Welcome to the third installment of our Ask Keith Anything video series. We published the call for questions far and wide to our readership, and the response was overwhelming! We received questions from all over the world. Now we’ve published the results! In this episode, Keith answers your questions on Bitcoin, supply chain bottlenecks, banking, book recommendations, the gold and silver markets and so much more![embedded content] Additional Resources Ask Keith Anything Part I Ask Keith Anything Part II Yield Purchasing Power Monetary Metals Gold Lease Monetary Metals Gold Bond Useless Ingredients Russia, Oil, Gold, Ruble Article Series Monetary Metals Gold Basis Real vs Nominal Interest Podcast with Stefan Gleason Usury and Speculation article Unadulterated
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Welcome to the third installment of our Ask Keith Anything video series. We published the call for questions far and wide to our readership, and the response was overwhelming! We received questions from all over the world. Now we’ve published the results! In this episode, Keith answers your questions on Bitcoin, supply chain bottlenecks, banking, book recommendations, the gold and silver markets and so much more!
Dickson: Hello again, everyone. My name is Dickson Buchanan. Welcome again to the Gold Exchange podcast. I’m joined with Benjamin Nadelstein, my co host for today’s episode. And of course, we’re here with the founder and CEO of Monetary Metals, Keith Weiner. This is part two of our Aka Ask Keith Anything series. To recap to anyone who might be new to this series or this episode, a couple of weeks ago, we sent out the invitation far and wide to everyone in the Monetary Metals network asking for questions for Keith, anything was fair game. Any question was fine. We accepted all any questions that were sent to us. This was your chance to peer inside of Keith Wiener’s brain and see everything that’s in there, all the different topics that we could cover. So we got tons of questions back from anything from current events, inflation, gold, Monetary Metals, and a bunch of random fun ones. So in this episode, we’re actually going to really kind of pick up where we left off. At the end of last episode, we finished with questions around Monetary Metals and Monetary Metals investments, investing in gold, precious metals. We’re actually going to start today’s episode there.
And just to give you a bit of a preview of the road map that we’re going on in this episode, we’ll start there. We’ll work our way outwards from Monetary Metals into more broader investing related questions. And we’ll also be visiting a favorite topic here. You may know it as digital gold, but we have a few questions about Bitcoin in today’s episode. Keith hasn’t written anything about Bitcoin. He has zero salts on Bitcoin, so that should be fun. We have to talk about that a little bit. After a pit stop in Bitcoinlandia, we’ll dive into the banking interest rates theory, some more questions on kind of the US banking system and the history of banking in the United States. So from there, we’ll end with another series of random questions, everything from commodities to Keith’s favorite TV show to, yes, even more Lord of the Rings questions. So make sure to stick around to the end of the episode to hear Keith’s answers there.
I just want to say before we begin, Keith has not seen these questions. This is raw, unfiltered access to the man, the myth, the legend Keith. So, yeah. So we’re recording this as a video episode. Everyone can share in viewing Keith’s responses to these questions in real time. So without any further ado, Ben, are you ready?
Ben: So ready,
Dickson: Keith, are you ready?
Keith: We’ll see.
Dickson: We’ll see. The power is in our hands. Keith, Ben and I, we have the easy job, which is we just ask the questions. We just lob the questions to Keith. Keith has the hard job, which is to actually answer them. All right, here we go. Starting off with more questions related to Monetary Metals, investing and gold. Keith, how many ounces of gold do you anticipate the average American would need to retire and live exclusively on the interest earned? The question assumes no other sources of income. There’s a follow up, but I’ll let you answer that first.
Keith: So sounds like a lead into the concept of yield purchasing power. Not if I liquidate all my gold capital how many groceries can I buy with it, but rather if I put it to productive work and get interest on it, how much gold capital gold I need such that the interest on it was sufficient to pay my living costs. So this is kind of a problem of reverse engineering. You start out and say, okay, well, how many dollars a year that you need? All your expenses are dollars. Assuming your house is paid off. Your house is paid off, right? I hope.
Dickson: I’m not the one asking you the question.
Keith: But reader or listener is hopefully your house is paid off in retirement. You don’t have that expense, but you have property taxes, you have insurance and electric bills and grocery bills. And you have a car. Hopefully you don’t have a car payment. You own the car outright. You want to take a vacation once or twice a year. You want to visit your kids and you want to spoil your grandkids rotten. So you want to buy them lots of presents. So what does that cost? I don’t know. Let’s say to make the math easy, call that $100,000 a year. So $100,000 a year. And let’s assume a $2,000 gold price just to keep the math easy. It’s 50oz of gold. So if you were earning 3% interest on your portfolio at Monetary Metals. So let’s assume you had some blend of bonds, not very particularly overweight in the bond, mostly leases, but let’s say the blended rate was 3%. Then it’s just one of those is over of questions that everybody doesn’t remember. And to the extent I remember hated from algebra class in high school or universities. The case may be how many ounces is it such that 3% is 50oz?
And the answer is something on the order of 1500oz, 1500oz divided by roughly 33. So 1600 or something like that.
Dickson: Which in dollar terms would be around 3 million if we’re using that same gold price. Yeah. Okay. Yeah. Pretty simple formula there. But I love where this question is coming from because I think it’s something that all of us need to think more about.
Keith: So there’s a follow up here and anecdote if I may.
Dickson: Yeah, go ahead.
