I saw an advertisement for "Gold Denominated CDs" (Certificate of Deposit). They are offered by Everbank. When I read the detailed terms of the CD, I was deeply offended. They are a scam, just like Liberty Dollars.
The "Gold Deonomicated CDs" are FDIC insured, just like any other deposit. Your principal is guaranteed. Even if the price of gold tanks, you are guaranteed your original investment back.
The CDs I looked at were offered for a term of 5 years. The gain is based on the average price of gold, sampled 10 times every 6 months. If the average price of gold over the next 5 years is 50% more than when you bought the CD, then your return is 50%. If the average price of gold over the next five years is 25% less than when you bought the CD, your return is 0%; your principal is protected.
Do you see the scam yet? I'll give you a chance to figure it out for yourself.
If you can't see the scam yet, you are completely illiterate about economics. I'll provide some spoiler space, as is customary.
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To see the scam, let's work out an example. Suppose the price of gold is $800 when you buy the CD, and the price of gold goes up at a uniform rate of $100/year. (In practice, it would be exponential growth on average, but that makes it an even worse deal for the CD buyer.)
After 5 years, the price of gold is $1300, and the average price of gold was $1050. A direct investment in physical gold would have yielded a return of 62.5%, but the stupid CD buyer received a return of 31.25%.
The bank who sells the CD buys gold put options, as insurance against a tank in the price of gold. Initially, the bank buys gold futures equal to the amount deposit. After one year, now the exposure to gold is only 4/5, and the bank only needs gold futures equal to 4/5 of the amount deposit, and so on. I summarize now.
In the first year, you have 100% exposure to the price of gold.
In the second year, you have 80% exposure to the price of gold.
In the third year, you have 60% exposure to the price of gold.
In the fourth year, you have 40% exposure to the price of gold.
In the fifth year, you have 20% exposure to the price of gold.
In years 2-5, the bank can invest the surplus in any riskless investment, such as government bonds.
Instead of buying the "Gold Denominated CD", you could buy the right combination of gold futures and put options, and be guaranteed a better return. The bank selling the "Gold Denominated CD" can make a guaranteed riskless profit by investing in the right combination of gold futures, gold put options, and government bonds.
An outright gold investment would be a superior investment, hedged with put options if you want protection against a contraction of the money supply. The value of gold itself does not tank, but the dollar-denominated price of gold could decrease if the money supply shrinks during the bust phase of the economic cycle.
If you do not understand the above explanation, IMHO your level of financial literacy is zero.
As always, if you want to invest in gold, physical metal in your possession is the safest investment, provided you can store your metal in a safe place.
Monday, January 7, 2008
The Gold CD Scam
Sunday, January 6, 2008
Hyperinflation - Could it Happen in the USA?
Could the US economy suffer from a hyperinflationary collapse, just like other countries have? Some economic historians say that a hyperinflationary collapse is the only way a fiat monetary system can end. None of the countries using fiat monetary systems have had the same currency for more than 100 years. The US is the oldest surviving fiat currency. Most European countries had their currency collapse to zero during WWI or WWII.
The US has had fiat money since 1913, 1933, or 1971, depending on how you count. In 1913, the Federal Reserve was established. In 1913, the Federal Reserve started printing more dollars than physical gold was in the US treasury. In 1933, President Roosevelt stole all the gold from US citizens. US citizens were unable to redeem their dollars for gold, although foreign central banks still could. In 1971, the US government defaulted on foreign countries' ability to convert dollars to gold.
Since 1971, not a single currency in the world has been convertible to gold or a tangible asset. Other countries use US dollars as reserves as if they were still backed by gold.
China has a huge amount US dollars and government debt. The saying is "The US is exporting its inflation to China". China is willing to load up on US dollars for several reasons. First, China views full employment for its people as more important than a bookkeeping profit on its dollar reserves. Second, a lot of US technology and factories are being exported to China. Third, this huge dollar holding gives China huge leverage it can use in negotiations with the US.
When a Chinese business sells products in the US, the Chinese business is paid in dollars. The business then turns its dollars over to the Chinese government in exchange for newly printed yuan, China's currency. The Chinese government is simply holding onto these dollars, investing them in US government bonds. The money supply in China is increasing, because Chinese businesses are exchanging their dollar surplus for newly printed yuan. China's government is just sitting on these dollars. This means that the money supply in China is increasing while the amount of tangible goods in China is staying the same. The US is, quite literally, exporting inflation to China.
For how long is China's government willing to accept a 5-10% loss per year on its dollar holdings? The value of China's dollar holdings are being eroded by 5-10% per year due to inflation.
China could, if it wanted, trash the US economy and show a profit at the same time. It would be just like in that "Trading Places" movie, where the two main characters make a fortune and ruin their enemy at the same time.
China could wreck the US economy in 5 minutes and simultaneously show a profit. China could, on every single dollar-denominated futures market, at the exact same time, buy the maximum amount of dollar-denominated assets it could. Each futures market has a limit to how much the price can move in one day. Suppose that China bought as much as it could, pushing the market limit-up in gold, silver, oil, copper, iron, food, etc., ALL AT THE SAME TIME. It would have to be well-coordinated, so that the buy orders would be placed on every exchange simultaneously. China could probably push every single market limit-up and still not have spent all its dollars.
China could start converting its US bond holdings directly to cash or short-term bonds, so it wouldn't lose when the US has to raise interest rates to fight hyperinflation.
The point is that China can dump all its dollar holdings in a few minutes. When other countries found out that China was selling dollars, they would see that the inevitable run on the dollar had started. Everyone else would start dumping their dollars.
The value of a dollar would collapse. Then, having initiated the run on the dollar, China could buy back its dollars after the dollar tanked. It probably would wind up with more dollars than it started with, plus all the commodities it had bought.
