No purple prose this time, I promise – I wouldn’t dream of risking any untoward interruption of your natural digestive processes – but I just came across the little invective (is there any other genre to which you turn your hand?) - in which you gave full vent to your scorn for my alleged lack of understanding of the banking system.
[Oh, and thanks for the editorial obiter dicta, but ‘fulfil’ is correct in real English, while the OED validates my use of both ‘nominated’ and ‘incongruous’. Typos are, alas, another matter for which you will just have to excuse one’s eternal inability properly to proof read one’s own work. It was however very stylistically astute of you, I must say, to exploit the frequent use of the [sic] insertion to make the subliminal suggestion that someone who apparently could not set grammatically accurate sentences on a page was ipso facto to be considered suspect in the coherent thought department, too! But, let’s not be too schoolgirlish about it. Onward to the point in hand.]
To chew over the first bone of contention and as you will not take my word for it that banks do create deposits by lending money, let me quote you a little Roepke from a footnote (p113) to his 1936 work, ‘Crises & Cycles’:
The process [of credit creation] is now clearly explained in any text-book on economics, banking or money (especially recommendable is Hartley Withers’ Meaning of Money). A fuller treatment may be found in the following books: R. G. Hawtrey, op. cit.; J. M. Keynes, A Treatise on Money, pp. 23-49 : C. A. Philips, Bank Credit, New York, 1920; W. F. Crick, “The Genesis of Bank Deposits,” Economica, June 1927, and F. A. von Hayek, Monetary Theory and the Trade Cycle, London,1933.
Without an understanding of this process and of its limitations, no real insight into the working of our banking system and, consequently, of our entire economic system seems possible, to say nothing of the mechanism of business cycles. There may still be many people who can no more believe the story of the genesis of bank money than they can believe the genesis of the Bible, but on the whole it now seems to be generally accepted. A last but hopeless attempt at disproving it has recently been made by M. Bouniatian, Credit et conjoncture, Paris, 1933. [Emphasis mine and apparently NOT the last!]
Or as Hayek indeed noted in ‘Prices and Production’ above his own lengthy footnote (pp 81-2):-
The main reason for the existing confusion with regard to the creation of deposits is to be found in the lack of any distinction between the possibilities open to a single bank and those open to the banking system as a whole.
Shall we hear from Mises? ‘Monetary Stabilization and Cyclical Policy’ (p105) seems pretty unequivocal on the matter:-
If the banks grant circulation credit by discounting a three month bill of exchange, they exchange a future good—a claim payable in three months—for a present good that they produce out of nothing. It is not correct, therefore, to maintain that it is immaterial whether the bill of exchange is discounted by a bank of issue or whether it remains in circulation, passing from hand to hand. Whoever takes the bill of exchange in trade can do so only if he has the resources. But the bank of issue discounts by creating the necessary funds and putting them into circulation. [which, incidentally, is an almost exact paraphrase of the argument I advanced and to which you took such exception, George]
Finally, let us allow Dennis Robertson a few words on the matter from the posthumous collection ‘Essays in Money and Interest’, p25:-
…bank money comes into existence mainly as the result of loans and investments made in the banking system… … Historically, there seems to me no question that the bulk of bank money in existence has come into existence in this way… If anyone retains any lingering doubts on this matter, whether these doubts arise from consideration of the multiplicity of banks or from some less rational cause, I commend to him the patient and careful article of Mr. Crick [see above]… Here time forces me to treat this particular controversy as closed. [Emphasis mine again]
Your basic case is that when a miller supplies flour to a baker on credit and takes the evidence of his claim on the latter to a bank to be monetized, the blameless Free Fractional Bank can only accommodate this demand once its managers are satisfied they already have sufficient, saved monies – either to hand or readily available – to honour whatever surplus of cheques it is which, as a consequence, will be presented to them at the next clearing.
This is utterly wrong, but to demonstrate my point, you will have to grant me a little empirical diversion.
Bundesbank data for aggregated balance sheets across the EZ show that, as of the end of QII, banking institutions (or ‘MFI’s) had taken in roughly 60¢ of deposits from other banks for every €1 owed to non-banks, and had extended a similar proportion of 60/100 in credit to other banks versus that granted to non-banks by means of loans or security purchases. In the first case, the total was some €7,617 billion outstanding, in the latter €9,515 billion – whether in absolute terms or at 38% of the relevant totals, hardly trifling sums.
Meanwhile, BIS data for cross-border banking shows an even greater predominance of ‘pig-on-pork’ with $19,204 billion in assets out of a total of $32,655 billion (59%) being claims against other banks and $20,875 billion out of $31,646 billion (66%) being liabilities due to other banks.
Clearing, did I hear you say? Clearing? Or, are we rather dealing with ‘money-from-thin-air’ pyramiding?
Since you so like to affect a folksy tone in your dismantling of opposing views, let me respectfully offer you a simple analogy in my turn.
Mick the Miller delivers flour to Bert the Baker in exchange for a post-dated IOU to the redeemable value of, say, $100. So far, so good – savers and lenders matched and nary a sign of inflation. Mick, however, next sells the note to Bartholomew the First Banker for a small discount and spends the $99.50 credited to his account on wages for the mill-hands. Matt the Miller’s assistant gets his paid into his account with Benjamin the Second Banker.
