Friday, March 24, 2017

Money

When studying monetary theory what we are aware of is that money instituted by force has been an utter failure. Fiat money, as it is called, is an inconvertible medium of exchange that is worth only what the government professes it to be worth.

Allow me to elaborate, according to Mises' Regression Theorem the objective value of money is arrived at through human interchange stated in market prices. The subjective values of individuals, which are scaled within individual ordinal scales of value, will allow the individual to make his choice through his action.

As mentioned in a previous blog post, higher time preference denotes a higher ordinal ranking, while a lower time preference denotes a lower ordinal ranking.

Humans will exchange a good, when both parties within the trade benefit. This idea applies to all human exchanges. Indeed every transaction is subjective. The moment in time when a trade occurs is when contractually both parties arrive at concilliation. This is how a price is set, oftentimes the spot price. A proprietary protocol, or any system adhered to with a signature of some sort, would fortify the terms of the contract.

Preferably those partaking in the contractual agreements favor a third party to enforce the contract. In many cases, this is a person or entity reputable and knowledgeable in adjudicating (they render an opinion). No government need exist, as a contractual agreement is always voluntary.

Due to humans constantly desiring to act, and because of the processes undertaken by people to facilitate life's interactions, new technologies are created. A medium of exchange aids in facilitating the process of exchanging goods.

Ludwig von Mises (and earlier Menger historically alluded to it) deftly simplified the preferences of human actors, claiming and demonstrating theoretically that humans tend to always prefer precious metals as that very medium for it's scarcity and because it is portable, durable and divisible. Other factors were it's uniqueness and because it was ornate. Let us reiterate, choices are subjective yet they coalesce.

Gold or Silver have been the common choices of individuals desiring to accumulate value, whether it be when it became known as a highly desired good at the primitive stages of civilization, or now when investors use it as a hedge (strategically implied to move opposite the market), and some of us describing it as money itself.

The monetary definition ascribed to precious metals is evinced in the actions of investors. As price spreads open, meaning that as prices fall and the possibility of generating a higher rate of return or agio becomes more likely, investors look to move their money into what will aid them to increase their effective cash balances. Hence, Gold prices rise and money is worth more.

Another way of explaining this is that the money stock falls, purchasing power of the monetary unit you hold increases (less bank notes or electronic digits denoting the number of bank notes), and recrudescence is arrived at after time preference schedules readjust. Let us remember, that pulling one's money out of a low returning stage (detracted price spread) would insinuate hoarding or savings (lower time preference for the human actor).

At the individual level, time preference corresponds with the rate of interest, therefore withholding consumption may be higher on one's time preference schedule whilst they continue to consume. This may continue to suggest that the rate of interest is high, yet it will fall over time as quantity of savings increases.

Money is key in aiding individuals to make proper choices in the free market. Of course less resources being allocated improperly would occur more commonly if the price mechanism were properly accorded with a money stock of stable value (precious metal reserves).

Tuesday, March 21, 2017

Debasement

Reverting back to an old post, we can summarize the Austrian position of inflation as being a rise in the money stock.

Without a doubt, people do not have complete information. Positivists or those attempting to statistically predict the future, using events rendered in the past, which are each designated a numerical value. These symbols are cobbled together as an archive of numbers, this is known as historical data.

Surely one can try to assume that mathematics or the philosophical descriptions stacked on top of the fundamental principles of math theory are methods by which one can predict the future, but realistically this procedure is foundationally relativist.

Everything goes back to the basics. Further theory serves to aid the theoretician in building confidence when acting within the real world. Creativity is experimentation, which is discovering the world with physical application. Indeed math is necessary, but it is theory, and only helps us enhance our world acumen.

Due to the luring powers of mathematics, economics has suddenly become daunting for those who require more allocation of time when arriving at complete comprehension. This is unknown, and completely subjective. Standardized tests will not measure this human phenomenon.

The mechanics of economies to the mainstream economist presumptuously embraces hypostatization, and they therefore posit that inflation and other incidents can be measured without any doubts. Their measurements are arrived at with events from the past, the historical data previously mentioned. To their dismay, these measurements are not absolutes and only describe what occurred.

A rise in the money stock should and would filter through the structure of production at later points in time. In an economy absent of government intervention, real wealth would be built upon Savings.

No palliatives would be needed from a central authority. The individual would act, and the entrepreneur would evince to the market the necessity for demand toward his innovation. Indeed capitalist-entrepreneurs seize price spreads. Therefore the process of supplying savings, and the corresponding advancing of these factors to the various stages is heuristic.

