Will COVID-19 Reset the Global Monetary Order?

By Andrew Moran – Re-Blogged From Liberty Nation

In response to the Great Recession a decade ago, the international community fired off the big guns to stave off the inevitable decay of the global economy that had been manipulated and distorted through the Keynesian doctrine. Despite the massive fiscal and monetary stimulus at the time, many countries failed to recover from the financial crisis – and those that survived the market meltdown are still paying for the spending and bailouts. After pulling the trigger on the Coronavirus-targeted bazookas, the world’s pockets are empty, potentially creating a scenario for a reset in the global monetary order. On the other side of the lockdown, who will stand tall and reign supreme? If history is any indicator, it will either be the country with a lifetime supply of printing press ink or the one with a vault full of gold.

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A Tale Of Two Markets

Do You Solemnly Swear?

Stay with me on this… the purpose will become clear soon.

Assume (without laughing or crying) that our U.S. senators are honest individuals filled with integrity. Yes, I know, but stay with me…

They voted during the impeachment trial for President Donald Trump. They swore to uphold the following oath:

Do you solemnly swear that in all things appertaining to the trial of the impeachment of Donald John Trump, president of the United States, now pending, you will do impartial justice according to the Constitution and laws, so help you god?”

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Is the Monetary Reset at Hand

By Chris Powell, Money Metals News Service – Re-Blogged From Headline Wealth

For most of this decade owning gold and gold-related investments has required the patience of Job, and the sector is so obscure that it is hard to be sure of anything.

But for months now the unusual developments have been piling up so much that it may be possible to regain some optimism.

There are indications of a shortage of metal not just at the New York Commodities Exchange, where for months now most contracts have been settled through a supposedly “emergency” procedure called “exchange for physicals,” but also in London, the hub of the world gold market, where the usual flow of metal to Switzerland recently reversed, with metal flowing back to London amid increasing demand.

This corresponded with announcements of gold acquisitions by central banks that had not shown any interest in gold.

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Central Planning Vs. Economics

By Keith Weiner – Re-Blogged From Gold Eagle

We have spilled barrels of electronic ink, making the point that central banks are wreaking havoc. They hurt the poor, the middle class, and the rich. They hurt the wage earners, the business owners, the investors (aka the “rentiers”), and the pensioners. They have variously inflicted rising interest rates, too-high rates, falling rates, and too-low rates. They have imposed perverse incentives to destroy capital and consume wealth.

Those discussions focused on the specific injuries, their causes and effects. An analogy is studying the damage done to the body if it is cut by a sharp blade, bludgeoned by a blunt instrument, burned by a hot flame, or poisoned by a toxic chemical. One can study these things in excruciating detail, without considering one thing.

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End Of An Epoch

By Keith Weiner – Re-Blogged From Gold Eagle

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

What the heck did John Maynard Keynes mean by saying this? Overturning the existing basis of society?! Let’s begin by stating something that is both obvious and unpopular. We are living in days that could be called the end of an epoch. The signs are everywhere, and becoming more blatant.

Wealth Inequality

The Left focuses on wealth inequality, because they see one of the signs. The falling interest rate seemingly benefits those who own assets (it does not actually benefit anyone), particularly those who finance assets with dirt-cheap credit. And it harms wage-earners, by incentivizing businesses to borrow cheap to buy capital goods to replace labor.

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Money And Prices Are A Dynamic System

By Keith Weiner – Re-Blogged From Gold Eagle

The basic idea behind the Quantity Theory of Money could be stated as: too much money supply is chasing too little goods supply, so prices rise. We have debunked this from several angles. For example, we can use a technique that every first year student in physics is expected to know. Dimensional analysis looks at the units on both sides of an equation.

Money supply is a quantity, a stocks, i.e. dollars or tons in the gold standard. Goods supply is a quantity per year, a flows, i.e. tons / year. You cannot compare tons to tons / year. The attempt is meaningless.

We have noted that if a bank sells a Treasury bond, it is not going to spend the cash on a big bender in Vegas. And we discussed the fact that a dollar is not consumed in the transaction, unlike the hamburger for which it is exchanged. At any given quantity of dollars, that dollar which bought the burger could be used again and again, at an accelerating pace, to buy more and more goods, driving prices up to infinity. We would add that when a burger—or anything—is bought, we cannot just assume that the price will go up. We need to know if the buyer took the seller’s offer price, or if the seller took the buyer’s bid price.

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150 Years Of Bank Credit Expansion Is Near Its End

By Alasdair Macleod – Re-Blogged From GoldMoney

The legal formalisation of the creation of bank credit commenced with England’s 1844 Bank Charter Act. It has led to a regular cycle of expansion and collapse of outstanding bank credit.

Erroneously attributed to business, the origin of the boom and bust cycle is found in bank credit. Monetary policy evolved with attempts to control the cycle with added intervention, leading to the abandonment of sound money. Today, we face infinite monetary inflation as a final solution to 150 years of monetary failures. The coming systemic and monetary collapse will probably mark the end of cycles of bank credit expansion as we know it, and the final collapse of fiat currencies.

This article is based on a speech I gave on Monday to the Ludwig von Mises Institute Europe in Brussels.

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The Perversity Of Negative Interest

By Keith Weiner – Re-Blogged From Gold Eagle

Today, we want to say two things about negative interest rates. The first is really simple. Anyone who believes in a theory of interest that says “the savers demand interest to compensate for inflation” needs to ask if this explains negative interest in Switzerland, Europe, and other countries. If not, then we need a new theory (Keith just presented his theory at the Austrian Economics conference at King Juan Carlos University in Madrid—it is radically different).

Perverse Inventives

Second, negative interest perversely incentivizes some very perverse behaviors.

For example, suppose you could borrow at -1% and just hold the cash. Your asset stays the same, while your liability is going down. You are making a positive return for doing nothing productive! It should be obvious to an 8th grader, though perhaps not a PhD economist, that there is something wrong with this. Grossly, monstrously wrong.

