This is a neatly, clearly and precisely written article explaining why it is that we are on the cusp of the most severe depression ever.  Though that is my claim, not Keith’s.

Highly recommended reading.  The whole Report is HERE.

June 22, 2020/2 Comments/by Keith Weiner

We are reading now about possible regulations for air travel. In brief: passengers might be forced to spend hours at the airport. Authorities will perform medical checks, including possibly needles to draw blood, no lounges, no food or drink on board the plane, masks required at all times, and even denied the use of a bathroom except by special permission.

We would wager an ounce of fine gold against a soggy dollar bill that people will hate this. The majority of vacationers will not want to fly. A holiday is supposed to be fun, and air travel promises to be a lot less fun that it was in March.

Even business travel will be discovered to be a lot more discretionary than previously believed. Forgetting continuing education and conferences chosen in tourist hotspots such as Las Vegas and Maui, even business meetings may be done remotely (they already have been, for three months). Going farther, we would expect major corporations to set policies that employees will not be required to travel except when specifically directed by a senior executive. No large employer would want to face a wrongful termination lawsuit from an employee who balked at being stuck with a needle.

If air travel is only for people who absolutely, positively have to visit faraway places, it will be a much smaller market than it was. This will have some big consequences.

What Kind of Consequences?

The airlines have far too much capacity. They must break leases on their gates at the airports (as will rental car companies). This means that the airports will find they cannot service their bonds. Likewise the restaurants and stores in the airports—which had increasingly become like malls in many places—will break their leases and default on the loans they used to pay for their buildouts.

The airlines will have to try to liquidate large numbers of airplanes. There will be no bid on most of them. Newer aircraft, with more efficient engines and more attractive interiors, will be retained. The others will go off to the boneyard. The bonds that financed all of this now-excess fleet will be defaulted.

The pain will fly up through the ecosystem. The airplane food service companies will be toast. The vendors that service soda fountains and refrigerators in restaurants in airports will freeze. Even the businesses that stand up racks of magazines at airport newsstands will fall over. Loans on the trucks, scissor lifts, and industrial kitchens will not be paid.

It Doesn’t End There

Moving farther upstream, what are the prospects for the manufacturers of airplanes, specialty airport service trucks, and scissor lifts? What of their parts suppliers? If any of those companies has debt, it will be defaulted.

Moving on to other parts of the airport, there are monorails that will seize for lack of demand. There are parking garages that will collapse for lack of cars paying $25 a day to park. Cleaning companies will kick the bucket.

Once passengers land, they travel by rental car, taxi, or Uber to a place where they can sleep. Usually a hotel. Hotels that depend on air passengers for a majority of their revenue—how many serve mostly people who drive?—will soil their beds one final time before they go off into the great goodnight.

A whole slew of upstream vendors, from carpet installers to plant nurseries, to colleges that turn out graduates in restaurant and hotel management will go down the river.

This leads us to the convention centers. Even if the airline business was not a lead balloon, the convention—which is pretty much the opposite of social distancing—would still be a dead letter. That means the companies who sell the paraphernalia for trade shows, like printed brochures, will fold. The manufacturers of exhibit booths will drop, the silkscreen companies who put corporate logos on pens and shirts will see red ink, and even the businesses who make the lanyards will be ripped up. Lighting companies will collapse like overloaded trusses.

There are many more companies not mentioned, and we could go farther upstream. But we will stop here, because we don’t want to belabor the point. We went this far, in order to paint a clear picture. There is a common element in every sad story above. No, it is not layoffs (though those are a human tragedy). Nor a drop in quality of life (which has already occurred).

We speak of bond defaults.

Bond Defaults Affect You

Many people may not care, because they do not own bonds. However, they should care if they have a pension, insurance policy, annuity, or a bank account. Institutions buy bonds, and now we are headed into unprecedented bond defaults.

If you manage a pension fund who owns some of those bonds, what do you do? If you are a pensioner who reads about this, what do you do?

The answer is as obvious as it is painful. Some of these creditors will, themselves, default If their asset goes *poof* then their liability is no good either.

Some may get subsidies. Keep in mind that the Federal Reserve can lend, but it cannot gift. Congress can dole out gifts, but how much can they get away with until voters get sick of it? We suspect far less than the amount needed to cover all this bad debt.

Assets Cannot Be Replaced With Liabilities

To a creditor, the loan is an asset. When it defaults, the asset loses value. The creditor cannot replace this asset by borrowing. If it borrows, then that loan would be a liability. Adding a liability does not fix the problem of losing an asset.

Pension funds may not be allowed to reduce the checks they pay to retirees. Instead, they will turn to employers—such as airport operators and scissor truck manufacturers—to pay more and attempt to shore up these underfunded funds. With their revenues dropping sharply, and debts of their own to try to service—not to mention laying off employees—these entities are fighting to avoid bankruptcy. Or they may already be in bankruptcy courts of their own.

The employers do not have nearly enough cash to make good on these pension obligations.

This is part of why we say the dollar is supported by the struggles of the debtors. Any analysis that begins and ends with quantity of dollars misses the quantity of debt, and the burden of every dollar of it rising with the falling rate of interest.

These banks, insurers, and pension funds—and their unhappy clients—will not be running out to spend trillions, bidding up consumer prices, and causing what most people think of as inflation. They will be cutting their consumption of real resources—including the paychecks of employees who consume real resources—in a desperate attempt to stay afloat.

The world is not dying the white hot death of nuclear explosion hyperinflation. It is dying the cold, dark death of drowning under a rising sea of debt.

A great educational article from the desk of Keith Weiner.  Find it in full HERE.