What would happen from the point of view of a person living in the US? I'm not sure what percentage of the total outstanding dollars are held by foreign countries. Suppose that 50% of the outstanding dollars are held outside the US. When other countries simultaneously dump all their dollars, these dollars will find their way back to the US. In other words, prices in the US would approximately double.
Suppose prices did double in a month. Would that be the end of hyperinflation? No, because once people in the US see inflation is out of control, they will refuse to hold dollars. Anyone who receives dollars will immediately spend them before prices go up. They'll spend their dollars on retail goods or gold or stocks.
What happens at the start of hyperinflation is not just an increase in prices. What also happens is that the velocity of money increases. When a currency is rapidly being devalued, people will refuse to hold onto it. Anyone who acquires rapidly inflating currency will try to spend it as fast as possible. This increases the effective amount of money in circulation.
What would happen if the Federal Reserve raised interest rates? Bond yields would rise. The Compound Interest Paradox would suck money out of the economy. But, all the new Treasury Bonds auctioned would be at a much higher rate. More dollars would need to be issued to pay off the bonds.
The way the system would break is that the income tax system would fail. If I do a barter transaction in January, I do not need to pay the tax until later. Under normal inflation, the dollars owed in tax will be comparable to the value of the transaction.
In a hyperinflation scenario, if I do barter now, and pay income taxes later, inflation works in my favor. By the time I pay income tax, inflation has eroded the value of the transaction.
Hyperinflation would force people to return to using barter. Currently, income tax is a disincentive to using barter, but during hyperinflation income tax is an insufficient disincentive to bartering. Further, when people are using barter instead of dollars, the demand for dollars will drop even further, forcing dollar-denominated prices even higher.
Hyperinflation would also destroy banks. The loans they had issued would be repaid with now-worthless money. Their net worth would be a large number of dollars, but those dollars would now be worthless.
Hyperinflation destroys the financial system because it reduces the effect of income taxes penalizing people for doing barter.
There is another way the dollar could collapse in hyperinflation, via an agorist revolution. Suppose a lot of people started refusing to accept dollars as payment for working, switching to gold, silver, or barter. Suppose the people agreed to not report each others' work to the government for taxation and confiscation. As the amount of goods that could be purchased with dollars decreased, the size of the agorist economy would increase. Eventually, the dollar-based economy would be like a foreign country relative to the agorist economy. The dollar would collapse in hyperinflation. As the government collapses, the agorist community would provide the services formerly provided by the government, preventing total chaos from occurring.
Saturday, January 5, 2008
Reader Mail #25 - Pro-State Trolling
I liked this article on Life, Love, and Liberty. The government is busy creating a "terrorist watch list". People should get together and create a list of which people are actually trustworthy and reliable. This would be a useful resource for an agorist economy. You would need to know who's a safe trading partner!
I liked this article on Intemperate Remarks.
But perhaps all is not lost. Per Bylund argues that Govt schooling, like all Govt programs, is a failure because a small number of radicals manage to escape the brainwashing. That would be incorrigibles like yours truly.
Subjects like Mathematics must be taught honestly, otherwise gadgets and electronics would not work! Plus, someone who lies while teaching Mathematics is easily caught! It actually is possible to learn how to think in a government-sponsored school, provided you take the right subjects!
That's one of the reasons most people are taught to dislike Math. Otherwise, there would be too many people capable of thinking! Some people do need to learn how to think, in order to keep things working smoothly.
I liked this collection of Stock Market cartoons.
This post on redpillguy's blog about training monkeys is interesting. I've heard that story before, and I don't recall if I mentioned it here before. I was thinking of naming this story "The Monkey Paradox".
You put a banana on top of a ladder in a cage of monkeys. Whenever a monkey tries to climb the ladder, you spray all of them with cold water. Eventually, the monkeys stop attempting to climb the ladder. Replace one of the monkeys. That monkey will attempt to climb the ladder to get the banana, and the other monkeys will stop him. One by one, replace each of the monkeys. None of them will attempt to climb the ladder, even though none of the remaining monkeys ever was sprayed by cold water.
This post on Overcoming Bias about the Asch Conformity Test is the same experiment, but with humans! A group of humans were asked in sequence "Which line has equal length to line X?" The correct answer was B. The first several respondents were confederates of the experimenter, who falsely answered C. This caused the test subject to also falsely answer C.
Adding a single dissenter - just one other person who gives the correct answer, or even an incorrect answer that's different from the group's incorrect answer - reduces conformity very sharply, down to 5-10%.
In other words, a sole dissenting voice releases conformity from nearly 37% to only 5%-10%!
Being the first dissenter is a valuable (and costly!) social service, but you've got to keep it up.
I guess my blog really is providing a useful service!
For areas where the details are REALLY THOROUGHLY OBSCURED, like money and politics, being the sole dissenting voice becomes a much more valuable service!
In other words, it REALLY IS a good idea to tell people when they indicate they aren't thinking clearly. A single dissenting voice is enough to get the ball rolling in the right direction.
This post on Overcoming Bias gives more details. Most people aren't able to distinguish between "expressing reasonable concern" and "being obnoxious". In other words, most people follow The Strawman Fallacy.
If you perform the group service of being the one who gives voice to the obvious problems, don't expect the group to thank you for it.
This post on Overcoming Bias talks about the Asch conformity experiment some more. It talks about the value of being the *FIRST* dissenter. It also mentioned that the experimental subject felt deep camaraderie for the other truth-teller in the experiment.
But you can only join the rebellion, after someone, somewhere, becomes the first to rebel.
I liked this article on Techdirt about Hollywood making digital archives of its movies. They're using proprietary encrypted formats that go unsupported after a few years. If they used one of the generally-accepted movie formats, it wouldn't be a problem.
