This week, the prices of the metals fell further, with gold -$18 and silver -$0.73.
On May 28, the price of silver hit its nadir, of $14.30. From the last three days of May through Sep 4, the price rose to $19.65. This was a gain of $5.35, or +37%. Congratulations to everyone who bought silver on May 28 and who sold it on Sep 4.
To those who believe gold and silver are money (as we do) the rising price of silver may seem right as rain. Why shouldn’t the dollar go down? It’s a rubbish currency, and any moment everyone else will realize it. And therefore it should go down in anticipation of that, right?
It certainly went down during this period, from 2.17 grams of silver to 1.61, or -26%.
What Is a Dollar Worth?
The question is: how much should it go down? This is a

Germany has recently joined Switzerland in the dubious All Negative Club. The interest rate on every government bond, from short to 30 years, is now negative. Many would say “congratulations”, in the belief that this proves their credit risk is … well … umm … negative(?) And anyways, it will let them borrow more to spend on consumption which will stimulate … umm… well… all of the wasteful consumption for which governments are rightly infamous.
While those who are about to borrow may find cause to cheer (as opposed to those who have already borrowed, at higher rates, who are now disadvantaged by this move), the savers are harmed. How can anyone save in an environment where savings has a cost?
John Maynard Keynes called for the “euthanasia of the rentier”.

A paradigm is a mental framework. It has a both a positive pressure and a negative filter. It structures one’s thoughts, orients them in a certain direction, and rules out certain ideas. Paradigms can be very useful, for example the scientific method directs one to begin with facts, explain them in a consistent way, and to ignore peyote dreams from the smoke lodge and claims of mental spoon-bending.
However, a paradigm can also prevent one from discovering an important new truth. This occurs because it can steer the thought process to the comfortable and the convenient. At the same time, it filters out information which may cause one to question these tempting conclusions. For example, the Medievals believed that the sun and planets revolved around the Earth. When

Everyone must ask himself the question. Do you want the world to move to an honest money system, or do you just want gold to go up (we italicize discussion of apparent moves in gold, because it’s the dollar that’s moving down—not gold going up—but we sometimes frame it in mainstream terms).
Gold’s Going Up
We have written about the tension between these two goals before. Many people start with the former. They come to gold, as they begin to realize that the dollar is going off the rails, that there is something wrong with bail-outs, bail-ins, Quantitative Easing, Zero Interest Rate Policy, and negative interest rates. But a funny thing often happens along the way. They buy into the story of gold to $5,000 (or $65,000).
They become speculators on its price. They

At a shopping mall recently, we observed an interesting deal at Sketchers. If you buy two pairs of shoes, the second is 30% off. Sketchers has long offered deals like this (sometimes 50% off). This is a sign of deflation.
Regular readers know to wait for the punchline.
Manufacturer Gives Away Its Margins
We do not refer merely to the fact that there is a discount. We are not simply arguing that Sketchers are sold cheaper—hence deflation. That is not our approach. Let’s look beneath the surface, and drill deeper.
Sketchers makes the sort of shoes that you wear frequently, especially for exercise. They are not made to last forever, and not haute couture that will be worn once every blue moon. If the customer likes the Sketchers styling and they fit well (e.g. for

We have recently written several essays about the fallacious concept of Gross Domestic Product. Among GDP’s several fatal flaws, it goes up when capital is converted to consumer goods, when seed corn is served at the feast. So we proposed—and originally dismissed—the idea of a national balance sheet.
It’s easy (conceptually) to add up all the assets and the liabilities. But the problem is that the falling interest rate pushes up asset prices. Even if one booked assets at their original acquisition prices, that does not solve the problem as assets often change hands and then would be marked higher.
Rising Net Present Value
In a recent meeting with a reader, we’ll call him Ludwig, he suggested one possible way to

“I know it, when I see it.”
This phrase was first used by U.S. Supreme Court Justice Potter Stewart, in a case of obscenity. Instead of defining it—we would think that this would be a requirement for a law, which is of course backed by threat of imprisonment—he resorted to what might be called Begging Common Sense. It’s just common sense, it’s easy-peasy, there’s no need to define the term…
This is not a satisfactory approach. Leaving aside concerns with undefined terms as the basis of sending someone to jail, it is an admission that one cannot define the term. As Richard Feynman once said:
“I couldn’t reduce it to the freshman level. That means we really don’t understand it.”
Obscenity has an analog in monetary

