Last Saturday we reached the 49th anniversary of the collapse of the Bretton Woods monetary system. It was on August 15th 1971 that Richard Nixon confirmed he was “temporarily” closing the gold redemption window.
Without the formal anchor of a scarce resource, debt and inflation have run wild since then with the following consequences.
1. Labour has suffered.
Artificially cheap money benefits capital and not labour.
2. Most people are getting relatively poorer.
– it’s a fraud
– it’s a ponzi scheme
– it will collapse
– they’re all scammers
I have to tell you, those arguments apply far more to fiat currencies like the USD than they do to bitcoin. What is more, bitcoin has zero staff and therefore zero lawyers on its payroll.
You can find more charts on the excellent source website about 1971 here.
As we know, there is come conjecture about whether general prices are in fact falling or rising. The answer lies in the basket of goods used to calculate the consumer price index. Take two extreme examples:
1. Johnny Jetset. He flies around the world in his own jet, has a legion of servants to tend to his every need and feels greatly aggrieved at the latest travel bans.
For Johnny, prices are falling, energy (so his aviation fuel), commodities (that made the wings of the jet) and housing are all falling. The wages of his assistants are falling too. Likely 80% of his spending is subject to falling prices. Accordingly, he is probably experiencing deflation and feeling better for it.
2. Stuart Student. Stuart is at university, his money is spent entirely on food, education and accommodation.
He may be making a small saving on accommodation but food prices are rising and that is 60% of his budget. Higher education doesn’t even appear in the list, it doesn’t form part of CPI (basic education does). Its price has skyrocketed in the last 20 years. Stuart is getting poorer fast and his debts are compounding, he may find himself quickly trapped.
The fact is, the mix of your spend matters most. If you spend all your money on food, healthcare and other services then inflation is likely double digit. Equally, if you spend on things not even in the CPI list, like higher education, you are likely to be grossly misled by the governments figures.
We could be even more basic about it, if you are poor you are getting absolutely hammered. If you are rich, life is getting cheaper.
It is not that the government’s figures are wrong, it is that they are totally misleading. They address the average person, rather than the median person and what is more, as income inequality grows, the extent to which the figures are misleading grow with it (because the average wage rises and the median wage falls).
In Australia, the CPI in the June quarter was -1.9% This was mostly driven by free childcare. If you are old person who needed paid healthcare help, or a young person with money only for food, you were looking at +7%. Arguably the groups the government is there to help are the most disadvantaged.
Fraud n.: the use of false representations to gain an unjust advantage.
If the CPI is not a fraud, I don’t know what is.
Not to be outdone, the European Central Bank released there latest musing on the topic. They tell us:
With the help of the ECBs Bayesian vector autoregressions we will now have much better signals.
I know you’re interested, you want to know more? No problem, I have lifted this directly from the paper. First of all you use this:
This sort of nonsense is deeply frustrating, there are pages and pages of it in the paper. The ultimate signal in economics, is price. Particularly the price of money, the interest rate. Price is determined by billions of economic interactions every day which all have a consequence on each other. It is so vastly complex that it doesn’t matter how vectorised your Bayesian idiocy is, you simply have to let the price mechanism do it its work, and the ECB wont.
They have intervened at every level since the launch of the Euro, they have a ridiculous monetary policy with artificial prices for money and they own 50% of the Euro area GDP in their own bonds. It’s a gigantic house of cards propped up by bureaucrats and their ridiculous working papers.
Something like this might happen.
1. Fed issues $1bn in Treasury Bills
2. Bank A buys them
3. Bank A posts them with Bank B as collateral for a loan
4. Bank B then does the same for 50% of the value with Bank C
5. Bank C does the same for 50% of that value+
So, Tether is now getting big enough to take some air from the room as far as the Fed is concerned. It is making their monetary policy tools less effective because now $1 billion injections do not support multiples of economic activity as large as before. Tether at $11 billion isn’t a big deal, Tether at $100 billion probably is.Fractional reserve banking really is a very fragile beast. I always thought it would be bitcoin that shook its foundations but it is amazing that Tether is now being discussed because it absolutely is not fractional reserve. They are preserving the value of their users 100% and paradoxically that might cause an issue.
Banking fascinates me. It has all the features of a ponzi scheme but if you call it something fancy like rehypothecation then almost nobody will know what it means. If you have ever read internal documents at a bank you will know they are littered with acronyms, it is basically a different language but it all sounds sufficiently complicated that it must be ok. History tell us, it isn’t.