Keith: Very early client who’s still a client. So if he’s listening to this. I’m not going to call him out by name, obviously, but he knows who he is. Asked a similar question about, okay, how much gold would I need to get a kilo of interest a year? And so I immediately kind of redo the math and said, okay, you’re talking about 32oz of interest. And then he kind of said, Well, I think in metric kilos. And I just burst out laughing and I just said, man, you just made my day. I said, I don’t know whether you’re going to become a client or not, but I love that we’re having a debate over how we measure gold in metric versus Imperial units versus with everybody else we’re having the debate of whether measuring it in ounces versus dollars.
Keith: But now with kilos versus ounces, I love it. You made my day. Anyway, he became a client, and everything was happily ever after.
Dickson: Nice. That’s great. That’s like the second level kind of question. Like they’re already beyond, already beyond dollars versus gold. Now it’s all right. Do we denominate announces versus grams.
Keith: Oh, man, that’s a next generation shit. All right.
Dickson: Yeah. So there’s a follow up here, which, again, an important follow up to discuss, which is how do you see that number changing with the combination of increased useless ingredients? So that’s your term as it pertains to inflation and all the non monetary forces that go into what just gets grouped into inflation, as commonly understood, and negative interest rates. So if you could briefly touch on how both of those forces might cause that number to change.
Keith: So the second question first, and I’ll break the second question into two halves. Is the interest rate gold affected by the interest rate in dollars? And the answer is no. At least that’s my theory. Monetary Metals were kind of in a very interesting and privileged position to conduct experiments in monetary science in the real world and get definitive answers. And so that will be one of those questions that either confirm my theory or prove it wrong, but I don’t believe that would be affected. However, as the interest rates falls, I have written tons about this. Essentially every decrease in the interest rates is an increase in the subsidy to producers. And so one can think of it as we’re feeding the savers to the consumers. Socialism is always about consuming capital, not just consuming income, but consuming capital. We’re feeding the capital of the savers to the consumers in the form of consumer goods through the producers. And what we do is we take their savings because they’re disenfranchised and we give a subsidy to (we being the government not Monetary Metals. I want to be really clear on that as the Fed doing this.)
And every time the interest rates go down, it’s an increase in subsidy. So we got more plentiful consumer goods, and we create extra capacity. So industries are running, a lot of slack in the capacity and that tends to be a downward force in prices. So that would tend to mean you’d be less gold to achieve that lifestyle. However, all the useless ingredients, which is when the government forces producers to add stuff to their products that consumers do not value. I first thought of the concept and I was thinking about the force gasoline manufacturers to add either MBTE or ethanol, depending on what time of year and where in the country you are. And I thought that’s a useless ingredient. I was like, oh, that’s actually the name I want coined for this. In the case of ethanol, I think most people probably know that gasoline has that and they probably have some awareness. If you said to the average person, what do you think that costs? They’d probably be able to make a guess that’s reasonable. But in most cases, people don’t even know the useless ingredient is even there, nor do they value it in any way.
They just call it inflation, so called. And then they say, well, which asset is going to go up with inflation? And the frustration is, well, the universe doesn’t work that way. It doesn’t provide you an asset that someone else will keep bidding up higher. The more the government makes gold more and more expensive and therefore less plentiful and therefore scarcer. So economics tells us that something is becoming scarcer. There’s less of it. The way we’re going to ration consumption is by having a higher price. There is not any particular magic asset that magically goes up as the government keeps adding more and more useless ingredients or mandating that producers add more and more useless ingredients to their goods. There’s no asset that does that. So as useless ingredients are increasing, yeah, you’re going to need more gold capital so that you can live on the interest on it. And that’s just when the government does this. So think about it. Imagine if you lived in the UK or Europe where they’ve systematically shut down all the forms of energy that can either be produced domestically or work.
So shut down coal, shut down oil, shut down domestic production of natural gas, and make themselves increasingly dependent on Vladimir Putin. So that already drove prices up quite a bit. If before the war in Ukraine, then Putin decides to go to war in Ukraine and suddenly the price of natural gas is whatever it is, ten times what had been previously. The good is actually scarcer for real. And so by making a scarcer for real, everybody’s become poorer. And so if the question is how do you avoid being poorer when everyone else is poorer? Work harder, work faster, be the rare guy who beats the market and finds better investments? It’s hard. But basically 99.9% of people are actually made poorer as a result and they’re going to have to eat less and they’re going to have to set the temperature thermostat in their house to lower temperature in the winter because the price of heating the house has gone up so much, and that just sucks. And people need to lobby their government and say, stop doing this. Start repealing some of these regulations that mandate these useless ingredients. Stop impoverishing us.
Dickson: That’s great. I was just going to say, I’m sure it’d be tempting to, you know, you’ve got one factor there that would increase the number of balances that you would need. And so you’d either need more capital or you need a higher interest rate and you’ve got one that might decrease it. It’d be tempting to come away and say, oh, well, those two things will just balance themselves out. But I have a feeling that it’s, as they say, more complicated than that.
Keith: It’s kind of like you toss a coin and then it lands on its edge. It can happen. One of the million coin tosses or whatever. I’m sure there’s got to be a statistic actually come to rest on the edge, but it’s not likely.
Dickson: It’s not likely. Yeah, that’s great. Okay, go ahead, Ben.
Ben: All right, Keith. So this is from Evan from Twitter. How is Monetary Metals growth and what are the current bottlenecks? Is it supply demand or something else entirely?
