Category Archives: economy and money

Why economy?

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Why am I so preoccupied with economy lately, I’m sure some or all of you might ask. I thought about this, and this is what I came up with.

The way people imagine economy working is you have something of value to offer, other people have something of value to offer, you all trade goods and services and the one providing the most valuable goods and services in greatest quantities ends up with most money.

That’s not how it works. Sure, it works that way on the lowest tiers of economy, but as I went into it deeper I discovered other principles in action.

The way economy actually works is that people with swords tell you what is money, after they more-less grabbed the entirety of that resource for themselves. Then people with money tell you what has value, and what goods and services will make you rich, what will make you poor, and what will get you killed.

The foundation of the US Dollar isn’t gold, or oil, not even the mortgages. It’s the US military. You will use Dollar as money, or an aircraft carrier battle group will visit your country and introduce democracy. When you accept using USD in international trade, all your goods and services are valued against a resource controlled by the people with guns, who control the quantity of the resource in supply (basically can print as much of it as they want), and you have to trade for this resource pretending it actually has the value it trades for on the market, because aircraft carriers and democracy. The situation in the late stages of the Roman Empire was similar. Silver Denarius was debased so badly it was basically bronze with trace amounts of silver. The problem was, their military refused to be paid in that shit, so they had two currencies, one for paying the military and one for common usage, until the fall of Rome finally put everyone out of their misery. How Rome forced everybody to use shit currency instead of simply switching to something that actually has value? People with swords.

Pure, naked force defines what is money, and what you can get it for, on the fundamental levels of the economy. If people with swords tell you copper is money, that it’s the most valuable thing and the only thing you can trade for or you and your family will be killed, and that it’s ten times more valuable than gold, you will sell your gold for one tenth of its weight in copper and you’ll say “thank you, kind Sir”. They would tell you shit is money, but then you could produce it, so that wouldn’t work. They actually found something less valuable than shit to use as money, and that’s how we got the US Dollar.

Basically, money is defined through brute force, its acceptance is enforced under threat of murder, and you are a slave.

That’s what economy is, and that’s why I’m completely preoccupied with it. It is telling me the most fundamental things about this world, about its fundamental laws, and intents of its creator. It might literally be one of the most important things for one to learn, as important as the nature of God. Because if something is designed to forever keep you apart from God, and you are enslaved by it, you tell me what’s the most important thing there is.

Trickle down

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Trickle-down economics are something you hear about these days only when it’s argued against by socialist-minded people, and even some billionaires seem to get it wrong. So let me explain the concept first, and then I’ll proceed to the related matters.

The concept itself is simple – it’s about whether the rich should be taxed more since they have more. The communist answer is “yes, because they must have stolen it somehow from the poor and everybody should be equal”. The capitalist answer is “no, because wealth is not pre-existent, it is created by people with ideas that worked, and in order to motivate others to explore their ideas, you must create an environment that rewards creativity and success, and punishes mediocrity and risk-aversion”. The trickle-down theory says that if you don’t tax the wealthy disproportionately, they will create jobs and therefore wealth for others. If you tax them, the state will squander the money like it usually does and it will do nobody any good.

The point of contention is that if you don’t tax the wealthy, they will not consume enough products on the market to create demand sufficient to justify the trickle-down theory. A wealthy person will own the best car, they will tell you, but it’s only one car. Also, I heard an even dumber argument, stating that wealthy people will just keep their money somewhere, being wealthy, and that money isn’t doing anything for the economy. It’s obvious why socialists are poor. They don’t know anything about money.

One of the explanations why Germany became so incredibly wealthy is because its people saved money. If they save money, the banks can use deposits to guarantee for loans. This grew the German industry and economy. The opposite theories, that people should spend more in order to stimulate the economy, invariably end badly, in collapse of the credit bubble, and eventually collapse of the monetary system. Paradoxically, when wealthy people save money, the economy thrives, because credit is backed by the deposits, and the alternative is for the state to debt-finance loans, which eventually collapses the state and its economy. In a healthy economy, everybody earns a lot and spends less. Essentially, instead of supporting the credit-financed consumption of the citizenry by foreign debt, the banks support the growth of the economy by internal deposit-financed debt.

Also, let’s see what the wealthy people actually do with their money. First there’s consumption. They put a portion of their wealth into their lavish lifestyle. This stimulates manufacturing and retail. Then there’s the money that is re-invested in their business, because if someone got wealthy by growing a shoe manufacturing business, he will re-invest some of the profits into the business, which means more jobs and bigger industrial output. Then there’s investment in stocks and bonds. If you buy bonds, you help the issuer get capital for his business without relinquishing share in the business. If you buy stock, you help businesses get financing by relinquishing share for capital. Basically, whether you invest in stocks or bonds, you invest into the economy, of course hoping to make a profit in the process, and by doing that, you are performing essentially the same function as the banks: you help economy get liquid capital in order to grow, and you are repaid with a share of the profit. The money you keep in the bank helps the economy through ways I described before, and there’s also the possibility that you keep a portion of your wealth in precious metals, which condenses your wealth to a form that is no longer useful to the economy, but instead performs another function: if the state manages to squander everything, all other forms of wealth will evaporate, but precious metals can be used to restart it from the ruins and get everything going again, and that is probably the most vital function in the entire system. Basically, every unit of money a wealthy person gets to keep functions either as a catalyst, lubricant or power storage for the economy as a whole. So, as you can see, all the criticisms of the trickle-down economics are based on total misunderstanding of money and the economy, which is no wonder, since people are learning economy from the communists. It took me decades to learn these things, and everything I learned in school or from my parents was so incredibly and utterly wrong, it’s a miracle I’m still here, and no miracle I had to go through several disasters to get here. I think even most bankers and heads of central banks have those things completely wrong, which is why today’s monetary system and the economy are in such a precarious state, facing either complete restructuring or a violent disaster.

