Transcript
It’s finally here! We published the call for questions for Keith and the response was overwhelming. Thanks for all of those great questions you submitted! In this first installment of our AKA series, we start tackling your questions one by one. This episode covers questions on gold, the dollar, Russia, inflation, why the dollar is still so strong, Central Bank Digital Currencies, Monetary Metals’ fundamental price and much more!
Make sure you follow us on Twitter, Facebook and LinkedIn and are subscribed to our YouTube Channel so you can submit question and check out all of our audio articles, media appearances, podcasts episodes and more.
A Gold Mine of Show Notes
Famous Buyer and Seller Fallacy
Monetary Metals fundamental gold price
World Gold Council estimates on amount of gold mined
The Dawn of Gold by Philip Barton
Keith takes down the Central Banks Digital Currency
The Perversion of the Dollar System
TRANSCRIPT
Dickson: Hello, everyone, and welcome to the Gold Exchange Podcast. My name is Dickson Buchanan. I am the VP of Marketing at Monetary Metals, and I am here today with Ben Nadelstein, who also works with me in marketing. And of course, we’re here with Keith Weiner, the founder and CEO of Monetary Metals. And this is a special episode. It’s a first for the company. It’s the first of what we hope to turn into a series, which is called the AKA: Ask Keith Anything. And as many of you know, we reached out to you on social media, through our newsletter and other avenues with a call for questions to Keith. You know, what questions do you want to ask Keith? Anything is fair game. And needless to say, we got an amazing response. We are overwhelmed with questions. So I’m very excited about this episode. It’s also a first because it’s the first video episode that we’ve done for the podcast. And basically the only reason for that is so that we can record Keith’s response to some of these questions. So I personally just want to see how Keith responds to some of the questions that we’re going to ask him today.
So it should be a lot of fun. Yes, we’ve got lots of questions covering a lot of different topics. We’ve got questions on inflation, the US global macro, gold, questions about Monetary Metals, money, credit, you name it. And of course, there’s plenty of Lord of the Rings questions as well. We’ll get to those. There’s also some other random fun ones. Keith has not seen these questions, so Ben and I have kept these questions secret. We’ve kept them safe. And that will not be the last Lord of the Rings reference you hear on this episode. So this is all brand new for Keith. He hasn’t seen any of these. This is all real time, so it should be a lot of fun. Before we begin, I just want to shout out to the Monetary Metals community. This is an idea that Ben and I have had for a while. We finally were able to do it. And again, just an incredible response. We got questions from all over the place. Twitter, Facebook, YouTube, got questions in reply to email. So we were really pleased with the engagement. So special shout out to the Monetary Metals community for that.
And also, I want to give special thanks to two super members of the community, Austin Jones and DarnoConrad. I’m probably not pronouncing that name right, but you guys achieved gold status with not only the number of questions that you submitted, but also the quality of question. So special, shout out to you. All right, before we begin, just a quick word. There is a lot of questions that we have here, a lot of questions to get through. So I’m going to ask Keith to be precise and concise. I know, Keith, you’re very capable of that. But I just want to prep you before we get started. All right. Any words, Ben? Keith, before we’re ready to go.
Keith: I think it was Mark Twain that his editor said how long would it take to write an essay of 2,000 words? And he said a week. And then the editor came back and said how long would it take to write an essay of 1,000 words, he said a month. So sometimes concision takes a longer time.
Dickson: Well, I would say if there are questions that were we need more time where we need more airtime, we need to answer in other format, that’s perfectly fine. But regardless, we are about to embark. So here we go. Alright, we’re going to start the questions around some of the current events that we’ve seen. So Russia’s invasion of Ukraine, some of the financial sanctions that were imposed on Russia, and the implications from that. So starting there here is question number one, and this comes to us from Twitter, I believe the Enlightened examiner on Twitter. What do you think about the freezing of assets of Russians? Is this a just move or a dangerous precedent?
Keith: I think I should probably confine my remarks to kind of economic aspect of it and stay in my swim lane when it comes to not only analyzing the geopolitics, but then opining as to what I think may be right or wrong, good or bad. So let me just leave it at that.
Dickson: Okay. And you’ve written a few articles on the implications of the invasion, at least as it relates to precious metals, the impact it’s had on gold and silver. So we can link to that in the show notes. I have a feeling that the show notes for this episode is going to be a literal gold mine of information because I think there’s a lot of these questions you’ve covered in previous material.
Ben: All right, Keith, freezing Russia’s reserves has highlighted the need for central banks to hold gold, China more than any other country. Do you think this is enough of a factor to adjust your gold forecast for this year? That question comes from Donald Woods from Twitter. What do you think?
Keith: Does that adjust my gold forecast? So my goal forecast for this year was that the gold price would be up 10% to 15%. Obviously, I made that forecast before Ukraine, before the freezing of Russian assets, but certainly the discussion of China and its gold reserves is not a new topic. So I would say I’ll stand pat on the prediction. And I also said that the case would be more bullish if the Fed were to reverse course and come back with the tail between its legs and said, yeah, we can’t really hike. I will note that that may be close to happening. We’ll see. I’m saying this on March 30 before this decision has been announced, but the yield curve has inverted. And we’ll see if the Fed just wants to keep hiking into an inverted yield curve. And if they don’t continue hiking, then I think that will be more bullish, as a lot of people would say, well, okay, then it’s time. It’s time to get serious about purchasing metals. But in the meantime, what I would say is obviously a lot of central banks are looking at buying gold. But I wrote something after the Irish central bank bought gold.