Alack and alas for your Trumpton theory of free banking, Ben does not send a runner, post haste off to present the cheque for clearing and thereby instantly expose Bart’s reckless issue of an unreserved demand claim, instead he goes searching for a convenient place to acquire an offsetting asset to put against his newly-assumed liability and typically ends up lending an equal amount to Bart in an interbank market which I have already demonstrated is still vast in extent, even today in our post-Lehman state of funk and even though I will grant you that as much as €1 trillion of this had to be further intermediated via the ESCB’s own balance sheets, using the TARGET2 system, at the height of the panic.
In this way (feel free to draw out the T-accounts if it is somehow not clear), money – i.e., Matt’s all too readily spendable credit balance in his demand account with Bank of Ben – has indeed been created ex nihilo. What is more, this has taken place long before Bert the Baker has had time to bring a fresh batch of his widely-praised Rustic Cobs out of the oven to sell to Matt and thereby begin the process of redeeming his own liabilities with an exchange of goods for the newly-created money. That creation was therefore inflationary, despite the complete absence of a central bank to muddy the waters in our toy community.
Not that this has exhausted the possibilities either. Banker Bart could simply sell Baker Bert’s IOU to Banker Ben, though obviously Ben will have to repeat the exercise if the recipient of Matt’s imminent expenditure does not himself bank with Ben. More likely Bart will try to repo it (effectively, pledge the IOU as security for the sum he needs to borrow from Ben). After all, this is a market which just in the US amounts to a $2.8 trillion daily turnover, a mind-boggling sum to which we can add the €11.9 trillion a month passing across the LCH in London and the €700 billion a day going via Euroclear. Furthermore, given the controversy which has arisen over the multiple use of such collateral as Bert’s IOU – its ‘rehypothecation’ in the proper jargon – we can be fairly sure that this innocent little promise to pay will be positively flying around the system, assuring the ready creation of ‘money-from-thin-air’ for so long as it remains in some banker’s or broker-dealer’s hands.
You might like to know that, many years ago now, I started out working in the Treasury department of a small international bank in the City and that several of my peers from that day now occupy decidedly senior positions in that same milieu. I can assure you that none of us had ever given much thought to the business of covering (or at least of matching) our loans before granting them up, right up until the late outbreak of unpleasantness. The working assumption was that funds could always be had in the short-date interbank market, even if a degree of interest rate risk was therefore unavoidable (indeed, this latter, offering the chance of a profitable arbitrage, was often the primary motivation behind the lending decision itself). Things may not be quite so free and easy post-2008, but the point nonetheless stands.
Incidentally, even with the baleful presence of the CB, you should be aware that for much of the last boom, as the result of a captured-regulatory race to the bottom, reserve requirements – and hence active, statist reserve provision – were so nugatory (indeed, in the UK they were both voluntary and the degree of that voluntarism was actually capped) that they were irrelevant to the everyday functioning of the banks in much of the developed world. Moral hazards and implied backstops were of course all too operative, but reserve provision per se was not really a determining factor in the contemporary insanity.
For reasons which escape me, it is widely recognised in your circles that the supposed automaticity of the restraint imposed by the classical gold standard was honoured more in the breach than the observance because of the ready resort to the creation of deferred claims between surplus and deficit entities (whether private or public) in place of any actual final settlement through the transfer of metallic reserves (you cannot afford to be too respectful of the role of the barbaric relic, lest you sound too Rothbardian, I suppose) and yet you seem to insist that the paper trail from every last, utterly mundane banking transaction must be instantly be presented for an equivalent, expansion-restricting act of ‘clearing’. To the contrary, you will find that whether conducted electronically or not, ‘note wars’ are a curiosity of the past and, it is my contention, would be likely to remain so even if the evil central banking were miraculously to be abolished.
It may be a truism of accounting that every asset has to have a corresponding liability (and that for entities such as banks, unlike for individuals and states, these must match internally, to boot), but this is to elide over the yawning gap between a genuinely ‘saved’ deposit and one which merely happens to have been caught on camera in someone’s possession at the instant of book-closing as it flits busily about between owners, performing its primary role as a medium of exchange.
Nor are we here even beginning to deal with the distortive effects of ex ante, desired versus ex post, forced savings (I think I am right to venture that I have not seen your school deal much with this concept either).
No. I would suggest to you that the dangers and distortions are much more immediate than that.
If Mick the Miller is turned into Mick the Mortgage Dealer and Bert the Baker into Bert the Bungalow-Buyer, I can hardly see it as a comfort that, when the accounts are squared up at COB each evening, there must necessarily exist a positive entry somewhere in the system (barring the more remote possibility of there existing a corresponding cash holding) or that this is very likely to consist of an inside-money, demand account one which, however fleetingly held between the act of buying and selling, has been transmuted via an equally transient interbank loan into the associated 30-year obligation.
Kind regards, from a ‘self-styled’ Austrian,
On Wednesday Finland gave in to public pressure and revealed where she stores her gold reserves. The statement followed a press release by the Bank of Sweden on similar lines released on Monday.