I liked this story on Techdirt. Due to Internet competition, salaries for sports reporters are being bid up to obscenely high levels. This is at the same time there are complaints of "The Internet is killing journalism!" There are several interesting points:
- Sports journalism is usually sincere honest journalism, compared to the fake "news" in the rest of the paper. If only the Federal Reserve received the same level of scrutiny as steroid use by baseball players!
- Sports advertising is very lucrative, especially when you consider the number of people who follow a popular sporting event.
- On the Internet, you can read an article minutes after a sporting event is over. With a newspaper, you have to wait until the next day.
- Internet competition is de-cartelizing the industry. You have Yahoo, ESPN.com, and other websites competing for stories now.
I found this article on Techdirt amusing. A commercial used 2 sentences from an MIT professor's lecture without permission. There was a threat of a copyright infringement lawsuit and a settlement. This really falls under "fair use".
I would be more offended about someone copying without citation, rather than pursing a copyright claim. I don't recognize intellectual property as a valid form of property. If you copy my stuff, provide a link back!
I liked this article on MacRaven. The Egyptians are attempting to copyright the likeness of the pyramids and other landmarks. Copyright law is being extended retroactively to 3000 years ago!
I liked this article on Techdirt. It talks about the difference between an "inventor" and an "innovator". An inventor is someone who invents something new. An innovator is someone who takes a new idea and profits off it. In many cases, the innovator took advantage of defects in the patent system or legal system to profit at the expense of the actual inventor.
For example, Amazon.com was not the first online bookstore. EBay was not the first online auction house. Google was not the first search engine. In many ways, they were "innovators" instead of "inventors". The innovators are usually people who have substantial financial backing from the financial industry. The "handful of guys working out of a garage" is more of a myth than fact, although it was sincerely possible to succeed that way at the start of the tech boom.
I would like to be an "innovator" for agorism. I have some original ideas myself also. I'm primarily interested in getting agorist trading groups started.
I found this story interesting. It was referred by Austro-Athenian Empire. The story was about a king who passed a law regulating the number of times per minute people were allowed to breathe. By mistake the law was allowed to expire, and the king was surprised to find people still alive in violation of the law.
Someone made the following argument to me in support of Microsoft:
Millions of man-millennia went into the production of Vista and Office. For only $400, it's a bargain!
That statement has as a hidden false assumption that all those years of work were productively spent. Like all large corporations, Microsoft receives massive government subsidies. Because Microsoft sells so many copies, its costs are easily amortized. Microsoft's monopoly means that its actual costs of production are largely irrelevant.
Even if I could assemble a crack team of 20 programmers and produce a better OS than Microsoft, it wouldn't be economically worth it. There's no way I would generate enough sales to justify the effort. If I were able to assemble such an elite team, it would be much more profitable to work on a product that wasn't directly opposed to Microsoft's monopoly.
Let's consider an analogy:
Thousands of man-millennia have been spent developing the current body of US law. You should be grateful that's available for you to use!
Just because a lot of time was wasted on something, doesn't mean it has any actual value or an alternative wouldn't be more productive.
The economies of scale of software point towards a single vendor. There are genuine efficiencies that arise from everyone using the same OS written by the same vendor.
The problem is that DRM laws and bans on reverse-engineering make it legally risky for someone to develop a Microsoft-compatible OS.
Microsoft got its initial market position as a gift from IBM. IBM had a government-endorsed monopoly. Bill Gates' political connections enabled him to be handed a great start from IBM. On the other hand, other software businesses have gone to lofty heights and fallen, so Microsoft must be doing something right. In the present, Microsoft's huge cash reserve and market position give it a huge margin for error. Other software businesses make one mistake and they've lost their market share to Microsoft. Microsoft can make big mistakes and recover.
Microsoft received another boon. A third-party reverse-engineered IBM's BIOS. They were able to make an IBM-compatible chip without IBM's permission. Current laws would make such a feat illegal today. This competition in hardware meant that Microsoft's OS was the key feature of a PC and not the hardware.
For example, suppose I'm able to reverse-engineer the XBox and manufacture XBox-compatible hardware, or a PC XBox emulator. Under current DRM laws, I have committed a crime if I try to sell it. Suppose I crack the encryption used by the XBox and sell XBox games without Microsoft's permission. Again, current law dictates that I have committed a crime.
I liked this article on Downsize DC. Congress passed a 3,417 page spending bill. It was passed within 2 days of being submitted for a vote. One Senator complained that he didn't have time to read it. Another Senator retorted "TWO FULL DAYS IS PLENTY OF TIME". In order to have read the entire bill, you would have needed to read 1.25 pages/minute, without sleeping.
Another interesting comment was that the committee hearing minutes are attached to the bill. Apparently, they have full force of law as well as the bill itself.
I liked this George Carlin clip. He really looks old! I wonder if he's been reading my blog?
I've been considering starting a standup comedy performance based on my blog. If that George Carlin clip is "comedy", I could do as well or better.
In Reader Mail #24, redpillguy asked me if I knew of any criticisms of the Anarchist FAQ. I found this article. This criticism of the Anarchist FAQ is as lousy of the Anarchist FAQ itself.
According to Unqualified Offerings (and many other sources), Ron Paul is going to be excluded from the next Fox News debate.
According to other sources, this story has been misreported.
Anyway, "Ron Paul excluded from debate" sounds like a reasonable story to me! Besides, even when they invite him, they don't give him equal time and ask him biased questions. He's been excluded from the debates he attended!
If I were involved with Ron Paul's campaign, I would release a series of videos directly to YouTube.
According to Google Analytics, my blog had 1207 Absolute Unique Visitors in December, up from 729 in the previous month. I had a spike of traffic due to Real GDP Growth Has Been Negligible Since 1990. It was mentioned on lewrockwell.com and then on a bunch of other sites. My regular readership appears to have doubled after that post.