Keith: Growth has been since the inception of the program have continued exponential. So we’re adding clients, adding gold to the program. We’re adding deals to everything that’s been growing in an exponential trend. Obviously, it’s relatively easy for early stage companies to grow exponentially, much harder for major corporations to grow exponentially. So we’ll worry about being a major corporation when we get there. But I think what’s important to say is that in our vision, this is a very important thing and a very big opportunity, and we’re doing something that if we can scale, changes the world. So I often say that a good working definition of a gold standard, not a formal academic definition. So don’t crucify me over this, but a good working definition is when anybody who wants to can deposit their gold and earn interest on it, then you have all of the other things that you want in the gold standard will cause consequences of that, including circulation of gold coins, including people will get their wages paid in gold. All those other things occur as a consequence of that. You have to be able to use both training stuff, as long as it’s sitting there on a shelf any warehouse with somebody’s name on it.
And then that person finally gets sick and tired of waiting for the price to go up or it goes down or ever. And then he sells it, and then basically it moves to the next shelf and get the new name tag pasted to it. Then it’s a dry asset. And that’s one of my critiques of Bitcoin. Doesn’t finance anything, cannot finance anything. But if gold is financing things, then gold is actually moving in the economy. That’s the gold standard. And so the gold standards, when we scale up, when monetary metals becomes a big company, we’re helping bring the world to the gold standard. And I think this is a very big business. So exponential growth, very big endpoint. What does it look like between here and there? Well, my crystal ball is a little bit murky, but I see. What was that? Another movie from the 1980s, Rocky, when he fights Lang, which is played by Mr. T. And they said, Mr. T, what’s your prediction for the fight? And he goes like face into the camera. He’s like pain. What’s my prediction for monetary middles? Growth. All right. That’s my Mr. T impression.
Dickson: That’s great.
Keith: I see. Because we’re helping savers get a return on their principle, which the banks no longer want to do, no longer can do. And even if you could get 2% on your savings in the bank, the Fed has a target, which is called price stability. So George Orwell would be looking down at this one saying “guys this wasn’t supposed to be a how to guide”. But they’re trying to create 2% debasement. Even if you got 2%, which you can’t, you wouldn’t be getting anywhere. You’d be on a treadmill moving, walking at 2 mph while the treadmill is spooling back at 2 miles an hour. You’re getting nowhere. So we’re helping savers, and then we’re helping finance businesses in a smarter, simpler way. And I think the market for what we’re doing is big and we’re creating it. So this is a new thing that didn’t really exist before us. As I said, there’s a purpose behind it. It was two halves of the question. I think I had just one half.
Ben: Yeah. I think the question was how is our growth, which I think we were saying is exponential. And then what were the bottlenecks that we might perceive? Supply. Demand.
Keith: Bottlenecks. We’re kind of an interesting place that there’s not one single long pole. Maybe that’s because of smart management to some degree. But I think there’s a lot of things. There’s supply and there’s demand and there’s staffing up and there’s internal systems and processes and there’s building the brand and there’s developing the partnerships. It’s a lot of things. There’s internal friction that we have to reduce, each one of which helps towards the goal. And we have to move forward on all fronts. I don’t think there’s a single thing that, hey, if we could chop that poll down, we’d suddenly jump ahead.
Dickson: Great answer. So you mentioned that answer. Something that actually ties into the next question, which is all these things when it comes to using gold as money, all these things kind of flow downward from the ability to earn a return on gold paid in gold. And one of the things you mentioned was wages, earning wages in gold. This next question asks this is from Twitter. Do you pay your employees and or contractors in gold. And if not, why not?
Keith: So I just wrote an article which I think will be published today or tomorrow, and you guys are the ones in control of that. So I’m saying this on Monday, April 4, depending on when his podcast is published. I just wrote an article about this narrative that Russia is demanding payment in rubles and it’s backing the rubles with gold, backing the rubble, the petrol rubles backed with oil. The US dollar is going to lose its reserve status, et cetera, et cetera. And address that issue of when we talk about paid in, are we saying that the economic calculation is performed and that long term contracts are set in terms of or are we saying merely as a mechanism for remittance? And so if I can give a spoiler to my own article, a series of articles I talked about, imagine you’re a homeowner and for whatever reason, you neglected the front lawn. And so now it’s eight inches tall and you have seed heads appearing or whatever. It’s kind of getting ugly. And so some kid comes along and says, I’ll offer to mow your lawn. And you say, well, how much do you want for it?
And he says, I want one box which contains 16 ice cream sandwiches. So would you say that the price of a lawn mowing is a box of ice cream sandwiches? No, nobody would say that. What they would say is what is a box of ice cream sandwiches worth? Well, it’s about $8. Now we say, okay, what’s the minimum wage in your area? And let’s assume you don’t live in New York City or Sacramento or La. It could be around $8. So essentially and let’s say it takes an hour to mow the lawn, he’s essentially saying, I want to get paid minimum wage. I’ll use your lawnmower. It doesn’t have any cost of fuel or equipment. I want to get paid minimum wage, which for 14 year gold bonds, that could be pretty cool. So the concept of Where’s the economic calculation performed, how is the price actually set and determined versus what is used to remit? And those are two very different. It should be treated as separate ideas or separate concepts. Certainly in the case of ice cream sandwiches, that’s clear. Talking about remitting payments and rubles to make that thing point. But in the case of wages, there’s a market for wages in the US and in the world, and that was a dollar market.