The totals (in tonnes) for these two Scandinavian countries are as follows:
|Bank of England
|New York Fed
|Swiss National Bank
|Bank of Finland
|Bank of Canada
So far, so good. But then the Head of Communications for the Bank of Finland added some more information in Finnish in a blog run on the Bank’s website. It is not available in English, so I asked her for a translation, but I am still waiting.
Instead, a Finnish reader of my own blog and a Finnish journalist who has been following this topic have independently given me an English translation of a highly relevant and interesting paragraph, three from the end. This is the journalist’s:
Maximum half of the gold has been within investment activity over the years. Gold has been invested among other things in deposits similar to money market deposits and using gold interest rate swaps. Gold investment activity is common for central banks. The risks associated with gold investments are controlled using limits, investment diversification and limitations concerning duration.
And my reader’s translation:
Throughout these years no more than half of the gold has been invested. Gold has been invested in for example deposits similar to money market deposits and gold interest rate swap agreements. Gold investment activities are common for central banks. Risks related to gold investments are controlled with limits, decentralising investments and limits regarding run times.
Half Finland’s gold is stored at the Bank of England, and “no more than half” is “invested”. If any “investment” is to take place it would be in London. It is not immediately clear what is meant by invested, but presumably this is a result of translation of what has happened from English into Finnish plus explanation for a non-specialist readership. However if it has been invested, then by definition it is no longer in the possession of the Bank of Finland, and will most probably have been sold into the market in return for a promise to redeliver at a later date. This follows the Austrian National Bank’s admission to a parliamentary committee a year ago that it had earned EUR300m by leasing its gold through London.
The evidence is mounting that Western central banks through the Bank of England have been feeding monetary gold into the market through leasing operations. Indeed, the Finnish blog says as much: “Gold investment activities are common for central banks”.
This explains in part how the voracious appetite for gold by China, India and South-East Asia is being satisfied, without the gold price rising to reflect this demand. It is also consistent with my disclosure earlier this year of the discrepancy of up to 1,300 tonnes between the gold in custody as recorded in the Bank of England’s Annual Report, dated 28th February 2013 and the amount recorded on the virtual tour on the Bank’s website the following June.
This article was previously published at GoldMoney.com.
Some things are stated as fact which are nothing of the kind. Right up until the Congressional deal raising the debt ceiling news anchors were parroting that without it the United States government would default. This is nonsense.
Over the next year the US government will take in around $3 trillion in taxes. The interest payments on its $16.9 trillion debt in that period are estimated at around $240 billion. As long as its income is greater than its debt repayments there is no reason whatsoever why the US government should default on those debt repayments.
It may choose to do so, deciding to anger China rather than domestic recipients of Federal money, but there is nothing automatic about it. But at some point the US government will default on somebody.
Since 2002 US government debt has risen from $6 trillion to nearly $17 trillion, a rise of 183%. Under George W. Bush it increased at $625 billion a year, and in 2008 Senator Obama was moved to declare “That’s irresponsible. It’s unpatriotic.” Under President Obama that debt has increased by $900 billion a year. It now stands at around 73% of GDP, or $131,368 for every man, woman, and child in America. Even with record low interest rates, by 2015 repayments on this debt will come to $50,000 a year for each American family .
And the situation is forecast to get worse. The Congressional Budget Office’s September 2013 Long-Term Budget Outlook warns that government spending is set to outstrip revenues in each of at least the next twenty-five years with the gap opening from 2% of GDP at its narrowest point in 2015 to 6.5% of GDP at its widest in 2038, “larger than in any year between 1947 and 2008”. As a result, after a slight improvement between 2014 and 2018, Federal government debt as a percentage of GDP is projected to rise from about 75% to around 100% in 2038.
The CBO identifies the drivers of this increased spending and debt as “increasing interest costs and growing spending for Social Security and the government’s major health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies to be provided through health insurance exchanges)”. Spending on the “major health care programs and Social Security”, the CBO writes, “would increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years” and “The federal government’s net interest payments would grow to 5 percent of GDP, compared with an average of 2 percent over the past 40 years”.
The CBO’s conclusion is stark; “Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past”. Sadly for the taxpayers of 2038 these are just the changes President Obama and Congressional Democrats steadfastly refuse to consider.
But a refusal to see reality doesn’t make that reality go away. These sorts of figures are unprecedented in peacetime and unsustainable and as the saying goes, ‘If something can’t continue it won’t’. The essential problem is that the US government, as with other western governments, has made spending commitments its tax base cannot support. And a promise that can’t be kept won’t be kept. Drastic change will come to Medicare, Medicaid, and Social Security, not because of ‘evil’ or ‘heartless’ Republicans, but because of math, because there isn’t the money to pay for them.
The desperately sad truth is that Uncle Sam won’t keep his current promise to pay pensions, pay for medical care for the poor or the elderly at a given level because he won’t be able to. This will amount to defaulting on elderly and sick Americans, the only question is whether it happens through some entitlement reform (whether the Democrats want it or not) or through meeting these commitments with devalued dollars (over to you Janet Yellen). Either way, if ‘default’ means a repudiation of a promise of payment this will be America’s default. The US government has a choice about ‘default’ now, it won’t in the future.
 The Telegraph, 8 October 2013.