We have spilled many electrons on the topic of capital consumption. Still, this is a very abstract topic and we think many people still struggle to picture what it means. Thus, the inspiration for this week’s essay.
Enterprise Car Service
Suppose a young man, Early Enterprise, inherits a car from his grandfather. Early decides to drive for Uber to earn a living. Being enterprising, he is up at dawn and drives all day. He finds that he makes a comfortable living. He grosses $250 a day, minus $50 in gas, or $200 net. He works the standard 220 days a year, so he takes home $44,000. Not a bad living.
One day, the transmission breaks. It costs $1,000 to repair. Early has no choice but to pay. He arranges with the shop to

Folks in the liberty movement often say that the economy is fake. But this does not persuade anyone. It’s just preaching to the choir! We hope that this series on GDP provides more effective ammunition to argue with the Left-Right-Wall-Street-Main-Street-Capitalists-Socialists.
We frame it that way, because nearly everyone loves to tout GDP (though some do so only when it suits their political agenda). It is fashionable to say variously that the Fed is doing a good job, Obama did a good job, and Trump is doing a good job. This is because GDP is up. It’s also because stocks and real estate are up. And because employment is up.
We have shown that assets go up because interest rates go down. We have shown that GDP is

Last week, we looked at the idea of a national balance sheet, as a better way to measure the economy than GDP (which is production + destruction). The national balance sheet would take into account both assets and liabilities. If we take on another $1,000,000 debt to buy a $1,000,000 asset, then we have not added any equity. This is so, even though assets have gone up. But unfortunately, as a consequence of assets going up, consumption goes up. This is the much-vaunted wealth effect.
The Wealth Effect
However, we abandoned this approach due to a problem that the falling interest rate—which is going on just about 40 years!—causes assets to rise in value. The Fed cannot print real wealth of course (though people

We have been writing on the flaws in GDP: that it is no measure of the economy, because it looks only at cash and not the balance sheet, and that there are positive feedback loops.
“OK, Mr. Smarty Pants,” you’re thinking (yes, we know you’re thinking this), “if GDP is not a good measure of the economy, then what is?!”
The National Balance Sheet
In the first part of this series, we introduce some concepts from accounting: cash basis and balance sheet. This approach would logically suggest that we look at the national equity account. Any accountant can tell you that assets = liabilities + equity. Or, to restate it, equity = assets – liabilities. So in this approach, we should add up the value of the assets. That is

Our economic views and unique product are generating buzz. There have been a number of interviews recently (more will be posted soon).
Lobo Tiggre interviewed Keith Weiner (video) about the unique Monetary Metals business model to pay interest on gold.
Silver Bullion interviewed Keith Weiner (video) when he visited Singapore, about the belief that Basel III regulations are good for the price of gold.
Claudio Grass interviewed Keith Weiner in Pro Aurum Newsroom (written) about macroeconomics.

Related posts: Is Keith Weiner an Iconoclast? Report 28 Apr
The Spreads Blow Out, Update 1 May
Gold Bullion International Lease #1 (gold)
Monetary Metals

Last week, we discussed the fundamental flaw in GDP. GDP is a perfect tool for central planning tools. But for measuring the economy, not so much. This is because it looks only at cash revenues. It does not look at the balance sheet. It does not take into account capital consumption or debt accumulation. Any Keynesian fool can add to GDP by borrowing to spend. But that is not economic growth.
Borrowing to Consume
Today, let’s look at another problem with GDP. To understand it, let’s walk through a plausible scenario. It begins with Johnny Fastlane. Johnny borrows $10,000 on his credit card to (yes, our favorite example) go on a gambling vacation in Las Vegas. An airline carries away some of his cash. A hotel lodges

Let’s start with Frederic Bastiat’s 170-year old parable of the broken window. A shopkeeper has a broken window. The shopkeeper is, of course, upset at the loss of six francs (0.06oz gold, or about $75). Bastiat discusses a then-popular facile argument: the glass guy is making money (to which all we can say is, “plus ça change, plus c’est la même chose”). Bastiat says it is true, and this is the seen. The glazier does make money.
Then he introduces the concept of the unseen. The shoemaker does not earn the 6 francs he would have earned, had the shopkeeper not had to replace his window. The shopkeeper himself has the same window as before, but he is poorer by 6 francs. The unseen are the consumer, and the other

Monetary Metals leased silver to Gold Bullion International, to support the growth of its gold jewelry line. The metal is held in the form of inventory in a third party depository.
For more information see Monetary Metals’ press release.
Metal: Gold
Commencement Date: May 29, 2019
Term: 1 year
Lease Rate: 2.0% net to investors
The lease is 260% oversubscribed.
The graph of the offers is less illustrative than others, as there was no rate-setting auction phase. We used only the call for metal phase, with the rate pre-determined at 2% based on comparable leases. Even in the call for metal, investors have the right to offer at higher interest rates–this is why there are some offers going up to higher rates.