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Why “Monetary Policy” Will Always Distort the Free Market

By Richard M. Ebeling – Re-Blogged From Savvy Street

Money is not a creation of the State. A widely used and generally accepted medium of exchange emerges spontaneously.

Carl Menger (1840-1921), the founder of the Austrian School in the 1870s, explained in his Principles of Economics (1871) and his monograph on “Money” (1892), that money is not a creation of the State.

A widely used and generally accepted medium of exchange emerges “spontaneously”—that is, without intentional government plan or design—out of the interactions of multitudes of people over a long period of time, as they attempt to successfully consummate potentially mutually advantageous exchanges. For example, Sam has product “A” and Bob has product “B”. Sam would be happy to trade some amount of his product “A” for some quantity of Bob’s product “B”. But Bob, on the other hand, does not want any of Sam’s “A”, due to either having no use for it or already having enough of “A” for his own purposes.

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Bitcoin Myths

By Keith Weiner – Re-Blogged From Gold Eagle

“Money is a matter of functions four: a medium, a measure, a standard, a store.”

Most of the talk was structured around discussing these functions. Medium is pretty obvious: the dollar is the universal medium of exchange. It is basically frictionless, trading at zero spread (with perhaps a fee to wire dollars internationally). Bitcoin claims to be a medium, but it’s slow, can be expensive due to limitations of the blockchain. And as later confirmed by bitcoin proponents, bitcoin’s bid-ask spread is wide and can widen unpredictably for large orders. Like $5,000.

Even in cases where bitcoin is a medium, there is a third-party currency exchange broker who finds a fourth party who wants to buy bitcoin. The merchant gets the dollars he really wants, the customer pays in bitcoin, and the fourth party buys the bitcoin and provides dollars to the merchant. All for a fee charged by the broker.

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Money And The Theory Of Exchange

By Alasdair Macleod – Re-Blogged From Goldmoney

Evidence mounts that the global credit cycle has turned towards its perennial crisis stage. This time, the gathering forces appear to be on a scale greater than any in living memory and therefore the inflation of all major currencies to deal with it will be on an unprecedented scale. The potential collapse of the current monetary system as a consequence must be taken very seriously.

To understand the consequences of what is likely to unfold requires a proper understanding of what money is and of the purpose for its existence. It does not accord with any state theory of money. This article summarises the true economic role of money and how its use-value is derived. Only then can we apply the lessons of theory and empirical evidence to anticipate what lies ahead.

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Motte And Bailey Fallacy

By Keith Weiner – Re-Blogged From Gold Eagle

This week, we will delve into something really abstract. Not like monetary economics, which is so simple even a caveman can do it.

A Clever Ruse

We refer to a clever rhetorical trick. It’s when someone makes a broad and important assertion, in very general terms. But when challenged, the assertion is switched for one that is entirely uncontroversial but also narrow and unimportant. The trick is intended to foreclose debate of the broad assertion, not really to retreat to the narrow one.

The essence is bait-and-switch, or equivocation.

So let’s start with a simple example: diversity in a corporate board body is good. Suppose you demand why. The predictable answer is that it would be a boring world with less creative solutions if everyone on the board had the same background and perspective. Most people would agree with this, of course.

And that is the trick.

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The 2 Faces Of Inflation

By Keith Weiner – Re-Blogged From Gold Eagle

We have a postscript to last week’s article. We said that rising prices today are not due to the dollar going down. It’s not that the dollar buys less. It’s that producers are forced to include more and more ingredients, which are not only useless to the consumer. But even invisible to the consumer. For example, dairy producers must provide ADA-compliant bathrooms to their employees. The producer may give you less milk for your dollar, but now they’re giving you ADA-bathroom’ed-employees. You may not value it, but it’s in the milk.

On Twitter, one guy defended the Quantity Theory of Money this way: inflation (i.e. monetary debasement) is offset by going to China, where they don’t have an Environmental Protection Agency. In other words, the Chinese government does not force manufacturers to put so many useless ingredients into their products as the US government does.

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Monetary Innovation In The Ancient World

By Keith Weiner – Re-Blogged From Silver Phoenix

We think we are the only generation to be smart. In the 19th century, they did not have the internal combustion engine. In the 18th century, they did not have the railroad. In the 17th century, they did not have the piano. So, most people assume, they were dumb. They did not know about smart phones, so they would not have understood anything. Such as money.

So let’s tell the story of the ancient city of Orinthus. They were innovators in money, millennia ahead of their time…

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Division of Labor

Orinthus was inhabited by the first people to settle down with agriculture and fishing. Soon, a new class of evolved: those who crafted goods out of riverbank clay, animal hides, and even stone quarried from the local hills. With the advent of real production and trade, they soon discovered it’s terribly inefficient if the guy who made leather needed to find a fisherman who needed shoes whenever he was hungry. They realized they needed money.

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On Board Keynes Express To Ruin

By Keith Weiner – Re-Blogged From Gold Eagle

Last week, I ranted about the problem with our monetary system and trajectory: falling interest rates is Keynes’ evil genius plan to destroy civilization. This week, I continue the theme—if in a more measured tone—addressing the ideas predominant among the groups who are most likely to fight against Keynes’ destructionism. They are: the capitalists, the gold bugs, and the otherwise-free-marketers. I do not write this to attack any particular people, nor indeed as an attack at all. My purpose comes from my belief that to fix a problem, one must understand the nature of the problem.

I highlight these groups because, if there is ever to be a real movement to reform our monetary system, it would come from one of these groups, or ideally an alliance among all three. However, that is not in the cards today. Let’s look at why not.

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The Duality Of Money

By Keith Weiner – Re-Blogged From Gold Eagle

Last week, in Is Capital Creation Beating Capital Consumption, we asked an important question which is not asked nearly often enough. Perhaps that’s because few even acknowledge that capital is being consumed, and fewer tie it to the falling interest rate (perhaps that is because the fact of the falling interest rate is, itself, controversial). At any rate, we showed a graph of Marginal Productivity of Debt.