I think that was November, December. I don’t remember when that was right. I said beware the fallacy of the famous buyer. 10,000 people sold gold. We don’t talk about them. One famous party, the Irish central bank, bought gold. We talked about them exclusively. But there’s two sides of the trade. Why do we know that the one side is automatically right and the other is automatically wrong? And that’s because we’re goal seeking. We’re just looking for whatever stories can support higher gold price and ignoring and spending to find a higher gold price and ignoring any stories that don’t necessarily lead to higher gold price.
Dickson: That’s great. I feel like one of the foundational axioms of finance should be for every buyer there’s a seller, and the seller has his own reasons for why he’s selling. I think it was Warren Buffett who said it, probably goes way back before Warren Buffett, but you should try and understand for any investment that you’re considering, you should try and understand why is the seller selling. But as you said, at least in the precious metal space, though, I imagine it happens in other spaces, too. There’s a lot of hype about who’s buying and how important of a buyer they are. And there’s almost no talk about the sellers on the other side of that trade.
Keith: Right and it should be added the thing that makes the gold market the gold market, gold is people would use the word liquidity. Menger would use the word marketability, which is a slightly different concept. Gold is not only the most marketable commodity, it was the most marketable commodity by far, and very big and deep and liquid market. There’s millions of people transacting in the gold market every day, probably tens of millions, hundreds of millions. I don’t know. It’s a huge market, a lot of transactions, and everybody’s transacting for reasons of their own and not necessarily a directional bet on price.
Dickson: Right.
Keith: It could be that some family in India are selling a little bit of gold because the cost of food has gone up. It could be that somebody’s buying a bit of gold as a rebalance of the portfolio, or because his wife has been nagging him or who knows what. Not all of these things have any predictive power for what the price of gold will do next.
Dickson: Right. They also don’t make good headlines either company sells gold because they need to raise cash or for whatever reason.
Keith: I just spoke to somebody in Austria who is company’s involved in selling gold throughout Central Europe, including in Hungary. And right now there are big lines in Budapest to buy gold. What are the reasons? Well inflation, because Hungary and forint is falling, obviously nervousness about Ukraine, Hungary is a neighboring country and they have an election coming up. How many people in America knew that Hungary had an election coming up? A lot of people are buying gold ahead of that election because they think that in that election, Victor Orban, who has been in power for a long time, may lose and that the opposition party, who’s going to be more pro Euro and pro globalist agenda, might win. And that might be some changes in policies. I mean, is that a thing in America to think about? Hungarian elections affect the price of gold. I hadn’t thought of it. I hadn’t heard of it. I haven’t seen it on Twitter until a friend of mine who’s involved in that business told me on a call this morning. So there you have it.
Dickson: Awesome. All right, moving on to the next question here. Related this is coming from Kale on YouTube. What are the implications of the fundamental gold price for (that’s Monetary Metals fundamental gold price) for Russia and Iran hoarding unprecedented levels of physical gold while also removing taxes on gold?
Keith: Well, the taxation thing is easy. It makes gold, it removes friction. So if you’re sitting on some gold that you bought a long time ago and the price was lower and there’s a tax make you more reluctant to sell because then you have this loss. So you might just say, well, just keep it. You remove the tax, it frees you up to sell. But at the same time, there might be another person who says, I don’t want to buy gold, because if it goes up, I’m just going to have to pay a tax. And then therefore, the tax tilts the equation. It takes away some of the expected upside. The downside is all yours. But you have to share the upside 50/50 with the government. It’s a less attractive bet. So you get less liquidity, you get less transactions. The tax is just a friction. Taking away friction doesn’t tell you what direction the vehicle wants to drive. It just says that the vehicle will be able to drive there more freely. What was the other half of the question?
Dickson: What are the implications for the Monetary Metals fundamental price, if there are any, based on what Russia and Iran are doing.
Keith: So it needs to be said, there’s an awful, awful lot of gold in the world. There’s even more than that. The official estimate from the World Gold Council, who, by the way, has done some great work in tallying this all up, because I talked to all the central banks. I talked to all the bullion banks, I talked to all the Brinks and everybody else. I talked to the mining companies and they’ve tallied up some 200,000, roughly tons of gold out there. A friend of mine by the name of Philip Barton wrote a book called The Dawn of Gold in which he argued, we all know that gold has been with us for perhaps 5,000 years, something like that, since at least the beginning of recorded history or even recorded suit of history before the Greeks. He argues in his book that the Neanderthals were picking up gold Nuggets out of the stream beds in Europe 13,000 years ago. There’s no way to know. He did some anthropological research and that’s what he came up with. And I think his thesis is at least plausible. So all that gold is still virtually all that gold still in human hands somewhere.
