Tag: gold

Investing & The Permanent Portfolio (Amagi Podcast @ Think Liberty Episode 6)

Nima and Dylan discussion a diversified investment strategy called the “Permanent Portfolio”, conceptualized by former Libertarian Party presidential candidate, author, and radio host Harry Browne.

Sources:

Failsafe Investing: Lifelong Financial Security in 30 Minutes (www.amazon.com/Fail-Safe-Investi…ity/dp/031226321X)

A Portfolio For All Occasions (beinglibertarian.com/growing-your-w…onomic-cycles/)

Debt: The First 5000 Years (www.amazon.com/Debt-First-5-000-…ars/dp/1612191290)

Regarding the Kalecki Equation: What Does the Market’s Response to Trump’s Election Tell Us About Investor Expectations?
(www.economicsjunkie.com/markets-respo…expectations/)

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Modern Monetary Theory – Rebutted! (Amagi Podcast @ Think Liberty – Episode 5)

Nima and Dylan discuss criticisms of MMT.

Sources:

MMT: A Rebuttal To The Theory & It’s Primary Stances (https://think-liberty.com/opinion/mmt-challenged/)

Debt: The First 5,000 Years (https://www.amazon.com/Debt-First-5-000-Years/dp/1612191290)

Tragedy & Hope (https://www.infowarsstore.com/infowars-media/books/tragedy-hope.html)

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The First US Money Was Fiat, Not Gold; The “Gold Standard” Is A Fiat Money System With A State Fixed Gold Price

We know from anthropological records that the first money in world history was credit money, in particular state credit money, aka fiat money, which is money introduced by a violent authority that imposes a tax in its currency and then proceeds to spend the currency into existence to move resources and labor into the public sector, as I’ve explained before, and as you can read in books like London School of Economics anthropology professor David Graeber’s Debt – The First 5000 Years.

Even the barter economy that supposedly preceded the advent of gold as money has never existed outside the minds of many “gold standard” theorists. This compounding effect of piling unproven falsehoods upon more unproven falsehoods has had absolutely disastrous consequences in the realm of economic thinking.

Recently I’ve encountered some arguments from people suggesting that while I may be correct as far as world history goes, surely at least in the United States money was initially gold & silver coins, before the advent of fiat money issued on top.

This is also a made up claim.

Here are some relevant, documented, referenced excerpts in the Wikipedia post on Early American currency:

One by one, colonies began to issue their own paper money to serve as a convenient medium of exchange. In 1690, the Province of Massachusetts Bay created “the first authorized paper money issued by any government in the Western World.”[3] This paper money was issued to pay for a military expedition during King William’s War. Other colonies followed the example of Massachusetts Bay by issuing their own paper currency in subsequent military conflicts.[3]

The paper bills issued by the colonies were known as “bills of credit.” Bills of credit were usually fiat money: they could not be exchanged for a fixed amount of gold or silver coins upon demand.[2][4] Bills of credit were usually issued by colonial governments to pay debts. The governments would then retire the currency by accepting the bills for payment of taxes. When colonial governments issued too many bills of credit or failed to tax them out of circulation, inflation resulted.

After the American Revolutionary War began in 1775, the Continental Congress began issuing paper money known as Continental currency, or Continentals. Continental currency was denominated in dollars from $​1⁄6 to $80, including many odd denominations in between. During the Revolution, Congress issued $241,552,780 in Continental currency.[46]

Continental currency depreciated badly during the war, giving rise to the famous phrase “not worth a continental”.[47] A primary problem was that monetary policy was not coordinated between Congress and the states, which continued to issue bills of credit.[48] “Some think that the rebel bills depreciated because people lost confidence in them or because they were not backed by tangible assets,” writes financial historian Robert E. Wright. “Not so. There were simply too many of them.”[49] Congress and the states lacked the will or the means to retire the bills from circulation through taxation or the sale of bonds.[50]

States have fixed prices of certain things throughout history, always to please certain special interest groups. The so called gold standard is nothing but a fiat money system with a gold price fixed by the state, a policy supported by special interest groups for various reasons, and suspended whenever expedient to the plans of other powerful groups.

The people who claim the “natural” gold money came first, and then was replaced by fiat money issued on top of it, have it precisely backwards. Fiat money came first, and was at times off and on accompanied by a government policy of fixing the gold price at a certain level.

Do you even fiat bro?

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Discussion About Gold, Money, Public Finance and Banking; Is Taxation Theft?

I had a great conversation with my fellow Being Libertarian contributors Baland and Arthur:

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What Does the Market’s Response to Trump’s Election Tell Us About Investor Expectations?

What I find helpful about investing in the permanent portfolio fashion, is that the assets observed together give you a good big picture overview of investors’ expectations about important macro data such as corporate profits, interest rates, and inflation.

The permanent portfolio consists of 4 equally weighted assets: stocks, gold, long government bonds, short government bonds (or cash).

We observe the following important movements since November 8th:

US stocks are now up about 6.2% since the election:

US Stocks since Trump election

Gold is down about 8.2%:

Gold price since Trump election

Long government bonds are down about 8.5%:

Long bonds since Trump election

On the short end rates are also up a bit as certainty a coming rate hike on December 14th has moved close to 100%:

To summarize: We have seen a selloff in safe haven assets like gold and bonds, and a surge in stock prices.

These are not hard and fast rules, but helpful for speculation:

Gold generally tracks consumer price inflation pretty well historically, but also becomes more desirable as a haven asset when expectations about corporate profits and interest rates on government bonds fall, diminishing the one big benefit that corporate stocks & bonds offer.

Long term government bond rates are a mix between government policy (bond buying or selling programs, future expected policy rates), corporate profit expectations (since high profit expectations encourage a move from bonds into stocks and low profit expectations do the opposite), and inflation expectations. While it is true that theoretically rates on government bonds in a sovereign floating fiat money system are entirely under the control of the sovereign government, most people including high level policy makers are unaware of this due to lots of misinformation on the topic, and we have to speculate accordingly, with that misinformation in mind. More on this in my post Why the National Debt Doesn’t Matter (And Why It Does).

Stock prices generally track investor expectations of corporate profits, but discounted by the rate on risk free government bonds. For example, you can see that since Q4 2014 corporate profits have trended down, yet stocks have actually edged up a bit over the period (even excluding the Trump effect post November 8th):

This can be explained by the observation that the rate on risk free options, namely long term government bonds, have also hit new all time lows in that same period:

Investor Expectations

So in summary, it looks like investor expectations of inflation remain low, while their expectations of corporate profits have jumped significantly, prompting them to sell gold and long bonds, while adding to their stock positions.

You can read more on the components contributing to aggregate corporate profits in this post about the Kalecki equation, which basically reveals that mathematically aggregate corporate profits can only be derived via the following spending/saving decisions made by different entities:

Corporate Profit = Investment + Dividends – Household Saving – Government Surplus + Export Surplus

There are several reasons why investors expect boosts to corporate profits, just to name a few:

Donald Trump has promised a significant corporate tax cut, which, all else being equal, will boost corporate profits noticeably. (In the equation above it would manifest itself in the form of a smaller government budget surplus or a larger deficit).

Furthermore, the elimination of arbitrary and scientifically unwarranted CO2 emission restrictions will likely boost domestic investment in oil, coal, and natural gas, which again, all else being equal, constitutes a net positive for corporate profits. (In the equation above this would affect the “Investment” component.)

It remains to be seen where household saving is headed, and also what happens to the trade balance, and other government spending programs which, if unmatched by tax hikes, could provide a further boost to corporate profits.

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