We said that this shows that consumption of capital is winning the race. And promised to introduce another new concept to explain why.

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Central Planning Is More than Just Friction

By Keith Weiner – Re-Blogged From Gold Eagle

It is easy to think of government interference into the economy like a kind of friction. If producers and traders were fully free, then they could improve our quality of life—with new technologies, better products, and lower prices—at a rate of X. But the more that the government does, the more it burdens them. So instead of X rate of progress, we get the same end result but 10% slower or 20% slower.

Some would go so far as to say, “The free market finds ways to work even through government restrictions, taxes, and regulations.” We won’t address cardboard straws emerging where plastic straws are banned. Or gangs selling illegal drugs on the black market, when they are prohibited by law.

As usual, we want to talk about the most important kind of government intervention. And it happens to be the one kind of government intervention that is accepted by nearly everyone. The intervention supported by the otherwise-free-marketers.

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Is The Buyer’s Market For Silver Coming To An End?

By Stefan Gleason – Re-Blogged From Silver Phoenix

Few markets are as depressed – and, as many analysts argue, suppressed – as silver. Prices for the white metal continue to languish in a low-level trading range amidst lackluster demand.

The upshot for investors is that they can now obtain silver bullion at both a low spot price and a low premium above spot.

How long this buyer’s market will is unknowable last. But given silver’s manic-depressive personality, prices could launch explosively higher at any time.

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World’s Biggest Hedge Fund Is Getting Whacked

By John Rubino – Re-Blogged From Dollar Collapse

A few years ago the Swiss National Bank (SNB) – which traditionally held “monetary assets” like government bonds, cash and gold to back up the Swiss franc — decided to branch out into common stocks.

This was a departure, but for a while a brilliant one. The SNB loaded up on Big Tech like Apple, Amazon and Microsoft, and rode them to massive profits, which enriched both the Swiss people and the SNB’s stockholders (in another departure, it’s a publicly traded company as well as a central bank).

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Why China Should Remove All Trade Tariffs

By Alasdair Macleod – Re-Blogged From Silver Phoenix

I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in tariffs. MAKE AMERICA RICH AGAIN

@realDonaldTrump  tweet 10:04EST, 4 December 2018

It is widely understood by economists of most theoretical persuasions that trade tariffs are a bad idea, but President Trump has laid out his stall. The political class, prodded usually by the vested interests of crony capitalists, always fall for trade protectionism. President Trump’s tariff war is just the latest example that coincidently stretches back to the introduction of central banks. I shall address this coincidence later in this article.

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Inflation

By Keith Weiner – Re-Blogged From Gold Eagle

What is inflation?

Any layman can tell you—and nearly everyone uses it this way in informal speech—that inflation is rising prices. Some will say “due to devaluation of the money.”

Economists will say, no it’s not rising prices per se. That is everywhere and always the effect. The cause, the inflation as such, is an increase in the quantity of money. Which is the same thing as saying devaluation. It is assumed that each unit of money commands a pro rata share of all the goods produced, so if there are more units then that means each unit is worth less. Value = 1 / N (where N is the number of units outstanding).

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Golden Renaissance

By Keith Weiner – Re-Blogged From Gold Eagle

A major theme of Keith’s work—and raison d’etre of Monetary Metals—is fighting to prevent collapse. Civilization is under assault on all fronts.

The Battles for Civilization

There is the freedom of speech battle, with the forces of darkness advancing all over. For example, in Pakistan, there are killings of journalists. Saudi Arabia apparently had journalist Khashoggi killed. New Zealand now can force travellers to provide the password to their phones so the government can go through all your data, presumably including your gmail, Onedrive, Evernote, and WhatsApp. China is now developing a “social credit” system, to centrally plan the economy and control citizen behavior. Canada has made it a crime to call someone by the wrong gender pronoun. Even in the US, whose First Amendment has (mostly) stood as a bulwark against censorship now has a president who threatens antitrust action against Amazon, because its CEO Jeff Bezos owns the Washington Post, which prints things he does not like. On college campuses, professors are harassed if they say one thing that the professional sensitives are sensitive to. If a controversial speaker is invited, he risks an angry mob coming to disrupt his talk (or worse).

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You Can’t Eat Gold

By Keith Weiner -Re-Blogged From Gold Eagle

“You can’t eat gold.” The enemies of gold often unleash this little zinger, as if it dismisses the idea of owning gold and indeed the whole gold standard. It is a fact, you cannot eat gold. However, it dismisses nothing.

This gives us an idea. Let’s tie three facts together. One, you can’t eat gold. Two, gold is in backwardation in Switzerland. And three, speculation is a bet on the price action.

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Why Are Wages So Low

By Keith Weiner – Re-Blogged From Gold Eagle

Last week, we talked about the capital consumed by Netflix—$8 billion to produce 700 shows. They’re spending more than two thirds of their gross revenue generating content. And this content has so little value, that a quarter of their audience would stop watching if Netflix adds ads (sorry, we couldn’t resist a little fun with the English language).

So it is with wry amusement that, this week, Keith heard an ad for an exclusive-to-Pandora series. The symptoms of falling-interest-disease are ubiquitous.

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Money, Fake Money, And Sound Money

By JP Cortez – Re-Blogged From Gold Eagle

Americans no longer carry gold and silver money in our pockets and purses as our grandparents did. But we still carry the history, legacy, and spirit of those gold and silver coins in our language.

“Sound money” embodies a clear message recognized for centuries around the world. It describes the musical, metallic ring of a gold, silver, or copper coin dropped on any hard surface of glass, stone, wood, or metal.

Sound money literally refers to real wealth, with a natural, unmistakable signature of authenticity, as opposed to the paper, plastic, and electronic debt instruments used almost exclusively today.

