Bitcoin is King

Bitcoin is King

Bitcoin is winning. Period. In fact, it may have already won and the people arrayed against it, no matter how powerful, are finally beginning to realize this.

This week saw a slew of major announcements which all point in this direction.

Of course the big news was Elon Musk’s announcement of Tesla Corp. having a $1.5 billion position in bitcoin.

But that news came on the heels of a lot of other news, like VISA saying it was ready to embrace bitcoin to help banks build crypto-payment and trading services.

VISA-backed debit cards have been around for a while now, like BitPay’s offering, but this announcement by VISA is different as it highlights the the futility of fighting the market when the market chooses something better.

And speaking of BitPay the most important announcement of the week, in my opinion, is Apple’s allowing BitPay’s Mastercard to be added to ApplePay wallets. Google and Samsung are next.

Later in the week MasterCard followed VISA now saying it will allow a handful of cryptocurrencies to flow across its network.

Lest I forget that no less than three major pillars of the banking community gave up fighting the bitcoin wave.

  1. Bank of New York Mellon announced custodial services for its institutional clients. They wouldn’t do that if the demand wasn’t there.
  2. J.P. Morgan, which has tried no less than four times in as many weeks to create a psychological break of the latest bull wave (H/T Zerohedge),
  3. Morgan Stanley’s investment arm is now considering taking a position, directly after buying up a ton of MicroStrategy, which is itself a proxy for bitcoin.

But still there is no ‘use-case’ in the words of perma-skeptics like the venerable Peter Schiff who is becoming increasingly desperate to make his case while trashing his bona fides as an Austrian-style economic thinker.

This tweet proves what I said about Schiff last fall.

To deny that Bitcoin has any value is to deny the fact that information is a commodity. And that’s truly facile when, at its essence, that’s all an economy actually is, information. The goods that move can only do so efficiently with good information about their production and distribution.

Price is the value of the information being transacted.

Peter Schiff makes his living getting paid to dispense opinions on markets. His entire life is built on the idea that information concentrated in one man’s mind is worth something to someone else who is ignorant of that information.

That people like Peter Schiff deny this simple process by which something acquires and builds commodity value through time is also irrelevant.

It means that while Peter studied Austrian economics he just didn’t understand it.

But it’s not just Schiff, it’s otherwise really smart people, who I normally respect, making the dumbest arguments imaginable in public.

It must be the hypoxia. It eventually rewires everything. Because Mr. Antifragile himself continues to miss the reasons why humans desire antifragility and expects that to occur on his time schedule not theirs.

So, he falls back on insults defended by dubiously-applicable math rather than admit to the paradigm shift happening in front of his eyes.

Bitcoin’s volatility isn’t as much a bug in its design but a feature of its adoption curve.

Because in any appreciable sense when viewed against other major assets as a function of its US dollar price moves, Bitcoin isn’t really all that volatile.

Weekly Volatility in Real Terms, N=187 weeks.

Bitcoin’s price is volatile, certainly. More volatile than any of the other assets here when comparing the weekly range from low to high versus the standard deviation of that range… call it internal volatility.

But that volatility is a function of it being in a bull market, operating in far less mature trading platforms than these other assets and about twenty other variables that do not apply to Apple, Gold, Silver or the Dow Jones Industrials, making any statistical comparison between them, frankly, puerile.

Mr. Taleb should know comparing statistical data from sets with different boundary conditions is the height of intellectual weak sauce.

And yet, given those caveats, on a week-to-week basis, trading 24/7 without arbitrary halts like the others, bitcoin measured against itself is only slightly more volatile than any of these other assets with higher internal volatility.

It’s an asset rapidly expanding its userbase, it’s acquiring monetary character daily as more of the old monetary system sees the opportunity to make a vig, in VISA and Mastercard’s case, or provide explosive returns for investors looking to hedge against the chaos of a ruling class gone equal parts crazy and moronic.

It’s a growth stock that is just finding the sweet spot of its growth curve as conditions for its value proposition increases daily.

Which brings me to the following observation:

If you are an asset manager today and you saw the brazen display of incompetence, pettiness and cluelessness in Congress and the Senate…

If you are an asset manager today who sees the draconian and willful destruction of the U.K. economy by a Prime Minister who should literally be dragged out of 10 Downing St. by his hair and thrown into the Thames…

If you are an asset manager today and see the ruthless political shenanigans perpetrated on the major economies of Germany, France, Italy and Spain…

… and you aren’t buying the living shit out of bitcoin right now, you should lose all your business!

What argument can you make to pile up more dollar-denominated assets in your client’s portfolios in a world literally drowning in dollars and dollar liabilities, knowing the policy responses will be to create more dollars, undermine the confidence of the system and accelerate a fundamental shift in the monetary system?

Are you really that enamored of Christine Lagarde at the ECB? Jerome Powell at the Fed? Kuroda at the BoJ?

Personnel is policy after all.

Are these the best and brightest the world has to offer us for stewardship of our future as a species?

Or are you finally willing to listen to what your clients are telling you and now have to pile in to save face?

Most of you have already missed the greatest wealth transfer from the rich to the middle class in history but, hey, past results don’t guarantee future returns, right?

The point is that bitcoin, and cryptocurrencies in general, are still assets in their infancy. But as technology anyone with an ounce of intellectual honesty can tell you where this is all headed.

And this week’s mass of announcements is the dam breaking down of adoption. It’s the clearest signal yet that the overreach and arrogance of the political class has reached its limit of power.

We don’t buy it anymore. And the whole system is now accelerating towards a catastrophic crisis of confidence.

Making arguments about historical volatility or intrinsic versus extrinsic value is, at best sophistry, and, at worst, egoism.

Bitcoin’s total addressable market just jumped psychologically by an order of magnitude last week. That’s why it’s winning.

We’re reaching the inflection point that I’ve talked about before. It is the moment when a critical mass of people stop valuing their portfolios in terms of dollars but in terms of bitcoin.

