. It creates no new learning and value, but merely
destroys information by distorting the time value of money. . . The Fed policy merely
confuses both savers and investors and contracts the horizons of investment, which in some
influential trading strategies have shrunk to milliseconds.”

..If money is the measuring stick in an information system, money must be moored in
something outside itself in order to become an accurate measuring stick of economic
growth. What the Bitcoin theorists taught us is that element is time, as a measure of input
(sacrifice) not output.

[Elihu]

Deflation? Bullshit. Inflation is almost driving me to ruin. The cost of food, gasoline, housing? It's insane. Where I live since 2010 rents have increased by 60- 70 percent!!!

100 bucks barely buys any groceries. Gas is 4.29 a gallon right now. My car insurance is almost 300 a month.

Fuck these fuckers who talk about deflation. Lying fucks.

it is not just one thing that is changing (the prices). the second is the value of the money you earn in relation to your effort. that is your real culprit, or the worse offender of the two, imo. in the foregoing comments by that commenter i posted, he said commodity prices will be falling in relation to real estate and financial prices. From the standpoint of investing in them yes, they are losers comparatively. buying them at retail with sketchy compensation for labor? not so much.