Ep 40 – Dan Oliver Jr: Markets Will Force the Fed to Balance
Dan Oliver of Myrmikan Capital joins Keith and Dickson on the Gold Exchange Podcast to talk about the history of credit bubbles, the inevitability of central bank failings, and what history can tell us about the Fed’s current trajectory.
Connect with Dan on Twitter: @Myrmikan and at Myrmikan.com
Connect with Keith Weiner and Monetary Metals on Twitter:
02:00–08:38 Modernity vs Antiquity
13:38–22:10 Tulip Mania and the Bank of Amsterdam
22:10–36:44 End Game of Central Banks and Gold Backwardation
36:44–41:46 Economics Trumps Politics and the Franc
41:46–47:34 The Laffer Curve and Laffer Maxima
47:34–50:12 Pushing Off The Sobriety Period
50:12–55:06 Credit Bubbles and War
55:06–58:35 The Lessons of History
Dickson Buchanan: Hello, everyone, and welcome to the Gold Exchange podcast. My name is Dickson Buchanan, and I’ll be hosting today’s episode alongside the founder and CEO of monetary metals, Keith Weiner. Today we’re delighted to have on our show Dan Oliver, Jr. Dan is the founder and managing member of Myrmikan and Capital, an investment firm specializing in micro-capitalized gold and silver mining companies. He’s also the president of the Committee for Monetary Research and Education, a storied nonprofit founded in 1970 (note that date) to promote greater public understanding of the nature of monetary institutions and the central role that a healthy monetary system plays in the wellbeing and indeed the very survival of a free society. Here here. I love that line, by the way. It’s a great line.
Dan Oliver Jr: I wish I came up with it, but the guys did.
Dickson Buchanan: Well, it’s as true today as it was then. Last but not least, Dan is working on a book that explores the nature and history of credit bubbles, going all the way back to ancient Greece and beyond. And we definitely want to hear an update on that project, Dan. But first, let me say we’re very glad to have you. Welcome to the show.
Dan Oliver Jr: Well, thanks for having me. I’m always glad to talk to the two of you. I know you’re both pretty good scholars yourself, so it’s nice to always have good conversations.
Dickson Buchanan: Great. Thank you. All right. So as I was preparing for this episode. I was going back through your body of work in my mind. And the thing that really sticks out to me is you have this ability to bring to life the lessons that we can glean from monetary and financial history. Specifically as it pertains to the historical blunders. The errors. The things that went wrong. The unsound decisions that were made. And of course. The consequences of those decisions and then taking those lessons and mapping them to our present day monetary madness. What we see all around us, I’m sure everyone’s familiar with the phrase, history never repeats, but it rhymes. And I feel like what you do so well is you identify what rhymes and then bring that to bear on our present monetary and political environment. We definitely want to get into that on the show today, but first, I just want to tell our audience where they can connect with you and your work. So you write primarily on your website, which is mermaid.com and on the homepage of Myrmikan.com. There’s a little tab, a little link that says Myrmikan Research. And that’s where you can connect with Dan in his writings.
And you can also find him on Twitter @myrmikan. And we’ll provide a link to both of those in our show notes. So, Dan, to kick us off, why don’t you give our audience just a little bit about your background and then also specifically when and how did you become interested in these topics of money, credit and financial history?
Dan Oliver Jr: Yeah, I’ll do that. But before I do that, I want to go back to something you said in the introduction about stories and the ability to use stories in the past, to illustrate the future. And I don’t want to lose the thread because it’s so important to understand that through the 1890s, economics was a humanity. It was in the Humanities department, the English department, the Literature department, philosophy department. It wasn’t a science and it was a story. It was a story of man and scarcity in his relationship with each other. Banking and money. It’s all about social organization. And so they looked back at what had happened in Middle Ages, what had happened in Rome, what had happened in Greece, and took real lessons out of those experiences. And so my primary education, which I can get to later, how I got into originally, but my education was written reading books, written most in the 1890s. That was a period when the gold standard, the silver standard, were at odds with each other. Williams Jennings Bryan wanted to have an inflationary silver standard, and there was a broad national conversation about that and lots and lots of books written that basically brought all of monetary history up to date being 1890.
After World War I, the economics profession was hijacked by Keynes and Fisher and they tried to turn it into a science. They’re looking at numbers and math. And now, of course, if you take economics today, they don’t worry about what happened in ancient Rome and say, well, agriculture… it wasn’t industrialized. Society is totally different, not to do with us at all. And it might be. That’s entirely wrong. It’s why that the economics profession has become so alienated from people. In fact, as I’m sure you know, the Fed has written paper saying that ordinary people should not comment on economics, that you have no value to add economic conversation unless you have taken preparatory work to get your PhD. It’s so complicated. These models are so difficult, you can’t know what you’re talking about. And I’ll tell you my favorite story to just prove that idea. And that is going back to the story from Tacitus, the first century Roman historian who wrote about the panic of Ad 33 in Rome. And he wrote about as stringent as in the money market. And the Emperor Tiberius responded to this by taking 100 million safaris out of the imperial treasury, lending it to the banks at zero interest against double the value of real estate collateral, which of course, is precisely what Henry, Paulson and Bernanke did in 2008.
And that one story, I think, explodes the idea that somehow modernity is different in kind than antiquity. And once you explore that myth, you can look back at these stories and see what happened and learn from it. In fact, in that particular case, I also like to point out that the Roman Danarius, the coin of the realm, had lost around 13% of its silver content over the previous 300 years. If you’re looking at a chart of silver content, 83 is precisely where the logarithmic decline in the silver content began. It’s a curve that goes to zero by the time shows up. It wants it being a ten coin of silver coating. And again, this is instructed for us because what happened after 2008, well, yes, they saved the system, but look at the monetary base, what’s happening to it, which is sort of the flip side of what a coin would look like in terms of silver content. And so again, looking at these episodes and your quote, which is perhaps overused, that history doesn’t repeat, it rhymes. What I like is when the Union was debating the National Banking Act in 64 during the Civil War, there were someone who rose up against them.