Gold doesn’t go away, doesn’t go out of existence, it doesn’t oxidize away, doesn’t rot, and it’s not really for consumer purposes. So if there’s an increase in hoarding by Russia and Iran of a few hundred tons, maybe 1,000 or 2,000 tons, doesn’t really change the equation very much. If there were to be a significant net increase in the desired accord, then what we would see as a drop in the basis, as a boost in the buying not of paper, so called paper gold, gold futures, but in buying of metal. So the price of metal relative to futures would rise, that is measured by us as a fall on the basis, and therefore our calculated fundamental price, which is based on the basis plus a few other things, fundamental price would go up. That’s what we would see.
Ben: All right, Keith, next question. Gold has been replaced twice in American history, once by SCR on purpose and once by Nixon on accident when he closed the gold window. Can Russia or China reprice gold? That’s from Darno Conrad from YouTube.
Keith: Well, I’m not sure I agree that Nixon did what he did by accident. What is the expression? With full malice of forethought on the advice of the alleged free marketer, Milton Friedman, who was whispering in his ear as early as I think, basically saying default. So the leading Keynesian at the time, Samuelson had penned an article for the Washington Post saying Nixon devalues the dollar against gold. Even the Keynesians wouldn’t go any further than that. It’s up to the alleged free marketer to say just default entirely. So I don’t think that was an accident. But leaving that aside, can they reprice gold? No, because they don’t price it in the first place. As we just said, virtually all of the gold mine in either 5000 years of human history or 13,000 years of combined Homo sapiens and Neanderthal history, all that gold is still around seven and a half billion people on the planet represents potential demand for gold. 5000 or 13,000 years worth of gold production represents the potential supply of gold, all under the right conditions. And at the right price. Of course, I have some gold that’s not for sale anywhere near the current price.
I’m sure most people watching this would be able to say that. I’m sure people watching this would say they have a bid for gold, maybe perhaps relatively near the current price. If it would have dropped $50, I bet some viewers of the show would be out there buying. I bet if the price went up 50 or $100, some of the viewers might be sellers. So you have a market with, at least in theory, seven and a half billion participants. Does a country, let alone marginalized one, Iran being complete pariah to the rest of the world and Russia being partial pariah. I’m not exactly sure how to on a scale of one to eleven, where one is, they’re not a pariah and eleven is their full spinal tap, turn it up to eleven because eleven is louder. I’m not sure exactly where you put Russia on that scale. Either of those people have the power to somehow do something that forces the price to go up. I’ve seen one theory that’s circulating around on Twitter. I shouldn’t call it theory. I guess I should call it fantastical notion. One fantastical notion that Russia could set its price of oil at 1/1000th of a barrel.
I’m sorry, one 1000th of an ounce per barrel. Excuse me, I didn’t state that right the first time. And so if you get 1,000 barrels for 1,900, then that means that the price of a barrel is a dollar, 90 something. And that according to this fantastical notion masquerading as a theory, then this will pull the price of gold up to $100,000 or something like that. Now, what happens when you. This is like not even economics one. This is like home economics for fourth or fifth graders, 101. When you sell something below market price and below cost, you don’t change the world. What you do is you change your own balance sheet to a technical state called bankrupt. That’s the technical term. That’s right. It’s kind of like if you go up to, I don’t know, a very large building and you tie a rope to it and you pull on the building. To think that you’re going to pull the Earth out of its orbit is just a little bit much. At most you’re going to either make your hands sore and get some rope burn or pull yourself into the building.
You’re not going to pull the building off of its foundations, much less pull the Earth out of its orbit. So, no, I don’t think they have any power to do any such thing. Again, I think people are goal seeking a story that leads to gold at $100,000, which means we all get rich Hooray at the end. And there’s not a plausible mechanism there for that.
Dickson: Just as a follow up to that, I’m curious. Like what do you think? Do you have any inkling as to the amount? Like what amount would be required to really move the price in a sustainable way? Obviously, you can look at average daily volume and what makes the market move on a daily basis. But the question seems to be asking for gold to reprice, we assume higher, significantly higher. At what amount of buying, if you had to throw a dart at the board, where would you put that?
Keith: That’s a good question. Gold miners are producing what, 2,500 to 3,500 tons a year. So the very least, you better be prepared to sit down and win the World series of poker. Okay, that 3,500 tons. That’s one white chip, right? How much does it take to win, to have a credible shot at winning? A lot more than one white chip. I could sort of think in my mind how one might kind of construct economics experiment to try to figure it out. But these things are all very nonlinear. You could look at how much, let’s say the price of gold goes up $50 across the span of a week. You could look at how much of that gold was buyers not holding to their bid, but hitting offers of sellers. And you could watch and we have the data to watch tick by tick and see whether each tick is somebody taking an offer to buy or whether it’s a seller taking a bid to sell and then try to add a cumulatively the volume behind all those ticks. But it gets very nonlinear, right. If the price keeps going up, there are more and more sellers that come out.