So what would happen if you said, okay, I’ll commit to paying instead of paying a $50,000 wage, I’ll commit to paying whatever, 26oz and then sign a contract, contract or something like that. Well, the problem is if the price of gold drops, if it drops 1%, I don’t think anybody is going to do anything about it. Let’s say it drops 10% or 20%. Now you have somebody who’s being paid significantly below market. Now, depending on what kind of employee, if that employee is anywhere near the minimum wage, you could actually fall below the statutory minimum wage, which is illegal. Conversely, what if the price of gold were to double? You’re now paying double the market rate. So the employee is going to be happy, but the employer is not going to be happy. So it’s one thing to say if an employee wanted would we remit the payment in gold, as in essentially do the employee courtesy service and buy the gold. Okay, we’re going to pay you $2,000 right now, but instead of paying $2,000 as a service, we’ll buy an ounce of gold and give you the gold to put it in your Monetary Metals account or mail you a gold eagle or whatever it is we’re going to do.
Sure, you can do that, but what’s not possible in the market, in the world as it exists today. And this is one of those things that certainly in the gold community, this problem is rampant. But even outside the gold community, I can’t tell you how many times I’ve been coaching an entrepreneur, mentoring an early stage company. You have to get in the discipline of understanding how the world exists today. What are the processes, what are the rules, how do things work? And whatever it is you want to do, you can take the world one step in whatever direction you want to go. But generally, if you tried to jump more than one step, what happens is you just skip a step, you get out of sync with the world, and it doesn’t work the way the world is today. The labor market is a dollar market. It’s that way for a lot of good reasons. It’s cemented in place. And if you try to change it by doing something like that, you only end up hurting yourself. And there’s an asymmetry to it, because if the gold price goes down, the person is either going to demand a renegotiation or he’s going to quit.
Even if you had a five year contract, you can’t force somebody to work. Slavery was outlawed 100 and whatever the 70 years ago now, right? And if the price goes up, then of course, the employee will hold you to the contract. So essentially, you’ve given a free option, you’re given a call option on gold for which you haven’t been paid. So unfortunately, it’s a dollar world, and you could try to change that, but you have to be very targeted on what kind of change you’re trying to create and what kind of mechanism you’re using, what vector you’re using to push that change that you want to push. Otherwise you don’t get any change at all. Otherwise, how many companies have said we’re going to enable people to use gold as a means of payment to other users of the system? And I’ve spoken to a number of those CEOs over the years and I’ve always told them it’s not going to work. The problem isn’t that everybody wants to pay out their gold and they simply don’t have a technology platform that enables that. That isn’t the problem if that’s the solution you’re offering. Well, there’s a lot of people that would be happy to be paid in gold.
Very few people want to pay out gold. And anyway, we can go deeper and deeper down that rabbit hole.
Dickson: No, I think that’s really good. And I think once we make that pit stop in Bitcoinlandia, I think we’re going to revisit some of those themes. So last question here as it relates to monetary metals, and it’s again related to this theme. So this is from Twitter as well. Is it possible to get non gold related companies to be financed in gold? What are the challenges of doing this and the possible solutions? So we’re right back where you left off in this.
Keith: The answer is yes. I don’t know if they still have the video. So the Arizona House of Representatives form something called the Ad Hoc Committee on Gold Bonds and invited me to be an honorary member. Even though I’m not a legislator, I’ve never been elected to anything, nor do I think I would be electable even as dog catcher, let alone legislator. But they may be a member of this. And I gave some presentations on how things would work. And one of them I did touch on how we would finance a non gold financing copper. I’m not going to talk about too much. Yes, obviously, there are significant challenges. I work through the match and believe I prove that it would work. And as we go forward, I like to use the analogy of everyone knows. I think most people know that the first video game was developed by a company called Atari back in the early 19th 70s. Now, the first video game was not punk. That was the second video game and the first one that became really popular. The first one was some sort of spaceship dog fight. The two players both had paddles, and then you had a button to fire, and there was a star in the center of the screen and the star had gravity.
So you try to fly this way, but the gravity would slingshot you around and then you fire your bullet and your bullet would also follow the ballistics with the gravity. And everything was complicated. So they put that game to trial. It in a couple of bars and pizza places, and it completely flopped. And the owners of the places that didn’t work, nobody could figure out too complicated. They used to pinball back at that time. So the feedback came back. We need the simplest possible game you can think of. And so what can be simpler than two paddles? That players take the ball that goes back and forth. That was such a wild success. The first bar they put that in Atari founders or whatever. The executives came back to the bar the next day. How did they do? And the bar owner said it did good for a while, but then your machine broke. So they opened it up to look at it. What happened was they had a one gallon milk jug as the coin holder. And when that filled, the coins stamped all the way up the slot and into the coin slot.
And so they said, oh, that’s easy. We’ll put in a five gallon pail and then fix that problem. It was a runaway success. Anyway, the moral of the story being don’t start with too many complications on the first iteration. We’re still at the point where the world needs to understand a gold bonds financing a gold business. Later, we can use a gold bond to finance a non gold business and the market. All markets do this again, smarter and more sophisticated, and they understand each new bell and whistle as it’s introduced. But not if you try to do it all upfront.
Ben: All right, Keith, my turn. General questions on investing and precious metals. So should a person who is without income and is only living on savings consider buying gold? And I guess the kind of two part question is what would that right amount of gold be to own in a portfolio? Is it 5%? Some people say 25%. Is there a case for increasing one exposure to gold right now?