And his comment was, we are neither wiser nor better than our fathers. And I like that a lot because the point again is that, yes, technical knowledge is better. We have airplanes now, computers now. They didn’t have that back then. That’s all true. But philosophical knowledge has not improved. I would put Aristotle up against any modern philosophy. And again, once you put economics back in that box of humanity, all of a sudden the world opens up in terms of different cultures, different times, different areas that you can draw stories out of. And what you see, like the example I gave you over thousands of years, and thousands, not hundreds. You see the same quotations in slightly different form, but basically the same thing over and over and over again. That’s, as you say, what I try to bring now the life back into economics so people can understand the context they’re in and apply ancient wisdom, which was very expensively, earned most of the revelations. And economics happen after a big crash, a big crisis, because that’s when things crystallize and you realize what happened and people don’t read it. Unfortunately. That’s a long comment on your introduction.
But in terms of my own personal journey, it plays into that because really, until 2008, I had no interest in monetary theory or anything of that nature. I mean, I was interested in markets and business and sort of, you know, both my parents were in the registration. So I grew up in DC around politics and that kind of thing. But in terms of the money, no interest. Until again, in my own life. Wow. I was drinking eight throw. A world fell apart. I wanted to find out what was this all about? And Keynes didn’t take me anywhere particularly interesting. But I sat down and started reading books written in the 30s about their experience. Most of my journalists, not economists, who were describing what had happened. I realized in those books that I was living through in 2008 was exactly the same. And those books again refer back to the 19th century events I’d never heard of. But then I began to research, and I discovered Ludwig Von Mises, who I’d never heard of before. I’d been along with all the top schools. I’d never heard his name mentioned. I took Keynesian Economics three times in university, in law school, and business school.
Never heard of Von Mises. And so I became an autodidact on these issues. But I think another story which you might enjoy hearing, what prepped me for that, which made receptive to learn that knowledge, was the previous experience I had. My first year in law school, I was working for a professor of the summer on antitrust case, my dad was at the FTC and antitrust was sort of the thing. And it was to do with the pattern industry, which took me about a week to figure out what that was. And what it was is that before 1900, people have made their own clothes. We wouldn’t buy them. This is sort of a revelation to me, but you would buy the fabric and you get the pattern, and you sort of cut around the fabric the way kids do today, and then you sell them together. And these patterns were sold in catalogs. And that’s been going on for a bit of time. But then in the 19 teens, when the Fed first got going, funding World War One and putting lots of money, these catalog companies went crazy.
And I came across articles written in 1919 saying things like, Bob’s Hardware Store. I thought he was too small to have a catalog, but we taught him he could have one too. And things like, in ten years, there will be no more retail stores because it will all be catalogs. This was I was reading this, by the way, in 1999, right when the exact same articles being written about the Internet. And what happened, of course, next was that the Feds stopped printing money when the war ended, the market crashed. Most of the catalogs went out of business, but the ones that survived, like Sears for example, which only survived because the founders put $3 million was back into the company to keep it going, did very well. And in fact, if you had bought the catalog, the survivors at the bottom of the market, you did much better than you did speculating in the teens, because they got so low that I basically got to almost zero. And then they recovered from there. And so I developed a thesis that the same thing would happen to the Internet. That the Internet would go through a crash and then you want to buy the survivors to bottom.
So the thing to do is to raise funds, have it in treasury bonds, wave the crash by the Internet companies bottom. Now, I was a first year law student and then of course I got shuffled to the big law firms thing. I didn’t do that and the thesis worked out precisely. And so in 2008 it wasn’t just an abstract intellectual journey. I was trying to see to myself as commodities collapsed, were there parallels in history the way I had found in 1919? Now again, at the time I knew nothing about the Fed or the influencer. I didn’t get any of that. I just thought that there was a pattern here. Could I figure out what the pattern was? And of course, once I started digging seriously, I discovered Austrian economics and I discovered that no, my goodness, this pattern has been going on for thousands of years. And commodities really the big daddy of cycles, not Internet stocks and tele stock stocks are fun too, but really the commodity cycle in the currency cycle and then the cycle of civilization is something that you can actually think about in terms of acting to preserve and enhance your wealth.
That was a long description of the intellectual journey that led me from just your average lawyer in New York and went to business school looking through and do it and realizing, oh my goodness, there’s a story here that is going to define really civilization for the next little while. Now I might get my timing off. I thought 2008, this was sort of the end and now it’s 14 years later, but the themes are the same. And all that’s happened in my view is that the amplitude of our cycle is just larger than it ever has been in history. And that is a very dangerous thing, very scary thing, but it cannot go on forever. And we could talk about with Keith why that is, but we will reach an end point at some point. It should be very ugly. And that’s why I think we’re talking.
Keith Weiner: The one thing that comes to my mind describing all that is somebody once said to me Tulip mania in Holland was not because of central banks, that it’s just intrinsic to human nature to get stupid and irrational. And I said, you are aware that and I haven’t studied exact connections, but I wonder if you have. I said to him, you are aware that the bank of Amsterdam, the first, what we would call the modern era of central banks was founded about a dozen years before Tulip mania that’s exactly right. He just kind of went silent and that was the end of that.
Dan Oliver Jr: That’s exactly right.
Keith Weiner: I haven’t studied the exact mechanism of credit expansion and credit transmission. It’s the tulip market from the bank of Amsterdam, but I’m sure that’d make a fascinating I don’t know if you studied it it but sounds like it makes it faster.