A number of people have asked me to expand on how the rapid expansion of money supply leads to an effect the opposite of that intended: a fall in economic activity. This effect starts early in the recovery phase of the credit cycle, and is particularly marked today because of the aggressive rate of monetary inflation. This article takes the reader through the events that lead to this inevitable outcome.
There are two indisputable economic facts to bear in mind. The first is that GDP is simply a money-total of economic transactions, and a central bank fosters an increase in GDP by making available more money and therefore bank credit to inflate this number. This is not the same as genuine economic progress, which is what consumers desire and entrepreneurs provide in an unfettered market with reliable money. The second fact is that newly issued money is not absorbed into an economy evenly: it has to be handed to someone first, like a bank or government department, who in turn passes it on to someone else through their dealings and so on, step by step until it is finally dispersed.
As new money enters the economy, it naturally drives up the prices of goods bought with it. This means that someone seeking to buy a similar product without the benefit of new money finds it is more expensive, or put more correctly the purchasing power of his wages and savings has fallen relative to that product. Therefore, the new money benefits those that first obtain it at the expense of everyone else. Obviously, if large amounts of new money are being mobilised by a central bank, as is the case today, the transfer of wealth from those who receive the money later to those who get it early will be correspondingly greater.
Now let’s look at today’s monetary environment in the United States. The wealth-transfer effect is not being adequately recorded, because official inflation statistics do not capture the real increase in consumer prices. The difference between official figures and a truer estimate of US inflation is illustrated by John Williams of Shadowstats.com, who estimates it to be 7% higher than the official rate at roughly 9%, using the government’s computation methodology prior to 1980. Simplistically and assuming no wage inflation, this approximates to the current rate of wealth transfer from the majority of people to those that first receive the new money from the central bank.
The Fed is busy financing most of the Government’s borrowing. The newly-issued money in Government’s hands is distributed widely, and maintains prices of most basic goods and services at a higher level than they would otherwise be. However, in providing this funding, the Fed creates excess reserves on its own balance sheet, and it is this money we are considering.
The reserves on the Fed’s balance sheet are actually deposits, the assets of commercial banks and other domestic and foreign depository institutions that use the Fed as a bank, in the same way the rest of us have bank deposits at a commercial bank. So even though these deposits are on the Fed’s balance sheet, they are the property of individual banks.
These banks are free to draw down on their deposits at the Fed, just as you and I can draw down our deposits. However, because US banks have been risk-averse and under regulatory pressure to improve their own financial position, they have tended to leave money on deposit at the Fed, rather than employ it for financial activities. There are signs this is changing.
Rather than earn a quarter of one per cent, some of this deposit money has been employed in financial speculation in derivative markets, or found its way into the stock market, gone into residential property, and some is now going into consumer loans for credit-worthy borrowers.
In addition to the government’s deficit spending, these channels represent ways in which money is entering the economy. Furthermore, anyone working in the main finance centres is being paid well, so prices in New York and London are driven higher than in other cities and in the country as a whole. They spend their bonuses on flashy cars and country houses, benefiting salesmen and property values in fashionable locations. And with stock prices close to their all-time highs, investors with portfolios everywhere feel financially better off, so they can increase their spending as well.
All the extra spending boosts GDP, and to some extent it has a snowball effect. Banks loosen their purse strings a little more, and spending increases further. But the number of people benefiting is only a small minority of the population. The rest, low-paid workers on fixed incomes, pensioners, people living on modest savings in cash at the bank, and part time employed as well as the unemployed find their cost of living has gone up. They all think prices have risen, and don’t understand that their earnings, pensions and savings have been reduced by monetary inflation: they are the ultimate victims of wealth transfer.
While luxury goods are in strong demand in London and New York, general merchants in the country find trading conditions tough. Higher prices are forcing most people to spend less, or to seek cheaper alternatives. Manufacturers of everyday goods have to find ways to reduce costs, including firing staff. After all if you transfer wealth from ordinary folk they will simply spend less and businesses will suffer.
So we have a paradox: growth in GDP remains positive; indeed artificially strong because of the under-recording of inflation, while in truth the economy is in a slump. The increase in GDP, which reflects the money being spent by the fortunate few before it is absorbed into general circulation, conceals a worse economic situation than before. The effect of an expansion of new money into an economy does not make the majority of people better off; instead it makes them worse off because of the wealth transfer effect. No wonder unemployment remains stubbornly high.
It is the commonest fallacy in economics today that monetary inflation stimulates activity. Instead, it benefits the few at the expense of the majority. The experience of all currency inflations is just that, and the worse the inflation the more the majority of the population is impoverished.
The problem for central banks is that the alternative to maintaining an increasing pace of monetary growth is to risk triggering a widespread debt crisis involving both over-indebted governments and also over-extended businesses and home-owners. This was why the concept of tapering, or putting a brake on the rate of money creation, destabilised worldwide markets and was rapidly abandoned. With undercapitalised banks already squeezed between bad debts and depositor liabilities, there is the potential for a cascade of financial failures. And while many central bankers could profit by reading and understanding this article, the truth is they are not appointed to face up to the reality that monetary inflation is economically destructive, and that escalating currency expansion taken to its logical conclusion means the currency itself will eventually become worthless.
This article was previously published at GoldMoney.com.