Keith: Well, second half of the question is the easy one. I don’t think there is a right answer, depending on how big the portfolio is, how many months or years or decades that person has at their current burn rate before the portfolio was depleted, how old they are, how risk tolerant? Are they unemployed at the moment as a matter of choice? In other words, are they highly employable as a software developer in a hot field like AI or data science, and they just choose to be bumping on the beach for a few months, or they’re really kind of down and out and not realistically looking at ever regaining their previous income? There’s so many questions that not only couldn’t I give financial advice for a lot of reasons, anyways, on top of it, there is no one answer something like that. But I think that kind of answers the first half too well, it depends on how big is the portfolio? How long are you planning to be unemployed again? Are you in a great position that you’re just taking off a few months to recharge your batteries, or are you anticipating along flag being unemployed, or if you go back to work, you’re going to decimate your income?
Those are some of the considerations I don’t generally encourage. I guess I’ll say two things. One, if somebody doesn’t have any gold, I do genuinely encourage everybody should own some regardless of price, because there’s crazy risks out there and they’re all what they call fat tail, low probability black Swan. But if they carboy banned. So for example, in Cyprus, the banking system collapsed one day. It took a long time to lead up to that, but one day, basically you couldn’t get your euros out of the Cyprus Bank anymore. And the purpose of owning gold, if you had bought gold before that, wasn’t that the price gold go up. And if I recall, at the time the price did not go up in Euro terms. However, the gold was still money good and the bank account was now frozen and you can only get €100 a week. I don’t remember what it was. I had very strong capital control. So if you wanted to get off the island and get to the mainstream where you could get a job and all you had was euros locked in the Cyprus Bank, you might have been screwed. If you had gold, I’m sure giving a little bit of gold to the captain of whatever boat, you would have had no problem getting off the island.
I think everybody should have some. But beyond that, I don’t necessarily recommend buying gold as a speculation that price and dollars will go up. So if you’re unemployed and you have a portfolio, I guess if you’re trading it, you’re going to have your charts and you’re going to have your guides to trading. We obviously publish a basis that we can talk about. When we think the price move has been driven by a lot of speculation is likely to pull back versus when we think the fundamentals are strong, you can trade it. I don’t necessarily make a strong recommendation for doing that, but your mileage may vary based on your circumstances.
Dickson: Very good. All right, here’s one about silver. Bit of a long one, so bear with me. Okay, this comes from Scott in reply to our newsletter. Buying silver coins and holding them physically seemed like a great idea for years, like a great idea for years. However, when I prepare it to sell, it seems there are extraordinary costs, often beyond the value or effort, often beyond the value of the effort or beyond the appreciated spot price. Physical silver seems relatively easy to buy but impossible to sell, but I still think silver coins are the best way to hold silver. Can you explain in economic terms what is happening in the silver market and what is the remedy? I take it in this question that he is referring to the astronomical premium costs that have occurred in silver and don’t look like they’re going away anytime soon.
Keith: So maybe you could speak to that I can touch on, certainly. It’s funny, I’ve even seen some silver dealers talking about this on Twitter that there are some who just charge an arm and a leg to their customers. They sell the silver scarcity story and they just charge above market prices for it until the silver price would have to go up if you overpay $10 for that coin, the price of silver has to go up ten drops just for you to keep even. So if that happened, then all I can say is I’m sorry that happened. I mean, we’re not really in that business, but I do see silver dealers on Twitter tweeting about this. So if that happened, then that’s one thing. But in economic terms, leaving that aside, assuming that’s not the case, in economic terms, what we’re dealing with is bid ask spread or bid offer spread. When you buy, you’re paying the offer price. Assuming you were to turn right back around before the solar prices had a chance to move even one penny and sell it, you’re selling it for the bid price. The spread between the two is the measure of what loss you will take to get trade in and out of the gold.
In this case, he didn’t say was that silver Eagles. He didn’t say what kind of coin it was.
Dickson: Yeah, he just said silver coins. It doesn’t really matter if it’s Eagles. Maple, Phils, I think they’re all having the same problems.
Keith: But go ahead. I think the Eagles may be the last time I see maybe the Eagles are worse, at least in terms of actually there’s premium and then there’s spread. So the coin is worth more than spot generally. And right now, I think the premiums are pretty high point. Other times the premium come down quite a bit, but also there’s a cycle and where the premium goes, if you bought at a time when there was kind of a silver mania on and then you want to sell when silver is in the doldrums, you could lose, even though the best spread may not be that wide. Not only are you losing the spread, but you’re also losing the premium goes up and down in some sort of cycle like that. Right now, I think the premium is actually pretty high. So if you’re trying to sell right now, you shouldn’t have that problem. But there is a bit of spread. So one thing I can say is that we’re not really in the business of dealing in coins. However, unlike other dealers who are going to say, okay, we’ll buy that coin, we’ll give you a premium for it right now, and then they’re giving you dollar.
So you’re out of silver, which isn’t necessarily what you wanted, was to capture the premium in your coin and get out of a coin into something like a bigger bar. Assuming you have enough coins, that gold be worth it. That’s what you wanted. So other dealers right now advertising that they’ll pay you dollars for it, which isn’t what you want. Monetary Metals is in neat position of saying if you want to sell silver coins right now, we can trade that for silver account balance and that there’s a net gain announces, and now is a pretty good time for doing that for whatever that may be worth. So you have been asked spread, you have a premium which is on cycle, and then you may in some cases have excessively wide bins spreads. But overall this is a problem. And earlier the question was about wages paid in gold. If wages were to be paid in silver and if paying wages in silver meant counting out coins the way a pay master used to do 100 plus years ago, silver would be completely, totally unusable because that cycle in the premium is very vague. So the issue is in the case of silver coins or any retail silver product, especially ones that are minted.