So silver, which is a less liquid market where it’s not true that virtually all the silver, every mine is in human hands, a great deal of it has been wasted or washed. Every washing machine that’s thrown into the garbage has a little bit of silver solder in it or silver in one of the relays things like that. All that stuff is rotting and tarnishing in landfills all over the world. And yet every time that some billionaire thinks he’s going to corner the silver market. So the Hunt brothers, 1980, Warren Buffett in the late 90’s, 20 years later, they get disabused of that notion because there’s a hell of a lot more silver out there than they expected there was. And then that silver just starts coming to market in a very nonlinear deluge. If you bid the price of silver up a dollar, yeah, you get more silver. But okay, you’re a billionaire. Fine, you just absorb it all. But the more you keep pushing it up, you get exponential increases in that flat of silver coming and then eventually you run out of capital long before the world runs out of silver to dump.
Dickson: I feel like the short answer is, the short answer to that question is a whole lot than most people think.
Keith: Great and more even than that.
Dickson: Yes. And more even than that. Right. All right. Moving to our next question. So we’re moving from Russia with love to the US, again in a similar vein here. So this one is a little long. All right. Here we go. This came in via email. I have a very important subject for Keith to address. Let me begin by saying I am very happy with my investments with you, but because of the shenanigans going on in the government and financial system, I am becoming very concerned about the investments I have in the United States. I have been told that most central banks are working on some form of central bank digital currency. They plan to replace the dollar with this per the World Economic Forum and give the central bank complete control over every financial transaction. Question does this pose any danger for us? How would this affect people who get Social Security from the government? And if Keith has already addressed this in an article, please point me to those articles.
Keith: So the first thing I would say, “they’re replacing the dollar”. Suppose you have a $400,000 mortgage on your house, you have $50,000 in credit card debt, another $100,000 in other miscellaneous debt, student debt and whatever. How did you decide to replace that debt? What is replaced in the concept of I have a lot of debt. What does the concept of replacement in that context mean? I’m not exactly sure on what that means, and I would have to hear somebody answer that to go further and kind of debunk the idea. The dollar is something everybody loves to hate. Libertarian, alternative finance, gold circles, which obviously there’s a lot of overlap in America. In the west, we love to hate the dollar for a lot of good reasons. I’m not in any way defender of the dollar. When you fly and travel around the rest of the world, as I have, you see there’s a lot of hate for the dollar because the dollar is screwing them in a lot of different ways. When you look around the rest of the world, things are heck of a lot less wealthy than they appear to be here. Some of that is, yes, we’ve had freer markets and therefore higher productivity and therefore, excuse me, we are wealthier, but a lot of it is the flow of capital from the rest of the world to the US via the dollar hegemony mechanism.
So there’s certainly no lack of people that hate the dollar both domestically and abroad. However, there’s kind of a game theory, stable equilibrium that maybe nobody’s happy with where we’re at, but nobody is really in a position to change it. And there’s a very powerful network effect that keeps everything locked in. Plus, you have a couple of other interesting things. One is, I like to say often all the other currencies are dollar derivatives. So what that means is all those other central banks hold dollars or they hold other currencies, such as euros, where the European Central Bank holds dollar. So they’re getting dollar exposure multiple ways. I don’t think it’s an exaggeration to say the dollar is on both sides of every major balance sheet globally, both on the asset side and the liability side. How do you replace that? Well, kind of like how do you replace the Internet? What if we came along and said that Novel NetWare or IBMnetBIOS was a better protocol than Internet protocol? We’re just going to go, what, knocking door to door and just say, sir, can I tell you about a better Internet? That you should bought some new equipment and change everything over and learn the new software and like, tall order.
Yeah. I mean, it’s intractable. So as far as replacing the dollar, not so much I’ve written about. I think the article is called The Fed Coin Is Coming. Is that the title?
Dickson: Yes. Two part article, The Fed Coin Is Coming, but there’s also one you wrote on the Fed’s actual paper on central bank digital currency.
Keith: That’s right. I did kind of a takedown of the Feds thing. Surprise, surprise. I showed that they were being disingenuous and some of the things they were asserting and doing some of the Jedi mind track, oh, you don’t need to worry about Privacy because we’ll be all private and secure. And anyway, leaving all that stuff aside, obviously, yes. The government is going to with one of these central bank digital currencies, they’re going to get more ability to monitor what you’re doing for tax purposes. They’re going to have more ability to monitor what you’re doing for political purposes. They will have the means with which to impose a social credit score and then say, oh, well, you can’t buy that gasoline because you’ve been too vocally against whatever the latest politically correct thing is yours. We’re not going to let you buy that gas. Too bad, your car can just die on the side of the road because we don’t like you today. Sure, all of that’s true. At the end of the day, if the Fed issues the Fed coin, it’s just a dollar in a different form. It’s not a replacement for the dollar, it’s a different way of having the dollar.
And I’ve written that there’s two reasons why that they will be forced to move to this Fedcoin, both of them having to do with the monetary system. I’m sure they love the tax enforcement implications. I’m sure they love the social control implications. But there were two monetary factors that forced it. One is as the interest rate continues to fall. Now, that might sound like a really weird thing to say with everybody predicting interest rate now entering a new rising trend, such as we had from World War II to 1981. But as the interest rate continues to fall, it continues to be my position that we remain in a falling trend. And this is one of those fads along the way. Anybody should look at a chart of the interest rate post 1981, and eventually you get below zero. And when you get somewhere, maybe not at -.01% or .1% or .2%. But there’s a line at which you start to get withdrawals for paper cash, which is a run on the banks, such as we haven’t seen since the early 1930s. And to prevent the run on the banks, they will have to say we’re taking away the cash and we’re now going to have everybody has a Fed Coin account in lieu of cash.