Gold Offers

We will start this off with a pet peeve. Too often, one is reading something about gold. It starts off well enough, discussing problems with the dollar or the bond market or a real estate bubble… and them bam! Buy gold because the dollar is gonna be worthless! That number again is 1-800-BUY-GOLD or we have another 1-800-GOT-GOLD in case the lines on the first number are busy!
Whether the writer is a bullion dealer, or whether just some HODLer (a term from bitcoin—it means Holding On For Dear Life) hoping for a higher price, and an opportunity to unload some gold to make profit$, it matters not. The “buy gold” message undermines the economic point. Perhaps the economics (or pseudo-economics) point bolsters the

In what has become a four-part series, we are looking at the monetary science of China’s potential strategy to nuke the Treasury bond market. In Part I, we gave a list of reasons why selling dollars would hurt China. In Part II we showed that interest rates, being that the dollar is irredeemable, are not subject to bond vigilantes. In Part III, we took on the Quantity Theory of Money head-on, and showed the counterintuitive property that, the more dollars are out there, the greater the demand.
Now in this essay, we will tie this all together.
You could say it in one sentence: the regime of irredeemable currency has unintended consequences. We often say that we do not prefer the term “unintended consequences” because

We have been discussing the impossibility of China nuking the Treasury bond market. We covered a list of challenges China would face. Then last week we showed that there cannot be such a thing as a bond vigilante in an irredeemable currency. Now we want to explore a different path to the same conclusion that China cannot nuke the Treasury bond market.
To review something we have said many times, the dollar is borrowed. It is not printed. Every time fresh new dollars are created, there is a borrower. There is never a giftee. The borrower has the dollar as an asset—but he also has a matching liability.
Once we understand that the balance sheet has assets and liabilities, it is senseless to talk about the increase in

Last week, we wrote about the impossibility of China nuking the Treasury bond market. Really, this is not about China but mostly about the nature of the dollar and the structure of the monetary system. We showed that there are a whole host of problems with the idea of selling a trillion dollars of Treasurys:
Yuan holders are selling yuan to buy dollars, PBOC can’t squander its dollar reserves
If it doesn’t buy another currency, it merely tightens monetary conditions in China
If it does, it will drive up the price of whatever it buys, but crash it when it sells later
It is still supporting the dollar, as the euro is (like the yuan) a dollar-derivative
It would lose money by holding the positon, due to the interest

There is a drumbeat pounding on a monetary issue, which is now rising into a crescendo. The issue is: China might sell its holdings of Treasury bonds—well over $1 trillion—and crash the Treasury bond market. Since the interest rate is inverse to the bond price, a crash of the price would be a skyrocket of the rate. The US government would face spiraling costs of servicing its debt, and quickly collapse into bankruptcy. America could follow the path taken by Venezuela or Zimbabwe.
How serious is this threat?
The Independent Institute wrote (replete with a graphic purportedly showing a “nuclear bomb”) about it:
What would happen if the Chinese government were to weaponize its holdings of U.S. Treasury bonds by suddenly

We have deviated, these past several weeks, from matters monetary. We have written a lot about a nonmonetary driver of higher prices—mandatory useless ingredients. The government forces businesses to put ingredients into their products that consumers don’t know about, and don’t want. These useless ingredients, such as ADA-compliant bathrooms and supply chain tracking, add a lot to the price of every good. Of course higher prices are reflected in the Consumer Price Index. And people say it is inflation.
We have also discussed a nonmonetary driver of lower prices. Every productive business is constantly working to remove useless ingredients too. They are not allowed to remove government-mandated useless ingredients,

Over the past several weeks, we have debunked the idea that purchasing power—i.e. what a dollar can buy—is intrinsic to the currency itself. We have discussed a large non-monetary force that drives up prices. Governments at every level force producers to add useless ingredients, via regulation, taxation, labor law, environmentalism, etc. These are ingredients that the consumer does not value, and often does not even know are included in the production process. However, these useless ingredients can get quite expensive, especially in industries that are heavily regulated such as health care.
What Force Pushes Prices Down?
There is another non-monetary force, and this one is pushing prices down. Producers are

Monetary Metals leased silver to Money Metals Exchange, to support the growth of its gold and silver bullion  business. The metal is held in the form of inventory in its vault.
For more information see Monetary Metals’ press release.
Metal: Silver
Commencement Date: May 1, 2019
Term: 1 year
Lease Rate: 2.2% net to investors