There are lots of reasons why QE hasn’t yet created inflation in the rich West…
SO HEADLINE writers everywhere got to say money really does grow on trees today.
Gold, in fact, has been found in minute quantities in eucalyptus trees in Australia. Analyzing tree leaves and bark could now unearth gold deposits up to 30 metres below ground elsewhere in the world, geochemists say.
Good news perhaps for the mining sector. But unearthing that ore won’t be easy like picking a leaf. Making money is never cost-free. And not even money-printers are making as much profit as you might imagine right now.
UK firm De La Rue today gave its second profits warning of the year. Weird as it sounds, there is over-capacity in note printing worldwide, it claims. That may seem hard to believe, what with quantitative easing still rolling ahead at record levels. But money printing isn’t what it used to be, even without the US Fed daring to taper its $85 billion per month. And De La Rue is lagging profit targets set back in 2010, when asset purchases with newly-minted central bank cash was hitting its stride.
De La Rue Plc is the world’s largest independent printer of banknotes. It has printed 150 different currencies over the last 5 years, and designed two-fifths of all new banknotes issued anywhere in the world since 2008.
You might think that was (ahem) a license to print money. But volumes actually fell this year, De La Rue says, down 10% in the first half of 2013.
Surely quantitative easing means there’s more money around? Near-zero interest rates are also bringing more credit and spending to the economy, right? And what about the revival of real estate prices, most notably in UK housing but also worrying German politicians as even Berlin rents soar?
All that money, however, is electronic, not physical paper. Indeed, the central banks’ printing presses are today an “electronic equivalent” as current Fed chair Ben Bernanke put it way back in 2002. Urging the Japanese to debauch the Yen just as he’s since attacked the Dollar, Bernanke only used “printing” as analogy, however. Whereas it was paper money, not photons blinking on a bank-account balance, which fired inflation in the basket-case economy of Zimbabwe when Bernanke spoke a decade ago, and in Argentina today.
Digitized cash, in contrast, is now the real thing, as military strategist, historian and consultant Edward Luttwak noted this month in an aside on Italian gangsters. Starting in the 1990s, says Luttwak, the Calabrian family gangs pushing cocaine north into Europe as far as the new markets of the old Soviet states found their “Colombian [cocaine] suppliers refused to accept cash, because it was no good for investing in Miami real estate or local hotels or restaurants. The Calabrians needed real money: not bundles of paper but deposits in bank accounts that could be wired.”
Fact is, legitimate businesses cannot use cash. And worldwide, reckons Mastercard (with a vested interest, of course), business transactions now account for 89% of the value of payments. Consumers, meantime, are also moving away from cash (at least, outside the black economy they are; and those immoral earnings still need laundering into the “real money” of digitized bank databases in the end). As a proportion of retail transactions by number, cashless payments now make up 80% in the United States, 89% in the UK, and all but 7% in Belgium according to Mastercard. Even ignoring the plastic PR team, nearly half of UK consumer transactions are now done without cash, with currency payments sinking almost 10% by value in 2012 from the year before, according to the British Retail Consortium. The bulk of non-cash growth came from “alternative” methods, notably PayPal, with “new ways to pay and new ways to shop shaping the retail landscape like never before.”
Might this explain why consumer price inflation hasn’t taken off in the developed West? Yes, there’s lots more money around. Yes, people keep buying gold as protection. Because basic economics says this should push the general price level higher, as the value of each monetary unit is shrunk. But all this extra money sits on hard drives, servers and in the cloud, rather than in purses and wallets. That’s where money is transacted too, in intangible code. Lacking a physical presence, perhaps this wall of money loses its impact.
There are lots of other reasons you could give for why inflation hasn’t surged with the money supply. It’s all locked up in banking reserves, for instance, instead of reaching the “real” economy. Increased spending power since 2008 has gone almost entirely to the richest households, who use it to buy shares, property and fine art rather than Doritos and donuts. Or perhaps central bankers really have kept that credibility which they fought to attain after the 1970s’ inflation. Western households are now sure that the cost of living will never be let loose again.
But the birth of physical money back in ancient Greece changed our brains and our world. Coins made kings of anyone holding them, with the “universal equivalent” marking the beginning of the end of feudal society just as it created an independent yard-stick for all values – mercantile, religious and personal. This is what the myth of King Midas is about, after all.
The human brain and how it conceives of the world is being changed again by digitization today. Just ask a 20-year old (go on, ask them. Ask them anything, and see if they can answer without checking online. Ask a 45-year old come to that). Plenty of people worry that it’s all changing us for the worse, twiddling their fears about the internet by writing, of course, on the internet. Plenty of other idiots think the posthuman world will prove a new joy, with the internet’s jibber-jabber of lies, confusion and stupidity taking us back to some forgotten Eden where everyone’s views are equal. Like, y’know, in the way opinions were freely allowed to medieval peasants who couldn’t read? Today’s infotainment and readers’ comments let knowledge morph and shift just like knowledge was shared and communal pre-Gutenberg. Who needs the Enlightenment?!
Either way, perhaps our brave new digital world also revokes the iron law of money. Perhaps our flood of new cash will never end in higher living costs in the way it always has – always has – in the past. Because money we cannot touch cannot in turn touch prices as surely as paper or metal did.