Entrepreneurs in essence fill niches. They believe there is a demand for a product, or create a supply in hopes of a demand arising. This is all time preference.

In this aforesaid scenario, inflation would be quelled. Competing banking enterprises would bring forth their method based upon the central component of an economy, the commonly accepted medium by human actors.

In our present system, the central bank as well as other government institutions, monopolize a benchmark, whimsically expand credit, and therefore rapidly increase the money stock. This increase in the money stock is not market driven, it is government (coercively) induced.

An Austrian would measure the agio or mark-up in various ways if so needed when issuing debt instruments on the free market. The most obvious would be to watch, with the limited data given, the rise in the money stock from it's starting point, marking up the rate of interest accordingly.

A stock of Gold of 100 oz, could be parceled out and issued as loans. 10oz issued would leave 90oz. These 10oz would be apportioned to employees and other costs, if the loan were a business loan. Each of these smaller fragments would represent less quantities of Gold, even if the analogous Note (or numerical value in a digitized system) represents a fixed quantity of Gold.

This process continues whilst businesses use their best judgment to calculate other mark-ups and measure other costs to eventually pay back these loans. This would also be consistent with other types of loans or debt instruments as well.

On the free market, the rate of return is obvious. The rise in the bank money stock could be used to measure the agio, pertaining to the point in time used to measure it's increase. Clearly the Austrian understands the credo of subjectivity, and with this in mind, using theoretical measurements a bank could mark up the loan agio with the statistics at their disposal.

This attempt at discerning the rate of interest would be stated within their contractual covenant, and would assist the business in measuring their expenses. This competitive process would weed out bad practices, as well as vastly reduce moral hazards.

Indeed the rate of interest is the inverse of the rate of Savings, so within the free market, another approach could be to simply measure the available Gold stock and apply the inverse of this concept. My previous blog post explains the rate of return, using this process, whence one is given a certain amount of income.

Monday, March 20, 2017

Charity

The question of charity is not one that need be deliberated extensively. For an Austrian, charity is defined very simply.

Within the Savings=Investment ambit, by a Saver withholding consumption he is both attempting to seize the price spreads (receive a rate of return) as well as assisting in advancing factors (providing needed capital for a company to Invest with).

When a person withholds consumption, he is Saving. Savings is represented either as money within a demand deposit (both Checking and Savings accounts), which then provide capital for the bank to issue loans, Loans=Deposits. In your contemporary Banking system, this accounting tautology holds.

A loan provides needed funds (capital) for a business owner or any consumer to borrow with the terms requiring repayment in installments over time, plus an additional mark-up. Loan, Debt and Credit are all commensurate, as each vocable describes a form of borrowing.

Everything is contractual as well. An equity, or company stock, through indenture allows an Investor to allocate Savings (withheld consumption) into a liquid asset. This contractual claim to ownership of a parcel of a company, can be bought or sold quickly on an exchange. Equities can be converted to cash forthwith.

The equity or stock is a standard Savings instrument, as is the Debt instrument or Bond. Various euphemisms are given to the contractual form of borrowing, such as Bills (short-term), Notes (intermediate-term) as well as Bonds (long-term). Moreover, any label can be given to this Debt instrument which allows an issuer, typically a corporation, to borrow funds.

In these respects, a Debt instrument is Credit money (as is comporting to the aforementioned). One entity borrows--buys money, the other lends--sells money. Debt instruments are less liquid, meaning that the amount of time at which they can be converted into Cash is longer than an equity.

Everything is subjective, therefore the interlude at which someone waits in order to reap a larger profit is dependent upon time preference. Risk is indeed a subjective factor more easily reduced with more certain terms to the contract entered into, one example, collateral.

Some equities are riskier than others, while some bonds are more riskier than others as well. Subjectivity also is an important facet in describing the array of risks involved in Savings-Investing, as inflation causes malinvestments.

Charity, therefore, is tantamount to withholding consumption, because as Savings increases, more factors are advanced and new jobs appear in the market. Less government intervention, less inflation that is, will allow for more accurate price gauging. The price mechanism is less deceptive as the enshrouded decrement of wealth, due to a higher money stock, becomes less efficacious and thereupon less harmful to an economy as a whole.