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The Cash it Takes to go Shopping in Failing Socialist Venezuela

By Reuters – Re-Blogged From IJR

Jittery Venezuelans on Friday rushed to shops and lined up at gas stations on concerns that a monetary overhaul to lop off five zeros from prices in response to hyperinflation could wreak financial havoc and make basic commerce impossible.

The Wider Image: Venezuelans rush to shops before monetary overhaul

Monetary Paradigm Reset

By Keith Weiner – Re-Blogged From Gold Eagle

Explaining a new paradigm can be both simple and impossible at the same time. For example, Copernicus taught that the other planets and Sun do not revolve around the Earth. He said that all the planets revolve around the Sun, including Earth. It isn’t hard to say, and it isn’t especially hard to grasp.

Indeed, one of its virtues was making the universe simpler. In the old geocentric model, there is the phenomenon of so called retrograde motion—the planets appear to stop moving forward in their orbits, and move backwards temporarily. It’s difficult to describe mathematically, and worse, no one could explain the cause.

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The “Productivity Of Debt” Myth

By Steve Saville – Re-Blogged From http://www.Silver-Phoenix500.com

Page 4 in Hoisington Investment Management’s latest Quarterly Review and Outlook contains a discussion about the falling productivity of debt problem. According to Hoisington and many other analysts, the problem is encapsulated by the falling trend in the amount of GDP generated by each additional dollar of debt, or, looking from a different angle, by the rising trend in the amount of additional debt required to generate an additional unit of GDP. However, there are some serious flaws in the “Productivity of Debt” concept.

There are three big problems with the whole “it takes X$ of debt to generate Y$ of GDP” concept, the first being that GDP is not a good indicator of the economy’s size or progress.

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State or Individual?

By Alasdair Macleod – Re-Blogged From Gold Money

The most important question faced by the human race is almost never addressed in modern times: which should be the master, the state over the individual or the individual over the state? It is particularly relevant today, bearing in mind President Trump is demolishing the established order both domestically and within America’s wider sphere of influence. The blowback he is getting from all the vested interests that have wormed their way into the processes and assumptions that drive government policy is considerable. It is very much relevant to the UK’s Brexit process, where the establishment is trying to scupper the freely expressed will of the people in a referendum.

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Venezuela’s Socialist Hyperinflation Turned People Back To Barter System

By Mac Slavo – Re-Blogged From Freedom Outpost

In the wake of socialist Venezuela’s massive hyperinflation, citizens have returned to the original monetary system in order to survive.  The barter system is now prevalent in the collapsed economy of the authoritarian dictator, Nicolas Maduro.

Barter is one of the best ways to trade goods, considering its almost impossible to tax those transactions and since money in Venezuela is as difficult to come by as food and medicine, that’s now the preferred method of trading goods and services. Women in Venezuela have been turning to prostitution and asking for payment in food instead of cash for a while now, and as the regime tightens its grip on the private sector, more will have to turn to trade to survive.

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Currencies – Truth And Confidence

By Gary Christenson – Re-Blogged From http://www.Silver-Phoenix500.com

In 1967 the Jefferson Airplane sang:

When the truth is found to be lies,

And all the joy within you dies…”

Restate this for global currencies and it becomes:

When the truth is found to be lies,

Confidence in currencies dies.

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Silver – The Original World Currency

By Rory Hall – Re-Blogged From http://www.Silver-Phoenix500.com

Silver has been money, and currency, longer than gold. The word “silver” actually translates to “money” or vice-versa in many countries around the world. Any true Christian knows that Judas sold out Jesus Christ for silver. Some theologians have reached the conclusion that Judas sold out Christ for approximately 30 pieces of silver. What would the value of 30 pieces of silver been in time of Christ?

The word used in Matthew 26:15 (argyria) simply means “silver coins”

There were a few type of coins that may have been used. Tetradrachms of Tyre, usually referred to as Tyrian shekels (14 grams of 94% silver) Continue reading

Common Sense Monics

By Keith Weiner – Re-Blogged From http://www.Gold-Eagle.com

Support you’re driving a car, and you turn the steering wheel left [s/b right. -Bob]. You will feel the door and pillar of the car push your left shoulder (in a left-drive car). This is an observed fact.

Common Sense Physics

One idea—let’s call it common sense physics—is that a force is pushing you outward into the door. If you picture the center of the circle that the car is making in its turn, there is an apparent radial force on you. The direction of this force is outward. It is called centrifugal force.

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Debt And Delusions (Part 2)

By Gary Christenson – Re-Blogged From http://www.Gold-Eagle.com

The problem with debt is the creditor expects to be repaid.

Sovereign debt will be “rolled over,” never extinguished, and repaid with new debt. We delude ourselves and pretend total debt will increase forever (it can’t). That explains global debt exceeding $230 trillion today and official U.S. government debt over $21 trillion, with unfunded liabilities adding another $100 – $200 trillion. There are two choices.

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Fake Markets Produce A Fake Economy

By Steve Saville – Re-Blogged From http://www.Silver-Phoenix500.com

Automtaic Earth’s Raúl Ilargi Meijer just posted an essential essay on the world’s financial markets – or what used to be the world’s financial markets. Here’s an excerpt:

“[Price discovery] is the process of determining the price of an asset in the marketplace through the interactions of buyers and sellers”, says Wikipedia. Perhaps not a perfect definition, but it’ll do. They add: “The futures and options market serve all important functions of price discovery.”

What follows from this is that markets need price discovery as much as price discovery needs markets. They are two sides of the same coin. Markets are the mechanism that makes price discovery possible, and vice versa. Functioning markets, that is.

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Black Tuesday October 29th 1929 Revisited?

By Richard Lancaster – Re-Blogged From http://www.Gold-Eagle.com

Note: This article was originally posted October 29, 2002, when US stocks were in the midst of a severe market crash.  Appropriately, and in view US stocks have already fallen 10% during the first 3 months of 2018, we believe everyone should carefully review the present update as another CRASH may be brewing on the horizon in 2018.