Dan Oliver Jr: Briefly, it wasn’t a true credit cycle in that I don’t know if you’re aware of this, but most of the speculation were future contracts which were then canceled. Very few were actually acted upon. So it wasn’t a broad base affectation of the economy at large investment. It happened so quickly in a specialized region market. But in short, the Bank of Amsterdam was a tremendous innovation, which I’m sure you’re aware of, and that is gold coins. And we’ll talk about this, gold is the ultimate monetary media, but then it has to take a form and the coin is better than ingot. You got to weight. You know what it is. A coin has a weight stamped on it and you can more or less trust what that weight is under certain conditions, but there are lots of conditions, but you can’t trust that. And one condition was in the 60th century, Holland, there were over 900 or 9000 I can reach nine something zero, zero different kinds of gold coins circulating the market. That hadn’t been the case when Rome was dominant. The Roman coinage defined coinage, and if you didn’t have Roman coin, they don’t want to deal with you.
And then it was Byzantine coinage. And again, it demonstrates the power of monetary sobriety, that Byzantium, which is far away from Europe, of a different religion, they were all Orthodox instead of Catholic, with no political or religious authority. And yet Europe transact on the basis of Byzantine coinage, because for 900 years, it was very solid. When Byzantium collapsed in the early Middle Ages, then every little prince in Europe started printing up mending of their own coins because there was no standard particular. And so when you show up a market with a gold coin in Holland in that time period, it wasn’t just you had different coins, different faces in different ways, but each one had been clipped or chipped. You put them back, you shake them around, little coin bits fall off. So merchants would weigh not just the merchandise we’re selling you, but also the coins with which you were paying for that merchandise. And what the Bank of Amerstdam did, which was again a market driven innovation, was they said, look, we’ll take your coins, we’ll wear them and ask for them and we’ll give you paper claims to them. And the market much preferred the paper claims because they’re entirely uniform.
You knew exactly how much gold you were getting and you could go to the bank anytime and get it out. Gold and silver flooded from all over Europe into the bank of Action because it was so much better way to transact. And so that’s why you end up with too much, quote unquote, money in Holland. And of course, you want to do that in a country that the people trust, the government’s not going to come steal the money. So that’s kind of limited France at that time. So you had to go somewhere, a commercial nation that would do that. And of course, what eventually wind up happening, like every other bank, is that it wasn’t that the paper is more valuable than gold because the bank charged a fee to do this. So it did trade at premium, but you lost premium because you had to pay to get the paper to the bank. When you got it, it was more liquid. The people preferred that. And so no one ever particularly took their metal out of the bank. And so it just sat there. Why would you take your very liquid paper and convert it, which you’ve already paid a fee to get, and convert it back into less liquid bullion, which no one wants anyway, because it’s so unusual form, I guess, except in a panic situation.
And so over time, the Bank of Amsterdam became corrupted in that instead of just swapping notes for gold and then lashed commercial bills, which maybe we can talk about later, they started financing the city, they started financing these companies, started financing these companies. And that was a very different thing to issue paper in return for future promises versus paper in terms of present value. And what’s interesting too, and this is not something you could dig around for, but over the next couple of hundred years, the back of Amsterdam maintained the value of notes because it actively traded them in the market. When their notes fell below par, they would go out and buy, repurchase their notes and support it that way. So even though they actually at some point stop being convertible, but they maintain their value because the bank would trade in the market and maintain it. They got too expensive. They would sell, they would sell more notes, which is more or less how such central banks operate today. And what happened was, I think it was in the mid 18th century, early 18th century, they effectively lent out so much money and they supported their currency to such extent, they ran out of gold.
So one day the currency crashed and there was no more assets to support it. And that was the end of the Bank of Amsterdam. The example is usually given in hard my circles as this paragon of virtue. Which it was at its founding. But rarely have I heard the story of his full development. Where it winds up being like every other bank in history. Or actually central bank. Where it winds up over issuing notes. Trying to maintain their value through market operations. And then failing that because they were so responsible for the money issued process because of politics.
Keith Weiner: When you say over issue notes I think most people in the gold community assume that there’s just a simple fraud that you have ten gold coins and you issue 100 notes. Or was this a more of an issue of either the soundness of the credit that they extended or the duration mismatch of the credit they extended? In other words, they did, let’s say, ten year loans financed by demand deposit notes that could be redeemed at the whim of the note holder at any time. And did they get crushed between short term liabilities being redeemed a long term asset so they couldn’t make good on?
Dan Oliver Jr: Yeah. So at some point I came around along the way, maybe 100 years after founding, they actually eliminated the right to withdraw your gold. The gold was backing in the bank, but you couldn’t actually get at the bank, which is sort of what the Fed did in 93, right? They said you can’t redeem your dollars anymore for gold, but all the gold was still sitting on the Federal Reserve balance sheet. And not only that, when they devalued the dollar, it meant the dollar was over collateralized by gold. So a lot of hard money guys in the mid 30s saying the dollar was going to crash because you couldn’t convert it anymore, redeem it anymore. What they didn’t see was that a bank has a balance sheet and as long as the assets are balancing, the liabilities not so important so much if you redeem them, as long as the bank is ready, willing and able to go into market and intervene. Unlike for example, in the 1860’s, in the Civil War when they tried the same thing, they eliminated the green back, which was not converted with gold, and the green back collapsed. Why? Because the state government had no resources with the which to intervene in the market to support it.
So two very different things. But to answer your question, Keith, my understanding is I’ve read or calls and I’m a story expert on it, but my understanding is that the problem they ran into was that like every other problem, they were pressured politically to lend to the state, to the city. As you know, if you’re issuing notes against bullion or commercial bills, you don’t set a credit cycle in motion because you’re exchanging present value for present value. But when you exchange present value for a future value that’s when you get the credit cycle going. And that’s when you get prices rising over speculation. It wasn’t so much that people were running to the bank with all their money, it was no one wanted anymore. And again, I’m glad you brought it up because it goes to exactly the end game of what we’re going to experience in our time at some point, which is that people assume that the Fed is this mystical thing, you can’t have a run on the Fed, we run in such a bank. And the theory is you go to the bank and say, here’s my money, I want my gold.