Yeah right. And money really does grow on trees.
This article was previously published at BullionVault.com.
It took me until my 43rd year to read The Selfish Gene, written in 1976 by Richard Dawkins. In many respects, it is a testament to its success that I felt no compelling desire to read it. What I perceived to be its central message had been absorbed into the very fabric of our culture. I thought the message was simply put. To summarize: we are driven to survive by our genes and via competitive and selfish natural selection; we follow our own self-interest in order to survive and procreate; genes that adapt more quickly and better to the competitive world survive at the expense of the others, and so forth. The state of nature is a Hobbesian nightmare of there being “no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.” It is survival of the fittest for most, but armed with this knowledge, we could overcome some of these rough edges of life.
This message became his new self-christened “meme” that has seeped into our own cultural way of thinking. Also, armed with this knowledge, Dawkins concludes we should restrain our biological drive and build a more cooperative world.
Needless to say, the book is rich with information on Darwinian evolution and easily communicated to the intelligent layperson. However, I think that he has at least one thing the wrong way around: we should not restrain our genes to build a more cooperative world, but embrace them and their phenotypic effects. As I will suggest, successful phenotypic effects are not as he assumes them to be when it comes to the catallactics of the market place.
The view of Dawkins — that we need to put restraint on our genes to effect a more cooperative outcome for all — would imply that if we do not, we get what is called social Darwinism which is as natural as the selfish gene itself. In the closing lines of The Selfish Gene, Dawkins urges us to rebel against this natural disposition.
It is possible that yet another unique quality of man is a capacity for genuine, disinterested, true altruism. … We have the power to defy the selfish genes of our birth. … We can even discuss ways of deliberately cultivating and nurturing pure, disinterested altruism.
Dawkins then concludes that this ability to force ourselves to work well with others is “something that has no place in nature.”
Being new to biology, I thought I should read some Darwin to see if it really does follow that if you accept natural selection you must move, as night moves toward day, to the whole of human society running itself as a group of individualistic selfish replicators.
Social Darwinism has nothing, seemingly, to do with Darwin himself. He never advocated a social policy of promotion of the natural tendency to the survival of the fittest. He thought that appropriation by others was the key in advancing man in society.
The Descent of Man is his book that touches most on these issues. Darwin himself imagines that primeval man was “influenced by the praise and blame of his fellows,” and that for individuals, there were many social rewards in avoiding purely selfish behavior since the “tribe would approve of conduct which appeared to them to be for the general good, and would reprobate that which appeared evil.” Primeval individuals knew that the acceptance of the group was important to survival, so, Darwin concludes, “[i]t is, therefore, hardly possible to exaggerate the importance during rude times of the love of praise and the dread of blame.”
Moreover, that which strengthens the group rather than the individual, Darwin reasoned, led to greater survival for the groups that avoided selfish infighting:
It must not be forgotten that although a high standard of morality gives but a slight or no advantage to each individual man and his children over the other men of the same tribe. … A tribe including many members who … were always ready to aid one another, and to sacrifice themselves for the common good, would be victorious over most other tribes; and this would be natural selection.
It would appear that Darwin very much did not advocate anything that has come to be associated with the term “social Darwinism,” if we mean by this that we should relish in the economic survival of the fittest at the expense of our fellow compatriots. Dawkins sits firmly in the same tradition as his great inspiration on these matters: Darwin no less. From this I conclude that social Darwinism is more of a “straw-man” style argument, used by people unfamiliar with the works on Darwin and market catallactics.
Concerning the social implications of social Darwinism, liberalism plans for eternal peace, social Darwinism for a war of all against all and, as discussed, neither the great master Darwin and his most modern advocate, Dawkins, would agree with the former extrapolation from biology to social science. I am sure — as Ludwig von Mises notes in Human Action — that what applies to relations between men and microbes are very different indeed, as we have the power of reason and they don’t. Thus, he says:
It need not always be a war of extermination such as in the relations between men and morbific microbes. Reason has demonstrated that, for man, the most adequate means of improving his condition is social cooperation and division of labor. They are man’s foremost tool in his struggle for survival.
Ancient man — maybe even Nick the Neanderthal — must have rationally had to think: “if I do X service(s) or provide Y good(s) to my fellow man — stone-age Sid — he will in return give me X service(s) or Y good(s) which he is doing/producing that I want that he can make/do better than me.” The ability to reason this is our key distinguishing feature from the rest.
Mises posits three conditions that satisfy the need for the social cooperation entailed in the division of labor. First, man is unequal; second the resources of the earth are unequally distributed over various geographies and climates. If neither of these distinctions existed, the division of labor would not offer any advantages to man. The third and most important point is that cooperation is needed for man to work with his fellow man to produce things more productively. A lasting society is built on permanent cooperation. A war of all against all or a violent competitive struggle is anti-societal.
We must always remember that one of the phenotypic effects of our genes — to aid procreation and successful multiplication — is the undeniable fact that if you cooperate with others, satisfy their most urgent needs, and seek the same in return, you will prosper and multiply.