Years ago, before bitcoin, when I was an advocate for the Liberty Dollar, I used to go everywhere with two one-ounce silver rounds in my pocket. And when I walked into a place where I could spend money I would reach in and hold them in my hand for a minute.

I asked myself one simple question each time, “Would I spend these coins to buy that thing.” And more often than not the answer was, “No.”

It was a great exercise in teaching myself fiscal restraint. Today people are doing the same thing with bitcoin. They’ll spend their dollars or euros but they are HODLing their bitcoin because they KNOW it’s more valuable to them than those dollars or euros.

Christine Lagarde called bitcoin, “Funny business money,” in her latest attempt at both wit and to warn us what her plans were. It failed to impress us on both fronts.

Because Lagarde, like Schiff and Taleb, believe they know what real money is. They think because they have the power (Lagarde) or the pulpit (Schiff and Taleb) that they can define for the market what money is or what it will be in the future.

These aren’t dumb people, but they are being dumb here. Because, at least for Taleb and Schiff they are supposed to know that the market is bigger than any one person or group of people.

Lagarde will learn this lesson in the hardest way imaginable.

Bitcoin will rise to some new, seemingly astronomical high that will be “unthinkable.” Eventually, sentiment will get so out of whack and supply will balance demand.

That will set off a correction of major proportions, think 50-60%, maybe more.

That’s fine. Been there, done that, got the alt-coins to prove it.

I’ll have to fend off the slings and arrows of people who think they’ve won some kind of victory because bitcoin went from $14,000 to $100,000 and corrected back to $50,000 when it was $8,500 at the beginning of 2020.

And I’ll do what I’ve been doing for four years now, calling them losers.

This article was originally featured at the Gold Goats ‘n Guns blog and is republished with permission.

Bitcoin is King

Bitcoin vs. Wall Street

The big worry among the bitcoin perma-bears is the threat of government ‘making it illegal.’

The latest bogeyman on this front is none other than U.S. Treasury Secretary Steve Mnuchin. Rumors float that he’s considering outlawing ‘self-custody wallets,’ in effect confiscating the private keys of everyone’s cryptos.

In a Twitter-thread, the chief executive [of Coinbase Brian Armstrong] said that his firm “heard rumors” about the US Treasury Secretary Steven Mnuchin’s plans to introduce fresh rules for “self-custody wallets” by the end of his term.

The open nature of cryptocurrencies allows anyone to create a private wallet by downloading third-party software on their computers/smartphones or through hardware devices that store digital assets. These types of self-custodial solutions come cheaper than traditional financial services — and they ensure privacy.

Those rumors are apparently valid since Mnuchin received a letter from four Congressmen imploring him not to do such a monumentally stupid thing.

Davidson make the very salient point that a move like this would be crippling to the burgeoning cryptocurrency, decentralized finance world.

It’s a stunningly well-written letter that shows a level of understanding about crypto that one simply wouldn’t expect from a Congressman. But, hey, I’ll take the pleasant surprise.

Now, by the same token, Davidson is talking to one of the ultimate oligarchs holding one of the most powerful offices in the world. Mnuchin, like the rest of the world-be world governors, sees the threat to central-bank issued currencies and doesn’t like the competition.

So many who have argued that Bitcoin would eventually ‘just be made illegal’ have done so on, at best, sophomoric grounds, ignoring the practicality of how the internet functions, etc.

I’ve already addressed these arguments in the past, c.f. Bitcoin vs. The Man published back in August.

With Stock to Flow rising, meaning the rate of inflation is falling while the total hoarded pile is rising, marginal demand can easily push prices to levels that make even the most ardent bitcoin bull blush.

Governments are, as I said earlier, in a Catch-22. If they ban bitcoin demand goes underground, people simply buy and hold it. They acquire it however they can and new technologies come in (decentralized exchanges) come in to replace current ones (Coinbase).

If they don’t ban it then they allow the demand for it as a store of value and financial asset to flourish. It exists in a gray-area where you can use it but you really don’t want to. That allows another relief valve for capital to exit the dying debt-based system and wait for the storm to pass.

Either way, bitcoin and cryptocurrencies win.

The Davidson Four’s letter acknowledges this basic understanding. Trying to make holding your private keys to your cryptos illegal will simply drive capital away from the U.S.

Now, if Mnuchin is a good little Davos Man than that is exactly what he must do because that’s their plan, man.

If he isn’t and he’s just your garden-variety clueless regulator then making such a move would be another classic case of what I’ll now call the Melinda Gates Syndrome—We Didn’t Think Through the Economic Implications of our Actions.

The truth lies somewhere in the middle, I’m sure.

But like I said at the outset, this is all a bogeyman in the end. If Mnuchin falls into the authoritarian trap of trying to ban ‘self-custody wallets’ he will set off two firestorms.

The first is to drive even more of the existing stock of bitcoins underground, and likely into privacy coins or onto distributed exchanges where the capital will never be found nor clawed back.

That will ultimately drive the price straight through the $20,000 level and set it on a path to much higher, headline-grabbing levels.

The second will be to re-engage the normies because of this who have already began rushing into this space in a big way especially after the insanity of 2020.

So, while Mnuchin may make it really difficult for people to get their coins off of Coinbase or any other approved KYC/AML-compliant on-ramp, most people really won’t care.

And all he’s doing is making the people who are building the systems to challenge his “Authoritah!” even more well-capitalized.

So, even if the worst comes to pass what will happen will not blunt the rise of the private currency markets.

Remember folks capital flows to where it is treated best. And if Mnuchin treats U.S. savers this poorly, which I expect him to try to do, then he will ensure Davidson’s predictions come true.

It is for this reason that he won’t dare do it. Because while this is being discussed at the highest levels of government everyday another major player on Wall St. takes the plunge into the world of Bitcoin.

This week it was Mass Mutual who put in another $100 million of its treasury into bitcoin. Even J.P. Morgan strategists are admitting what’s happening here.