“These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again.”
– John D. Rockefeller on the Depression in 1933

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Why Central Banks Could Mint Their Own Digital Currency

Re-Blogged From Stratfor

Highlights

  • Only 8 percent of global financial transactions today involve cash, but that figure will diminish even further as digital currencies gain prominence.
  • Faced with the growth of cryptocurrencies such as bitcoin, central banks around the world will continue their research into introducing their own digital currencies.
  • By entering the market for cryptocurrencies, central banks could pose a profound threat to the commercial banking business model.

A worker passes a bitcoin mining operation in Quebec in March 2018.

(LARS HAGBERG/AFP/Getty Images)

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This Concept Called ‘VALUE’!

By Don Swenson – Re-Blogged From Kingdomecon

The Millennial generation (those in the 19-34 age bracket) desire to change our monetary system so that a decentralized system emerges. Cryptocurrencies are their attempt for inventing this decentralized marketplace. I fully agree with the general ‘intentions’ of these millennials. But do these folks understand what they are proposing? I, personally, don’t think so. What we need to understand is this inner concept called ‘Value’ and why this concept is key to all money proxies. Let’s think on this concept for a few minutes!

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Inflation vs. Deflation – State Finances

By Alasdair Macleod – Re-Blogged From www.Gold-Eagle.com

There is a general belief, and that is all it is, that state finances fare better in an inflationary environment than a deflationary one. This perception arises from the transfer of wealth from lenders to the state through a devaluation of the currency, which occurs with monetary inflation, compared with the transfer of wealth from the state to its creditors through deflation. The effect is undoubtedly true, even though it is played down by governments, but it ignores what happens to continuing government obligations and finances.

This article looks at this aspect of government finances in the longer term, first on the route to eventual currency collapse which governments create for themselves by ensuring a continuing devaluation of their currencies, and then in a sound money environment with a positive outcome, for which there is good precedent. This is the second article exposing the fallacies of supposed advantages of inflation over deflation, the first being posted here.

Inflationary Policies

While central bankers have convinced themselves, in defiance of normal human behaviour, that consumption is only stimulated by the prospect of higher prices, there can be little doubt that the unmentioned sub-text is the supposed benefits to borrowers in industry and for government itself. Furthermore, the purpose of gaining control over interest rates from free markets is to reduce the general level of interest rates paid to lenders, further robbing them of the benefits of making their capital available to willing borrowers.

All this is in defiance of the principles behind contract law, but the courts do not accept that the unbacked state-issued currency of today is no different from the gold-backed money of yesteryear, nor the same as tomorrow’s further debased currency. Tax on interest is an added distortion, reducing net interest received by holders of depreciating currency even more. It is hardly surprising that the savings rate collapses in an economy characterised by inflation and taxed savings, leading to a relentless expansion of debt, financed by other means.

These “other means” are mostly the expansion of bank credit, which is money created simply through book-entry. The cost of creating this money is set by the wholesale money rates, which are in turn set by the banks that issue the credit. If they all expand their bank credit at the same time (and it should be noted that bankers are very susceptible to herd instincts), interest rates can theoretically fall to zero, or more practically, the marginal cost of expanding it, which on large loans is almost the same thing. And as if that is not enough, there is now in addition a combination of central banks rigging interest rates to be negative coupled with quantitative easing, which has even allowed corporate borrowers to be paid to borrow money.

As already stated, the whole point of monetary inflation is to transfer wealth from lender to borrower. In the government’s case, it is a replacement for taxes that have become so burdensome, that to increase them further either risks provoking a taxpayers’ rebellion, or is so economically damaging that even the state knows to back off. But the books must be balanced, and given the unpalatable alternative of cutting spending, funding through monetary debasement is the accepted solution.

Most central banks understand from experience that if the central bank is involved in funding the government’s spending directly, the currency will eventually descend into crisis. Instead, central banks achieve the same thing by suppressing interest rates and allowing the commercial banks to subscribe for government bonds. They are bought by the banks themselves, or alternatively by lending to others to buy the government’s debt. There are technical monetary differences between bank and public subscriptions for government debt, which must be conceded. Nevertheless, it is just as inflationary, being supported directly or indirectly by the expansion of bank credit, particularly when central banks ensure that total currency in circulation will never be allowed to contract.

An important assumption behind long-term inflation targets, currently set at 2% per annum, is that the general price level can be controlled by managing the money stock. This flies in the face of all experience, and even economic theory. During the Volcker chairmanship of the Fed, when the effective Fed funds rate rose to over 19%, there was no let-up in the growth of broad money. It grew at 6.2% that year, compared with a long-term average annual growth rate of about 5.9%. To link interest rates to the money-quantity is a common mistake by those who do not realise that interest rates regulate not the quantity of money, but its application.

The rate of US monetary expansion was reasonably constant at a little less than 6% until the Lehman crisis, yet interest rates (measured by the effective Fed funds rate) had varied between 19.1% in 1981 and 1% in 2003. US consumer price inflation had also varied between 14.4% and 1.07% on the same time-scale. There is no correlation between the quantity of money and these two statistics at all, so the control mechanisms employed, which are meant to regulate the decline in the currency’s purchasing power, are entirely bogus.

The point was sort of accepted by an official at the Bank of England last week. Richard Sharp, who is on the Bank’s financial stability committee, warned that if the UK Government increased its borrowing, it risked sliding into a Venezuela-style crisis. Undoubtedly, this comment was provoked by a growing debate over Jeremy Corbin’s proposal to borrow an extra £250bn if Labour is elected. But it raises the question over what is the difference between Venezuela’s disastrous inflation policies and those of Britain, other than scale. The answer is simply nothing.

Venezuela’s economic collapse into hyperinflation is all our final destinations as well. It is the eventual destination for all governments that depend on financing themselves by inflation. No longer are deficits being talked about as only temporary. Realistically, the accumulation of welfare liabilities, past, current and future, make it impossible to balance the books from taxation alone.