A robust economy is built on real wealth, not on palliatives or vast reductions in purchasing power. Moreover, the rate of interest is key in the process of assistance to those most in need of building up a capital stock, or growing their wealth. It is profits, or the agio, that every human actor desires to grow their wealth, as those with more Savings become the greater benefactors.

Inflation would be the great deceiver which harms all decisions and causes vast misallocation of resources for all actors. Time preference is misgauged, and therefore more heedless decisions are rendered.

Charity is, ergo, the lack of government intervention, as government is the monopoly on coercion. Monopolizing money and law (a result of the existence of government), force out the needed competition in finding the stabilized market value of each. It is these dynamics which also complicate the natural confection of the agio, that being price discovery.

Wednesday, March 8, 2017

Market Fluctuations

In order to understand the process that takes place when market prices fluctuate, we must reconsider the existence of the various price spreads of the factors of the production process.

As Rothbard so deftly pointed out, Keynes had no idea what the rate of interest was. He believed it derived from the producer's loan market, and that a central authority needed to guide this supposed abstract concept. Rothbard laid to rest Keynes, as he incited the Austrians to the very fact of the mark up, the difference between buying and selling prices.

Keynes was so oblivious to this fact that his broad conjecture wound up contributing a convoluted method of mathematics which subscribed to the common present value formula. This formula is exponential, a fraction of a whole number (a percentage), multiplied by itself.


PV= Present Value (current market price)
FV= Future Value (or price at maturity-$1000)
R or i = Risk Free Rate (10 year Treasury)
N= Time or Number of Periods

Indeed these is your standard calculation when attempting to attribute value or a price to an obvious subjective factor. Evidently the most influential variable is the interest rate. The majority of financial theory requires the inclusion of the rate of interest, especially within the formulas concocted.

In the descriptions above, R or i is qualified as the commonly used instrument in all of finance, which is the instrument universally adopted by all financial theoreticians, that being the 10-year Treasury.

Applying the general moniker of "Risk-Free" to this instrument is solely due to the cajolery of governments, which resulted from that moment by which the US Dollar became the reserve currency for all central banks in the world. The Bretton Woods Conference led to the virulent Keynesian victory, which was to the world's detriment.

The elastic currency was able to thrive, all the while every other country in the world adopted the US dollar as it's reserve currency. A Gold-peg would be the aim of the US government in an attempt to make others believe they manage their expenses, or as some economists wangle, to stabilize the currency with the assistance of the central bank.

Time preference is so important to conceptualize because it tabulates the legerdemain of valuation theory. The theory of mathematics to the innumerate can seem daunting, and thus results in credulity. To those who believe they have mastered it, their persuasion is a result of embracing their theory as an absolute. One does not have perfect information.

Thus, Keynes' neophyte conclusions on the rate of interest, most specifically the Marginal Efficiency of Capital (MEC), led him to include a mark up within a mark up. Both mark ups, as aforementioned, are the subjective time preference us Austrians refer to as the rate of return or agio, time preference thereof. As Rothbard highlighted in an important footnote in his treatise on economics, the MEC is the rate of return itself.

To calculate the market, investors need to become numerates. What I refer to is that investors must understand that the lack of clear foresight (we are not God and cannot predict the future), leaves us with purview or experiences. Data is historical, they are numbers associated with occurrences that have already occurred in the past.

The more experience or information one gathers, perchance the enhanced the success of the wager.

Friday, February 24, 2017

The Fed is Filching

The main problem for the novice investor to solve is how to gauge market rallies. The trick to this, for the Austrian, is to build a strong foundation in theory. The rest is wagering.

When understanding the concepts of manias in prices, that is, the upthrusting of prices on the market, one must strongly consider the rise in the money stock.

The basic Austrian theory is that when the rate of interest is lowered, debt is issued which allows for more money to flow into these lower priced instruments. This is where one arrives at what is called a false boom.

Mainstream economists call this process "Boosting Aggregate Demand." The theory first assumes that every individual demands at the same rate, and at the same time, creating one large abstract demand curve. An assumed desire of investing and saving on a large scale. Completely fallacious.

Aggregate Demand has the theory of diminishing marginal utility applied to it. Par example, every following bite of ice cream I consume is desired less. A completely subjective concept.

On the other hand, the agglomerated supply shaped upward sloping. As Aggregated demand assumes satiation, the agglomerated supply assumes a constant increase.

In mainstream economics, due to the desired application of numerical symbols to constant unpredictable human occurrences, a theoretical paradigm was created. It is as follows:

As one can see, this is a very abstract creation. IS (Investment-Savings) is rooted in the subjective time preference of individuals, which derives from their subjective value scales.