Not just the Fed, but all the European banks were convertible and the way the Great Depression got touched off wasn’t so much the crash of 29, the stock crash, it was the bond market crash. And that was precipitated by the Austrian bank Guaranteeing Credit Install, which was hopelessly insolvent. The bank failed. People ran to the Austrian central bank with their currency, said, give me my gold. They tried to meet the demands for certain time. They ran out of gold. They closed the window. Then Germany was next. Well, Austria can’t pay. Germany probably can’t either. There’s a little run on the central banks in Germany and then England, and that can’t happen, obviously. You can’t go to the Fed and say, here’s my $20, give me an ounce of gold, or my $2,000, or whatever the numbers. But what you can do is you can go to the coin store and say that and say, here’s my $2,000, give me an ounce of gold. You can’t redeem it, but you can convert it still. Right. And that’s effective would have at the Bank of Amsterdam. You couldn’t redeem it, but you could convert to something else.
And the way I view the 70s, which I’ve never seen anyone else write on this, maybe you have an opinion, Keith. But the decade started with gold at $35 now, which was a fixed price. Now, the US had lost two thirds of the gold reserve defending that price. It wasn’t a market price, it was a fixed price. And at that level, the gold Federal Reserve’s balance sheet backed its liabilities by about 12%. By 1980, the Fed appeared so much money and gold went up so much that at 650 ounce, the gold and the Fed’s balance sheet exactly matched its liabilities. In other words, the dollar had become, at 650 ounce, a gold back instrument. It was just a goal. It was entirely backed by gold. And in fact, gold ran to a 875, but not for a very long time, is kind of the top, except for that speculative pop at the end. And so the market effectively had a run on the Federal Reserve. And that’s what it looks like. You run the coin store and you sell your paper dollars until it gold reaches a price that backs. That balances the balance sheet again and again.
I think when the Fed finally the control, which will at some point the way the market stages that run the Fed is it will price gold at a price to make the Fed’s balance sheet balance the day that price is around $14,000 an ounce. Which I know it sounds crazy, but that’s just simply math. And I think it’d be very bad assumption to assume that the Fed isn’t going to print more money between now and it’s final collapse.
Keith Weiner: Yeah, that’s the problem, is the desperate need for an exponential growth in the quantity of what people call money. And of course, the debt on the other side is growing exponentially.
Dan Oliver: That’s right.
Yeah, sure. Okay. So it’s 14,000, but then the following year, 28,000, and the following year is six times two is $112,000. And when it starts to get away, this is my permanent gold backwardation thesis, that there’s a point at which the people with the gold because it isn’t a redemption, as you point out. And I would quibble with the word conversion. I would say it’s simply an exchange. You’re going to somebody who has gold at a higher price than he paid for it, so he’s getting a profit, or so he thinks. But when the people with the gold begin to perceive the nature of this exponential destructive trend, there’s a point at which the gold owners say, I’m not doing this anymore. They’re not willing to sell their gold anymore, and it’s not a function of price either. And then what you’ll see is this incredible backwardation developing gold along with exponentially rising price. And then there’ll be a point in which gold goes from the dollar perspective people will see it as gold going no offer. Now, my quibble was that and Grant Williams gave a talk at a conference, and that was kind of the thesis that gold will go no offer at the end of this process. I said, it’s kind of odd that in everything else in times of crisis, think something goes no bid. Why is gold no offer? And in this case, it’s because we’re looking at it through the dollar lens. And if you invert that and say, actually the gold is the money, the dollar is a credit instrument no different than the credit of the Bank of Amsterdam or any other credit. It’s the dollar going no bid.
Dan Oliver Jr: That’s right.
Keith Weiner: Not gold going no offer. That gold is the money. It’s bidding on things. And when it decides to stop bidding, which is hard to predict and are very nonlinear, I’ve heard the term stick slip dynamics, for example, you’re dropping little grains of sand onto the top of a conical pile. It sticks, each one is sticking, and then there’s one almost at random. It’s a possible to even compute this even with the best supercomputers. One more grain and the whole pod goes right.
Dan Oliver Jr: Exactly right.
Keith Weiner: How do you predict that when you can’t. And the two things to consider, one, if you’re early I said this on the interview not too long ago being early is indistinguishable for being wrong. However, in a run on the bank, it’s far better to be a year early than an hour late.
Dan Oliver Jr: I agree with that. And I think you don’t need to be so binary. Right? I mean, if you see go on going down, you should accumulate more. And if it goes up, especially against other assets, it’s a very complicated thing to think about because you have the goal going up and down dollar terms, you also have gold going down in terms of other assets. And that can give you a clue as to where gold is in the cycle. I agree that gold can go a lot higher nominally but will not be $80 a barrel when gold’s at $20,000 the economy will still function. As you say, it’s a dollar going, no bid, not going new offer. But I think it’s important to note, understand what you’re alluding to is the cycle is what we usually call hyperinflation. And hyperinflation can seem like an event because your grain of sand example, I think it’s a very apt one that the avalanche you don’t know what snow starts the avalanche happens very suddenly there’s also a process. But by that I mean if for example, the currency, the dollar were to collapse tomorrow, right? And the Fed would say like we’re not sparing our balance sheet.
Well, gold wouldn’t stabilize at 14,000. And I said that because the assets in the Fed’s balance sheet aren’t worth zero. I think the long term bonds were a lot less than the market thinks they are. But I wouldn’t say they are worth nothing. And the same thing with the mortgage securities. I think they’re overvalued, but not zero. And so gold doesn’t need to go to a backing of 100%, which is what it did in 1980. And that was overdone obviously because gold went to a bear market after that. And the treasury bonds back 90, 80 were yielding what, 13%? The 30 year of a Congress that was sold. I mean the it’s all debt position us is 30% of GDP 33%. So it was nothing compared to today. So gold doesn’t need to go 100%. It needs to go to a number that said to make the balance sheet balance, other assets have some value. So that’s not the question. The question is what happens when that first event happens and the first collapse happens. If as we know will probably happen, the government doesn’t want to tighten its belt, what should happen is government says we’re broke, sorry.