Silver Offers for Money Metals Exchange – Click to enlarge

Related posts: Monetary Metals Leases Silver to Money Metals Exchange
Quantum Metal Lease #1 (gold)
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Monetary Metals Leases Gold to Quantum

Scottsdale, Ariz, May 3, 2019—Monetary Metals® announces that it has leased silver to Money Metals Exchange® to support the growth of its business of selling gold and silver at retail and wholesale. Investors earn 2.2% on their silver, which is held in Money Metals’ vault in the form of silver products.
Monetary Metals has a disruptive model, leasing gold and silver from investors who own it and providing it to businesses who need it, typically for inventory or work-in-progress.
Investors benefit, because they earn a return rather than pay storage costs on their metal. Gold- and silver-using businesses benefit, as the lease is their lowest-cost capital. And the lease is more user-friendly, with no need to be hedged

The bid-ask spread of both (spot) gold and silver has blown out. Both, on March 1.

In gold, the spread had been humming along around 13 cents—gold is the most marketable commodity, and this is the proof, a bid-ask spread around 1bps—until… *BAM!* It explodes to around 35 cents, or two and half times as wide. On the same day, silver went from half a cent to 1.5 cents, or about triple.
We zoomed out far enough—it does not interfere with chart readability in the slightest—to see the last time the silver spread changed radically. That was Nov 13, 2017, and the spread had been three times higher again (i.e. over 4 cents). Nothing happened to the price at that time, though a few weeks later the price began dropping and

We have a postscript to our ongoing discussion of inflation. A reader pointed out that Levis 501 jeans are $39.19 on Amazon (in Keith’s size—Amazon advertises prices as low as $16.31, which we assume is for either a very small size that uses less fabric, or an odd size that isn’t selling). Think of the enormity of this. The jeans were $50 in 1983. After 36 years of relentless inflation (or hot air about inflation), the price is down to $39.31. Down 21.4%.
Of course, we just employed a slight sleight of hand. After introducing the concept of useless ingredients, we now showed a lower price on Amazon. Amazon has cut out some ingredients which are useless to many consumers: (1) displaying products on a shelf, (2) in a

We have a postscript to last week’s article. We said that rising prices today are not due to the dollar going down. It’s not that the dollar buys less. It’s that producers are forced to include more and more ingredients, which are not only useless to the consumer. But even invisible to the consumer. For example, dairy producers must provide ADA-compliant bathrooms to their employees. The producer may give you less milk for your dollar, but now they’re giving you ADA-bathroom’ed-employees. You may not value it, but it’s in the milk.
On Twitter, one guy defended the Quantity Theory of Money this way: inflation (i.e. monetary debasement) is offset by going to China, where they don’t have an Environmental Protection

Last week, we wrote that regulations, taxes, environmental compliance, and fear of lawsuits forces companies to put useless ingredients into their products. We said:
“For example, milk comes from the ingredients of: land, cows, ranch labor, dairy labor, dairy capital equipment, distribution labor, distribution capital, and consumable containers.”
There are eight necessary ingredients, without which milk cannot be produced.
But, today, the welfare, regulatory, and litigation state forces dairy producers to add numerous other ingredients such as paying for food stamps for unemployable people in the inner cities hundreds of miles away from the dairy farm, tracking tags, giant wheelchair accessible bathrooms, etc. We

This week, the Supply and Demand Report featured a graph of debt vs profitability in the Russell 2000. Here’s the graph again:
This graph shows a theme that we, and practically no one else(!) have been discussing for years. It is the diminishing marginal utility of debt. In this case, more and more debt is required to add what looks like less and less profit (we don’t have the raw data, only the graphic).
We do not view the coming end of this incredible false boom in biblical terms, nor in a malevolent sense that man gets his comeuppance for daring to build something. We don’t see it as inevitable that what goes up must come down. And we don’t believe that all good things come to ruin in the end.
We see it as math’s

We have written much about the notion of inflation. We don’t want to rehash our many previous points, but to look at the idea of purchasing power from a new angle. Purchasing power is assumed to be intrinsic to the currency. We have said that the problem with the word inflation is that it treats two different phenomena as if they are the same. One is the presumed effect of rising quantity of dollars. The other is the effect of rising regulatory and tax burdens.
Let’s use milk as an example. Suppose milk was $1 per gallon. Many would say that a dollar is worth one gallon of milk. Or, alternatively, a dollar’s purchasing power is one gallon of milk. Suppose that later, the price of milk goes up to $2. Then, people say