And of course, the Fed coin account, unlike paper dollar bill, is subject to negative interest rates. If they want to have -50 basis points or half of 1% on bank accounts, they’ll have -50 basis points on Fed coin as well. There will be nowhere to run and nowhere to hide. That’s the first thing. The second thing is that in a irredeemable or an irredeemable currency system, there has to be constant exponential growth in credit. And if that doesn’t happen, then you have calamity. So what the Fed has done in the past is either push down the interest rate of tick and or tinker with the rules by which they regulate the banks so they reduce the reserve requirements or something like that. Well, in the wake of Covid, they reduced the reserve requirements to zero, and it didn’t unleash the torrent of bank lending that they probably wished for and that the gold community, properly predicted would lead to hyperinflation didn’t happen. So the banks are absolutely not reserved, constrained. There is no reserve requirement. And yet you don’t see the lot of bank lending. So they’re going to have to they can’t work through the commercial banks to get the credit expansion that the system needs anymore.
So they’ll move to a Fed coin. Now, what does that do about for gold or two gold or what kind of threat is that? In 1933 everyone knows that Roosevelt wrote an executive order that confiscated the old gold and did a bunch of other things. That confiscation wasn’t because he wanted to loot the American people, although no doubt that delighted him because he was that kind of guy. That wasn’t the driver of it. The driver was monetary, that there were these runs on the banks. People were going to the banks and demanding their gold. In those days, it wasn’t a price of gold. It was a redemption value. So people deposit an ounce of gold, get a $20 bill. At some point they come back with a $20 bill and they give me an ounce of gold back. And as the interest rate would be pushed below what they would want, and as the soundness of the banking system was sinking, more and more people were demanding their gold. This was causing a problem. One was causing bankruptcies or banks. Two, it was causing the banks have to sell a bond to meet redemptions, which was pushing bond prices down, which is the same thing pushing interest rates up.
FDR wants interest rates down. What he did was he altered the monetary system and went from a gold standard with a gold coin standard that the currency was redeemable to a new redeemable system, at least to American citizens. It was still redeemable to foreign governments and foreign central banks for another 30 some odd years. So there’s no reason for them. And then after Nixon ended redeemability, there was no reason that they had to care about gold anymore. So Congress re legalized gold in 1975. Subsequent to that, they re enable gold clauses in loans and leases and employment agreements, whatever. But by that point, gold was exiled from the monetary system and gold was no longer a thing.
Dickson: They have no reason to mess with gold today because they’ve got other avenues if they want.
Keith: No, I mean they have control over the monetary system.
Dickson: Right.
Keith: And if you buy gold, it doesn’t change their control over the monetary system. If you buy gold, you’re personally getting out of the loop, but the person who sold you the gold is getting themselves into the loop and taking your place. So the dollars are all trapped in the system and then what name is on the record and the banking system of those dollars, they don’t particularly care. And anyways, you have to sell the goal to do anything with it anyways. If they know they’ll get you for capital gains tax, it doesn’t matter to them anymore. And nobody can predict what the government might do in the future, of course, but there’s no the reasons why they did it. And I think they are inapplicable today, I guess is what I would say.
Dickson: Right. And there’s a few more questions that dance around that same topic. First, that was a very thorough answer to that question and I just want to summarize what I think might be the essence. So when it comes to central bank digital currencies, if I’m trying to recapitulate what you said, basically it’s all the badness of the dollar as it exists today, plus more. Plus more of it. There’s more control. There’s greater control. There’s greater visibility. There’s greater power really for Sauron to see into, to do damage to, the Hobbits of the Shire if he wants to. Would that be a fair summary of your position?
Keith: It’s exposing all the Hobbits to the Eye. We see all their little transactions. It’s really cutting the banks out. Everybody today, if you want to hold a dollar balance, I mean, if you want to have $100, you put it in your pocket. If you want to have $100,000, you put it in the bank. Well, now they’re going to cut the banks out.
Dickson: I remember in your article you hinted at that possibility, your article on the CBDC that if a bank was reading that, they might get a little nervous because that’s right. What’s their business model after that, by the way? We’ll link to that article, and we’ll also link to the two part series on Fed Coin and the show notes. So all those resources will be available. Okay, you said something early in that answer, which actually is almost verbatim. Another question. So, Ben, I’m going to skip ahead a little bit if that’s okay. So you were talking about the dollar system and you were talking about how the dollar is an asset and a liability on almost everyone’s balance sheet and that other currencies. We really shouldn’t think of them as kind of their own independent currencies that exist outside of the dollar system, but in reality, they are dollar derivatives. So with that in mind, I’m going to read you this question. This is coming from Michael on Facebook. Could you elaborate, please, about the thesis that non USD currencies are derivatives of the USD. How exactly does that work? And what are the implications for currency intervention, exchange rates, interest rates, and the economic policies of those countries in particular, you have said that a USD is held in the balance sheet as an asset. What is meant by this? Because I never hear anyone else talk about it.