Seventeen million people walk though the doors of Tesco Plc, voluntarily, each and every week in the UK because Tesco gives them better goods and services at more affordable prices, when they want it. This is voluntary cooperation writ large and no coercion abounds in this model. Their competition with the others is peaceful and driven solely by the wishes of the consumers expressing their sovereign choices by spending their money where they do. From the consumer preferences down, the management shapes its offer to serve them.
Wherever you see disharmony, if you look carefully, you will see government intervention, or a strongman/bandit at work, to favour one party over another party, or a court ruling to do the same. All intervention is anti-social and thus anti-cooperative and we should be very wary of it as some one, or some class of persons, is usually being exploited at the expense of others.
Reject social Darwinism, as it has nothing to do with Darwin or his modern apostle Dawkins. Dawkins has stimulated me to show how potentially the phenotypic effects of cooperation could coherently link biology with economics. This is a magnificent thing!
This allows us to lift ourselves out of autarkic or small hunter gatherer groupings in order to seek to cooperate, in peaceful social harmony with our fellow man. Then I say, in the language of Dawkins: embrace and glorify our genes. Don’t rebel against them.
This article was previously published at Mises.org and in expanded form at TobyBaxendale.com.
A Bloomberg appearance by Gordon Kerr, Cobden Centre advisory board member and founder of Cobden Partners
Oct. 21 (Bloomberg) — Gordon Kerr, consultant at Cobden Partners, talks with Guy Johnson about the potential $13 billion settlement by JPMorgan to end civil claims over its sales of mortgage bonds. He speaks on Bloomberg Television’s “The Pulse.”
China is now overtly pushing for the US dollar to be replaced as the world’s reserve currency.
Xinhua, China’s official press agency on Sunday ran an op-ed article which kicked off as follows:
As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.
China does have a broad strategy to prepare for this event. She is encouraging the creation of an international market in her own currency through the twin centres of Hong Kong and London, side-lining New York, and she is actively promoting through the Shanghai Cooperation Organisation (SCO) non-dollar trade settlement across the whole of Asia. She has also been covertly building her gold reserves while overtly encouraging her citizens to accumulate gold as well.
There can be little doubt from these actions that China is preparing herself for the demise of the dollar, at least as the world’s reserve currency. Central to insuring herself and her citizens against this outcome is gold. China has invested heavily in domestic mine production and is now the largest producer at an estimated 440 tonnes annually, and she is also looking to buy up gold mines elsewhere. Little or none of the domestically mined gold is seen in the market, so it is a reasonable assumption the Government is quietly accumulating all her own production without it becoming publicly available.
Recorded demand for gold from China’s private sector has escalated to the point where their demand now accounts for significantly more than the rest of the world’s mine production. The Shanghai Gold Exchange is the mainland monopoly for physical delivery, and Hong Kong acts as a separate interacting hub. Between them in the first eight months of 2013 they have delivered 1,730 tonnes into private hands, or an annualised rate of 2,600 tonnes.
The world ex-China mines an estimated 2,260 tonnes, leaving a supply deficit for not only the rest of gold-hungry South-east Asia and India, but the rest of the world as well. It is this fact that gives meat to the suspicion that Western central bank monetary gold is being supplied keep the price down, because ETF sales and diminishing supplies of non-Asian scrap have been wholly insufficient to satisfy this surge in demand.
So why is the Chinese Government so keen on gold? The answer most likely involves geo-politics. And here it is worth noting that through the SCO, China and Russia with the support of most of the countries in between them are building an economic bloc with a common feature: gold. It is noticeable that while the West’s financial system has been bad-mouthing gold, all the members of the SCO, including most of its prospective members, have been accumulating it. The result is a strong vein of gold throughout Asia while the West has left itself dangerously exposed.
The West selling its stocks of gold has become the biggest strategic gamble in financial history. We are committing ourselves entirely to fiat currencies, which our central banks are now having to issue in accelerating quantities. In the process China and Russia have been handed ultimate economic power on a plate.
This article was previously published at GoldMoney.com.
We use the term “reserve currency” when referring to the common use of the dollar by other countries when settling their international trade accounts. For example, if Canada buys goods from China, it may pay China in US dollars rather than Canadian dollars, and vice versa. However, the foundation from which the term originated no longer exists, and today the dollar is called a “reserve currency” simply because foreign countries hold it in great quantity to facilitate trade.
The first reserve currency was the British pound sterling. Because the pound was “good as gold,” many countries found it more convenient to hold pounds rather than gold itself during the age of the gold standard. The world’s great trading nations settled their trade in gold, but they might hold pounds rather than gold, with the confidence that the Bank of England would hand over the gold at a fixed exchange rate upon presentment. Toward the end of World War II the US dollar was given this status by international treaty following the Bretton Woods Agreement. The International Monetary Fund (IMF) was formed with the express purpose of monitoring the Federal Reserve’s commitment to Bretton Woods by ensuring that the Fed did not inflate the dollar and stood ready to exchange dollars for gold at $35 per ounce. Thusly, countries had confidence that their dollars held for trading purposes were as “good as gold,” as had been the Pound Sterling at one time.
However, the Fed did not maintain its commitment to the Bretton Woods Agreement and the IMF did not attempt to force it to hold enough gold to honor all its outstanding currency in gold at $35 per ounce. The Fed was called to account in the late 1960s, first by France and then by others, until its gold reserves were so low that it had no choice but to revalue the dollar at some higher exchange rate or abrogate its responsibilities to honor dollars for gold entirely. To it everlasting shame, the US chose the latter and “went off the gold standard” in September 1971.