The LM (Liquidity Money or Quantity of Money) curve assumes the government can gauge the inflows and outflows of money into the stock of money in an economy. The mainstream economist hypothesizes that the quantity of money derives from the producer's loan market, since ultimately the number of loans produced influences the money supply.

Therefore, they assume, the central bank is necessary to influence the supply of money, to then indirectly influence the consumption of individuals and do as was aforesaid, "Boost Aggregate Demand." Doltish abstraction.

What is most insightful is that applying this abstract concept down to the individual, one finds that it is merely relative or cerebral, and not at all realistic.

Take for instance the previous idea of the rate of return and individual investment-consumption ratios derived from our subjective value scales I described before. As a vast amount of money is injected into the economy abruptly, all prices are bid up quickly which then causes the individual to consume at higher quantities.

Everyone is hypothetically doing this in tandem. We coin this capital consumption, as purchasing power dwindles at the rate of inflation, which is ultimately subjective.

For the mainstream economist, their objective is to ignite this consumption because, to them, inflation is benign. Their false belief is that they can actually calculate the natural rate of interest, and infuse the markets with new money. They desire higher rates of inflation, all the while misunderstanding the ramifications of a deteriorating monetary unit.

By monopolizing the rate of interest, the benchmark (what the Federal Reserve Board terms the Federal Funds Rate), the central bank believes it can influence the quantity of money. A lowering of the rate of interest, makes them feel they can induce this economic boom which will lead to both higher GDP and therefore the rate of interest need only be adjusted upward to the new equilibrium.

In the abstract, this process of reification seems quite simple and easy to manage. Yet taking into account the more complex aspects of an economy, one realizes that calculating the proper moment in time at which the rate should be raised is practically impossible. Sadly, by monopolizing all agios (creating the monopolized benchmark), the central bank distorts the natural market adjustments that should be constantly occurring.

An expansion of credit, by lowering the monopolized benchmark, will then filter the new funds through the fractional reserve banking system, simultaneously creating more loans and deposits.

Banks attempt managing this process, but are woefully undergirded by the central bank--this is, simply put, further inflation. This pyramiding never ends until individuals readjust their investment-consumption ratios.

Thursday, February 2, 2017

The Debt Will Never Disappear

The debt will never disappear. Unless of course we come to the realization that the market must properly adjust, forcing a complete repudiation of the national debt itself.



During a readjustment process, as was discussed in a previous post, market prices fall to their proper free market level. In order for this readjustment process to be effectuated with ease, the free market must be free of any precluding laws that uprear market prices.

These underpins that are in place are unnecessary hindrances of the clearing out of bad practices. Some may refer to this period as the liquidation of bad assets on business balance sheets.

In order for a market to function properly, especially during these moments of falling prices (deflationary period), the government mandated impediments must be eliminated. A gracious clearing can occur when the market represents a glade in absence of government laws.

As we speak, the debt stands at around $19 trillion. This is an astronomical leviathan of false prosperity. When the monopolized benchmark is slowly adjusted anew upward, Treasury prices within this realm of affected yields, will fall.

Therefore, a raising of rates simply makes current market prices of outstanding debt instruments fall. Unless the IOU matures, the instrument has a remaining time of existence. A fall in Treasury prices does not shrink the debt.

The only debt instruments that disappear are those from failing companies in the private sector, yet even then many private equity companies and investment banks revive some of these feeble IOUs of trifling value and attempt to recreate a profit seeking venture. Capitalism has a unique way of rewarding those capitalist-entrepreneurs who gauge market prices correctly.

The reason for such a vast amount of failures during a rate hike is due to the common business strategy of managing cash flows with debt issuance. Rate hikes make new debt issuance more expensive. Hence higher amounts of cash flows must be paid out.

Government debt instruments are managed differently, their method is to issue debt whimsically. This is where the old proverb of "printing money" comes from. Debt issuance leads to new money in the system which is filtered through the fractional reserve banking system. Namely, loan agglomeration.

Debt monetization (coined "money out of thin air") is the more aggressive approach to injecting new money into the system. Both government debt issuance thereof as well as the socialist central banking method of debt monetization create new money which enters the economy spontaneously. The two aforementioned processes are anti-Free-market and lead to another false boom or simply stated, an amplification of the business cycle itself. Inter alia, transient expedients.