In a note earlier in the week they noted:

Institutional investors flocking to bitcoin could put downward pressure on gold in the longer-term, according to a group of JPMorgan strategists led by Nikolaos Panigirtzoglou.

In a Tuesday note, they said that bitcoin’s near-term price is “skewed to the downside,” while gold looks more positive. However, they see the medium- to longer-term trending in the opposite direction.

“The adoption of bitcoin by institutional investors has only begun, while for gold its adoption by institutional investors is very advanced,”JPMorgan said. “If this medium to longer term thesis proves right, the price of gold would suffer from a structural flow headwind over the coming years.”

While I’m not advocating their commentary about gold, given that J.P. Morgan is always on the opposite side of gold as a company, admitting that institutional investors are now pushing into bitcoin is significant.

Wall St. loves money. They don’t care how they make it, including allowing billions to pump into something today knowing a major rule change is incoming to dump the losses onto their muppet clients tomorrow.

Years ago, during the early stages of the gold bull market Jim Sinclair warned all of us budding gold bulls that the very people today who are making your life miserable in gold, suppressing the price and playing their games, will be the very people who make the most money off the gold bull market.

That shouldn’t matter, however. His lesson was get comfortable with that, accept that reality and don’t try to time the peaks or the troughs, because you won’t be allowed to get them anyway.

With the evolution of the cryptocurrency market into a safe-haven asset capable of absorbing billions in inflows, Wall St. will make their vig on it. And Mnuchin will not be allowed to kill that golden goose too quickly.

I think this rumor is real but I also think, at this point in time, it’s mostly just headline MOPE—Management of Perspective Economics—trying to hold the line for a few weeks/months.

Because it isn’t like Mnuchin’s expected replacement, Former FOMC Chair Janet Yellen, will be any less hostile to an asset which directly competes with the Fed’s almighty dollar.

It was just meant to spew a little CO2 on this electrical fire and slow it down help keep things from getting out of control.

One last point about all of this, the DeFi market today is quickly becoming the new junk bond market. And it’s been that very market which has helped prop up asset prices, i.e. stocks, for years in the Fed’s zero-bound regime.

The search for yield in a mandated ‘yield-free world’ eventually creates the very markets the financial repression of central banks are loathe to admit doesn’t work.

Whether you would partake in Ethereum-staking projects or even think they are anything other than scams (which, likely, most of them are), like the junk bond market, they only exist because there’s a market for them.

People are pulling their coins off of exchanges into cold storage, they are staking them in projects like Wrapped Bitcoin (WBTC) to pull a yield off their HODL’ings. It’s happening and there’s nothing the Fed and Steve Mnuchin can really do to stop it.

They can slow it down, scare people off, but after more than a decade of zero return on capital, something has to give. DeFi may take Ethereum to levels which will likely break it once the next wave of investors come into the space.

Governments are always fighting the last war, while the markets innovate and leave them breathless and confused playing catch up. Just wait until the gold bugs and the bitcoiners put down their Hatfield/McCoy feud and build a real monetary system for the digital age.

Then things get really interesting.

This article was originally featured on the blog Gold Goats ‘N Guns and is republished with permission.

Bitcoin is Unbeatable

Bitcoin is Unbeatable

Bitcoin and cryptocurrencies are headline news again. DeFi—Decentralized Finance—tokens like LINK and others have exploded in recent weeks, capturing speculators’ imaginations.

But more importantly, given the day-to-day fragility of the capital markets and the political reality they reflect, governments are scrutinizing cryptocurrencies harder.

From the U.S. to China to Russia, governments are drafting laws and rewriting rules to disadvantage the use of cryptocurrencies. This is the main argument against them by hard money advocates and others who maintain that all that has to happen to destroy bitcoin is for the governments to make them illegal.

If that were to happen bitcoin would drop to $10 overnight, they say. I can’t tell you how many times I’ve heard this coming from the mouths of men who, honestly, should know better.

Because I have three words for you that blow open big gaping holes in that argument.

The Pirate Bay.

Can’t Stop the Music

For twenty years peer-to-peer networks have been the bane of the digital entertainment industry. Fire and brimstone have been hurled at the bittorrent community for more than a decade. However, a quick perusal of the major torrent sites reveals that everything the big media companies want you to pay top dollar for is still available.

Slap all the warning labels on the blu-rays you want. Redefine ‘victimless crimes’ in ways that do violence to not only language but the very concept of property rights but it doesn’t matter.

People, always, respond to incentives and the internet, which is vital to the state’s ability to maintain any semblance of control, was built to resist control.

All governments can do is put up artificial barriers to commerce to direct people differently, create perverse incentives and raise costs.

Has that truly ever worked? Has raising the cost of cigarettes stopped people from smoking? No. Health education has. All the taxes did was make government more powerful to feed the dominant political religion of the age, technocracy.

Look around the cryptocurrency space today. Look at the tax code in the U.S. and soon to be Russia, with the pending version of the Digital Currency law.

Classifying cryptocurrencies as property places it in the most disadvantageous category of asset for tax purposes imaginable except for where gold is.

It means every transaction in bitcoin is tracked for capital gains taxes, necessitating filing a 1099-B just like any stock trader, calculating cost basis for every single purchase you make with them.

Buy a candy bar with bitcoin, pay capital gains tax on top of everything else.

If you don’t think that’s tantamount to making it illegal to transact in bitcoin then I really think you need therapy, because it is. It is the ultimate perverse incentive to hold bitcoin rather than spend bitcoin.

This is the reason why Amazon doesn’t take Bitcoin, even though before the IRS classification it was experimenting it. It’s the reason why it doesn’t circulate.

Gresham’s Law is quite simple. Overvalued money (the dollar) drives undervalued money (bitcoin, gold) out of circulation. And, no Martin Armstrong, it is just as true today as it was when money was coins.

And that feeds the next bad argument from those who are smart enough to know better. Driving an asset underground only raises its price rather through a shortage of liquidity and hoarding rather than lowering it.

Liquidity and access to a commodity drives prices down, not up. It’s that pesky free market thing.