We got to slash the military, slash all the social spending we have to slash all that stuff and let the market reemerge as the overriding force to organize society. Well, that would burn itself out pretty fast and we would start over again pretty quickly. And there are lots of examples of this. Earhart’s Germany in the late 40s, early fifty s a good example of this. When John Kenneth Galbraith was saying we need more price controls when Germany was a total mess, you probably know that the Nazis came in, they had a full employment policy. That was what they wanted to do politically. And the only way to do that, of course was to print lots of money and create lots of work for people that the market didn’t have. And so before long they had price controls, everything. Because once you start organized economy as Hayek taught you either have to abandon your efforts or expand them. And so they expand them. Then the Nazi lose the war and the US Keynesians show up and they keep the controls in place. It made them worse. It was unbelievable. So German got worse and worse.
And finally it was Earhart, who later became Chancellor, who in the middle of a crisis enabled him to get rid of all the price controls overnight, completely. And that’s what began the German economic miracle at that point, because they get rid of all those controls. So that is in the logical space of outcomes. The question is, is that likely in the US at this point? And the answer of course, is no. What will happen when the Congress loses purchasing power because the dollar is falling in value is they’ll tell the Fed buy more of our bonds. And that’s why I say it’s a self reinforcing cycle. Because when the Fed is being forced to finance the government, especially once we get into a real inflationary cycle, they’ll be buying bonds that nobody else wants, at prices that nobody else believes in. And that means that they’ll have to either buy all the bonds in circulation because they’re all wound up at the Fed’s doorstep if the Fed is paying above market for them, or let the whole thing collapse. And the Congress simply won’t let them do that. So that’s where you get that cycle going, where the central bank, and this is what happened of course, the central bank is being forced to monetize the government debt, which spirals up very fast because the purchasing power is falling so fast that they keep the same level of spending.
You got the monetary basis to go up and exponential basis. So I think we’re a long way from that. But I do think that’s the end came on the track we’re on now. I don’t think that’s the only outcome here. The other one is the dry run with Cyprus. Right. In 2013. Which is that when we get this imbalance in the bank system. When the government does any money and they’re sort of printing it. But they bail everybody in terms of deposits when I was living in Argentina. For the safety of pensioners they made them take their private IRA accounts and put them into government bonds because that would be much more safe. Of course. So there are things they can do like that to keep the show going for a while, and no doubt they will.
Keith Weiner: That’s my answer when people talk about the government going to confiscate gold again. I said 1933, gold confiscation was about getting a controlled monetary policy. Today gold has nothing to do with the monetary system, they don’t care. And if they just simply want to grab the loot, as much loot as they can grab, then the obvious thing to do would be the IRA’s and the 401K’s And the easiest way to do that, and it wouldn’t even be a constitutional issue. Congress has given us tax deferred status. All we have to do is pass a new tweak to the amendment regulation that says in order to retain your tax deferred status you have to have whatever 50% of your retirement account has to be in these fishing new government retirement bonds that we’re going to issue for your protection, safety and convenience. And these new bonds are going to have a 5% coupon or something like that. It’s going to sound really good and I don’t think even most people would even object, and they’ll get half the value or whatever it is for everybody’s iron with a four one case, which would be what, mid to high single digit trillions of dollars.
Whereas if they try to confiscate gold, I think they’d be lucky to get tens of billions of dollars of it at this point.
Dan Oliver Jr: Yeah, I agree actually. But Roosevelt made possession of gold punishable by ten years in prison and what was it? 10,000 dollar fine. I think no one was prosecuted under that law. It was meant to suppress people’s desire to have gold but no one has ever actually sent to jail, my understanding is and they got very little of the gold came in. Now they did manage to take gold out of the system so they wanted to manipulate race the way they wanted to and have the whole Bretton Woods thing work the way. But to your point actually if you research why gold was legalized in the 70s, it actually had to do with the fact that it was so incongruous for the Keynesians to say that global barbaric relic and yet why is it illegal to hold it? It made absolutely no sense. And so there were some right wing people pushing for it to legalize it and it was very difficult to argue against it because to do so would therefore undermine the whole idea that we don’t need a golden monetary system.
Keith Weiner: Well they don’t have any reason to care anymore, it is out of the moentary system, so okay, we don’t care. I understand that Jim Blanchard he was a paraplegic. He had his arms but not his legs. Showed up in Washington DC in front of capital and he’s holding up a bar of gold and he says this is a felony for me to possess it. Calls a press conference or something like that, has like the Goodyear blimp flying overhead legalize gold again. And he’s holding up this bar of gold and he’s like I dare you. I dare you arrest me for possessing as far as gold, which of course they didn’t dare do. Here I am a cripple, I dare you. And everyone’s kind of looking at why is this…? So they legalize it and then they kind of turned it into it. They introduced it as a chip in the casino. Right now we’ll have futures on this thing and we’ll treat it like pork belly and orange juice.
Dan Oliver Jr: The Fed sent a letter to the bank saying that they were not to advertise gold, especially not to undermine confidence in the banking system in terms of gold. And the gold is a speculative asset that they should not encourage their customers buying. Who was it the head of the treasury was Assignment at that point who threatened the market and said, look, we have so much gold, if you bet it up, we’ll just smash you down. Which they did a few times. But of course, as you know, the more they spent their gold, essentially selling it to control the price, the less gold they had and the more the market said, okay, well, we’re less scared of you now because we got less gold to sell on us.
Keith Weiner: Yes, a central bank saying that we’re going to fight the market. The central bank is a finite resource and the market is essentially an unlimited… think of it as like a zombie board pushing against the gates, but there’s an unlimited number of them and the central bank is always going to lose in the end.