According to Google Analytics, 20 people have visited my blog over 100 times total.
According to Google Analytics, 299 of the people who visited my blog in December visited it over 15 times, compared with 125 a month ago.
"Organic growth" seems to be working well for me.
On The Mistakes Anarchists Make, M. Altermark says:
I don't many (authentic) anarchists consider institutions or certain kinds of behaviours as evil - but they do have much going when they argue that one must look behind the larger social machinations that lead to a certain system being enforced, oppressing the working class.
According to your blogger profile, English is not your first language. I have no idea what you're saying.
On the Social Credit Monetary System, rashomon trolls:
Your post seems to be describing (quite accurately) a Local Exchange Trading System (LETS) as initially described by Michael Linton in 1982 (often referred to as a mutual credit system with promotion of goods offered by participants) instead of what is generally referred to as Social Credit, as proposed by CH Douglas early in this century.
Key elements of the Social Credit system, as it is generally known, are:
- price controls
- government issuance of currency (vs. bank issue)
- government money makes up difference between cost of production and money in circulation
All of which require a central authority for implementation. The whole point behind social credit in a typical proposal for implementation is distribution of a basic income to ensure that purchasing power is available broadly. You'll find a lot about it by looking at Guaranteed Basic Income on the web.
While I do appreciate your posts, it would help to use the commonly-accepted terminology.
To use a recently-defined FSK term, you're "pro-State trolling".
LETS doesn't work. The problem is that a LETS network is a centralized alternate monetary system. A LETS network is required to report all transactions to the government for taxation. The participants of a LETS network do not benefit, because they still need government-issued money to pay income taxes. An alternate monetary system does not provide economic benefit for the participants, unless it enables them to work without taxation.
I first read about Social Credit in "The Money Myth Exploded", by Louis Even. According to Louis Even, Social Credit is a decentralized stateless monetary system, exactly as I described.
Like all important economic ideas, "Social Credit" has been bastardized. There are several different definitions circulating for the Labor Theory of Value. "Social Credit" as sponsored by the Social Credit Party bears absolutely no resemblance to Social Credit as described by Louis Even.
I didn't discover "pro-State Social Credit" or "Social Credit for Wimps" until after I wrote my "Social Credit" post. I'll make an updated version of that post at some point. I consider my version of Social Credit to be "Real Social Credit" or "Stateless Social Credit".
The idea of "Social Credit for Wimps" is that, to compensate for the Compound Interest Paradox, the government introduces new money by directly giving it to the people. The benefits of money supply expansion are spread evenly across the population, instead of being concentrated in the financial industry. That runs contrary to the Supreme Leader of Humanity's agenda for complete economic enslavement of everyone.
That's another good rule: If there are multiple circulating definitions for the same economic idea, you can be sure that economic idea is important. This applies to "The Labor Theory of Value" and "Social Credit".
On The Market Anarchist Blog Carnival, Francois Tremblay says:
Yes, the Market Anarchist Carnival is still in its infant phase and the word needs to be propagated. This is generally a slow process. We just need to keep going at it and keep linking to it and make it known.
I'd be willing to do it again in a few months. The Carnival post got enough visits to make the "Best of FSK" list, but it didn't generate a noticable traffic spike for my blog.
I'm wondering if the Carnival was read more by people who are already regular readers, than by people who specifically visited to see the Carnival?
On The Market Anarchist Blog Carnival, David_Z says:
Great carnival despite the content...
Expect a "Labor Theory of Value" post of my own in the near future, in which I think I can reconcile our earlier disagreement.
I think it is mostly an issue of definitions. "The Labor Theory of Value" is something that has many different definitions in different sources, just like "Social Credit". In both cases, I picked the definition that made the most sense to me.
If you disagree with my analysis, let me know. My conclusion was that in an REALLY free market, a worker's salary is proportional to the actual economic value of his work. If you disagree, I accuse you of "pro-State trolling".
You also said you were going to write up a description of how stateless free market justice would work.
Post a link when it's done.
On The Market Anarchist Blog Carnival, Zhwazi says:
Woot, I didn't even enter and got my whole blog pimped. Thanks!
Your blog is better than almost all of the entries that were "officially" submitted. I put a link to your new blog when you first started it.
IMHO, keeping up a regular posting schedule is important for attracting and retaining readers.
I've been wondering: How much traffic do I direct to someone's blog when I mention it? Has anyone been keeping track? The author of the Picket Line seems to appreciate that I mention his blog sometimes, so I must be directing him some traffic.
Zhwazi's latest post was interesting. There was one part where Zhwazi was also guilty of "pro-State trolling".
I'd throw humans under "loss-oriented" for fearing the loss of an improperly valued identity.
When you say "Humans are intrinsically loss-oriented", you are pro-State trolling. Most people are "loss-oriented" due to State brainwashing and schooling. That is not an intrinsic human trait.
"Loss-oriented thinking" means that, when making a decision, you consider the worst-case outcome instead of the average expected outcome. Suppose an investment strategy yields a return of +300% half the time and a full 100% loss half the time. If you're a "loss-oriented thinker", you will avoid this investment. If you are capable of thinking, you will make this investment, but you will be careful to not risk all your savings on it.
Zhwazi raises another interesting point. Do I have a responsibility to try and educate everyone, or only those who have a clue? If almost everyone is the victim of State brainwashing, aren't we responsible for helping them? On the other hand, the same information is available to everyone on the Internet now. At some point, don't people have to take individual responsibility?
On Megan McArdle Trolls the Gold Standard, an anonymous reader says:
I found the piece useful so no it was not a waste of time. So long as most people are unaware and they appear to gain something from the current system, or they think it is normal for things to be as they are...they will continue to support it. The alternatives may be too painful to bring into effect or they are made to fear alternatives as chaotic and would lead to anarchy (as in disorder and chaos....so they will not rise up against it. The mass man is totally controlled and his ideas and views are pre-configured for him, by mass education and mass media. Edward Bernays made a good job of Public Relations and Propaganda.