The fallacy that the state benefits from inflation ignores our central point: it transfers wealth from the masses. Far from stimulating the economy by persuading the masses to spend rather than save, it gradually grinds them down into poverty. The high standards of living in the advanced economies were acquired over decades by ordinary people working to improve their lives. The accumulation of personal wealth is vital for the enjoyment of improved standards of living. Remove earnings and wealth through currency debasement, and people are simply poorer. And if people are poorer, the finances of the state also become unsustainable.

This is why regimes that exploit the expansion of money to the maximum, such as Venezuela and Zimbabwe, demonstrably impoverish their people. It takes little intellect to work this out, yet amazingly, neo-Keynesian economists fail to grasp the point. The most appalling example was Joseph Stiglitz, a Nobel prize-winner no less, who ten years ago praised the economic policies of Hugo Chavez. Ten years on, we know the result of Chavez’s inflationary follies, which have taken Venezuela and her people into the economic abyss. Despite Stiglitz’s execrable errors, he remains an economist respected by those whose biased analyses are simply to wish reality away.

Economists and commentators fixated on the cheapening of government debt through inflation fail to distinguish between the sustainability of existing and future debt. These wishful thinkers believe that drawing a line under the past will allow governments to finance future obligations as if nothing had happened. They suppose that with a clean national balance sheet, facilitated perhaps by the issue of a platinum coin with a trillion-dollar notional value, everything will be righted. This ridiculous proposition was seriously considered in the wake of the Lehman credit crisis. It was not contemplated just to put government finances on a better footing, but as a device to permit more government borrowing.

The reality of inflation is what starts as a temporary escape route from constraints on government spending ends up being a trap from which escape becomes progressively more difficult, until it is practically impossible. Inevitably, if the state impoverishes its citizens today by debasing the currency, it will have a larger welfare bill tomorrow. It requires an accelerating rate of currency debasement to keep balancing the books.

The only solution is to halt the expansion of money. Then, to ensure it retains its purchasing power, unlimited convertibility into gold on demand by all-comers must be introduced and enshrined in law, so that no further currency can be issued by the central bank without increasing gold reserves to cover. This currency then technically becomes money-substitutes, the money being gold. Bank credit can either be curtailed by making fractional reserve banking punishable as fraud (which it was in times past, and without a banking licence, still is), or alternatively ensuring there is a discernible difference between balances credited to depositors, and the money substitutes issued by the central bank and covered by gold. Furthermore, all bank bailouts and bail-ins must cease, again by law, despite the consequences. Deposit protection must also be removed.

The reliance on regulation to control bank excesses is a mistake. Banks must be entirely customer focused, and not driven by regulation. Only then, will bankers understand that enhancing their public reputation is what keeps them in business. Unwise speculation by the bankers in the knowledge the central bank will always bail them out will cease. A split will naturally emerge between loans financed by bank deposits (mostly working capital, trade finance and similarly secure short-term liquidity requirements), and more risky loans, properly financed by bond issues.

This way, cyclical disruption by variations in the overall level of bank credit will be minimised. Money would be returned to its original purpose, for which it is best suited by being sound, which is to act as the temporary storage of production, and no more.

The Sound Money Alternative

The alternative to inflation is to return to the conditions of sound money. It has to be sound and beyond the reach of governments as a means of inflationary financing. Deflation at the general price level is then a reflection of progress and improved living standards for all, through evolving product innovation and competition. The amount of money required in an economy must be set by markets, and it must be covered by further purchases or disposals of gold.

It should be noted here that preferences for and against holding money will always vary, even for sound money, but with sound money those variations are minimised. Variations in the general level of monetary preference can affect prices of goods and services most, so it is important the effect is lessened as much as possible. By sound money, we mean either physical gold itself, or substitutes convertible into gold on demand. And with gold or money substitutes, price arbitrage between states or regions also using sound money provides additional price stability.

These, broadly, were the conditions in Britain from 1817, when the new sovereigns were first minted, and after Britain returned to the gold standard proper in 1821. The gold standard was also adopted by other developed nations when they fell in line with Britain’s single standard, particular in the later decades of the nineteenth century onwards.

The enormous benefits and wide-spread wealth that sound money brought were traduced by socialists, such as Marx and Engels. A one-sided argument provoked envy at the wealth accumulating in the hands of successful businessmen and their families, derided as the bourgeoisie, by describing it as being at the expense of downtrodden workers. But the facts were very different, with living standards for manual labourers improving beyond all earlier recognition. Successful businesses earned their wealth through being subservient to consumers, by producing the products they wanted. If not, they went out of business. And while markets have delivered considerable benefits since, it is easy to establish that progress would have been even more beneficial to blue-collar and low-skilled workers, if free markets had been allowed to persist on their own without government intervention.

It is the stuff of obvious logic to understand that if wealth is transferred from ordinary people to the state, the people as a whole are poorer for it. It is a myth, perpetuated by the state, that wealth transferred in this way is held in trust for the population, when it fact it is destroyed.

If people are allowed instead to accumulate personal wealth, society as a whole, benefits. This is the key to understanding the benefits to a nation from sound money, because a successful economy is ultimately what gives the state its power. Before the First World War, Britain’s dominance over world trade was not due to its military campaigns; the navy and army merely protected free trade. It was the accumulation of wealth in the hands of entrepreneurs, backed by sound and reliable money accepted everywhere, which made Britain great. Its success was based on wealth creation, which accumulated in private hands with minimal government destruction.

The inflationists’ objection to sound money is that governments need to reduce their debt burden by eroding its value at the expense of their creditors. But as we have shown above, this argument is short-sighted, and ignores the mounting future obligations spawned by inflation. Instead of forcing increasing dependence on the state, sound money protects savings, allowing people to avoid state dependency. Instead of government obligations increasing over time, they decrease instead.