Dan Oliver Jr: That’s right. And again, that’s a core lesson of history, is that economics trumps politics every time. It can take a while, certainly the Soviet Union example, but it does. You simply cannot.
Keith Weiner: Well take a look at the Swiss National Bank. Everybody understands when you have the central bank of the banana republic saying, we’re going to support the pay, stock one to one against the dollar, and the market is saying, we don’t believe you anymore, we don’t trust you anymore, the way they have to support that is people are dumping pesos to buy dollars. And the only way the central bank has to fight that is by buying the pesos and selling dollars. But they only have a finite number of dollars. It’s obvious the game was up long before. It’s like in chess, you could put your king down and I see the maintenance recombing long before you don’t have to actually play it out to the bitter end.
The Swiss National Bank was this bizarre case that by conventional theory should have been able to get away with it. And in 2013 and 2014, they said, we’re going to hold the franc not up, but down. No one holds it down to no more than 1.3 franc to the euro, because the Swiss banks are getting crushed. Their liabilities are in francs, which are going up, their assets are in Euros, which are going down.
And I’m sure the exporters were complaining bitterly as well, but it’s really a banking solvency thing. So the Swiss National Bank says, we’re going to hold the franc down. We stand ready. All we have to do to hold it down is print.
Dan Oliver Jr: That’s right.
Keith Weiner: We can print unlimited amounts. We’re not a banana republic trying to prop it up, we’re trying to hold it down. And then one fateful day in January 2015, the peg snapped violently. The Swiss National Bank lost something like 20% of annual GDP in a millisecond because it turns out it’s not printing, but borrowing. Its balance sheet expansion. It basically became this over leveraged hedge fund borrowing more and more in Francs to buy Euro denominated assets. And then when they were staring down the barrel of insolvency, they get to a point of saying, this is untenable. We can’t continue doing this. We’re going to jeopardize the bank, we’re going to jeopardize Switzerland itself. Who knows what would happen. And then even that was actually not unlimited. Although within a few weeks before that, central bank governor Thomas Jordan was out there ghosting and thumping his chest. We have unlimited resources to do this. We will stare the market down, we will win. And a couple of weeks later, completely overrun.
Dan Oliver Jr: Well, it goes back to my point that the central banks are still balance sheets. And actually Benjamin Anderson running in I think the 40s, about the 30s, he made the point that when Roosevelt designed the dollar from $20, now $35 they did it in Europe. They had to sell dollars, right, to issue more dollars, and they bought gold. And so he said, a tremendous amount of selling a dollar to beat it down, because if you swap it out for gold, you’re not really changing the value. That’s a liquidity operation, not a solvency operation. And what happened was you look at the backing of the Federal Reserve by the War, by 1940 it was 80%, backed by gold. They had to buy so much gold to issue enough dollars to get the dollar lower that they wind up being again almost a pure gold instrument by any Great Depression, as it was 90, 80, and so again, it wasn’t 80. Phenomena. This happens again where balance sheets matter. Central banks have balance sheets. Yes, because they are backed by the state they can do certain things for a certain period of time. But at the end of the day, the markets triumph against politics and the market will liquidate the Fed and the way that will look like is again, the market forcing the balance sheet to balance.
Keith Weiner: That’s a very interesting way of expressing that.
Dickson Buchanan: I was going to say central banks with an emphasis on the word bank. Right? There is some state privacy, but at the end of the day, it’s a bank, it’s got a balance sheet and it can get out of whack, but eventually it’s got to get balanced.
Dan Oliver Jr: That’s right. Now, the left, they say, look, you always raise taxes and short the bank that way. Right. And there’s some truth to that. I mean, theoretically, if there’s upside down making losses, you could jack up taxes to shore it up again. But the limitations of that are two fold. One is we all know what the Laffer curve. There is a tax rate above which tax revenue goes negative. You take on less revenue than you did before. The other thing, of course, is in conjunction with that is the higher your tax, the worse the economy is going to be. And again, the less production they’ll be and the less money there is to shore up your bank. So that’s the theory. In a static point of view, it’s correct, but in a real world situation, it actually doesn’t work because you simply can’t raise enough taxes to hand it over. And by the way, how politically popular would it be for Congress now? It’s a special tax. Want to hand it over to Jay Powell? I think there’d be some resistance to that idea.
Keith Weiner: The sheer magnitude of the Feds liabilities are so much greater than… does anybody think you could tax any meaningful proportion of $30 trillion?
Dan Oliver Jr: Well, that’s right.
Keith Weiner: It’s so far beyond and continues to grow exponentially.
Dan Oliver Jr: And has to grow, because the social contract demands it. Again, people have for decades talked about how Social Security is going to bankrupt and that will happen. It takes longer than you think. I think it was Adam Smith who said, there’s a lot of ruin in a nation. And I always go back to Gibbons, who said his monumental decline to follow the Roman Empire. He starts by saying the surprise wasn’t that Rome fell. The surprise was that it took so long to fall. It was such a disaster, and it kept going for so long. I think we’re here now. I remember when I had my first job in Paris in 1991. I worked with Held Tribune for the political response, and he told me France couldn’t last the way they were structured. Well, it’s still around, but I need to write in a day. I’m not sure France will make it in another six months. Given the energy situation, given the immigration situation, given the economic situation, and given the demographic situation, these things do build. And as Keith alluded to earlier, not just monetary affairs, but also political affairs, these things have more quanta dynamics. They’re not curves. They behave nonlinearly.
And the collapse of countries and collapse of currencies behave that way. And you see, one example I always like is the Berlin Wall. For decades, people trying to cross that wall were shot dead. And then one day, they weren’t. It wasn’t a slow process. Just one day, boom, the wall came down. And that is more in the model of how the world changes. We’re seeing it today in the Ukraine. It happens in these very sudden moments. As Lenin said, everyone knows there are decades when nothing happens, and there are weeks when decades happen. And I think we’re heading towards that kind of event.