The equipment that mints it is expensive. And so the companies that do this don’t want to over invest. They don’t want to borrow too much to just accommodate the peak demand and then leave the equipment idle during other periods. So the capacity for manufacturing the blanks, you can stamp anything you want on it and stamping is easy. All you need is a press and a die, right. So for a couple of $1,000, you can get any die you want and the press is just a lot of weight and hydraulics or even this or the lever. But manufacturing the blanks is a big deal and it’s kind of expensive. So when retail demand goes up, then the capacity to provide the product to meet that demand is inelastic. And so what you get is widening the premiums going up and up and up relative to buy bigger bars. So for some people, if you’re in a position to buy the bigger bars and then we’re aware of a company that is buying the 1000 ounce bars and then cutting them down into smaller chunks which they put their own hallmark on and then sell them. And so you can get closer to the price.
Obviously they have to charge some sort of mark up for what they do. But you can get much closer to the price of a thousand ounce bar versus the price of the 1oz Eagle, which can be $15 over spot right now it’s pretty crazy.
Dickson: Yeah, that’s really good. I think just to piggyback on that a little bit, I think what confuses people sometimes is that there’s really two markets here. There’s the spot silver market and you have bid and offer and spot silver and then you have these micro markets, if you will, that form around each of these coins, whether it’s the American Eagle, the Silver Philharmonic Canadian Maple Leaf, and you have been an offer in those coins. And of course the demand for those coins well, of course it’s demand for silver. It’s not necessarily that the demand for silver Eagles is driving the silver spot market are reversed. It’s almost this mini market that’s part of the broader silver market because what you hear is a lot of people saying, well, I can’t get any silver. The price is $40 to buy a silver Eagle, but the spot price is $20. Something doesn’t smell right. Here what’s going on the other way around.
Keith: The global bullion market will drive the price, the base price of the coin, and then the coin has its own premium. But you’re right, it’s very hard to drive the overall global boolean market, which is much bigger than the coin market. And so I wrote an article many years ago like getting it, too. Yes, it’s true. You’re drawing demand from the global bullion market through Eagles. However, you have a giant Lake of silver in the global market and you’re trying to drink through a straw, which is the Eagle market or the Maple market. And yes, you are pulling water out of the Lake. That is true. At what rate and how much difference does that make, right.
Dickson: It’s real demand. Don’t hear what we’re not saying. It is real demand. But what impact are you having? Right.
Keith: When you measure there are some folks that are more arbitrage oriented. So there are some folks that are absolutely inclined. They want to go out and buy silver Eagles until they talk to their dealer and they find out that the spot price is $25. However, the price on the Eagle is $40. And then they make a decision to say, I’m going to arbitrage, which is I’m not going to buy Eagles, even though I thought Eagles would be a better form of holding the silver because it’s very recognizable. If there were to be a post apocalyptic economy, you will not have a problem passing off Eagles because everybody recognizes them. There are some real advantages to the government minted coin that the bar doesn’t have. However, at $40, there are a lot of people who say, yeah, there’s an advantage, but it’s not a $15 advantage. It’s only $5. I would pay, but not $15. And then they will switch and buy kilo bars, 100 ounce bars, thousand ounce bars, whatever. And so as the premium goes up, yes, it will shunt other people to go buy the bigger bars to some limited amount. The buying through the limited manufacturing capacity in the coin market is a pretty slim straw, right?
Dickson: Hopefully, Scott, you’ll find that answer helpful. All right, Ben.
Ben: All right. So this is from our newsletter. So, Keith, I know you don’t give much weight to the silver and gold manipulation on the COMEX and the LBM. I respect that. But there sure seems to be some odd, predictable ways that the price moves every so often. Is there any situation where Keith raises his eyebrows and thinks this is odd? Please elaborate either one.
Keith: Thanks. Sure, I’ll give a pithy, perhaps sarcastic cancer, but I raised my eyebrows to anyone who says there’s a predictable pattern that can be traded, because if there truly were a predictable pattern that truly could be traded, somebody would be trading it and then that would end the pattern. So, okay, the theory is if you buy at the end of the close and you sell on the open. All these kinds of things that were really true. So there’s a lot of people who can do a lot of very sophisticated math in terms of setting up headphones much more sophisticated than the basic statistics to see if it were true that you could buy on the closed and sell on the open and make money. Remember, you have brokerage fees, potentially depending on what you’re trading commissions, bid, ask spread, and everything else. If that’s really true, then somebody would be doing it and that person would be scaling it up and other people will be doing it and they’d be scaling it up. There’d be so much buying on the close and so much selling on the open that whatever spread there was to be made would be compressed into something so small that the marginal hedge fund would walk away from it.
And generally that means in modern markets, with the cost of credit being so dirt cheap, when you get to that point where it isn’t worth it anymore to the marginal hedge fund or to the marginal bank, the spread is so small that to the naked eye, as a casual retail investor, you wouldn’t even see it. It’s a basic spread. If you plot a picture of the gold price in the futures market and overlays that on the gold price. We have 60 somewhat graphs on our site. I don’t think we actually publish this. Show the gold price in the spot market overlaid Keith, the gold price in the futures market. I don’t think we even published it because the difference is so small. It would look like two lines, one on top of the other. You couldn’t see it. You need a more sensitive instrument. It’s like human hair, all kinds of barbs and scales and all kinds of things on it. You need much on microscope to zoom in. It’s the same thing with something like that. So I raised my eyebrow when someone says that that’s a predictable pattern. I would say anybody who saw that pattern would be making a killing on it rather than complaining on the Internet.