In addition people who depend on a salary, or owe money to a bank are easier to control and manipulate because they fear losing their jobs or homes. Only when the system starts to produce real destructive effects will people attempt to rise against it, however by then the Police State will be firmly entrenched and they will point their weapons at their own domestic populations to keep order and the money masters in power.
Yes, debt is a very effective enslavement technique.
I looked up Edward Bernays on Wikipedia. He appears to have pioneered the "manipulate the masses" marketing techniques. However, this wasn't until after the advent of mandatory public education. When people are subjected to mandatory State brainwashing as children, then it becomes much easier to control them as adults. If Edward Bernays didn't conduct his research, someone else would have done so; you shouldn't blame him personally.
People are trained to believe "debt contracts are valid contracts". When you consider the unjust nature of the monetary system, a debt contract is NOT a legitimate contract. When you borrow, the bank literally prints new money and lends it to you. That is not a service of tangible economic value. Under a gold standard, a loan DOES have tangible economic value. Gold represents tangible economic wealth and not merely a number printed on a piece of paper.
As a sovereign individual, you can arrange your affairs so that you have minimal or no debt. It is tricky. Student loans mean that a young worker is starting out with a heavy debt burden. If a good college degree costs $200k, at some point you're better off keeping the $200k and investing it.
Most loans are taken out by businesses and corporations. Even though money is only created when someone takes out a loan, sovereign individuals can minimize their use of debt. If you own a house, having a mortgage is in your best interest, because real interest rates are negative! That assumes you're able to invest the proceeds intelligently.
I'm not sure that the Police State's power is increasing. The US GDP is decreasing! If GDP is decreasing, that means the resources of the Police State are decreasing. As the Police State tightens its grip, economic activity decreases even more. The wealth squandered spying on people has to come from somewhere!
Remember: Violent revolt is pointless. I think an economic revolt has a nonzero chance of success.
IMHO, the tricky part about getting an economic revolt started is that people with cushy middle class jobs are reluctant to risk their position. As the middle class is eliminated, it will be easier to rally support for an economic revolt. I've found that people with cushy middle class jobs are extremely reluctant to accept a hypothesis like "The current economic system is unfair and needs to be replaced!" Exacerbating the problem, people with below average jobs tend to think they're better than they actually are!
There's never been a true economic revolt before.
If you're having problems with a pro-State troll, let me know! I found a bunch of people discussing David Frum. I'm not going to write a specific critique of him unless someone asks. Almost every mainstream economics author trashes the gold standard. On the Internet, if you know where to look, you can find good information.
It seems that Ron Paul's "pro Gold standard" philosophy has brought out a bunch of pro-State trolls saying "The gold Standard sucks!" Suppose a lie repeated 10,000 times is combined with the truth repeated a handful of times. With mainstream monopolistic information sources, it's very easy to suppress the truth. The Internet allows the truth to filter to the people who want to know.
On Megan McArdle Trolls the Gold Standard, an anonymous reader says:
Well written. Question though.
Your last statement:The price of gold/silver is stable. The price of oil/gold is stable. If you look at the price of one commodity relative to another, the prices are usually stable. The price of commodities, quoted in dollars, is unstable.
Commodities pricing is also subject to market manipulation, and natural (whenever the market is allowed to be natural - i.e. almost never) supply demand curves. However, you are perfectly correct that the dollar is an unstable measure of price as the private banks and Fed manipulate its purchasing power constantly - usually in favor of Wall Street at the expense of Main Street.
However, could you please explain your assertion that the price of gold/silver ratio is stable? As far as I can see and assuming these graphs are correct, it doesn't appear that stable to me. At one time, you can see the ratio of gold to silver is: 1/100 (approx) and as low as 1/20. As of close yesterday it is 1/56.42.
Even the gold/oil ratio is not all that consistent.
What could explain these gyrations?
I backed up my claim in A Commodity Price Volatility Calculation. The 1 year historic volatility of gold/silver REALLY IS LESS than the 1 year historic volatility of gold/$ and silver/$. The disparity was not as great as I predicted. I was *SHOCKED* to see that the volatility of gold/$ was so much lower than the volatility of silver/$. That calculation is evidence that someone is manipulating the gold price.
If someone is manipulating gold, that would explain the fluctuations in gold/oil. Have you also looked at silver/oil? If you're interested, I'll repeat my calculation for oil/$, gold/oil, and silver/oil.
In that link, you're looking at a 30 year chart. I would only consider a 1 year or 5 year chart to be valid. Central banks have nearly exhausted their gold and silver reserves. Their ability to manipulate the gold and silver price downward should come to an end soon.
Don't forget about the Hunt Brothers' attempted silver corner. That was responsible for a spike in the silver price. (I should make a post on the Hunt Brothers' silver corner.)
It is harder for the world's central banks to manipulate the price of silver. Their silver reserves are far less than their gold reserves. Remember: The world's central banks stole the entire world's gold supply when they defaulted on the gold standard. They've been gradually selling off their gold so that "gold as an investment" is discredited. This makes their fiat money look better by comparison.
I was surprised that "Oil goes over $100/barrel" was touted heavily on CNBC. "Gold nears record high" was barely mentioned. The communists on CNBC seem very eager to talk down the value of gold as an investment.
On A Commodity Price Volatility Calculation, David_Z says:
It's been quite a while since I used blogger, but I imagine you can write the HTML for a table in the editor instead of using the visual editor.
You can also paste a table (from Excel, e.g.) into the visual "compose" editor and it should maintain the integrity of the rows/columns (but not borders) so it will look like a tab-delimited output.
