Caveat Archos

[This is a copy from my personal website: getintuit.blogspot.com]

So these are the days of miracles and wonders, huh? It’s been a long time since I’ve been able to post, and it will probably be another long-time before I find the time to do so again. My first semester went pretty well; hopefully things fall into place and I have some work lined up for the summer. Enough about me: it’s time for the show.

Jim Cramer thinks what we need is a rate-cut. Donald Trump, too. And for good reason: they are at the forefront of where increased liquidity makes its debut. The following theory may or may not be backed up by empirical data and/or reputable economic philosophy, but here it goes. The reason Wall Street and the initial consumers of capital want rate-cuts is because they are able to get their hands on the pseudo-capital (capital that would not have existed but for the alchemy of monetary policy) and utilize it before the market as a whole (stocks, commodities, etc.) can digest the increased liquidity, meaning the Joe Q Public who gets his paycheck is usually the last to receive the marginal benefits of higher liquidity. It is the inverse nightmare of trickle-down economics: The initial consumers use it before the market realizes that the capital is actually worthless and adjusts other commodities upward to reflect the lower marginal value of the pseudo-liquidity. It is a little wonder the Private Equity and Hedge Fund gurus made off like bandits over the last 3 years. And frankly, I don’t blame them for making hay while the sun shined. Had the government-incentive system provided by Helicopter-Ben not existed, there would have been no pseudo-liquidity of which to take advantage. Additionally, as a nation, we were fortunate enough to be able to (1) literally export our inflation to China and other foreign nations that hold our dollars as reserves; and, as a corollary (2) Make all sorts of imprudent (see: high-risk high-yield) investments that would not have been made had interest rates been held higher and closer to what would have been proper in a market-based monetary regime. But what are we going to do if (and when) those who accept our shreds of cotton-paper for goods decide that they don’t want anymore cotton-paper?

The call for another round of rate-cuts showcases a certain myopia to the economic realities that surround us: namely, that inflation is everywhere a monetary phenomenon and not a commodity-phenomenon; and, that we are on the brink of a very-real possible hyper-inflation. What the Fed uses to measure inflation is useless: “Core” inflation? Is it hard or soft? Measuring inflation by virtue of what a governmentally-defined “basket of goods” costs is kind of stupid and very tautological. It’s like allowing a convicted criminal to impose his own sentence with minimal guidelines. The value of our currency isn’t really based in loafs of bread, blades of lawn-mowers produced, or even the price of a barrel of oil. Sure, what a dollar can buy in those commodities is important to the functioning of the economy; but the causal link reported in the media is completely backward. The price of oil is not “inflating” the dollar; rather, the “inflated dollar” is driving up the dollar-denominated price of oil, since the marginal value of the dollar is decreasing.

The true value of our currency in a fiat system is its relative value to other currencies around the world, and, even more importantly, to the greatest yard-stick of monetary value ever: Gold. And, as any reasonably literate person can tell you, the price of Gold is through the roof, increasing by as much as 50% in the last 2 years, and 100% in the last 42 months. That’s one hell of a rate of return for a metal with minor industrial applications and nearly zero currency applications. So why is the price of Gold vs. the Dollar increasing at such an astronomical rate? Because Gold is the best retainer of wealth in the world. There’s a reason that Gold was the first currency of international trade, going back as far as Rome (or farther, I’m sure). And, as the best retainer of wealth in the world, it is subsequently a refuge for people who may have had their wealth in what is no longer a valuable reserve (see: the Dollar).

The reality is, our government has debauched our currency heavily, but we’ve been fortunate enough to hide behind our reputation as a productive nation so long that the impacts have yet to be felt. The Sub-Prime mortgage meltdown and all this other talk of recession is, in reality, a small hill of beans compared to coming storm of inflation caused by the Central Bank of the U.S. Our monetary policy over the last decade has been an absolute disaster, and things can only get worse with every unnecessary increase in pseudo-liquidity. The party is over (at least it should be). The punch-bowl should have been taken away back in 2001 with the .com burst. Instead, the Fed decided to replace the punch-bowl with Everclear-laced Jungle Juice and allow the party to continue into the wee-hours of Too Long. The hang-over is coming…