From Dr. Keith Weiner – CEO of Monetary Metals and President of the U.S. Gold Standard Institute
On one side, they force rates higher. This will wipe out the marginal debtor. After rates have been falling so for so long, the margin may be a wide swathe of the economy. Each downtick is a greater incentive to borrow. And also a business case for borrowing to finance projects of ever-diminishing return on capital.
On the other side, those who understand credit—surely some are among the Fed elite—are eying the tightening conditions nervously. The Fed itself, via the excellent FRED site published by the St. Louis Fed, tracks the spread between junk bonds and Treasurys. Not only is the 10-year Treasury yield up to nearly 2%, but the spread is up from 3.0% to 3.74%.
By some estimates, the percentage of “zombie” debt out there is over 20%. Zombies are companies who make less in profit than their interest expense. They couldn’t afford to pay the interest (without borrowing more) even before this latest Fed wild hair. The higher the rate, the more previously-non-zombies become zombified.
In other words, zugzwang. In chess, this is when any move makes your position worse. This describes the Fed’s situation perfectly.
Read it all HERE
From the desk of Keith Weiner of Monetary Metals
To listen to the audio version of this article click here.
The Federal Reserve published Money and Payments: The U.S. Dollar in the Age of Digital Transformation, and solicits comments about its ideas for a central bank digital currency (CBDC). This is our extended commentary offered in response.
Read it all HERE
To listen to the audio version of this article click here
Picture, if you can, a world in which gold circulates as the medium of exchange. People pay for everything, from groceries to rent, in gold. Employers pay wages in gold. Productive enterprises borrow gold to finance everything from food production to constructing apartment buildings. In other words, picture a world where there’s abundant opportunities to earn a yield on gold and finance productive businesses in gold.
What Happened to Gold After the Gold Standard?
It is difficult to picture because it is so different from the world of 2021. In our world, the government first established a central bank in 1913, then prohibited gold ownership and voided all gold contract clauses in 1933. It finally severed the tie between gold and its official currency, in 1971. It decriminalized gold in 1975 but, by then, circulation of gold coins was a distant memory. Gold was intended to be no different than frozen orange juice and pork bellies, and less useful besides.
How Gold is Used Today – Speculation and Hoarding
Circulation once occurred spontaneously in the free market. But when the government makes it impossible for gold to circulate, then circulation is replaced by hoarding and speculative churn. Let’s discuss speculative churn first.
Post-Gold Standard Gold – Speculation
Speculative buying and selling of gold is not gold circulation. The gold is not even used to purchase goods, much less finance the production of goods. It is used as a betting chip in the Fed’s casino to win *sigh*more dollars.
Speculative gold changes hands whenever there is a price move. Which is every day. The new buyer does the same thing that the seller (the old buyer) did, he holds it waiting either for dollar gains or his stop-loss limit. This creates churn. Instead of the gold capital being used to finance businesses, it gets traded back and forth in zero-sum fashion — creating winners at the expense of losers.
The casino analogy is fitting, for the only real winner in this activity is the house (the entity which facilitates the trade). They are happy to keep raking in fees and covering the bid-ask spread. They could care less where gold trades, only that it trades.
Post-Gold Standard Gold – Hoarding
Hoarding is different than speculation. Hoarding gold is perfectly legitimate and occurs in a free market for money and credit. If we do not have the right to hold our money in our hand, then what do we have?
But what causes hoarding of gold? Hoarding happens when the interest rate is too low. If you don’t like the rate, you hold onto your gold instead of putting it at risk.
We live in a world where governments impose price controls on borrowing. They declare the interest rate to be zero. What would happen under a gold standard if the government imposed ZIRP? No one would take the risk of lending, without being paid interest. In lieu of lending gold to the banks, they would resort to the next best thing. In a word, they would begin hoarding gold, putting it under the mattress. Hoarding removes gold from circulation.
In a free-market gold standard, hoarding gold causes the interest rate to rise until it becomes attractive to lend gold again. In a government-imposed dollar standard, this cause-and-effect mechanism is purposefully absent. No amount of hoarding dollars will affect any changes in dollar interest rates.
Read it all HERE
Coinbase, a publicly traded cryptocurrency company, recently announced that it will sell 1.5 billion worth of bonds (then revised it to 2 billion). Dollars. A leader of the crypto revolution is borrowing dollars.
Without any awareness of the irony, crypto promoters say that this validates crypto. That a crypto company borrowed dollars supposedly validates crypto.
Think about it, take as long as you need.
I have been saying for over four years that bitcoin is not suitable for borrowing. And now the crypto bellwether demonstrates that they agree!
Bitcoin is Not Suitable for Borrowing
If anyone could borrow bitcoin, surely a company who handles large quantities of it for large numbers of passionate investors would. They chose not to. As any bitcoin enthusiast can tell you, it would be foolish to borrow bitcoin as the cryptocurrency is expected to go up to many multiples of its current price. Better to borrow dollars, which are expected to fall.
To be more precise, anything that rises or falls rapidly will have volatility. This is because dramatic price action attracts speculators, who bet (with leverage) and overextend the move. Then it snaps back, and they hit their stop-loss orders, and sometimes reverse their positions.
A borrower needs stability, not drama. Bitcoin provides plenty of the latter, but not so much of the former. Bitcoin is not suitable for borrowing.
Is Bitcoin “Digital Gold?”
Bitcoin is often called “digital gold”. Well, here is one difference. Gold can be used to finance productive businesses.
Not only can it be used to finance. It is being used to finance. My company, Monetary Metals, recently announced the maturity and repayment of the first gold bond since President Roosevelt wrecked the gold bond market in 1933. We will issue many more gold bonds (and have been leasing gold—which also pays interest to investors—since 2016).
The below photo is an example of the certificate investors received for investing in the Gold Bond. The certificates were printed on special 24 karat gold film manufactured by Valaurum Inc., a company we lease gold to (investors earn 2.25% interest in gold in that lease).
Is Bitcoin Better than Gold?
It is obviously better at skyrocketing (and also crashing). Much better. But price appreciation is just a means for sellers to get buyers’ capital. You see, when you buy, you fork over your hard-earned savings to the seller. He can spend some of it, as it is his winnings. You do this, of course, in the expectation that the next guy will hand you even more of his savings.
But gold can finance productive enterprise. Gold can enable businesses who make real things in the real world, to buy the equipment and pay the expenses to start or increase production.
This is why the next monetary standard will be gold, not bitcoin.