Keith: So a central bank is a bank. It has some unique legal statutory privileges, and it’s part of the government. But at the end of the day, a bank is raising capital, which is synonymous with issuing these liabilities, which is a borrowing function. So it’s very counterintuitive to think the dollar that you hold in your pocket, what you think of as money is actually the Fed borrowing off of you. Very counterintuitive. But that’s exactly what it is.
Dickson: And you get that, really, by focusing on the balance sheet. That’s where you see historically.
Keith: I wrote an article, I don’t remember the title of it, that basically said, let’s take a look at all these adulterations to the dollar, going from a gold redeemable promise to pay and saying, well, that’s definitely not money. It was a promise to pay money. And as you adulterate it, you make it worse. There’s no degree of worseness that converts a credit into money itself. It’s the liability. So it’s not just a rationalistic “oh, well, by definition, a liability on a balance sheet is whatever” it’s tracing the history and origin of it. It’s looking at the balance sheet, it’s looking at the meaning of it. A bank raises capital in order to deploy the capital, i.e lend. So it borrows with one hand and lends with the other to make an interest rate spread between the two, hopefully a positive spread. Central banks are highly politicized, so they may have a greater degree of either tolerance of either risk or negative spread, at least for a time. But that’s what they’re raising capital at a certain cost to invest it in assets at different costs, essentially banks of the rest of the world. So the Fed doesn’t own euros, much less yuan.
Keith: The Fed owns dollar denominated assets. The central banks of the rest of the world own US Treasury bonds. So there’s quite a difference between the European Central Bank, the People’s Bank of China, any of them, versus the Fed. The Fed doesn’t own their government debts. They own US government debts, big asymmetry there. And so because they own US government debt, and you could point to the percentage and say it’s higher, lower now versus five years ago or whatever. But the US government debt is the core of their balance sheet, not the margin, it’s the core. And so that makes them USD derivatives. But not only that, but all of the commercial banks and all those other countries and all the major corporations in all those other countries both owe dollar denominations on their borrowings and have dollar cash and treasury bonds and other things like that on the asset side. And there’s no other country that really works like that. Yeah, the Euro was number two. But I would like to use the example. Who was the first person to fly across the Atlantic solo in an airplane? Charles Lindberg, who was number two? Who was the first guy to walk on the moon and get out of a rocket and land on the moon?
Neil Armstrong, who is number two? Yeah, there is a number two. Number two is a very distant second. Not even close. Not a photo finish. The Euro is number two. It’s not close to the dollar. It is distant.
Dickson: Right.
Keith: And then the other currencies are distant to the Euro. Anyway. Do I just answer one part of the question?
Dickson: I think that’s good. Again, just to try and summarize as I understand it, it really gets down to what do central banks what are the central banks of the world hold on the asset side of their balance sheet? And the resounding answer to that is Treasuries. US Treasuries. Is that fair?
Keith: Treasuries, of course. And then other US dollar denominated assets, like corporates all kinds of other things, as do the commercial banks in these countries, which also constitute part of their monetary system. And the major corporations to whom those commercial banks lend their dollars have dollar denominated assets, including Treasuries. So the treasury isn’t just at the central banks. The treasury percolates all the way down to the major corporations and probably even the businesses that aren’t major corporations. It permeates everywhere, and we’re just going to replace it.
Dickson: The implication is, if I’m a holder of euros or something else, what is the asset that stands behind that Euro? Well, it’s actually a US dollar denominated asset. And that’s where you get the phrase or the idea, you know, all these other currencies are really dollar derivatives at the end of the day. I think that’s good for that. So, yeah, back to you, Ben. We can pick up.
Ben: We are going to get to the hottest topic of the year, inflation, your favorite. Let’s start off with this. What is your definition of inflation and how does it differ from everyone else’s?
Keith: So there’s that famous quote from Milton Friedman where he says “inflation is always and everywhere a monetary phenomenon”. Now, in the context of that quote, he means rising prices or a monetary phenomenon, and he uses the word inflation to refer to that. And yet he, more than anybody would say no. Inflation is actually the increase in the quantity of what he called money. And rising prices is the always and everywhere consequence of the increase in the quantity of money. There’s that quibble, that distinction that they make between the increase in quantity and increase in prices. But since the increase in prices is always in everywhere, he doesn’t quite say a linear response. He does say leads and lags in other quotes. But since one is causing the other as a fact, most people can use them interchangeably. And my definition is quite different. I define as I say, there are lots of different causes rising crisis, and some of them are non monetary. I’ve identified four non monetary forces, which I won’t go into now. So I think one should not use the same word to describe essentially different things that have some superficial similarities.