Ben: But if it’s so easy, everyone would be doing it.
Keith: It would only take one person right with enough scale, and he would just arbitrage that gap right out. And then the market would go back to the market. Looks like a random stochastic signal. Anybody who has the math and the sensitive instruments and other things to see something that’s not random in it will trade that not random component, and he will scale up his operation until the not random part is crushed down to just a marginal one take above the interest rates or whatever it is. And then what he leaves behind is a market that is so random that even he can’t see a non random pattern. Somebody else has a different theory, and usually the people with those theories trade them and make money rather than complaining about it. Because if you make money, somebody will. It doesn’t take everybody. It takes only one person gold point.
Dickson: Then why don’t you ask your next question? There’s one more, but as I’m reading it here, I think it’s better suited for the random fun ones at the end. So go ahead and ask your next one.
Ben: So I think I’m going to know the answer to this, and it’s going to reference one of our gold exchange podcasts. But what can Arizonans do to support your public policy efforts on gold, and what can Americans do in general?
Keith: So I think there’s a couple of public policies that are important, so sort of going down in descending order. One, if there’s a sales tax on gold, which Arizona does not have, write your legislators and say this is unjust. This is obscene. And by the way, it isn’t really adding any meaningful amount of revenue to the state caucus anyways. All you do is you push the volume trade out of state. Secondly, if there’s a capital gains tax on gold, which finally, after five years of my efforts and the efforts of a number of others, including some heroic legislators, I say heroic because I don’t know that they really had a lot of voters that demanded it. I think they just did it because they thought it was right. And so for that, they deserve credit for that. Yeoman’s work. We don’t have a capital gains tax on gold and silver in Arizona either. And there’s a number of other States. Utah, Oklahoma, I believe Texas doesn’t have any income tax, period. So therefore no capital gains tax, period. And therefore no capital gain tax on gold and silver. So if there’s capital gains tax in your state, absolutely.
Write your legislators again. Number one, this is morally obscene. Number two, it’s impractical. Number three, the revenue that produces I looked at Texas, I looked at Arizona, and Arizona estimated it might be something like $150,000 a year to the state government. I mean, truly a rounding error that would round to zero on the state budget. And for that you’re troubling citizens with all these things in Arizona. I was on this, as I mentioned in a previous answer on the Ad hoc Committee on Gold Bonds, I think it would be a huge acceleration to the idea of gold returning us money, not just something, an asset that people trade and goes up in price, and then people can get more dollars. But actually, it’s useful. If a government were to issue a gold bonds and the state of Arizona could potentially do that, there’s a few other States that could potentially do that. Nevada being the biggest gold mining state producing, I think 166 times a year. The last time I booked Utah, Idaho, Alaska, California also produces gold. But I’m going to almost hesitate to even suggest California, because if you live in California, your odds of getting California to issue a gold bond or slim to none.
But in Arizona, maybe the legislature would have an appetite to pick it up. Now, maybe the governor would have more appetite for it than before. And as soon as one state government would issue gold bonds, I think that would open up a lot of Keynes generate a lot of news buzz. When I was working with some folks in the legislature in the state of Nevada, I’m talking with the state controller and a couple of other folks. Even just the introduction of a bill by one of the state representatives generated news buzz way out of proportion to the very slim odds of that bill had at that time, which never even got out of committee anyway. So if people are inclined to participate as activists, I gold encourage anything that can go towards that. There are other States, I guess, that are passing legislation. I think Idaho and Wyoming are among them, and perhaps Utah that legislation to either authorize or even in some cases require the state, if they have a rainy day fund to hold some of that rainy day fund in gold. That’s kind of cool, especially if that rainy day fund and gold could be invested in a lease gold bonds to get a return on it, versus sitting there in a vault gathering dust, waiting for the price to go up so the state can make a profit by buying and selling gold, then I’m all in favor of those types of bills as well.
Ben: And make sure to check out our recent podcast with Stefan Gleason. We get into all that good stuff, the Sound Money Project. All right. Time for everyone’s favorite B word. And no, I don’t mean banking or Ben, but we’re going to get to banking later. It’s time to do Bitcoin. So, Keith, you barely looked into Bitcoin at all. You don’t really write about it. Hardly ever. But and this is thick sarcasm. We want you to open your mind for us here. We want to hear all about Bitcoin and start the first question. So this is from the newsletter. Your main objection of Bitcoin is that it cannot be used to finance debt yet debt is a huge problem for lots of people, and they’re working very hard to get out of it. So new businesses can be financed by the founders or by investors who buy shares in the business. So why do you think that debt is so important for civilization?
Keith: Debt is a tool. There’s a lot of people that would say guns are intrinsically evil. And I think the correct answer to that is, well, a gun in the hands of a bad guy can be used to commit evil. But the gun in the hands of a good guy is not used to commit evil. It’s not that I say that Bitcoin can’t be used to finance debt. I would frame it as can’t be used to finance productive enterprise. So if you put your business manager hat on and for people that aren’t business managers, I realize it’s a big challenge. But bear with me. You’ve got an opportunity, let’s say, to expand and build a second factory because there’s a lot of demand for whatever widget you manufacture. You could sell shares if the share price is at a good level at the moment. Otherwise it’s extremely dilutive. But if you can borrow money and you compare the cost of borrowing the money to the effective cost of issuing the shares, there are times when the borrowing makes more sense. When you have a strong balance sheet, you have good assets, you have a track record of making a good steady profit.