Bitcoin v. Gold – False Choice

Today’s bitcoin and cryptocurrency markets operate in an environment that is designed to keep normies out of them. And yet the prices of these assets keep rising and explosively.

Bitcoin Weekly ChartYes, that environment retards demand for these safe-haven assets, in effect capping the price. But all that price-capping can do is slow down demand, not wipe it out. Because people are rightly worried about the state of our society and the government’s ability to make good on its promises.

So, that also drives those demand for them as stores of value. Remember, all government edicts do is misdirect capital flow to the nearest substitute, not quash demand for the thing.

The counter argument to bitcoin is, of course, gold. “Buy gold not bitcoin,” say these monetary Luddites. Gold is real, bitcoin isn’t. And I agree with them, buy gold.

But, remember, gold is taxed as a collectible in the U.S. This is as disastrous a classification as you can get and yet, the hard money guys keep telling you to buy gold, even though the tax rate on selling gold is 28% rather than bitcoin’s 12% on capital gains.

No one in this community says not to buy gold then? 28% taxes on capital gains is as perverse an incentive as one can get.

Gold you can’t spend in the real world is, in effect, no more a ‘real’ money than a ‘digital’ bitcoin you can’t spend in the real world. Men whom I respect greatly fail to see this basic point that it the issue isn’t reality vs. digital.

The core argument is counter-party risk. That’s what drives demand for these assets. People demand things without counter-party risk during times of chaos.

And that is why the governments are in a classic Catch-22 and are only delaying the inevitability of their currencies’ demise. Everything government does increases counter-party risk while simultaneously driving up demand for assets without it.

I don’t believe for a second that this time around governments banning or outlawing gold will do anything. In fact, they won’t ban gold again not when they can simply, like with bitcoin, raise captial gains taxes to the point where there is almost no incentive to sell it.

Banning them is tantamount to admitting failure. Governments ban things to stifle competition and maintain its power. Banning bitcoin will only increase marginal demand in the long run, increasing the available capital for the cryptocurrency advocates to build systems resistant to the next phase of government intervention.

So, to recap so far.

  • Peer-to-peer networking is government intervention proof.
  • Bitcoin and gold have been driven underground by rules and tax schemes which make it prohibitively expensive to do anything other than buy and hold them. This, by the way, perfectly satisfies Gresham’s Law.
  • This dries up available supply making marginal demand ever more price inelastic. Low supply amid a marginal uptick in demand equals explosive price moves.
  • Bitcoin and gold are in the early stages of massive price appreciation.

The Dollar Strikes Back

This week the Fed put out its June meeting minutes and that gave markets an excuse to sell off, extending the weakness in the precious metals and capping the breakout in bitcoin above $12,000, which right now seems to be the latest Maginot Line (see chart above).

At some point you knew the Fed had to counter market expectations that they wouldn’t defend the dollar. They weren’t sufficiently dovish and that was all the markets needed to take some profit off the table.

I’ve been very clear in recent posts (herehere and here) that this weak dollar wave was being exploited for political advantage as much as anything else.

And I never wavered in thinking it was anything more than a counter-trend rally due to end when the reality of a sick global economy made its way back into the news.

Friday’s big news is that Europe’s economic rebound hit a snag. It won’t help that its political leadership are hellbent on locking their economies down to extend the fiction that COVID-19 is still a thing to cower in abject fear to.

That sent the euro down below $1.18 and it looks like the rally’s best days are behind it. Watch for a daily close there below $1.1722 for a sign of further weakness into September.

Because the dollar is still the U.S.’s most powerful weapon and the Fed will move to defend it for as long as it can. And that is the weapon they will use to break gold and bitcoin, not the legal system.

The Revenge of Logic

There are two further contradictions between the argument that governments can simply kill bitcoin by outlawing it.

The first is simple. It is predicated on the idea that government edicts are all-powerful. They are not. If they were then the Pirate Bay wouldn’t still be a thing and gold would still be $35 per ounce, per the Bretton Woods agreement.

The same people who argue for the beauty of competition and free markets and who embrace technology obviating out-dated systems refuse to accept that those same basic economic principles can be applied to money.

They want to fall back on tradition, gold, while denying that technology may have a better solution to the problem of government-issued credit.

Second, they argue for gold as a safe-haven asset which calls the bluff of central planners and technocrats. They also agree that we’re in a phase of the cycle where faith in governments is failing which is why gold is rising.

But they still cling to the idea that all governments’ have to do is point guns at us and we’ll stop being bad. They can decree a thing verboten and it will become so.

I guess their argument is that gold has magic fairy dust and bitcoin doesn’t. Or maybe, just maybe, they don’t understand the technology anymore than the people in charge do.

And that is why they fail.

Look, I know that the State is scary and, right now, awesome in its power. I have no doubt that it will do anything and everything to protect that power. We’re seeing that play itself out daily in our ridiculous media-frenzy-driven, hyperbolic politics.

But that, like so many things, is a short-lived, meta-stable state of being. The transition state from the current monetary system to then next will be messy.

Big Bitcoin

But taking a step back and looking at the bigger picture of Bitcoin today I see something that dwarfs that transition state, because, as a technology it portends a very different future.

Bitcoin Quarterly ChartThis half-log quarterly chart of Bitcoin is all you need to see where we are headed. It’s not rocket science. You don’t have to have a Ph.D in charting to see what’s what.

If bitcoin closes Q3 above $10482.60, the Q4 2019 high, that’s a two-bar reversal of a three quarter shallow downtrend within a three year consolidation pattern. It sets up a Q4 move toward the 2019 high around $14,000 and a break above that starts the move to $100,000.

Even if $14,000 holds for another two to three quarters, bitcoin’s base only gets stronger, not weaker. And with demand far outstripping available supply, the probabilities are higher for a move sooner rather than later.

We are three years into one of the most explosive consolidation patterns ever. The last one of this length saw bitcoin rise two orders of magnitude.