So, for instance, if somebody is defending himself and kills a would be murderer, versus if someone commits murder, you wouldn’t use the same word murderer to describe both people. The person who’s defending his life is not a murderer. And so we have two different at least two different causes for rising prices. We shouldn’t call them both by the same word because it misleads. And then, of course, everybody expects the central bank to go to the same remedy, which is rising interest rates, which is a whole different story. That wouldn’t cause falling prices. That would actually cause rising prices. It doesn’t mean they could do it, which they can’t right now. So I define inflation as the counterfeiting of credit. When you commit monetary fraud, that’s inflation. So it’s not an increase in quantity as such. It’s the degradation of quality or the asset that’s backing the currency is increasingly puffery or air or something. Nonexistent. Imagine if you’re building a building and you’re using cinder blocks, and then you start to replace the cinder blocks with a few of them, only a few here and there. Only 1% a year of the cinder blocks are replaced with styrofoam blocks, and then at 2% a year and 5% a year, and so on.
You get to a certain point where the building gets tall enough and there’s enough styrofoam which has no structural strength. Of course, that the whole thing will collapse. It’s not whether the prices are rising, it’s the threat of collapse. That’s the real issue. So I would say there are four criteria for legitimate, honest credit. Two of them are with a lender and two of them are with the borrower. So I said earlier, if you have a dollar bill, you’re a lender. Not only don’t most people know that most people are actively resistant to that idea. And if you tell them that, they tell you you’re wrong. They tell you that you’re an idiot. They tell you to go study economics. They don’t know. They don’t want to know that they’re a lender, number two. So one lender has to know that he’s lending. Number two, the lenders be willing to lend. And I know a lot of people who think that the US government is such a terrible borrower and it’s borrowing so much, but they don’t want to be a lender to that. So they want to sell their bonds and then they hold cash right?
But anyway, the other two criteria on the borrower side, the borrower has to have the means to repay. A lot of people think in consumer terms, this is really not how to understand the monetary system. They think, okay, I make a salary of X dollars. I can go take out some credit card debt and go on. My favorite example is to go on a vendor in Las Vegas and drink and dissipate it away. But you rack up $10,000 worth of debt, you have a salary, you could advertise it, okay, makes sense. The person has the means to repay, but in a corporate sense, and then in the institutional sense, whether it’s government, banking, Corporation, whatever, the borrowing only really works if it is financing an increase in production. You’re buying a factory, you’re buying something that produces revenue. Opening a gold mine, you’re doing something that increases production by selling the products that are produced, you get revenue. The net of revenue, minus expenses, is gross profit to service the debt. And if you don’t have that element, if you borrow money, let’s say to dole out welfare payments, stimmy checks, as I guess they’re being called now, as a counterfeiting, I mean, you don’t have the means to repay it.
You called the borrowing, but you just gave it all out. You didn’t create any asset that’s going to generate the cash flow. And you’re just saying, well, next year we promise to have more discipline than we had this year. And if anybody believes that, I have an NFT of a bridge to sell them in Brooklyn. So that’s the first one. The second one is intent. The borrower has to have means and intent to repay. Clearly, that’s lacking with government borrowing today. So we have the counterfeiting of credit. Now, by defining it this way, the fact that they’re counterfeiting credit does not necessarily tell us that that’s going to cost consumer prices to rise or to fall. To understand that from a monetary perspective, we have to look at which direction is the interest rate headed. And I think a way of understanding the falling interest rate. I’ve used the term we’re feeding the savers to the consumers via the producers. But another way of looking at it is a falling interest rate is an increasing subsidy to producers. So if we’re increasing the subsidy to hamburger production, would we expect a hamburger price to rise or to fall?
Right, because we subsidize it, we got more of it.
Dickson: And you get more hamburger producers, right.
Keith: So the falling interest rate is an increasing subsidy to produce production of everything. So we get softer falling prices mitigated by ever increasing mandatory useless ingredients. And so I think I wrote an article. It was a little bit different, focused. I wrote an article for the Sound Money project called Sound Money Isn’t What You Think It Is. And I posited the question. I’ll frame it in a different way here versus the way I did in the article. Suppose the falling interest rate, we’re pushing prices down at about 2% per year. And suppose that the regulators got together and conspired to add just enough burden of additional regulation to push prices up at 2% per year. Would anybody call that “oh, that’s Sound Money. That’s a disinflationary environment. Everything is fine.” No, of course not. So I had a picture of the Norman Rockwell painting he used to paint for The Saturday Evening Post. And the painting is entitled the Double Ride. And so it’s a woman buying a chicken at a butcher shop. So they have the old style scale hanging on the chain from the ceiling.
And here’s the scale. And the butcher can’t see it, but she has a finger underneath pushing up to lighten the scale and the meat is blocking his view of that. She can’t see it because there’s a piece of butcher paper that’s curled over, but behind that he’s pushing down on it. And I asked the rhetorical question, suppose the up force from her finger happened to match the downforce from his finger. Would anybody call that an honest or sound measurement of the weight? Of course not. Two frauds that by pure luck, cancel each other out at this moment in time don’t really represent any kind of honesty at best. Okay, we got lucky and the scale has the right value at the moment.
Ben: Okay, here’s a good one. This 2% inflation number, it gets thrown around all the time. 2% inflation in perpetuity is needed for growth. I know that these central bankers, they’re just so intelligent and they mathematically came to this 2% number. But Keith, you got to tell me, how did they come to 2% inflation and why not 2% deflation? How did they come up with this number?