Following the Napoleonic Wars, the British Government was left with extremely high debts, which had to be paid down. Instead of yielding to the temptation to inflate them away, the solution chosen was to honour them with sound money. This was followed by the removal of economic distortions by the repeal in 1846 of the Corn Laws which had been mistakenly introduced in 1815, and the removal of other trade tariffs generally. Despite the gently falling prices of goods over time, the Government’s debt was reduced from over 250% of estimated GDP to only 30% before the First World War.

The Return To Sound Money

The why and the how fiat currency must be replaced with gold as money, and fully-convertible money substitutes, has already been described. This was never fully achieved by the British government, because of a simple mistake in the implementation of the Bank Charter Act of 1844. While the Bank of England had by law to cover increases in its note issue with gold, control over the expansion of bank credit was neglected, because the consequences of making no distinction between cash and bank deposits were not properly understood. It was that mistake that permitted a credit cycle of alternate boom and bust to develop, leading to a series of banking crises in the second half of the century, and that cycle is still with us today.

A practical approach to the problem is to first recognise that central banks have succeeded in suppressing the gold price, measured against their fiat currencies. Replacing fiat currencies with gold and gold substitutes will require either a far higher gold price measured in fiat, or a massive contraction of fiat currency in issue, or alternatively some combination of the two. Furthermore, most bond markets are wildly overvalued, being priced on the back of central bank intervention. They do not reflect the risk that all fiat currencies’ purchasing powers are set for a decline. The realisation of a sharp fall in bond prices would be catastrophic for the banks that hold debt either as an investment or as collateral against loans. It is therefore likely a return to sound money will only occur for most jurisdictions after a global credit crisis, when the purchasing power of the currency is already sliding, we are in the midst of a global systemic crisis, and a return to sound money would be more acceptable, even demanded, by the public.

There is the highest degree of anticipatory certainty that a catastrophic loss of purchasing power is where fiat currencies are headed, only the time-scale being open to question. Keep Venezuela in mind. Therefore, at some point gold should begin to discount this future event, and could rise to many times its current value, expressed in declining fiat currencies. This will, in theory, make it easier for central banks possessing physical gold to consider using it as a monetary stabiliser. But given the difficulties involved and decades of neo-Keynesian fallacies, it probably will be seen as a last resort.

There are two significant nations amongst a number of Asian states which could introduce sound money before or during the next credit cycle crisis, if they choose to, assuming they possess adequate undeclared physical gold. In the case of Russia, her banking system has already been pre-conditioned for severe monetary turbulence, thanks to Western sanctions and a collapse in the price of oil. Furthermore, her economy is oriented towards energy and commodity exports, whose values can be expected to decline less rapidly than Western currencies when the decline of Western currencies accelerates.

Russia is aggressively buying gold, joining China in her attempt to dominate physical gold markets. It is clear Russia sees gold rather than dollars as being important to her monetary and economic future. China has also demonstrated her understanding of gold. Having secretly accumulated it since 1983, China then encouraged her citizens to acquire it for themselves since 2002, and in the last few years embarked on a policy of gaining access, influence and control over foreign physical gold markets, such as London. Most recently, through a state-owned enterprise she plans to remonetise gold for day-to-day payments, in partnership with Goldmoney.

It is unclear at this stage to what extent these two dominant Asian states view gold as a monetary objective, as opposed to a strategic weapon to use against a belligerent America. There may be a divergence of views, with Russia more willing to destabilise the West by introducing a gold-backed rouble, than China by introducing a gold-backed yuan. However, it is unlikely that Russia and China will act independently, preferring to act together, taking a second tier of Asian nations with them, such as Iran, Turkey and other members of the Shanghai Cooperation Organisation.

China is almost certainly moving towards incorporating gold into her domestic monetary system, as outlined above. Her domestic monetary system is ring-fenced with capital controls from internationally circulating yuan, for which her policy has focused on improving its marketability as an international trade settlement currency. At some stage, these objectives are likely to come together, because the yuan is undermining the role of the US dollar, leading to its continuing weakness and therefore, a rising gold price. The timing of international developments is no longer closely controlled by China, because timing is shifting to the markets.

China must know that moves towards incorporating gold into the international yuan, or even threatening to do so, will drive US, EU and Japanese currencies relatively lower. Bond yields in these currencies will rise in response to price inflation, and that will almost certainly contribute to further currency destabilisation. China’s exporters will suffer, an undesirable consequence perhaps, but manageable. However, for the meantime we can only conclude China, Russia, and all the other allied Asian states await developments before going ahead with any form of gold convertibility.

For the West, it is another matter. Monetary economics remains dominated by neo-Keynesian thinking, which pursues economic planning and state control until free markets cease to exist. Official responses to the next debt-driven credit crisis will move away from sound money, rather than embrace it. Central banks are certain to throw more base-money at the banks and large corporations, to stop them going bust. Interest rates will be reduced to accommodate escalating government borrowing, and there will be more quantitative easing. Central bankers have no other response to adverse credit conditions.

Last time, a decade ago, there was a rush for liquidity. This time, thanks to ten years of “extraordinary measures”, the liquidity is there in spades. Only if you are a Nobel prize-winning economist perhaps, will you then ignore the inevitable collapse of the currency’s purchasing power and the hardship faced by ordinary people. You will declare the outlook for economic growth is good, like Professor Stiglitz regarding Venezuela ten years ago. It is at this point that China and Russia might decide to pull the trigger on gold convertibility.

Elsewhere, there is no appetite, no intellectual capacity, for a return to sound money. The West, particularly America, may feel it is the victim of a financial war against it, making them more belligerent. Putting that to one side, Western nations will have wound back the clock to the early 1920s, when Germany, Austria, Russia, Poland, Bulgaria, and Hungary all suffered currency collapses, their currencies being unbacked by gold. It is out of the ashes of a far larger global currency collapse in the coming years that a return to gold as the only money, and the return of circulating currency being fully convertible money-substitutes, is the eventual outcome.

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When Will Free Markets Emerge?

By George Smith – Re-Blogged From http://www.Silver-Phoenix500.com

If someone asked you to define “free market,” could you?  Could you do it on the spot without recourse to dictionaries or other crutches?

