Sound money – FreedomWorks Foundation

John Tamny in RealClearMarkets: $1900 Gold Will Depress Growth. So Did $1,200, $500 and $36 Gold

July 29, 2020 by Jack Scheader

By John Tamny
July 28, 2020

If Tom Brady wanted, he could be the NFL’s fastest player. His personal trainers or someone on the Tampa Bay staff would simply need to redefine two seconds as one second, at which point Brady’s 6+ second 40-yard dash time would be 3 seconds. NFL’s fastest man like that!

To which the half-awake would gently point out that changing the length of the second wouldn’t alter Brady’s speed one iota. He’d still be one of the NFL’s slowest quarterbacks and players. A second is just a measure. Changing the measure doesn’t change reality. So very true.

Too bad economists and politicians don’t understand what is so basic to the densest of dense sports fans. The dollar, like the second or foot, is just a measure. Movements in its value don’t alter the real price of anything.

Which brings us to the gold price. As of this writing, the dollar buys 1/1935^th of an ounce of gold. In January of 2017 a dollar purchased 1/1200^th of an ounce of gold. In January of 2000, a dollar purchased 1/266^th of a gold ounce. In 1970, a dollar purchased 1/35^th of a gold ounce.

Some may respond that gold has “soared” since 1970. In truth, the dollar has sunk in value. Gold has long been a way to measure the value of money precisely because its value is so stable due to unique stock/flow characteristics. As 19^thcentury free thinker John Stuart Mill explained it about gold, it is “least influenced by any of the causes which produce fluctuations of value.” That’s why currency regimes around the world have for centuries gravitated toward the yellow metal as their definer. Since it generally doesn’t move, movements of gold in the currencies in which it’s priced signal a decline, increase or stability in the purchasing power of the currency.

So when gold moves up in value in dollars, that’s merely a sign that the dollar’s purchasing power is shrinking. Though President Richard Nixon delinked the dollar from 1/35^th of a gold ounce peg for good in 1973, he didn’t erase the gold signal. His move signaled that the Nixon administration wanted a weaker dollar. Markets complied. The dollar price of gold rose throughout the 1970s under Presidents Nixon, Ford and Carter. The economy performed badly, at least by U.S. standards. That it did was a blinding glimpse of the obvious.

To understand why, never forget that no one earns money. They earn what money can be exchanged for. The dollar’s devaluation in the 1970s signaled a major tax on work simply because the dollars earned while working were exchangeable for fewer and fewer market goods.

For businesses, much the same was at work. To this day it’s assumed that devaluation improves prospects for businesses. No, they earn dollars. Devaluation shrinks the value of their earnings. After which, no business creates products or services without global cooperation. Something as basic as the pencil is a consequence of global production.

If the dollar is devalued, the dollar cost of production increases. A statement of the obvious. Currency devaluation is an explicit acknowledgement that the currency commands fewer market goods, which means the dollar cost of production rises.

And then there is investment; the driver of economic progress. Investors invest by purchasing shares or lending money, but no one invests dollars; rather they shift resources to someone else or some other corporation in the hope of attaining greater resource access (an investment return) in the future. In other words, they hope to get back more wealth than they committed to said venture. But if the dollar is devalued, so by definition are investment returns devalued. Investment is what enables greater productivity among those who comprise any economy, but if policy favors devaluation, investment becomes less enticing.

If the currency is in decline, as in if monetary authorities are shrinking its exchangeable value, there’s a tendency to protect what’s being devalued. Translated, investors hedge against inflation, which is currency devaluation.

More specifically, when currencies are being devalued there’s a tendency among investors to consume hard assets (think land, housing, rare stamps, art), or wealth that already exists, instead of investing in stocks and bonds; both claims on wealth that doesn’t yet exist. Wealth that already exists is more of a sure thing than claims on what might eventually amount to wealth.

Looked at in terms of the dollar and gold, the dollar has always merely been a measure of wealth facilitating the exchange of the goods, services and labor that represent real wealth. And while the dollar is still the world’s currency, the measure has shrunk substantially since the 1970s versus the constant that is gold.

During weak dollar stretches since 1973, a great deal more money has found its way into hard assets like land, housing, rare stamps, art, gold, and other commodities least vulnerable to the dollar’s decline. Translated, wealth that already exists does best during periods of devaluation. Think the 1970s. Think the 2000s. Investment, which is the purchase of uncertain future returns, doesn’t do as well during periods of devaluation. Why risk stretching for uncertain returns if, assuming you get them, they come back in dollars exchangeable for fewer and fewer goods, services, and labor?

