May 2012


The previous post was in response to a post on money, and the confusion engendered by the abstract nature of money. This appeared as a “comment” in the original post:

Resting In Awareness said

May 31, 2012 at 7:14 pm
The LETSystem is an improvement on straight bartering. In bartering between two people, each must have something the other wants. LETS is a like a pool of barterers, with credit given to someone providing goods or services, which they can then use to purchase their requirements from anyone in the pool. I was involved in the very early stages of a LETS group in Kingston-upon-Thames which has been operating over twenty years: http://www.kutlets.org.uk/

Barter is direct exchange. You must have a confluence of wants for barter to succeed. I produce bread, you shoes: you must demand bread, and I must demand shoes for a direct exchange to take place.

The second issue of course is value or in money terms, price. How many loaves of bread for this particular style, make, function of shoe? What you end up with are endless exchange ratios that require negotiation on every potential exchange.

Third is proximity. You tend to barter face-to-face. Save all the explanations of how this can be done online, yes it can, but this was made possible by the use of money those thousands of years ago.

Money was developed to solve these problems.

The “LETS” system grants credit. So all they have done is create a free market money. Essentially, they are just waffling. They seem oblivious to the contradiction. They are not undertaking barter…they are exchanging using a “money system.”

The average chappie, who is not involved in the markets on a day-to-day basis, and thus only thinks about and/or considers issues that the financial chappies think/argue about on a daily basis, have a very different perspective and understanding of money. Although, that could be said for quite a few of the financial chappies also. The following can be found as the original here

Token money was never meant to be an end in itself, and certainly not for speculation.

Interesting opening statement. Money…an end, or a means? I would agree I think that money is a means: a means to facilitate exchange, to simplify and universalize the price system, to allow economic calculation and incorporate the reality of time into those calculations.

As for the second…speculation? Incorrect. Entrepreneurs are speculators, and have to be. They speculate, calculated in terms of money. Money allows, and is necessary for this speculation, which is itself responsible for creating wealth through production.

What is money, but a token of convenience which parties trade goods and services.

Superficial analysis. Money allows for indirect exchange to take place. This indirect exchange creates the price system. The price system allows economic calculation. Economic calculation must take into account the passage of time. As such, money, is actually responsible for the expansion of society.

These tokens made of paper, of base metal, or markings in the memory of a computer are worthless in of themselves.

Incorrect. The Regression Theorem of Money proves that any commodity money, viz. gold/silver, has to have value as a commodity, prior to an additional value that accrues to the commodity as a money.

The problem is that those in control of these tokens think that they have control over you and me; they start treating these tokens as commodities to gamble with; and they play games by devaluing, printing more or scrapping these tokens.

The basic confusion between a commodity money, that is a product of the free market, and a fiat money which is a product of a coercive power exerting monopoly power over money.

A man can be the richest man on earth with trillions of these tokens on a computer database in a bank, and in one crisis it can be wiped to nothing. Money as tokens is a worthless illusion.

Fiat money value is controlled by the coercive power that holds the monopoly over the fiat money creation. Your statement confuses so many different issues. Your example states money held as a cash balance can be wiped to zero, is incorrect. Money held as fiduciary media, viz. a debt instrument, can be wiped to zero if the debt is defaulted. The basic confusion here is [talking about fiat money] the lack of distinction between fiat held as cash, and fiat held as fiduciary media.

Spain at the present time occupies the minds of bankers, politicians and media, in the place of Greece, in the latest financial crisis as the experts attempt to play further tricks with worthless tokens to stem total disaster. Money tokens have been replaced with debt tokens. I am unsure how one can trade with negatives.

Fiat money held as cash balances has been substituted with fiduciary media. That fiduciary media is not cash, it represents a claim on cash, which, may not be available on demand, on maturation of the contract, or ever. The ECB and all Central banks are printing/creating more money & credit [inflation] so that the supply of money as cash, balances the total supply of fiduciary media. This inflation dilutes the purchasing power of each individual unit of existing cash.

The real commodity of trade is things produced, our time, our sweat. You may have no money, but everyone has a commodity of their creativity, time and sweat which is tangible and more valuable than a token that can vanish as an item of value overnight.

You conflate commodities with factors of production, which muddies the water somewhat. Cutting to the bone, the issue that you seem to be trying to reach is the issue of property rights and natural law.