Keith Weiner: We’re touching on a couple of my favorite themes non linearity. It’s not a matter of, okay, divide this quantity by this quantity, and that tells you where things should be. And the other one being that it’s a dynamic, not a static snapshot. And you touched on it. But I just want to dwell on a little bit more the idea that, okay, suppose you were to try to tax the people to shore up the central bank’s balance sheet. Well you’ve got a political dynamic that there might be a great deal of outrage against that probably for both parties. I don’t know that Republicans would like that anymore than Democrats I have to think about that a little bit more.
Dan Oliver Jr: I don’t think so.
Keith Weiner: I wonder what the Republicans spin machine might say.
Dan Oliver Jr: Well I mean not the MAGA Republicans, right? You’re talking about Clinton Democrats and Bush Republicans or who are you talking about?
Keith Weiner: I’m not sure. I’m talking about a sort of non specific Republican. But then the other dynamic is if you impose that taxes second thing is you have a point. I use the term the Laffer Maxima. I don’t know if that term has been coined or not or I’ve used it that’s like theoretical maximum tax rate above which you can increase the rate but the tax take actually goes down. Now I believe my friend about this that the Laffer Maxima is not a static but actually moves with the credit cycle. So if you’re on the fun rising part of the credit cycle you can get away with a higher Laffer Maxima and then at the bust phase you have to lower it to maximize revenues. But obviously if you’re raising taxes even let’s say you’re raising it to that point if the Laffer Maxima higher than whatever your tax rate currently is which may or may not be the case, then you’re reducing the economy which means you’re reducing economic output which means reducing the ultimate capacity to pay that tax that’s being reduced. Thus you’re working counter to the purpose that you’re trying to achieve. You have this dynamic that’s going against you and the longer you pursue it the worse it gets.
Dan Oliver Jr: Yeah and it’s worth noting Keith that because you look back at credit cycles over history and of course at the top of credit cycle governments are spending as fast as they can to build state houses and canals and finance things and that’s ubiquitous. It’s not just that they can’t tax the people as much to turn down but they’ve got their own credit problems, their projects they can’t finish and all the chaos that entails so they can’t even pay their creditors. What this goes back to is I think history is pretty clear on this that all these imbalances in the economy and in politics, in society the faster they get resolved better. So the 19th century when you didn’t have a central bank and the credit collapse would come everyone got wiped out, labor got fired, the capitalist went bankrupt, everyone was at zero but the assets were still there. And after four, six, eight month sobriety period people pick up and start over and keep going. And people who weren’t as reckless would foreclose on the assets the reckless people had constructed and they hired people again and off you go. And the whole problem of the 20th century now the 21st century is that the government didn’t let that process happen.
They bailed out labor, they bailed out capital, they bailed out everybody. So there was no cleansing of the system. There was no getting rid of those assets or repurposing them for better use. This was the story in the 20’s and it’s certainly the story that we’re living through now.
Keith Weiner: That’s right. When they socialize it and just bring it on board. I wrote an article for Forbes, I forget the title, but it’s like putting a penny in the fuse box. Suppose you’re trying to cook dinner and it’s your daughter using the hairdryer and dad is using a power tool in the garage, and then the fuse burns. So you go down the basement, you replace the fuse, but of course all the load is still there, so it burns again and now you’re out of more fuses. The hardware store is closed, it’s Friday evening. You put a penny in the fuse box and then that happens on another circuit. You start to put pennies in there and it lets you keep things going, at least keeps the pretense that everything’s fine. But the ultimate then failure mode isn’t to burn out a fuse, now it’s to burn the house down.
Dan Oliver Jr: Well, that’s right. And that’s why, exactly why Hayek wrote incorrectly that the Great Depression was so much bigger than any depression had been in the 19th century, because the Fed kept the show going for a decade and they hadn’t done that in the 9th century because there was no Fed to do that. It was the state he called the stabilizers. People trying to stabilize the markets who intervened to make sure the overcapacity never liquidated created that problem. And again, we have a problem, just not monetarily, just monetarily, but economically, just on a much larger scale than they had in the 20s. So our depression, when it comes, will be much, much worse. And what scares me more than that though is that another theme of credit bubbles is if you look at the end of them. You often see a war and there’s good reason for this. And that is when the government is trying to control the economy and spend money. You usually have the left wing groups that want to spend less money. The right wing groups that don’t. And you have this conflict there. But the one thing the right wing groups always will somewhat is defense.
And so you get these deals where the right wing gets their defense budgets, the left wing gets their social budgets, and everyone’s happy, which is again defines basically the US politics over the last 50, 60 years. And so you construct these enormous armies that become economically important. I think the John T. Flynn who quipped that if you would asked an Itlaian statesman to demobilize the army pre WWI, he could have done it because he was the largest industry in Italy. They were reliant on this for a source of jobs and all these things. And so once you have these armors, of course there’s a short step from having them to using them and creating the conditions with which you have to convince the population you need them. Which is why we had no peace dividend. I mean, you remember back in the 80s when the Soviet Union collapsed in the early 90s. The whole idea is to be a peace dividend. We wouldn’t spend all this money on military arms. We spent more money on the military on inflation bus, inflation adjusted basis since the Soviet Union fell than before because we’ve created monsters all the world to go chase.
And again, this is wonderfully economically stimulative when you pass these laws and you have these huge defense budgets, but it undermines the social fabric. It was Bastiat who said back in the 1850s that if economies were helped by military spending, why not call all men to the colors, is how he phrased it. So this is not a new idea, but we’re seeing it play out. Again, nobody talks about these things because this is economics. And economics today is a science. And what I just described can’t be expressed by a formula. It’s a story. It’s a story that repeats over and over. The same thing happened in ancient Greece. But the economists don’t talk about this. Historians don’t talk about it because it’s not interesting historically in terms of their narrative. History is now about narratives and groups and oppression, all the rest of it. So nobody in academia or anywhere else looks at these old books and these old ideas and analyzes them. And that’s what I’m trying to do with my own work, is to revive this by knowledge that’s out there. Anyone wants to look for it, but it’s not publicized.