Fast forward to the present, Donald Trump has made plain since before he was president that he wanted a weaker dollar. Currency markets have complied over time. As previously mentioned, a dollar purchased 1/1200^th of an ounce of gold in January of 2017 when Trump was inaugurated. Its value has slowly declined ever since.

The decline hasn’t crushed the economy, but it’s made the purchase of existing wealth like housing more and more attractive a la the 1970s and the 2000s. People have been consuming wealth that already exists in slowly higher amounts over investment in the creation of future wealth. This is the definition of slower growth. Consumption is the easy part. It’s the abstinence that drives progress as new ideas are invested in.

Right now the yellow metal is at all-time highs. Which means the dollar is at all-time lows. This will slow investment, and with it, the economy. If it continues, it will destroy the economic portion of Trump’s presidency much as it did those of Nixon, Carter, Bush 43, and Obama.

Read Original Article At :

The Yield Curve Is Telling Us Something, but Not About the Fed

August 20, 2019 by David Voegtle Leave a Comment

Originally published in Real Clear Markets, 8/20/2019

In the spring of 2013 Apple conducted a very successful, $17 billion debt offering. It was heavily oversubscribed at long and short maturities, and reflected the fact that investors trust the creditworthiness of one of the world’s most valuable corporations almost as much as they do the U.S. Treasury.

Apple’s popularity with investors rates discussion in consideration of all the recent hand wringing within the business media about the inverted yield curve. According to pundits on the left and right, the curve has inverted before every recession since 1955. Supposedly higher yields on two-year Treasuries relative to 10-year debt signal an overly restrictive Fed based on near-term borrowing becoming more expensive than long-term. So with the yield curve allegedly predictive of every recession going back decades, it’s useful to stop right there and ask if so, as in if recessions are in fact man-made creations of the Fed, why market actors have never bothered to work around what has long been artificial.

It’s seemingly a fair question, but to the yield-curve triggered, there’s very little introspective thinking of this kind to be found…

Facebook’s Libra Is A Global Reaction To Endless Currency Instability

August 12, 2019 by David Voegtle Leave a Comment

Originally published in Forbes, 8/4/2019

“Money does not pay for anything, never has, never will. It is an economic axiom as old as the hills that goods and services can be paid for only with good and services.” – Albert Jay Nock

Albert Jay Nock’s pithy statement of what should be obvious came to mind recently while reading Financial Times columnist Rana Foroohar’s failed takedown of Facebook’s proposed Libra currency. Somehow Foroohar’s editors forgot to delete her question about whether “easier cross-border financial flows are what the world really needs now.” She plainly knew not what she was asking, or writing.

Missed by the journalist is that money crosses borders solely because real goods and services do so with wondrous regularity. Money’s sole purpose is to facilitate the exchange of actual market goods: I’ve got bread, I want your wine, but you have no interest in my bread; the object of your consumptive excitement the butcher’s meat. Money is an agreement about value among producers that enables the exchange of actual market goods.

Looked at through the prism of a question asked by Foroohar, and that she plainly didn’t understand, “easier cross-border financial flows” have been the sole purpose of capitalist production for as long as the world’s inhabitants have been able to specialize, and in the process exchange the fruits of their own labor for the fruits of others. For one to work is for one to express a powerful desire to import. The importing could be from across the street or from the other side of the world, but import it is. The “cross-border financial flows” that Foroohar so naively disdains are merely happy evidence of a world that grows more connected by the day.

With its proposed introduction of the Libra, Facebook is thankfully aiming to enhance the ability of individuals to exchange with other individuals. Will it succeed? Who knows? Foroohar thinks not, so she dismisses the very notion of the Libra with misplaced and misinformed contempt. She misses the point. To see why, please read on.

Inequality Has Surged Since 1989, and Life Has Become Much Easier

August 12, 2019 by David Voegtle Leave a Comment

Originally published in Real Clear Markets, 6/20/2019

I first read about “imported inputs” in a Wall Street Journal editorial published sometime in the late 1990s. It’s a near certainty that the editors of the world’s most important editorial page had written about them before, but it was around then that this most elementary of concepts registered with me.

The editorial page was correcting a fallacious economic narrative that lives to this day: it says currency devaluation (in our case, devaluation of the dollar) results in greater competiveness for American producers. The editorial reminded readers that nearly every “American” good or service produced is the happy consequence of global cooperation. Translated, “imported inputs” from around the world very much factor into the production of what’s American. If currency policy accents devaluation, the costs of producing stateside go up. American producers gain nothing from devaluation. Actually less than nothing as readers will soon see. But for now, the obvious should be stated. Currency devaluation doesn’t confer a competitive advantage on producers in the devaluing country simply because the devaluation itself logically raises the cost of making things in the first place.