Friday, March 24, 2017


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


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


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.