Nevertheless, the dollar was still held by the great trading nations, because it still performed the useful function of settling international trading accounts. There was no other currency that could match the dollar, despite the fact that it was “delinked” from gold.
There are two characteristics of a currency that make it useful in international trade: one, it is issued by a large trading nation itself, and, two, the currency holds its value vis-à-vis other commodities over time. These two factors create a demand for holding a currency in reserve. Although the dollar was being inflated by the Fed, thusly losing its value vis-à-vis other commodities over time, there was no real competition. The German Deutsche mark held its value better, but German trade was a fraction of US trade, meaning that holders of marks would find less to buy in Germany than holders of dollars would find in the US. So demand for the mark was lower than demand for the dollar. Of course, psychological factors entered the demand for dollars, too, since the US was seen as the military protector of all the Western nations against the communist countries for much of the post-war period.
Today we are seeing the beginnings of a change. The Fed has been inflating the dollar massively, reducing its purchasing power in relation to other commodities, causing many of the world’s great trading nations to use other monies upon occasion. I have it on good authority, for example, that DuPont settles many of its international accounts in Chinese yuan and European euros. There may be other currencies that are in demand for trade settlement by other international companies as well. In spite of all this, one factor that has helped the dollar retain its reserve currency demand is that the other currencies have been inflated, too. For example, Japan has inflated the yen to a greater extent than the dollar in its foolish attempt to revive its stagnant economy by cheapening its currency. So the monetary destruction disease is not limited to the US alone.
The dollar is very susceptible to losing its vaunted reserve currency position by the first major trading country that stops inflating its currency. There is evidence that China understands what is at stake; it has increased its gold holdings and has instituted controls to prevent gold from leaving China. Should the world’s second largest economy and one of the world’s greatest trading nations tie its currency to gold, demand for the yuan would increase and demand for the dollar would decrease. In practical terms this means that the world’s great trading nations would reduce their holdings of dollars, and dollars held overseas would flow back into the US economy, causing prices to increase. How much would they increase? It is hard to say, but keep in mind that there is an equal amount of dollars held outside the US as inside the US.
President Obama’s imminent appointment of career bureaucrat Janet Yellen as Chairman of the Federal Reserve Board is evidence that the US policy of continuing to cheapen the dollar via Quantitative Easing will continue. Her appointment increases the likelihood that demand for dollars will decline even further, raising the likelihood of much higher prices in America as demand by trading nations to hold other currencies as reserves for trade settlement increase. Perhaps only such non-coercive pressure from a sovereign country like China can wake up the Fed to the consequences of its actions and force it to end its Quantitative Easing policy.
This article was previously published at Mises.org.
We are now into a second week of a partial Federal Government shut-down, which is causing considerable concern, centred on the Government’s ability to finance its debt and pay interest without a budget agreed for the new fiscal year. Should this continue into next week and beyond, the Fed will have to enter damage-limitation mode if the Treasury cannot issue any more bonds because of the separate problem of the debt ceiling.
Most likely, QE will have to be switched from financing the government to buying Treasuries already owned by the private sector. Any attempt to reduce the monthly addition of raw money will simply result in bond yields and then interest rates rising. And indeed, already this week we have seen yields on short-term T-bills rise in anticipation of a possible default. The market is naturally beginning to discount the possibility that the Fed may not be able to control the situation.
The T-bill issue is very serious, because they are the most liquid collateral for the $70 trillion shadow banking system. And without the liquidity they provide securities and derivative markets, we can say that Round Two of the banking crisis could make Lehman look like a picnic in the park.
This is the sort of event deflationists have long been expecting. According to their analysis there comes a point where debt liquidation is triggered and there is a dash for cash as assets collapse. But they reckon without allowing for the fact that deposits can only be encashed at the margin; otherwise they are merely transferred, and only destroyed when banks go under. This is the risk the Fed anticipates, and we can be certain it will move heaven and earth to avoid bank insolvencies.
Furthermore the deflationists do not have a satisfactory argument for the effect on currency exchange rates. Iceland went through a similar deflationary event to that risked in the US today when its banking system collapsed and the currency halved overnight. Today a dollar collapse on the back of a banking crisis would also disrupt all other fiat currencies, forcing central banks to coordinate intervention to conceal the currency effect. This leaves gold as the only true reflector of loss of confidence in the dollar and therefore all other fiat currencies.
Those worrying about deflation ignore the fact that it is the fiat currency that takes it on the chin while gold rises – every time without exception. This was even the experience of the 1930s, when Roosevelt suspended convertibility, increased the price of gold by 40% to $35 per ounce, and the banking crisis was contained.
Of course there is likely to be some short-term uncertainty; but against the Fiat Money Quantity (FMQ) gold is down 30% compared with the price pre-Lehman crisis. This is shown in the chart below.
With gold at an extreme low in valuation terms, current events, whichever way they go, seem unlikely to drive it much lower. A wise man perhaps should copy the Asians, who know a thing or two about paper currencies, and are buying gold in ever-increasing quantities.
This article was previously published at GoldMoney.com.