Central Planning Is More Than Just Friction

Of course, earning interest is important to people who work for wages, and also to retirees who live on the income on their savings. If the government destroys the relationship between creditor and debtor, then workers are impeded in saving for retirement. And retirees must consume their meager savings.

Suppose it is true, that industrial production and distribution is capital-intensive. Suppose it is true that this capital is provided by creditors. Suppose it is true that workers and retirees need interest…

Maybe Lenin and Keynes were right (in this one premise), that the relationship between creditor and debtor is sacred, and the foundation of the modern economy.

One thing is for sure. The price of borrowing money (i.e. interest rate) affects the price of everything else. And if the rate goes too high, producers begin to be bankrupted. Just as if the rate falls to low, producers are destroyed (by a different means).

Let’s tie this back in to the topic we opened at the start of this essay. Government interference in the credit market does not merely slow the economy. It stops some people from engaging in wealth-creating production and trade. And encourages other people to engage in wealth-consuming activities instead. That is, the altered price of credit alters, in turn, the incentives that drive everyone in the economy.

When people blame the so-called one percent when they rail against so-called late-stage capitalism, when they decry inequality, they are the leading edge of what was described by Lenin:

“Those to whom the system brings windfalls… become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.”

This is our motivation to re-develop a market for interest on gold, not subject to the central planners.

Supply and Demand Fundamentals

Yesterday was Presidents Day in the US. The price of gold rose last week a bit, but silver not so much.

To understand if stocks will crash, don’t look at indicators which may be lagging or at best coincident. Jobs data or GDP won’t tell you what’s going to happen to stocks. Even earnings (which, in theory, is based in part on GDP) can’t tell you much.

It’s credit.

Today, we thought we would talk about yield curve. Here is a graph showing all maturities from 1-monthy to 30-years.

 

We have done something with this graph that one normally shouldn’t do (and you should always be on the lookout for). We have started the vertical axis, not at 0 but at 2.4. We did this to zoom in on the curve, which is very flat. Note that 1-month is 2.43% and 5-year is 2.49%. That is 6 basis points difference between lending for a month vs five years. Yikes!

We say “yikes” because banks engage in what is euphemistically called “maturity transformation”. That is, they borrow short to lend long. This is an unstable practice. Without getting into the theory here, let’s just say that if the yield curve is flat then banks cannot make money. If it inverts, they are losing money.

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Gary Anderson 1 year ago Contributor's comment

Two things. First, you spoke about hoarding, but not about bond hoarding. Second, you mentioned the dollar and gold as money, but if you ask a clearinghouse, bonds are the real money. They are the collateral. So, there is a stability there. I am not saying it is a good system, but after MBSs blew up, interest treasuries became the collateral of choice and we entered the new normal.