Keith: So there we get to something. I don’t know if I’ve written about this. I know I’ve used the term court economist, but if I’ve really written an article about this that essentially there are three kinds of people running around calling themselves economists. The first type is really the central planner, who either just lusts for power or somehow has the hubris to think that he can direct everybody’s little lives for them and to everyone’s benefit. The second type, which is probably where a lot of these things come from, are the court economists and the court economists an employee of the King. And they’re not really there to study economics or really to understand anything. They’re there to sell the propaganda to convince us all that it’s good. And so they want to convince everybody it’s growth, it’s good. It’s this the other thing government wants to borrow so that I can spend and it can spend more than it could by getting the tax revenues. Taxes are unpopular. So if you have to raise taxes, you’re going to perhaps lose as many votes as you get by whatever you give away for free. But if you can borrow and you’ve got a winner.
So conventional theory holds that this is inflation, which causes rising prices. So then they have to sell people on why rising prices are good. And so the court economists go out there and do a full court press to go out there and sell it, you get a secondary benefit. And that is if the money were truly being devalued, and if the measure of the money is one over consumer price level, then easing the burden of the borrowers, I think there’s several fallacies there, but maybe I should hold that for now in the interest of condition. But it’s nonsense. I mean, this idea that by stealing everybody’s savings, by consuming or destroying all the capital that people hold, that you’re going to get any kind of growth out of this, the technical term for that would be rubbish.
Ben: Okay, Keith, we got so many more inflation questions, but I’m just going to do one more. So if a glut of Fiat money doesn’t necessarily cause inflation, which I think they mean a rise in consumer prices, and governments can print money to their heart’s content, what is the ideal ratio of goods and services to money? And this is from Richard from the newsletter.
Keith: One of the problems. So there’s a great quote from early 20th century physicist Wolfgang Pauli. Somebody presented a paper to him and he looked at it and then he crumpled it up and he threw it into the garbage can and said, this isn’t even wrong. So comparing a good supply to money supply falls into that category. So there’s something that everyone who mates in science or engineering would get if not in high school, certainly freshman year College. And that is called dimensional analysis. It’s looking at the units of the things on both sides of the equation, or the inequality. If you want to say X is greater than Y, I’m making sure that they’re the same. So for instance, we have to compare distance to distance, speed to speed, acceleration to acceleration, jerk to jerk. Those who have studied physics will know that it’s just gone. First derivative, second derivative, third derivative. But leaving that aside, you can’t compare distance to velocity. You can’t compare velocity to acceleration. You cannot compare acceleration to jerk. They’re inefficable. We can’t speak of the rate at which your airplane is traveling and compare that to the distance that my house is from the Phoenix capital.
They’re just inefficable or incomparable. And so the reason why I say this is that, of course, money is the stocks and goods are flows. So it’s literally comparing distance to velocity. When the gold standard money is measured in ounces or tons, today, it’s measured in dollars. But goods are flows. It’s tons per year. And so we literally can’t compare them. Another way of thinking of it is the money is not consumed in the transaction, but the goods are. If you sell a bunch of pork bellies, somebody cooks those pork bellies up with barbecue sauce and eats them, and then they’re gone. But the money that was used to pay for the pork belly, the seller of the pork belly now has the money, and then he uses that same dollar. So the question people should be asking is there’s an observation and then a question. The observation is that clearly the money just doesn’t keep going around faster. The same amount of money doesn’t keep going around faster and faster and faster, bidding the prices up to Infinity. There’s some break, there’s some process that stops it. What is that process? And I don’t think the main humans answer because all they say is the only thing that causes prices to go up is an increase in the quantity of money.
And if the quantity of money didn’t increase, then they just presume that the money wouldn’t keep going around doing that. So I like to use an analogy of a bone in the human body. So you take your arm bone from elbow to wrist. And everyone assumes that that is a static, fixed thing. The length isn’t changing. The diameter isn’t changing. Presumably isn’t changing until you get much older. And then you start to get loss of bone density, which can be a problem called osteoporosis. So it isn’t really static. That’s just a layman’s assumption. If you look at what’s going on in the bone every minute of every day, the body is called resorption. It’s actually pulling calcium out of the bone and bringing it into the bloodstream where it’s disposed of. But at the same time, there are bone cells that are adding new bone matter. And so there’s an equilibrium because the two rates of adding new bone and subtracting bone are balanced. You have to look at the forces that are pushing money to just go crazier and crazier versus forces that are pulling it down and say the rate of it down to say what is causing some sort of equilibrium and that would take you down a very different path from conventional economics.
So in terms of ideal ratio, well, unless you can make that ratio, but even if you could, the second problem is the central planners dilemma. What is that magic number? How would the central planners even know what it was? And by the way, since everything in the economy is dynamic and not static, even if there was a magic number and even if you knew it at this moment, 1 second from now.
Dickson: It would be a different number and your first number is completely obsolete. It’s meaningless.
Keith: It’s changing. That’s right.
Dickson: Yeah.
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