A direct HTML edit doesn't always work for me. For some bizarre reason, Blogger strips out the closing '/'X tags. I'm not interested in the expense and effort of self-hosting at this time. At some future date, I may switch.
I could just post the .csv file so that someone could import it into Excel.
Nobody asked to verify the details of my calculation. Presumably, anyone smart enough to care is capable of performing the calculation themselves.
On The Market Anarchist Blog Carnival, Will says:
Exports are indeed good, the political backlash comes from trade deficits, but we tend to not get a good idea of what trade deficits are.
I run a trade deficit with Wal Mart--I've never exported any good to them. Big crap. The trade is beneficial.
The US has run a deficit all but 30 something years of its existence. Hasn't hurt us much.
This is another pro-State troll.
It is only possible to run a permanent trade deficit with fiat money. Other countries accept the USA's unbacked paper because military force requires them to do so.
I read somewhere that in the decades before the Federal Reserve was created, the USA had huge trade surpluses. Almost all the world's gold supply had found its way to the USA. In order to correct this "problem", it was necessary to debase the US currency. When the US switched to an unsound monetary system, its economic productivity was crippled.
It is silly to look at JUST your relationship with Wal-Mart. If you have net savings, you are running a personal trade surplus. If you are saddled with debt, you are running a personal trade deficit.
Think of yourself as a sovereign country of one person. You export your labor to your employer. You import when you go to a store and buy things. For all practical purposes, Wal-Mart and the corporation that employs you are the same.
As a sovereign individual, you are at a huge disadvantage to the people who control banks and large corporations. You don't have the magic money-printing power that they do.
On The Five Levels of the Economy, Thomas Blair says:
I read it somewhere. I forget the source. I think it was on one of the agorist websites.
I know of its use by Samuel Konkin in his New Libertarian Manifesto, specifically in his discussions on counter-economics.
That might be right. I don't use the exact same terminology that he uses. I define:
The red market is pure theft and waste. This includes lawyers, bankers, accountants, and politicians.
I haven't heard the term "pink market" elsewhere. I define the pink market to be useful products and services, whose price is kept artificially high by government violence. This includes doctors, electricity, telephone, and Internet service.
The white market is legal productive work. After careful consideration, the "white market" segment of the economy is SURPRISINGLY SMALL!
The grey market is work that would otherwise be legal, conducted off the books. In the present, the grey market is relatively small.
The black market is forbidden activity. Drugs and prostitution fall under this category.
The grey and black markets are the "underground economy".
I think the other definitions of "red market" include "non-state-approved violence" as red. I define "non-state-approved violence" as black market.
Since these "colors" aren't mainstream-accepted jargon, I'm going to use my definitions. Other people have given me a hard time for my definitions of "The Labor Theory of Value" and "Social Credit".
Friday, January 4, 2008
A Commodity Price Volatility Calculation
On Megan McArdle Trolls the Gold Standard, an Anonymous reader questioned my claim:
The price of gold/silver is stable. The price of oil/gold is stable. If you look at the price of one commodity relative to another, the prices are usually stable. The price of commodities, quoted in dollars, is unstable.
In this post, I illustrate the calculation that backs up my claim. I had not performed it when I made that post, but I intuitively guessed the result. The disparity is not as extreme as I predicted, but the price of gold/silver REALLY IS more stable than the price of gold/$ or silver/$.
I use the GLD ETF as my historic price of gold and the SLV ETF as my historic price of silver. These aren't exactly accurate, but they're the best resource available. I don't know how good those ETFs are at tracking the actual gold or silver price. I downloaded the historic daily ETF closing prices into a .csv file and then into Excel.
I now performed a historic volatility calculation. If P_i and P_(i+1) are two adjacent daily stock prices, then let Y_i = ln(P_i / P_(i+1)). I then calculate the standard deviation of Y_i, which is sqrt(E(Y^2) - E(Y)^2)). This is the historic daily volatility. I used daily price points, so I must convert to an annual volatility. I multiply by sqrt(252), because there are 252 trading days in a year. The justification for multiplying by sqrt(252) is the "Central Limit Theorem".
Do I need to give further details for "how to perform a historic volatility calculation"? It's just the standard deviation of ln(P_i / P_(i+1)), converted to an annual scale. I take the logarithm because, when investing, you only care about the % gain or loss and not the absolute $ gain or loss.
For GLD, I calculated that the 1 year historic volatility was 17.7%. In 1 year, a "1 standard deviation" increase or decrease in the gold price is 17.7%. Professional traders always quote volatility as a %. Professional traders always quote the "1 year standard deviation" movement, which is the reason I multiplied by sqrt(252).
For SLV, I calculated that the 1 year historic volatility was 26.1%.
Then, I looked at GLD/SLV. This is the price of gold divided by the price of silver. This should remove the effect of dollar volatility from the price. The 1 year historic volatility of GLD/SLV was 13.8%. (The fact that I was using the ETF instead of the physical price is irrelevant at this step, assuming the ETF closely tracks the physical price.)
For comparison, the VIX is the CBOE's S&P 500 volatility index. The VIX is calculated from the prices of S&P 500 index options. The current value of the VIX is 22.5%. Its 52 week range was 9.7%-37.5%.
I found the conclusions to be surprising.
The volatility of silver is A LOT HIGHER than the volatility of gold. I expected them to be nearly equal. There are two possible explanations. One conclusion is that someone is manipulating the gold price, dampening the volatility. Another explanation is that silver has much greater industrial demand than gold. This would cause the price of silver to have greater volatility than gold, because more silver is consumed by industrial processes than gold. I'm more inclined to believe the "someone is manipulating gold" explanation.
The price of gold/silver was only half as volatile as the price of silver/$, and 22% less volatile than the price of gold/$. My original claim is verified, but not to the degree I originally expected.