With Stock to Flow rising, meaning the rate of inflation is falling while the total hoarded pile is rising, marginal demand can easily push prices to levels that make even the most ardent bitcoin bull blush.

Governments are, as I said earlier, in a Catch-22. If they ban bitcoin demand goes underground, people simply buy and hold it. They acquire it however they can and new technologies come in (decentralized exchanges) come in to replace current ones (Coinbase).

If they don’t ban it then they allow the demand for it as a store of value and financial asset to flourish. It exists in a gray-area where you can use it but you really don’t want to. That allows another relief valve for capital to exit the dying debt-based system and wait for the storm to pass.

Either way, bitcoin and cryptocurrencies win.

Breaking the Law!

There is no upside in banning it because then governments can’t take some advantage of the situation, i.e. collect taxes in a time when tax hunting is the raison d’etre of broke governments.

So, to conclude Bitcoin has already beaten The Man. What happens next is exactly what is just beginning to happen now and what happened in gold in 2011 and Bitcoin in 2017. They will manage the price rise of them while the crisis they can’t avoid unfolds.

This will slowly build into a speculative mania in all of these assets, far above any sustainable supply and demand fundamental.

Then they will change the rules to trap late-comers filled with FOMO in unprofitable positions as they break the market in the short-term. This is what happened in gold in 2011 when they created a $500 billion central bank swap fund and in 2018 when cash-settled futures began trading on the COMEX.

Notice how neither time they changed the law, just the rules of the financial system.

And when that next break in these markets comes, which it will, they will collect obscene taxes when a lot of folks are forced to sell.

But the war for monetary independence will continue until they are no longer relevant.

This article was originally featured at the blog Gold Goats ‘N Guns and is republished with permission.

The Fed and the Road to QTM

The Fed and the Road to QTM

Milton Friedman famously said, “Inflation was always and everywhere a monetary phenomenon.” But Friedman didn’t live through the QE years here in the U.S. and blatantly ignored the twenty plus years of Japanese deflation despite QE and insane levels of money printing during the latter years of his life.

Because Friedman, like a lot of modern economists, adhered strictly to the Quantity Theory of Money (QTM).

And as an Austrian economics kinda guy I somewhat agree with the QTM. I agree with Ludwig von Mises on this, as you would expect. So, how do we square the QTM with the evidence that QE in all of its guises has resulted in deflation, as expressed by the general price level, where ever it has been tried?

Martin Armstrong ask this question all the time and is openly hostile to the QTM. And his arguments have some merit, because, as he rightly points out the QTM only looks at the supply side of the money equation.

It cares not about the demand side. He’s right about that. What he’s wrong about is that the Austrians, like von Mises, haven’t considered this either.

Demand for money is just as important as the supply of it. And during a crisis, the demand side of the equation for any particular currency may, in fact, be more important.

This is what the Fed has struggled with for the past twelve years. The demand for the U.S. dollar has far outstripped the increase in supply, causing a far lower aggregate price rise than anticipated by the QTM.

But money, like all commodities, goes to where it is most demanded by thos that obtain it. And Bernanke’s QE post-2008 crisis didn’t go to the people, it went to the banks and the banks and the government who did what they thought was best with it.

In trying to prop up asset values the Fed, however, blew bubbles in no only equities but also home prices, cars, education, health care, government regulation etc.

Offsetting that has been the destruction of price in things like food and energy, which are now far cheaper in real terms (and as a percentage of disposable income) than they’ve been in decades.

And this dynamic couldn’t change in the post-Lehman years under Bernanke if the Fed, like the Bank of Japan before them and the other major central banks today, allowed the money printed to actually circulate.

The QTM seems to fail because the money never circulated.

Bernanke ‘sterilized’ the new money, paying banks not to lend but rather hold the money on reserve with the Fed paying a nominal interest rather than engaging in traditional lending.

Because if he had done that the QTM would have risen up to bite him in the ass.

Bernanke understood that he had a demand problem. There was too much demand for dollars to service non-performing debt. But if he had let those trillions circulate it would have touched off an inflationary spiral as most of the money wouldn’t have gone to debt service but to bid up the price of base commodities.

So he chose to slowly bleed out the excesses of the previous credit-induced boom through time and attrition, just like the Bank of Japan, and slowly build the unavoidable inflation through the expansion of the money supply while demand returned to normal.

While the QTM ignores the demand side of the money equation, when the definition of the money supply and, more importantly inflation itself, doesn’t accurately describe reality the QTM becomes a hindrance to understanding what’s going on.

This is summed up in the question, “If Bernanke printed all these trillions, why is there no inflation?” To which Gary North, writing for Lew Rockwell all those years ago answered, “IOER.”

IOER = Interest on Excess Reserves.

To Bernanke he beat the QTM by paying IOER. Previous to Bernanke, excess reserves hovered around zero. The market always paid a better return than the Fed’s 0.25%.

But North was on it at the end of 2009:

The Federal Reserve can re-ignite monetary inflation at any time by charging banks a fee to keep excess reserves with the FED.

Anyone who predicts an inevitable price deflation does not understand that the present scenario is the product of legitimately terrified bankers and the Federal Reserve’s Board of Governors. At any time, the FED can get all of the banks’ money lent. But the FED knows that this will double the money supply within weeks. This will create mass price inflation.

Bernanke paid the banks not to lend and therefore most of the money printed didn’t circulate. It wasn’t part of the supply and therefore couldn’t cause inflation.

Moreover, credit money was contracting at that time. The top of Exter’s Pyramid was collapsing and Bernanke was trying to widen the base of the Pyramid by printing trillions in base money.

Exters PyramidBack then it was there was a fight pitting the inflationists led by Peter Schiff versus the deflationists led by Harry S. Dent, and to a lesser extent Martin Armstrong.

Some of that money circulated through the growth in government spending and the returns generated as second-order effects of rising stock prices, the so-called ‘wealth effect.’