Interest bearing investments, stocks and shares and other token based investing is really a mass delusion with nothing of value backing it up, but of debt.

Incorrect.

You are purchasing [contracting for] the property rights to productive assets. Those productive assets, if you have speculated intelligently, will provide future value cash-flows discounted through time and risk. If you lend [hold debt] you settle for an interest return [future value discounted by present value] on those productive assets.

You yourself have just stated that production underlies the production of wealth, which is correct. You have simply confused yourself with abstract concepts.

For investments something of practical and tangible value is better like land, buildings, art, manufactured commodities (the type useful even if civilisation collapses) than token money.

The productive assets of the steel mill, or oil field, or search engine are every bit as tangible as the ones that you have listed. Land is actually a factor of production, whereas art is a product. The two are very different economically.

It is better to invest as an investor in small local or creative enterprises, such as those on KickStarter.com. As has been shown by the Facebook IPO saga, the small investor was ripped off by faceless bankers.

Caveat emptor. If you do not possess the skill, experience, intelligence and/or luck to accurately assess the investment, you have no business trying to speculate against the professionals. FB was roundly slagged off by everyone who participates regularly in the markets. At 100X earnings, in this market, it was doomed as an IPO. Every blogger would have told you so, and did, endlessly.

I haven’t had a gold post for a while. Gold is potentially at a decision point.

Both of these charts appeared in yesterday’s blogoland. Both are essentially stating the same thing: viz. that gold is/has reached a potential inflection point. Going to the Futures data, we see the following:

The interesting points are the COT and volume data. Dealing with the volume first, we can make the following factual observations: [i] there has been a surge of volume, in excess of normal volume levels. [ii] Price came off of the lows.

The COT data is less helpful in the raw format that we encounter it on the chart. The trouble is that I don’t track COT Gold data, so the one off figure that I have calculated doesn’t shed a great deal of light on the matter. For what it is worth, the index number is 21%. Producers are buying contracts. Speculating? Covering sold short contracts? Difficult to say.

On that basis, I will only consider the volume. The volume is significant. The volume is coming from the producers. Will it turn prices? I think that it will. Gold will I suspect trade higher.

The market is starting to look rather vulnerable here. The next two days will see a massive vomiting of economic data from all over the world. Now, what do you think will be the underlying message in that data?

I would state that it will for the most part be utter shite. The economies of any country you care to mention are more or less in the toilet, save perhaps Germany. The question then becomes: have markets already priced in the probable bad news to come?

This is a little more difficult to answer. The decline in May, has been I believe largely driven by disappointing Corporate profit results, definitely weaker, but, additionally, weaker guidance. Add to that the Grexit, the now building Spexit, and you have those events possibly already priced in. With the deluge of potentially [likely] bad economic data over the next 48hrs, I would say that lower prices are a definite possibility, I do not think any potential bad news has been priced in to date.

My market neutral trade is starting to work [at least today] which is long MCD and short YUM. I’m looking for circa 7% movement to close the trade. I suspect a bearish market would probably help the trade, higher volatility is associated with panic and fear.

Goldman Sachs economist Jim O’Neill has a chart that shows the market forecast for oil going forward 5yrs. So how accurate might that be?

Essentially he is making the call that it pretty much ends up, and stays around this level. The chart that he shows, demonstrates no fluctuations; how realistic is that, even if the price ends up circa $90.oo in 5yrs?

So first up, what is the condition of supply?

Production, and therefore supply, is flat. Even the highs of $140/barrel did little to increase supply. Why is that? The obvious answer is that supply is constrained, either voluntarily, or through an inability to produce more, viz. reserves and pumping capacity are limited. I don’t buy into the fact that at $140/barrel, producers decided not to take the money, although it is possible.

The Saudi’s you would think, if anyone, might make this decision to strategically preserve oil reserves for another day so to speak, after all, apart from oil, they basically have nothing of any value.

The Saudi’s no longer seem able to produce the marginal barrel. That distinction seems to be held by Russia, now the producer of the world’s marginal barrel. The Russians I dare say are not averse to high oil prices, and the higher they go, the happier, for the moment anyway, they will fulfill that demand.

Russia’s production has only really replaced the falling Saudi production. The chart of over-all supply, seems pretty static, regardless of the price fluctuations.