The most surprising conclusion I draw from this calculation is "Someone *MUST* be manipulating the gold price. There's no other reason for the volatility of gold/$ to be so much lower than the volatility of silver/$." If someone were manipulating gold by selling whenever the price rose, that would show up as decreased volatility.
I could repeat the calculation for oil/gold, oil/silver, or other commodities. I'll only do that if someone asks.
Let me know if you don't understand my calculation and want to see more details. Does Blogger support including an HTML table so I can illustrate my calculation?
Thursday, January 3, 2008
FSK Asks - Digg the Market Anarchist Blog Carnival
Someone submitted the December 2007 Market Anarchist Blog Carnival to Digg. I also noticed that someone submitted my article on "Real GDP is Barely Increasing Since 1990".
So far, those two articles have each attracted only 4 Diggs. Ironically, it was a different 4 people for each article. I'm curious how many Diggs I can get if I explicitly ask for them. Such tactics are commonly used by Ron Paul supporters.
I don't normally bother with Digg. It isn't worth my time to submit and promote my posts on Digg. The problem with Digg is that each article has a single global score. If my article is very interesting to a narrow segment of the population, that won't lead to a high Digg rating.
If your personal interests don't match the aggregate bias of Digg users, then you won't like the content presented on Digg. Ideally, there should be a Digg-like engine where you see articles by people whose interests match yours.
I consider "Google Reader Shared Items" to be superior to Digg, because the articles are selected by people with interests similar to mine. I currently subscribe to two RSS "Feed Aggregators". I subscribe to "Kevin Carson's Shared Items" and the "Libertarian Left" Feed. IMHO, everyone who has a blog and uses Google Reader should have a "Google Reader Shared Items" widget on their blog.
Wednesday, January 2, 2008
The Fallacy of LETS
A LETS network is a *CENTRALIZED* implementation of the Social Credit Monetary System.
A centralized issuing authority defeats the entire purpose of using an alternate monetary system.
With a centralized alternate monetary system, the IRS will demand that all transactions are reported. If you participate in a LETS network, you get a 1099 form at the end of the year. All your transactions were reported to the IRS for taxation.
Income taxes may *ONLY* be paid in Federal Reserve Points. A LETS network does *NOT* enable you to boycott the Federal Reserve, because you have to pay income taxes on your transactions.
An alternate monetary system with a centralized issuing authority CANNOT SUCCEED. The IRS will demand that the centralized authority report all transactions for taxation. The participants don't recognize any benefit from using the alternate monetary system, because they still must pay income taxes.
Only a decentralized monetary system can successfully replace government controlled money.
Tuesday, January 1, 2008
Megan McArdle Trolls the Gold Standard
On the Ron Paul Forum, someone asked about this thread on mises.com, referring to this article by Megan McArdle on thealtantic.com.
"The Atlantic" is a mainstream magazine. Of course, they are going to tout the official party line. The official false party line is that history discredited the gold standard, and we should all be grateful for the Federal Reserve and Ben Bernanke for their sound management of the US economy.
Unfortunately, none of the posters on mises.com gave a good response to Megan McArdle's troll article, so I guess I have to do it.
I get tired of repeating the same arguments over and over again. On the other hand, some people find a direct response to a troll to be helpful.
In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg). Meanwhile, the limitations on the government's ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It's a terrible idea, which is why there are so few economists willing to raise their voices in support of it.
The US government and the Federal Reserve are *NOT* credible stewards of the money supply.
Any foreign country that pegs its currency to the dollar is effectively ceding its sovereignty to the Federal Reserve. Why should it be a surprise that foreign countries with a dollar currency peg suffer economic disaster?
An unsound monetary system is the CAUSE of fiscal crises. If you have a sound gold standard, your money CAN'T be under attack by foreigners.
Most economists get their funding, directly or indirectly, from the government. Any economist who advocated a sound monetary policy would soon find himself out of a job.
No Ron Paul supporter (or other gold standard advocate) has managed to articulate to me what problem the gold standard solves. Inflation is low, and even better, relatively predictable, so the expectation is built into asset prices. Moreover, most people on fixed incomes are retirees, and most retirees get almost half their income from Social Security, which is indexed for inflation.
According to M2, inflation is around 7%. The scumbags at the Federal Reserve ceased publishing M3. Some sources say M3 is growing at a rate of 15% or more. I wouldn't call inflation of 7%-15% to be "low". The CPI is a biased measure of inflation.
Social Security is *NOT* indexed for inflation. Social Security is indexed according to the biased CPI, which understates the true inflation rate.
This Ron Paul speech lists a number of reasons, all of them wrong:
1. The Federal Reserve destabilizes the economy with its "boom and bust" monetary policy. This is hard to square with the fact that the longer the Federal Reserve has been in existance, the more stable the economy has been. Dr. Paul's words strongly imply that he believes that there was no business cycle in the 19th century, which is untrue; as best we can tell, recessions were much longer and deeper before America had a central bank.
This is the Compound Interest Paradox. I don't see how you can credit the Federal Reserve with "stabilizing the economy". The US economy is shrinking! All the Federal Reserve "stabilizes" is profits for politically connected insiders.
The problem before 1913 was REGULATION of banking. The large banks practically had a monopoly over the gold supply, and they acted as a cartel. Regulation of banking limited the ability of non-cartel banks to counteract the manipulations of large cartel banks.Also, some sources say that boom/bust cycles were LESS SEVERE before the Federal Reserve was created. History is written by the winners, and it's not possible to go back in time and check.
The most severe boom/bust cycle in US history was the Great Depression. That occurred after the Federal Reserve was created. A depression that large would have been impossible without the Federal Reserve.
2. Americans don't save because they're afraid inflation will erode their savings. This is daft. Moderate inflationary expectations are built into the interest rates that banks offer. After thirty years of stable monetary policy, a good portion of the population doesn't even remember high inflation, and the ones that do are mostly retired and spending down their savings. Americans don't save because . . . well, have you tried the Wii? It's awesome.