Tariffs

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How can you tell which country has the stronger economy?

Economy of scale 101: if you produce for a bigger market, you produce in greater quantities. This reduces production overheads per item, allowing you to have lower manufacturing costs per product. Also, it allows you to keep a lower profit margin per item while still earning more on the overall volume. This makes your product cheaper to the consumer, who will therefore prefer it, all else being the same.

Countries with bigger internal markets tend to have manufacturers who are producing for those bigger markets, and therefore have the lowest prices. When such big countries export to the smaller countries who don’t have such economies of scale, they can keep the prices so low, it completely suppresses the manufacturing in the smaller countries, because they cannot hope to be competitive with the technologically superior and cheaper results of strong competition on a big marketplace; it’s like introducing more highly evolved animals to some island that was geographically separated and shielded from the competition that produced better living things. In order to survive, a small country introduces tariffs to make the imported products more expensive and level the playing ground. The bigger country then complains internationally that free trade is great, freedom is wonderful, there should be no borders that separate people, and all other bullshit that is meant to increase pressure on weaker countries to remove tariffs and allow the invader’s products to dominate their markets and destroy their manufacturing industry. Once everyone’s manufacturing is destroyed, the prices will of course be raised.

I’ve been repeating for years that American whining about free borders and free trade has only one purpose, to pressure weaker countries into allowing America to flood their markets with American products, counting on the fact that nobody can retaliate and flood American markets with cheaper products because nobody can match American economy of scale, because they manufacture for a very competitive market of 300 M people. They didn’t really count on China because they saw it as basically their own offshore factory, with labor and location outsourced in an extension of American manufacturing sector’s effort to keep the prices down. What happened is of course that China learned how to make their own products even cheaper than the China-manufactured American products, while keeping the quality the same, or actually stepping it up, because where there’s manufacturing, there’s also experimentation and research that ends up evolving better technology.

That’s why Huawei is a problem for America. It is now actually a manufacturer of superior 5G technology that America cannot match. The roles have turned and now America is a technologically weaker country whose marketplace is to be conquered by a stronger country’s superior products. Also, a technologically superior country that controls the infrastructure can use said infrastructure for its own nefarious purposes if it so desires. America is used to being in that position, but as soon as it smelled the coffee and understood that China is going to replace it in this position, it started raising hell about unjust this and that and switching from a globalized free market paradigm to a “we must protect our small and weak country from stronger countries flooding our market with their products”. It’s really funny to watch.

It also explains why China is now rooting for free trade, no borders and broader international cooperation and other nonsense. It calculated that it has the technological upper hand and nobody can successfully compete with it on its own market, while it can out-compete anyone else. It’s like the osmotic pressure: you can have a porous membrane that allows two-way flow of liquid, but the liquid will always flow in the direction of lower pressure.

Trump’s statements that China is going to pay those tariffs and not the US citizens is of course a blatant lie. Of course the US citizens are going to pay those tariffs, that’s how tariffs are supposed to work. China is not going to reduce their prices for that amount, that’s impossible. The irony is, China will now benefit from all the open borders and free trade infrastructure that the Americans pushed for when they thought they will forever remain the dominant manufacturing and technological power, and they can’t just say it was all horseshit intended to collapse our borders, destroy our manufacturing sectors and make us American colonies. No, it will be “yellow man bad”.

 

Soft-landing of the economy?

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There is a “soft landing” scenario that actually seems to be where the central banks are going, but I don’t give it much long-term chances for success.

Basically, the central banks lowered the interest rates to the point where a large percentage of bonds are now yielding negative interest. Negative interest on bonds is technically called a default. Also, Basel III magically reassigned gold from a level 3 security (valued at 50% nominal) to a level 1 security (valued at 100% nominal). Before that, only the bonds were level 1. This means the central banks can now legally swap bonds for gold, and they are actually doing that for quite a while. If they reach more than 20% of monetary emission backed by gold, and more likely 40%, we are then technically on a gold standard, although the public might not even realize. There are, however, problems with this. According to my estimate, dumping bonds for metal will deflate the economy, in a process very similar to what’s going on in a refrigerator, when the compressor liquefies the gas, and bleeds extra energy into the environment. This will basically bleed bullshit from the economy and solidify assets into smaller volume but greater reality and reliability. As this takes place, the states will lose the ability to convert debt into monetary mass, since the market will be saturated by their unwanted, negative-yielding debt. Also, all sorts of imaginary n-th order derivatives will evaporate, they will collapse into nothing, or at least very minor percentage of their overall volume will be converted into solid assets.

Eventually, as the monetary mass is converted into real assets, monetary metal will appreciate at least by a factor of 10, but that is a conservative assessment. Silver might actually over-correct and appreciate by a factor of 100. Basically, if you don’t want some asset-class to evaporate, you will need to convert it or back it with solid assets. The central banks will buy the most of monetary metal on the market before anyone else smells the coffee, so the fiat currency might actually survive the impact with purchasing ability relatively intact, but money might be quite scarce. The rest of the asset-holders will fight for scraps and try to buy whatever monetary metal and other solid assets on the market for extremely high prices and in very small quantities.

During this process, there will be a huge social crisis due to the reduced availability of money, where the populist politicians will rally the mob against the central banks “that hoard gold while people starve”, and they will successfully pressure the governments into printing money to throw at the mobs wielding pitchforks, at which point the system will collapse and civilization will die in a hyperinflatory explosion. The alternative is for the government to figure out how to kill off a significant portion of the population that is currently in debt, creates no solid income and is reliant on government aid. Basically, either those people die, or everybody dies. My assessment based on game theory is that everybody dies.