Cheap energy is critical to the current utilization of fixed capital, which underlies all production. The price of oil, therefore is critical to profit margins going forward. It doesn’t seem plausible that with increasing demand, static supply, that we end up with static oil prices, unless natural gas can replace oil in critical areas of energy production, powering utilities that produce electricity etc.

The US is now sitting on, if it is to be believed, enormous natural gas reserves, the price of natural gas are pretty close to, if not actually at, all-time lows. There are a few savvy investors calling for higher prices, which is not unreasonable, being that the sustainability of capital to absorb oil prices, will essentially kill any potential economic growth, unless there is a rampant inflation within goods and services supplied.

Forgetting about whose fault all this is, what a fucking disaster. That is a fair chunk of capital to destroy, in a time when capital is scarce.

Keynesians, including the Times columnist Paul Krugman, have been highly critical of the Europeans for impeding growth rather than stimulating it with contractionary fiscal policies. For example, with an eye on Europe, Professor Krugman has written, “Slashing spending in a depressed economy depresses the economy even more, and if you don’t have to, you shouldn’t do it — ­you should wait until the economy is stronger.”

There seems to be some confusion between fiscal and monetary, and inflationary: an economy is either inflationary, or it is not. It matters not where the expansion in money and credit originates, whether from fiscal or monetary policies, just that it is either present, or it is not. The US has been inflationary since the 1900’s, I’ll try and find older data, but you get the picture.

Consequently, it is somewhat heretical to hear Mr. Romney express grave concern about the potential economic impact of embracing the conservative consensus and slashing the deficit quickly. As he told Time’s Mark Halperin:

If you take a trillion dollars, for instance, out of the first year of the federal budget, that would shrink G.D.P. over 5 percent. That is by definition throwing us into recession or depression. So I’m not going to do that, of course.
Continuing, Mr. Romney said:

GDP is not an accurate measure of prosperity or poverty in an economy. It is largely reflective of the effects of money and credit expansion as nominal prices expand reflecting this net increase in money. Production of goods and services multiplied by nominal prices = GDP…and so what? It tells you nothing of the question that you are asking.

I don’t want to have us go into a recession in order to balance the budget. I’d like to have us have high rates of growth at the same time we bring down federal spending, on, if you will, a ramp that’s affordable, but that does not cause us to enter into an economic decline.

Noble sentiments. Obviously a politician seeking election, all the usual platitudes flow. Yes, you can, have high growth and less federal spending, simple: drastically cut government expenditures, and cut taxes. You immediately shift the circulating money from useless government bureaucrats to entrepreneurs. The free market price system will then allocate as efficiently as it is possible to do so, allocation of scarce resources to their most demanded uses.

The problem is that this forecast makes sense only if one accepts Keynesian economics — something the C.B.O. has long been accused of doing. Partly for this reason, Newt Gingrich referred to it as a “reactionary socialist institution” and called for it to be abolished.

Definitely get rid of these bureaucrats.

Mr. Romney is not the first Republican to embrace Keynesian economics. The free-market economist Milton Friedman, who advised the G.O.P. presidential candidate, Barry Goldwater, in 1964 told Time in 1965, “We are all Keynesians now.” (Dr. Friedman later complained that the Time reporter truncated his full quotation, which was, “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.”)

In 1971, Richard Nixon famously told the broadcaster Howard K. Smith that he was “now a Keynesian in economics.” Mr. Smith expressed shock at Nixon’s statement. He likened it to a Christian saying, “All things considered, I think Mohammad was right.”

Keynesian economics are the economics of socialism, and even tending towards totalitarianism. Keynes embraced the philosophy espoused by Plato, that the gifted elite should constitute the ruling class, and hence allocate all economic resources. Government is that ruling elite. Yes indeed, those fuck-wits actually have the temerity to consider themselves the intellectual elite.

Although Ronald Reagan never expressed sympathy with Keynes, many economists have asserted that his economic policies were de facto Keynesian. They point to the sharp rise in federal spending to 23.5 percent of G.D.P. in 1983, from 21.7 percent in Jimmy Carter’s last year, which significantly softened the blow of the 1981-82 recession and helped restore growth.

Reagan is an interesting one. He deserves a post all to himself.

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