In the end we got what the Austrians would expect. Asset bubbles in the things people buy on time at zero-bound rates—cars, houses, medical bills, college degrees, military weapons, war—and deflation in legacy maturing financial assets and high depreciation cost assets like infrastructure through capital starvation, waste and fraud.

The Yellen and Powell years were marked by them hoping to withdraw these ‘temporary’ funds from the banking system by raising rates and doing QT—Quantitative Tightening.

It didn’t work at all, precipitating a credit collapse last year thereby, again, invoking the threat of the QTM. Because now the world was used to these assets at zero-cost of carry, zero-bound rates, which inflated their prices..

And those prices were way too high relative to that old supply of money. Withdraw the funds and watch the money markets seize up.

This is why we Austrian types kept saying the “Fed was trapped!” There was no way to go back to the way things were because while the Fed may have run out the clock on the 2008 toxic asset pile, it created an all-new even bigger pile of toxic-assets-in-waiting by the time we get to 2020…exactly as predicted.

Worse than that the Fed internationalized that pile, spreading the cancer out the world over, by turning the dollar into the ultimate carry-trade currency.

The real pandemic we should be scared of in 2020 isn’t COVID-19 it’s the immense pile of un-payable loans of all types, commercial or otherwise. With the rise of MMT now we’re just openly admitting the debts aren’t payable.

And the Fed has done nothing so far to say that it has any cures for this disease other than mo’ money.

It may be the first bit of honesty we’ve ever gotten from them.

So, color me not shocked when I see the latest proposal to come out of the Fed to stave off the deflationary vortex, directly pump money into everyone’s bank account.

From Zerohedge:

The response was striking: they two propose creating a monetary tool that they call recession insurance bonds, which draw on some of the advances in digital payments, which will be wired instantly to Americans.

As Coronado explains the details, Congress would grant the Federal Reserve an additional tool for providing support—say, a percent of GDP [in a lump sum that would be divided equally and distributed] to households in a recession. Recession insurance bonds would be zero-coupon securities, a contingent asset of households that would basically lie in wait. The trigger could be reaching the zero lower bound on interest rates or, as economist Claudia Sahm has proposed, a 0.5 percentage point increase in the unemployment rate. The Fed would then activate the securities and deposit the funds digitally in households’ apps.

As Potter then elucidates, “it took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure. The Fed could buy the bonds quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more. The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side.”

Bringing us right back to Milton Friedman and, more importantly, von Mises and the QTM. Because now the Fed is not talking about injecting sterilized reserves into the money supply to create fictions of bank balance sheets.

Because, as Mises pointed out, once there are no more vacancies at the debt hotel now the QTM can be fully expressed. More supply equates to more inflation.

Now Friedman will be proven prophetic.

Because the Fed would be injecting money directly into the economy to stimulate aggregate demand because there are no more places to hide it and get any kind of future return.

Most of the world’s debt trades at a negative yield. IOER is 0.10%. National budgets are running at 20% to GDP deficits. Pension systems are trillions in arrears.

Now we’re at that moment where the old thought exercise of what happens when you inflate the money supply by 10% prices occurs. The answer is prices will go up by 10%.

Critics of the QTM, like Armstrong, argue that the Fed are obsessed with creating 2% price inflation in a deflationary environment. That’s not completely true. Because if they charge those excess reserves they can create whatever inflation rate they want in a heartbeat.

What they are obsessed with is doing that and bailing out the banks at the same time.

That they can’t do without destroying confidence which is a nice way of saying they are scared of the QTM calling their bluff.

Because no matter how you try to hand wave the arguments away, more money chasing the same number of goods is inflationary. One look at home, car, health care and education costs tells you exactly where all the inflation went.

Bernanke dreaded that scenario just like Dr. North said which is why he paid IOER while destroying the middle class through rising prices for real goods and wage stagnation.

He created trillions in latent inflation based on the U.S.’s capacity as the world’s reserve currency, stuffing the world with reserves it didn’t need to maintain asset prices it couldn’t sustain.

He undermined the validity of every other currency in the process to save the dollar. They’ve had to deal with the QTM biting them, but we only care about ourselves.

In an environment where most people’s time preference is short because they are literally fighting for their economic lives, this new stimulus money will go right into the things people needs right now—food, clothing, shelter.

Things are so bad for so many Americans now that they saved their first stimulus checks and only spent them on the bare necessities, forgoing any thought of paying down debt.

They used what’s left of their credit rating to feed themselves now on someone else’s dime and let the bank choke on their mortgage when the credit card is maxed.

This next round of stimulus money will circulate. The Fed will finally do what Bernanke tried desperately to avoid, print helicopter money.

Zerohedge is right, the Fed finally admitted that QE is deflationary because it signals to the markets that conditions are still too fragile after 12 years to invest in the future because there is no future.

Therefore the money given to the banks is hoarded as excess reserves because the potential return on investment is lower than IOER. Today Jay Powell stopped paying IOER, it’s 0.10% lower than Bernanke’s 0.25% and he still can’t get the money moving.

Excess reserves are rising again. Same playbook, worse results.

Execess ReservesThat was the first phase of this crisis.

Now that we’re past that part and if the Fed adopts this policy, it will hand us money to keep asset prices from falling by creating fake demand. All that will do is undermine the confidence anyone holding dollars abroad has in the U.S., the dollar and our leadership.

And then the QTM will be our problem, not theirs. Because demand for dollars will collapse and the circulating supply will rise. Gold is sniffing this out now.

Then, and only then, will the Fed achieve its inflation target…and beyond. And Milton Friedman will look down and say, “I was right.”

And Mises will look back at him and say, “Yes, eventually.”

This article was originally featured at the Gold Goats ‘N Guns blog and is republished with permission.

Risk? We don’t Need No Stinking Risk!

Risk? We don’t Need No Stinking Risk!

We’ve crossed the monetary Rubicon. There is no going back to the way things were. With the creation of a series of Special Purpose Vehicles (SPV) the Treasury Dept. and the Federal Reserve have fundamentally altered the financial landscape of the United States.