There’s an old tale about the origin of the term “laissez-faire” that gets to my point.  Here’s the write-up in Wikipedia:

The term laissez faire likely originated in a meeting that took place around 1681 between powerful French Comptroller-General of Finances Jean-Baptiste Colbert and a group of French businessmen headed by M. Le Gendre. When the eager mercantilist minister asked how the French state could be of service to the merchants and help promote their commerce, Le Gendre replied simply “Laissez-nous faire” (“Leave it to us” or “Let us do [it],” the French verb not having to take an object).

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Gold Coin Dilemma, Politics and Nonsense

By Gary Christenson – Re-Blogged From Sprott Money

There are five identical bags of gold, and each contains ten gold coins. However, one of the five bags contains fake gold. The real gold, fake gold, and five bags appear identical, except the coins of fake gold each weigh 1.1 ounces, and the real gold coins each weigh 1 ounce. You have an accurate digital scale and CAN USE IT ONLY ONCE.

How do you determine which bag contains the fake gold?

(Thanks to my friend Brian C. for sending me this dilemma.)

There is a straight-forward answer to this question, but let’s speculate on what happens when we involve politics and prejudice.

The Gold Coin Dilemma, Politics and Nonsense - Gary Christenson

Trojan Horse Before Wall Street

By IM Vronsky – Re-Blogged From http://www.Gold-Eagle.com

The generally accepted definition of TROJAN HORSE (*) is a person or thing intended secretly to undermine or bring about the downfall of an enemy or opponent. In today’s world, the THE Trojan Horse is Bitcoin – manned by ‘geeks’ using the unbridled greed addiction to attract naïve, innocent and ignorant investors of Troy (i.e. Wall Street).

However, many worldwide recognized monetary mavens, pundits, gurus and experts have emerged to inform and alert the investing world to the eventual dire consequences of the phony currency labeled Bitcoin. Here following are just a few sage well supported views condemning the Bitcoin scourge.

broken bitcoin

 

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Back to Economic Basics

   By Bob Shapiro

My blog is about 2½ years old now, and I’ve had well over 30,000 views. Articles automatically also get posted onto my Facebook page, where a larger number of my friends see them; most of the comments show up on my Facebook page.

While I still write posts myself, the lion’s share are re-posts from friends around the world who write well on the issues which are important to me (hey, it’s my blog). Many times, I fall into the trap of forgetting that many (most?) readers have zero training (and less understanding) of the subjects I blog about.

Because so many people (Americans and not) have no real clue about the good that is Capitalism and the benefits that each person enjoys because of Capitalism, I’d like to go over a few basics. So, this is for the good people out there who say things like, “He can afford it,” and “He’s just greedy and only worrying about making a profit.”

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When the Black Market Becomes the Real Market

By Jeff Thomas – Re-Blogged From International Man

For many years, I’ve described black markets not as the evil danger to economies that governments profess them to be, but as predictable and sensible reactions to the overregulation of official markets.

Black markets appear whenever an official market has become overregulated or otherwise unworkable due to governmental interference. They then thrive in direct proportion to the failure of official markets to function freely. They are, in fact, both a barometer and a checks-and-balances system for official markets.

Back in 2008, I commented on the growth of the black market in Zimbabwe, as that country slid from inflation to hyperinflation. At that time, the people resorted to the use of other currencies (most notably the US dollar) as black market currency. The government, desperate to force their people into the dying Zim dollar, made it illegal to use the US dollar, but this hardly made a dent in the use of what was clearly a more stable currency. The ban on the US dollar only succeeded in driving it underground. Commerce did not grind to a halt, and money did not cease to change hands. The only real change was that the Zimbabwean government was taken out of the monetary loop.

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Protect Your Wealth from Hackers

By Stephan Gleason – Re-Blogged From Money Metals Exchange

Could your wealth be hacked? It’s a threat most investors overlook. But they do so at their own peril.

If elections can be hacked, then so can bank and brokerage accounts, as well as any online platforms for digital currencies.

More than five months into Donald Trump’s presidency, the “Russia hacked the election” conspiracy theories still won’t go away. They’re expanding to also implicate Russian hackers for meddling in elections in France and elsewhere. The latest Russian hacking story centers on Qatar.

Hackers

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The Cryptocurrency Market is Exploding. Here’s What You Need to Know.

[It’s an interesting concept, but I can’t see how a private currency – backed by nothing of intrinsic value – can command a price above zero. -Bob]

By Chelsea Gohd – Re-Blogged From Futurism 

On April 1, 2017, the total market cap for all cryptocurrencies was slightly higher than $25 billion. Roughly two months later, the cap exceeded $100 billion. In just over 60 days, the value of cryptocurrencies surged by 300 percent. So what is going on?

The leading cryptocurrency, Bitcoin,  recently made headlines by climbing dramatically in value (it’s currently sitting around $2,600 USD, about 160 percent higher than its value in April). But Bitcoin hasn’t been alone in this extreme growth. The cryptocurrency market as a whole has spiked in value within the last few months.

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On Say’s Law

By Alasdair Macleod – Re-Blogged From http://www.Gold-Eagle.com

One of my regular readers has raised the important subject of Say’s Law, the denial of which both Keynesian and modern monetarists are emphatic. They need this fundamental axiom to be untrue to justify state stimulation of aggregate demand. Either Say’s Law is right and state intervention is economically disruptive, or if it’s wrong modern economists are right to ignore it and progress their science beyond it.

The basis of post-Keynesian economic stimulation assumes a breakdown between consumption and production can occur, and the correct response is for government to step in and revive failing demand. It is the favored explanation of the 1930s slump. Obviously, Say’s Law would have to be discarded.

This article revisits this subject, explains where Keynes went wrong, redefines the Law to include money as a good, and explains why supply-side is less destructive than demand management. Say’s Law is crucial to understanding why increasing state intervention to revive economic demand cannot work, and has led us into the current crisis.

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