American's don't have savings because of the Compound Interest Paradox. There literally isn't enough money in circulation for everyone to have savings.
The US population doesn't understand inflation, because they've been brainwashed by corrupt economists and a corrupt media.
Americans are being squeezed by a corrupt economic system. For most Americans, their pay raises aren't keeping pace with the true inflation rate of 7%-15%. It's hard to have savings when your inflation-adjusted paycheck is decreasing.
If you keep your money in a bank, you will earn a negative inflation-adjusted return. This is a further disincentive for saving. Most Americans don't feel comfortable investing in the stock market or in physical gold or silver.
3. American exporters are whipsawed by our fluctuating currency. Unless Dr. Paul has plans to put the entire world back on the gold standard--which I mote would require the kind of powerful international organization he's so suspicious of, or invasion--our currency will still fluctuate relative to others if we're on the gold standard. Every time the price of gold changes in another country, American exporters will either be helped or hurt by a change in the relative prices of their goods. The gold standard will shelter exporters from currency fluctuations only in their trade with other countries on the gold standard. There are no other countries on the gold standard.
If the US returned to a gold standard, you can be sure that other countries would follow.
Under a gold standard, a natural arbitrage mechanism insures that imports equal exports. Otherwise, you wind up importing or exporting gold.
Under the current system, the US imports in exchange for a piece of paper with a number printed on it. Such a system cannot continue forever.
Other countries accept a worthless piece of paper in exchange for exports to the USA. How can US exporters be economically competitive under such a system? If other countries prefer a piece of paper to an export of tangible goods, why not just export paper?
4. Fiat money inflation benefits those shadowy figures who receive access to artificially inflated money before the inflationary effects kick in. Those shadowy figures being the bankers who loaned it to you so that you could buy your house. At any rate, this would only be true if we were talking about unexpected inflation. Expected inflation is already built into asset prices. The US economy does not have significant unexpected inflation.
Bankers are able to loan you money at 6% for your mortgage because they can borrow from the Federal Reserve at 4.25%. Using leverage, banks make a practically guaranteed riskless profit.
A mortgage contract isn't technically a valid contract. In order for a contract to be valid, *BOTH* parties must provide something of tangible concrete value. When you take out a mortgage, the bank literally prints new money and loans it to you. As an individual, you don't have this magic money printing power. An individual must perform actual work to acquire the principal and interest payments required by the mortgage contract. A mortgage contract is technically a "no-interest contract", where one party has not provided a service of tangible economic value.
Why can't I borrow directly from the Federal Reserve at 4.25% when I take out a mortgage? Why do I have to go through the middleman of a banker? The spread between the Fed Funds Rate and the rate banks change on loans is unearned profits for banks. The banks earn economic rent from their privilege of being able to borrow at the Fed Funds Rate.
Property values are so high that a mortgage is the only practical way to buy a house. Your expected interest payments are less than the true inflation rate. This makes the loan a sensible financing option. Even if you could afford to pay the full price in cash when buying a house, you would be a fool to do so. You're better off taking out a mortgage and receiving this massive government subsidy.
If your mortgage rate is 6%, and your expected return on stock investments is 10% or more, you should maximize your mortgage and invest the proceeds in stocks. As an individual, this strategy is risky, because you don't know when the next economic bust will occur. However, if you have sufficient investments and income to meet the mortgage payments, this is a sound investment strategy.
Expected future inflation isn't built into current asset prices. That money hasn't been printed yet! Asset prices rise as new money is printed. Tangible assets are an inflation hedge.
5. Fiat money inflation "also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state". This is an extraordinarily primitive view of the money supply. The Federal government is not Caesar cutting his denarii with lead. The revenues from seignorage on 2% inflation are trivial. The Federal government gets the money for the "welfare-warfare" state just where it says it does: by taxing the bejeesus out of your wages.
Inflation is not 2%, even according to the corrupt and biased CPI. Inflation is actually 7%-15%. When you say "15% of the entire value of the economy is stolen each year via inflation", that sounds like more than pocket change to me.
Most of the benefits of inflation accrue to the financial industry and not the Federal government.
6. Congress does not have constitutional authority to delegate its power "the authority to coin money and regulate the value of the currency". Hmm. Okay, but I'm pretty sure none of our legislators are qualified to operate a printing press, much less the annealing ovens and upsetting mills needed to mint coins.
This point makes absolutely no sense whatsoever.
That's like saying "If you don't know how to program a computer, you aren't qualified to post lies and propaganda on the Internet."
The US Constitution no longer imposes any restrictions on the behavior of the Federal Government. Here's a better way to think of government. There exists a criminal organization that has adopted the US Constitution as its bylaws. The US Constitution is followed only when it is convenient.
7. Congress "should only permit currency backed by stable commodities such as silver and gold". Commodities, almost by definition, are not stable. The price of gold looks as if it used to be stable, because the dollar was fixed relative to an ounce of gold. This does not mean that its value relative to other economic goods was unchanged. You could fix your currency to the price of a bushel of wheat, and suddenly "wheat bugs" would be claiming that wheat is the only reliable, stable commodity in the world whose price never changes. That wouldn't stop fluctuating wheat supplies from whipsawing your economy back and forth. To be sure, the supply of gold changes more slowly than the supply of wheat. But demand for it is not so fixed.
Commodity prices are quoted in dollars. Commodity prices are not stable because the value of the dollar itself is not stable.
The price of gold/silver is stable. The price of oil/gold is stable. If you look at the price of one commodity relative to another, the prices are usually stable. The price of commodities, quoted in dollars, is unstable. This is due to the Compound Interest Paradox.
I grow tired of responding to trolls all the time. Did I waste my time writing this?