“To help clarify our point, let’s go through the mechanics of this. Step one, a commercial bank borrows $1 million. Step two, the bank buys a bond. That is, it gives up $1 million in cash, and gets a $1 million bond in exchange. Step three, the Fed borrows $1 million. Step four, it buys the bond. That is, it gives up $1 million in cash to the commercial bank, and gets the $1 million bond in exchange.

“The act of borrowing and the act of buying are combined in one step with the Fed. It’s simple but it’s so hard to see, because people think of the dollar as money. However, the dollar is actually the Fed’s liability. When a bank sells a bond to the Fed, it prefers the Fed’s liability to the bond. If the bond is a Treasury bond, then why would the bank prefer the Fed’s credit to the Treasury’s credit?

“There is not so much difference between the two. Both are government credit. The Treasury pays interest (barely) and has a maturity that is a date in the future. By law, the Fed’s credit is a current asset, that is, zero maturity. And it may be used to pay all debts.

“To sell a bond is to exchange one credit paper for another.”

Carl Menger was a brilliant economist who set the foundations for the Austrian School of Economics.  He also perpetuated one of the great errors.

Gold is not money because it is ‘the most marketable good’.  Menger’s mistake continues to be repeated by many otherwise fine thinkers.  It is based on the misconception that money’s primary role is that of a medium of exchange.  That is where the expression ‘the most marketable good’ comes from.

It was surmised that Gold became money because over a huge span of time people showed their preference for it in the marketplace as their medium of exchange.  They favoured it over salt, fish, cows, copper etc.

That error has had profoundly negative consequences.  If money is just a medium of exchange, then governments are free to issue pieces of paper (cotton/plastic these days) with numbers printed on them and force them into circulation via legal tender laws.  This they have done – in every country in the world.

A good is properly defined ‘an exchangeable, quantifiable value’.  How is it quantified?  By being measured.  What does the measuring?  The same as does the measuring in any science: the most stable value available in the pertinent genre.  As a litre/pint measures liquid volume, a metre/yard measures distance and the speed of light measures time, so Gold measures value.

Because the Stock-to-Flow ratio gives Gold the most stable value available, it performs the role of measuring value in the marketplace.  Today, we appear to measure the value of goods using paper money, but the value of paper money is, and always has been, set by Gold.  You just have to turn the conventional dollar ‘price of Gold’ chart upside down and back-to-front.  Then you will see (through the paper) the (dwindling) value of the dollar.  Paper money is the de facto measure, but Gold remains the de jure measure.

To return to the definition of a good (an exchangeable, quantifiable value), if money is doing the measuring, then it cannot also be the measured.  Therefore money cannot be a good.  To claim that money is a good, denies its role as the measure of value.

But not only is Gold (in monetary form) not a good, it is also not very marketable.  Even under the Gold standard, it was very difficult to buy or sell day-to-day items using Gold, because the value of the goods rarely approached anywhere near that of the measure.  Popping down to the shop to buy a loaf of bread with an ounce of money was going to give the shopkeeper a problem.  He could use the Gold to measure the value, but he did not have sufficient change in his till to accept it as the medium of exchange.

That is why silver was commonly used as money’s surrogate.  Silver’s value was not stable, but it was more stable than anything except Gold.  And that value was small enough (and still fungible, durable and divisible) to be useful in the everyday marketplace.

The most marketable good is not Gold; it is silver.

So what is money’s primary role?  The reason that a known weight and fineness (purity) of Gold became money, is that not only is it a stable value, but it holds that value into the future with more stability than anything else.  That, and that only, is the reason that Gold became money.  It is a store of stable value over time.

That is why people preferred Gold.  Once they had accumulated enough surplus silver or cows, they swapped it for Gold.  Only then was their excess wealth secure.  In that manner, did the world’s first real accumulations of wealth begin.  Those accumulations of wealth, beginning in Ancient Egypt, are the bedrock of today’s high-tech, low cost world.

Gold’s stability of value is why governments disapprove of it and seek to replace it.  Nothing that they introduce in its stead holds its value over time.  That is perfect for those with the intent to degrade the debt notes that they offer.  And that is why they perpetrate the myth that money is just a medium of exchange.  To agree with that belief is dangerous to your financial health.

Money has a far greater stature than that of the ‘most marketable good’.

Friday

From the desk of Keith Weiner and Monetary MetalsI am writing in response to the comments you made in a letter to investors yesterday, which were widely reported. You have set the gold community afire, with claims that are not new and not true. So I shall attempt to douse the flames.

As everyone knows, President Roosevelt outlawed the ownership of gold in 1933. Although gold was legalized in 1975, fears linger today that the governments may repeat this heinous act. There is no reason for this fear. In 1933, Roosevelt had two monetary policy goals to accomplish by banning gold.

Read it all HERE

Wednesday

Keith Weiner’s notates and dissects the most immediate problems stemming from the lock-downs.

 “…we’re now going to make a call, for the first time, for certain consumer prices to rise. This call is absolutely, positively not based on rising quantity of money. It is based on three things. First, as we said in item number one above, many vendors and service providers in many supply chains will be ruined. This will make manufacture and distribution of consumer products less efficient, slower, and more expensive. Second, the government will be ordering, or in many cases outright owning, the means of production. We see this already with President Trump ordering General Motors to manufacture ventilators, a product with which GM certainly has no experience, expertise, or efficiency in producing. It should go without saying that government-directed production is expensive (and, of low quality). Low quality, it should be noted, itself makes things more expensive for everybody. Third, in the new normal that is to come, there will simply be fewer restaurants and fewer stores of every type who remain in business. Lessened competition will enable the survivors to charge higher prices.”

And here is the full article.  Get a beer or a cup of tea before you read it.