We are no longer a country that tolerates the risk of capitalism. To be honest, we haven’t been that country for a very long time. Steadily over the course of my life (I was born in 1968 the year the London Gold Pool failed), the global monetary system has cut tie after tie to the discipline of the free market in money.

With the U.S. at the center of the system, it was inevitable that we would reach the point of no return once there was no other way to reflate the system.

And it has been in the service of arrogating the power of money creation, and by extension the power that confers to the printers, to a global oligarchy I’m fond of calling The Davos Crowd.

My last post was an open letter to these folks letting them know that no matter how much they try to scare us into accepting a world where they have total control over our lives their chances of success are limited because we can see them and what they are planning.

The response I’ve received from people to that post confirm my view on this. Few things I have written have generated the kind of passion I’ve seen from folks.

And this Davos Crowd is the most risk averse of any crowd there is. Because near unlimited power makes you both paranoid and stupid. Paranoid that the power will slip from your grasp and stupid because you believe yourself immune to the consequences of your actions.

They use that insane power of the printing press to erect walls around competition and ensure nothing but one-way trades where no matter what ‘risks’ they take, someone else pays the price for their failure.

Their failures are nearly complete today. Because when you divorce money creation from the discipline imposed by the proper pricing of risk you divorce the application of that money towards sustainable and productive activity.

These people were always monetary Marxists. And the Austrian economists of the last century accurately called them out on their methodological errors while ruthlessly applying their reason to predict exactly why it would all eventually fail.

Because mispricing risk by mucking with interest rates alters the structure of production to misallocate capital from where it is actually demanded in a free market for money to what they want to use it for: global governance, endless wars and the subjugation of humanity.

Money flows into projects which wouldn’t be funded otherwise and at the end of the business cycle reveals them to be uneconomic. This is why we’re staring at a world today that only needs 70-75 million barrels of oil per day versus the 100+ million we needed just last month.

This is why we’re staring at a world of endless strife and conflict and not one where the biggest thieves are brought to account for their actions but seeminingly rewarded for it.

And with each intervention to prop up asset prices, by keeping interest rates at or below zero, all that happens is the uneconomic businesses stay functioning far longer than they should have, ensuring that the next time the cycle turns against them, the needed intervention will be even bigger.

This is why every time there is a crisis the numbers get bigger, the responses more ludicrous and the effects on the real economy ever more brutal.

And guess who always bears the brunt of the collapse? Those that caused it with their profligacy and thievery? No.

You do. I do. And our children do.

When government creates a risk-free trade in one area of the economy it forces inordinate risk onto another area. It turns everyone into speculators and not builders of wealth. The money they print raises the demand for those commodities which they value while retarding the demand for the ones we value.

This is why the Quantity Theory of Money fails. It’s why the CPI and GDP are poor metrics to set in opposition to justify more money printing, more government intervention and bigger bailouts.

It only looks at the supply of money but ignores the demand for it. And right now, thanks to a biblical short position against the U.S. dollar demand for money is still insanely high.

It will allow them to ‘get away with this’ for another period of time.

Mises laid all of this out in The Theory of Money and Credit in 1912. The basics are all there in chapter one. And it’s why we’ve reached the end of the fiction of a debt-based monetary system here in the U.S.

But once the demand subsides, the money is still there. The latent inflation that doesn’t show up in the CPI is still there. There is no calling this money back in without deflating asset prices and causing the exact situation they are avoiding today.

We’ve reached the end of laying off risk onto a greater fool. There is no one else to sell the next round of debt to to finance the bailouts. So, now the Fed and the Treasury have merged, as Jim Bianco pointed out two weeks ago, to ensure the free flow of money completely unmoored from risk.

This is the Rubicon I said we crossed at the beginning of the article.

This allows the U.S. government to complete its transformation into an entity wholly indistinguishable at this level from China with state ownership of strategically and systemically important businesses.

From my latest piece at Money and Markets:

This, folks, is pure MMT — Modern Monetary Theory. The Fed is creating money out of thin air having bought the debt they never intend to sell from the Treasury so that it can buy whatever it wants and will have Blackrock (NYSE: BLK) be the fund manager, to make the whole thing quasi-legal.

The only functional difference between this and Lincoln’s Greenbacks of the Civil War year (1861-63) is the accounting fiction of the asset (U.S. Treasurys) on the Fed’s balance sheet.  Functionally, there is zero difference.

And the funny part about this is that it was done by the so-called fiscally responsible Republican president. Now Trump is happy with his Federal Reserve Chairman, Jerome Powell. In order to save the stock market, the frackers, the municipalities, the 16 million people who have lost their jobs in the past three weeks (and possibly the stink bugs hounding my blueberry bushes), they will print whatever money is needed to forestall the cure for what ails the world — deflation.

They will buy whatever assets they feel they have to (or just want to) to save their skins and maintain the power amassed to this point. The moral hazard will be as biblical as the short position against the dollar. The outright thievery of good businesses ruined by this bust will happen right alongside the bailout of of the crappy ones.

And they will expect us to thank them for it.

Risk isn’t just something for the other guy to worry about. It is the nature of life itself. They can avoid it for another phase of the cycle but they can’t avoid it forever.

Because the real risk on the table today is the risk of us no longer believing that funny money holds any value at all. When we’re sitting at home, out of work and destitute and prices for the things we need to stay alive rise above our ability to pay for them, that’s when things get real.