Keith Weiner: Yeah, I think that’s a very worthy goal and I hope your book is successful. But the one fine point that I want to add to it when you talk about the social dimension of all this is when we get to this mother of all bus, which is going to be bigger than any other, in part because, boy, we’ve kept it going for so long. In part because I think this is the only time in world history where the entire world has gone all in on the same scheme. Previously, if Germany, their scheme collapsed in 1923. Well there were a lot of other countries around that had capital the peasant and so insane. But now the whole world is all in on it. Which means that the misery that is going to come with this boss will be commensurately the greater. It’s that misery that provides the greatest impetus for more. People that are hungry and desperate and angry are much more apt to say, yeah, look, go march off to war, stupid neighbor. If we go punish them, they’re the ones that are responsible for all this.
Plus, look at all that loot over there that we can get to make our own plight less bad.
Dan Oliver Jr: Putin’s price hike. It’s all Putin’s fault.
Keith Weiner: Right? Exactly. Let’s go over there and have more, and we can get revenge and we can take all that loop that will make things well again. And that could be the capstone to the whole thing, is that sort of war. Anyway, this is all getting pretty bleak. I think there’s a positive takeaway that I’d like to impart to the end of this conversation. It’s ultimately by appealing to people and appealing to reason and saying, think about this. This is the direction that we’re going in. And just step outside of whatever interest group you may perceive yourself to be in this moment. Look at this from a social dynamic perspective, on a monetary dynamic perspective. If enough people say it’s time to change this, then things can be changed. If everyone just says it’s hopeless, we’re just going to watch it go over, then the going over is going to be really bad.
Dan Oliver Jr: Well, if I can add to that, kid, that’s exactly why I like to look for stories at other times in other places. Because when I talk about John Law in 1710, nobody has a dog in that fight. If you talk about today’s policies, everyone has their ideas surrounding today’s issues. But if you talk about something that happened in Greece, Rome, France, 300 years ago, no one has any preconceived ideas. They can actually look at the lessons that they learned back then and then hopefully realize, wait a minute, I can apply these to my current circumstance. And I think it’s a worthy goal to try to help people to do that don’t know how to do it themselves. And all I would say is that I think most of the time when you read history, countries don’t really end. I mean, 1923 was a bad time for Germany, but Germany is still here. It recovered and had some rocky times. But you can get through these things. Civilization doesn’t usually end. And now I said to someone at lunch yesterday, and he said, what about 1917? And I had to admit, well, that was maybe not the great, maybe it’s a good counter example, but I don’t think at least I hope that at least in the US, there’s still enough people here who would resist what I would call full Bolshevism, that I think we can avoid the 1917 scenario.
I mean, we might get the 1973 scenario, but not the 917 scenario. And that may not be true for countries without knowing much about it. I would have told you three or four years ago that the place to go and a big prices might be Canada or New Zealand or Australia, Crocodile Dundee and all that stuff. I had no idea that they turned into prison planets, those three countries. And I certainly learned that over the last couple of years. So I don’t. Know where that one goes. Even Switzerland, unfortunately, is being sucked into the EU and losing some of its independence. And I’ve heard Europe perhaps as a place to go, but not that I want to go somewhere, but my point is, in the US. I think we’re not going to do the full Bolshevism thing. And that’s a hopeful thought because it means that we can get through a credit collapse, social government collapse, and come up to their side more or less unscathed. Money will be moved around and people who are rich now won’t be rich then, and lots will change. But that’s happened before. I remember a friend of mine in France telling me darkly that if you can’t trace your noble lineage in France, pass through the revolution, it means you probably bought it in revolution. Count, whatever his name is, beheaded, and someone else bought his title, current account, so and so.
That kind of thing definitely happens individually. It’s a very difficult time too, but as a country, hopefully we can get through it.
Keith Weiner: Through and survive that’s right. That’s a good distinction. All right, well, on that note yeah, Dan, go ahead. Keith, I so appreciate you coming on. This has been a fascinating conversation that I think our listeners will find very interesting. And do let us know when your book is out.
Dan Oliver Jr: I’m going to send you an advanced copy, Keith. And next time I want to talk about the Real Bills doctrine, which I know you’re very familiar with, and I want to bring that into the conversation as well.
Keith Weiner: Absolutely.
Dan Oliver Jr: I need your help to do that. It’s a tricky topic.
Dickson Buchanan: Do you have a date?
Dan Oliver Jr: Just quickly, I had almost had it done. I was ready to hit the button and send it out. And then I had a third kid. Covet hit. We moved to the country, my business went crazy. And then what happened was that so much has happened in the past two years. You can’t write a book about the history, credit bubbles without including the government, Federal Reserve, and not include the last three years. And not just that, but all the themes that I think about and talk about: Monetarism printing money to stimulate the economy, Keynesianism, which is direct physical stimulus, authoritarianism, where they come in and they tell you what to do, price control, things like that, where you no longer have sovereignty over your own money. Right. War. These are the four elements you see as you’re going down the other side of the bubble, and we have all four of those now converging into the singularity that we’re reaching towards. And it’s so important to get that right that it’s difficult to tie those four trends together, convincing the right stories and the right data and all that kind of thing, which is why it’s taking so long.
But that’s where we’re headed, and hopefully we’ll be able to get it out in the near future.
Keith Weiner: Very good.
Dickson Buchanan: Well, I certainly echo Keith’s remarks. It was great to have you. We’ll definitely look to have you back on in the future, and hopefully at that time, we’ll have an advanced copy in hand.
Dan Oliver Jr: Sounds good. All right. Thanks, guys.
Keith Weiner: All right.
Dickson Buchanan: Thanks so much!
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