Hamilton's utopian perspective was to have a centralized bank manage the cash flows of a government. His Treasury serves this purpose, it is itself a central bank.

Government expenditures cannot be managed with the estimates used in the competitive private sector, as extortion must be enacted in order to pay off the obligations. The monetary unit is debased at every step of the way within this process.

The CBO attempts to manage expenses by suggesting a rate of expropriation suitable to garner the matching amount of revenues that will pay for those expenses. This is unknown until the end of the year. Many times governments decide to spend more than is estimated, requiring further expansion of credit. There is truthfully no optimal tax rate.

A surplus is ultimately paltry to the failed measurements in expenditures by the government. Extra money in one year would mean less credit expansion the following year, whilst, once again, debt is constantly being issued. Treasuries are sold twice a month for Notes, once a month for Bonds, and more frequently for Bills (typically once a week).

In order for the debt to disappear the government must cease expanding credit, that means cutting all expenditures outright. At this point, only the remaining outstanding obligations would need to be paid off, consecutively managing the cash flows then later paying off the full amount at maturity. Radical cuts to this measure are not in the plans any time soon.

Surely one can deliberate a mystical strategy as to how to rid the country of it's Tower-of-Babelesque sized debt, but this socialist planning would only be useful as pretexts for keeping the coercive monopoly in place. Without a doubt, one might see how the theories of mathematics are earnestly nothing but artifice with symbols called numbers.


Wednesday, February 1, 2017

Instrument of Consumption

The US Treasury instrument is an instrument of consumption. Those investors of the scholarly infusion from your typical university believe that government debt instruments are instruments of investment like those commonly sold on the free market.

Debt instruments are contracts sold for a certain price at present, bought by an investor, with the terms affirming the reception of a quantity of money in the future. This includes a stream of periodic cash flows parceled out over time which will ultimately equal the coupon (a percentage of the face amount).

Coupons are fixed, what fluctuates on the market is the present market price. This price is speculated upon amongst investors all across the world. A trade is reached when both actors act upon the ranking most suitable to them, which is compromised on, and where both gain from the trade. This process is fully subjective.

Corporate bonds are IOUs which will be fulfilled at some time in the future, with each person partaking in the contract receiving snippets of compensation over time until the full face amount is received. At this point, the debt instrument matures.

Corporations manage their expenses by estimating their revenue stream, usually dictated by quantity of sales, as well as the value of the other defined particulars such as shareholder's equity. Accounting is an aggregation of components, and a netting out of money owed. Assets-Liabilities=Owner's Equity. Arithmetic is the more commonly organic term used; basic mathematics.

This process rendered in the private sector creates a competitive mentality that foments a wary foresight amongst the capitalist-entrepreneurs. The agio used universally, will guide the ultimate decisions of these investors.

The monopolized agio, something I have coined the monopolized benchmark, distorts all processes within the free market buying and selling of goods. The US Treasury--including all government debt instruments--is most heavily influenced by this monopolized benchmark. As a matter of fact, all rates of interest are fully distorted by this coercive agio.

Unlike the private sector, governments can issue debt instruments heedlessly. Central Banks serve as their underpin which essentially produce moral hazards. The money stock rises withering away the consumption capabilities of the monetary unit, confecting less effectiveness: lower purchasing power.

Making certain that the appropriate amount of Net Income is generated allows for the corporation to allocate it's capital properly to where costs must be fulfilled. They economize through estimates using market prices, typically nominal. Measuring the inflation rate is another educated guess. What are real profit margins?

This type of business is coined price discovery, it is something that voluntarily arises naturally on the free market.

Governments use their Treasury department to issue debt instruments which are valued according to the monopolized accounting measurements. These measurements are phony mathematical formulas that cajole people into believing governments can manage costs in the similar fashion that the private sector does.

A Government debt instrument is paid by taxing the population, this is mere expropriation. Inflation is the other more formidable occurrence which reduces monetary purchasing power by filch. Both occur when attempting to manage an economy through a coercive monopoly.

The profit and loss mechanism works best in the private sector, prodding capitalist-entrepreneurs toward forbearance. With government, or within their ambit, the profit and loss mechanism is distorted and additionally frugality is replaced by feckless frivolity.

The Government does not own the economy, and the public goods it believes we need (which are coerced upon us) can be provided more efficiently on the free market.

A transient protuberance of the money supply by injecting liquidity will result in an obscured dwindling of one's capital structure, which will ultimately result in what is an abrupt awakening.