Follow Tom Luongo at Gold Goats ‘N Guns

Now, We Get Local. Now The World Gets Real

Now, We Get Local. Now The World Gets Real

“Reality is that which when we stop believing in it doesn’t go away.”    Philip K. Dick

In March of 2003, we broke ground on the first real thing I ever built, the house I currently live in. Then I understood that there was only one way this economic and political system ended, badly.  And I knew then that I was woefully unprepared for the challenge. When I started building my house I could barely drive a nail straight. By the time the first part of it was finished I could lay a square of asphalt shingles with the best of them…. if only until about 10 am or so.  I could now solve logistical problems of much larger scale. I learned that building a house wasn’t one big task but a million little ones, some good and some, well, not so good.  My wife and I had a lot of help, to be sure. We leveraged the skills, labor and knowledge of family and friends.  My house became a kind of community project with some weekends having as many as eight or ten people milling about like semi-competent Amish men setting trusses, digging trenches and installing windows.  And I’m forever in the debt of those who gave up their Saturday to work in the singularly horrific heat of a north central Florida summer, a place I’m sure Dante had in mind when he wrote about the eighth circle of Hell.  I figured then we had about five to eight years before the system would break. During the 2008 crisis I was convinced that, ‘This was it.” It turned out to be bad but the world wasn’t quite ready to give up on the system it had built.  And we allowed the central banks to coordinate a global bailout. But that was granted with the explicit understanding that there would be no next time or there would be hell to pay on both sides of the traditional political aisles.

Welcome to the Coronapocalypse.

Regardless of what you may think about the origins of COVID-19, bio-weapon or not, ‘just the flu’ or the new plague, the reality is that it is here. The response to it is real and the damage it has had on the global economy is real. It doesn’t matter at this point in time whether the response is the right one or the wrong one. Because in an age where perception is more important than reality and has been that way for so long, we have no real frame of reference to guide our conclusions.

Prices and costs have been distorted beyond all recognition to the saved capital they represent. The epic meltdown of markets speaks to just how insanely overvalued the world was once the layers of credit contracted.  In the end, all we have are our observations. And those observations are intensely personal. And most of the the time the conclusions we draw from them are wrong no matter how tightly we believe in them.  Be that as it may, we still have to make choices. We still have to act.  And, if this is truly now a survival-like situation, one that I personally tried to prepare for nearly a generation ago, that means we have to deal with reality.

We have to put away the childish things we’ve been fighting over for the past five years politically. How ridiculous and insipid do the identitarian fights over gender, race, sex and color look now? How dangerous and stupid does all that capital, that time spent, look now in hindsight when today people with skills, humility and high executive function are needed? Do you really care today if the guy behind the meat counter at your local supermarket is a MAGApede or a Bernie Bro, hates gay people or is a closet transsexual? If you do then I suggest you stay home and reassess your priorities and your choices. The reality is that now that the damage to the economy has been done we will need each other more than ever, regardless of what we thought about each other yesterday.

The reality is governments are grabbing for insane levels of power. Martial Law is here in Europe. The U.S. isn’t far behind if we look at how some governors and mayors have acted. The reality is that the more power governments grab the less capable of protecting you, your family and your community it was before that. It will view you as a threat. It will treat you as less than human because your disobedience threatens their control. If the Trump administration is smart it won’t go there. If Trump wants to ensure the U.S. is the destination for global capital in the near term, he won’t go to where Europe goes. Because the way to restore confidence in a currency, a people and a government is to not panic. Lead and show competence and trust.

Those that over-react, enforce one-size-fits-all mandates become incapable of solving problems, only maintaining the current misery. So we have to be strong enough and brave enough for commerce to flow. If you aren’t then stay out of the way of healthy, low-risk people taking real risks necessary to keep the lights on, the sewers functioning and the food supply from collapsing. Celebrate that guy behind the meat counter or restocking the shelves. Because the life he saves may be yours and vice versa. Yes, some people will make the wrong choice, but most won’t. Stop using them as straw men to grind your political axe. Old habits die hard but guess what? You’re not an old dog.

We’re moving into that dangerous area of zero tolerance which implies maximum costs for marginal net benefits. Striking the necessary balance to keep our communities alive is how we best fight back against these threats — the government overreach or the virus itself. It means realizing that bad people will do good things and good people will do bad things.

It means decisions made today may need to be reversed tomorrow. Top down order separates us from our greatest strength, our ability to try new things, solve new problems and turn what is into what will be.

It means keeping your opinions tempered, your humility high and finding ways to solve real problems that alleviate current and potential suffering.

It means realizing you don’t have all the answers, and pretending like you do is literally a matter of life and death.

The economy isn’t some big aggregate thing. That’s the fundamental flaw of all dominant economic thinking, these concepts of aggregate demand and aggregate supply. They don’t exist. They aren’t real. We talk about them like they are but they aren’t. They are pale and unfocused reflection of trillions of small decisions taken by billions of people everyday. And no matter how much you try to model reality by looking at the big numbers, the reality is that you only see things through the densest of fog, near blind and full of hubris. This is the central flaw in all forms of central planning, the lack of specific knowledge to come up with the right policy decisions. That’s not ideology. That is fact. Any guess at my behavior, no matter how educated, carries with it a measurable error which when multiplied by the number of decisions I make per day and the number of people whose actions you are trying to aggregate makes the entire exercise a futile and dangerous attempt to play god. Even God doesn’t play dice with the Universe. And the sooner we give up our grand ideas of top down control through the decisions of wise and insouciant verified smart people the sooner we can deal with the reality of the life in front of us.

Today the world is contracting, not ending. It’s a smaller, tighter world than it was yesterday. That means the closer your relationship to someone, the more valuable they are. The people in charge now if they are competent, if they have a shred of decency and humility, will realize by getting out of our way we can thrive. And if they won’t, then we have to do the other thing humans are really good at, subverting crude attempts at control.

That’s not ideology folks, that’s who we are. And I love people for it.

It’s simply giving up control over what you cannot and staying focused on what you can. It’s the humility to know that I don’t have the answers to the problems of the world but maybe the problems don’t exist as I think I see them.

We’ve been given a huge wake up call that what we’ve built is a house of cards. You’ll hear a lot of cries for people to ‘get local.’ Use the time you have in front of you to build skills you didn’t have yesterday. Find ways to be more valuable to those nearest you that may need you tomorrow.

Forge real relationships with people you never thought you could.

But most importantly, it’s time to stop denying that which is in front of us.

Because, try as we might, it isn’t going away.

Follow Tom Luongo at Gold Goats ‘N Guns


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