Borrowing is cheaper. It’s a better tool for the job versus selling equity. As to the founder putting money in when you get to any kind of scale, unless the founder is a billionaire, the founder taps out. That just isn’t realistic. I can speak for myself a little bit. I think it’s pretty well known that I sold a company called Diamond Ware to a company called Nortel. People can Google that. They did announce the size of the transaction. I did very well in that transaction. Personally. My personal ability to keep funding something that grows is very finite. But I guess there is a tendency for people to think that the founders and CEOs have more power than they do and are richer than they actually are. So usually those in scale, usually that founder is funding it from zero to some point and then he taps out and then needs investors, lenders, whatever. But borrowing is absolutely the right thing and the right tool in certain circumstances. And if you don’t have anything to borrow, then you ultimately collapse back to the Dark ages. Dark ages was a time when the founder could just finance it out of his own personal savings.
And what you find is you have subsistence villages of a couple of farm families surrounding a little village where you have a blacksmith, cobbler and Cooper, and a family farm or a one man workshop is about as big as you can get. Anything bigger than that requires investment requires the ability to borrow and lend, and Conversely, the savers need income on their savings. There’s a lot of things in my series that I get why they are not obvious and therefore quite controversial. If I talk about how the interest rates is set, I get why that’s controversial. People understand what I’m saying or misinterpreted wherever there are some things that I think should be pretty obvious, and one of them is that whole generations can’t possibly get rich speculating on the price of an asset. The only way that everybody is better off, not in the zero sum way, but in the positive some way is if productive investment is financing, or investment is financing an increase in production so you lend money to a company, that company uses that money to increase its production. The company makes a profit based on that increase. The consumer is getting something more or better than he could have before, which is why the company has revenue and the investor, provided that loan, is getting a return on his money out of part of the share of the proceeds of the increase in production.
If you say, well, we’re not going to have that anymore because that’s the problem. Sure. Gun violence is a problem, too, is the answer to just say, well, from now on, homeowners aren’t allowed to defend their homes with a gun because they’re gangbangers out there that are committing murder, that businesses shouldn’t have the tool of being able to borrow because there’s been props like it corporations and governments and consumers that have gotten themselves. So I wrote an article unusually, and I would encourage everybody to read that. I’m not going to foreshadow what I said in it, but I make some distinctions about the different kinds of purposes to which that could be put and which ones are usury and which ones aren’t usury. So I’m going to put in a plug for my own article and read the article usually on that distinction.
Ben: All right. I love it. I want to shift from our B word Bitcoin to the B word banking. Let’s do it.
Dickson: This one is from Michael from Facebook. Keith, I’m interested to know your thoughts. The now commonly understood concept that commercial banks create deposits using similar balance sheet operations used by central banks to issue dollars where bank deposits are promises to deliver dollars in an additional credit risk. Doesn’t the fact that the great majority of deposits are created by banks in this way overpower or influence the Fed’s efforts in issuing dollars and in open market operations?
Keith: I’m not sure they’re really at odds. The question kind of assumes that the banks are doing something in the opposite direction of the Fed, and that isn’t necessarily so. Yeah, it is absolutely true that there’s so many mechanisms that we have in our banking world today that are sort of just digital that don’t really make a great deal of sense until you kind of look back to the antecedent how it worked in the gold standard. So in the gold standard, the bank reserves it the bank had gold in the vault. And today it means that the bank itself is the creditor to the Fed. And the bank has a special kind of dollar, which is reserves held at the Fed, which aren’t really fungible in any market other than the market to other banks and a few other specially privileged parties that can get Fed accounts. And so based on the balance that the bank has over here, then over here, the bank can create loans and people take the bank’s credit paper as if it were money. Good. Now, a lot of people say this is very perverse but I say if you drill down into the root of it everything that everybody calls money today.
And when I say everybody, I mean even the otherwise free marketers will fight vehemently, even a lot of the Austrian school economists will absolutely fight vehemently and violently to defend the idea that money means merely the medium of exchange and therefore bank credit is money and Fed credit is money and all these things are money too, which I have a response and that is that I say that in every era there’s a question hanging in the air screaming out to be asked and answered and for whatever reason that culture and that society wants not to ask the question and desperately fears it being or as a reason why they don’t want it to be answered. And then the time of Copernicus that question was how do you explain the retrograde motion if everything is revolving around the Earth? What you see in these orbits, this thing is going around and then reverses and then goes further and reverses and further. And there’s no explanation for this. It makes no sense as soon as you realize and what they didn’t want to know at that time was that everything is going around the sun. And once you realize everything’s going around the sun, the math to even simply describe what’s happening, it becomes much simpler and then the explanation obviously falls into place.
But the question in the monetary area that’s screening to be answered is okay supposed to go back to the gold standard for a minute. You have this piece of paper that says $20 bill on it and you go into any bank and you slide that across the counter to the teller and then the teller pushes back to 1oz gold coin, possibly 1oz. If the word for the piece of paper is money, then what is the word for the gold coin that comes back at you? I said this at an Austrian economic academic Australian economics conference. This is in Europe. So I said, look, I’m just some stupid American. You don’t owe me an answer. You don’t owe me anything. I’m just going to go away. At the end of the day, I’m going to get on an airplane, I’m going to leave you in peace. However, you owe yourself an answer and you owe yourself an answer with intellectual rigor. And there’s a real epistemological challenge here which is okay, if the concept for the piece of paper that was irredeemable to promise to pay gold. If the word for that is money, then what’s the other thing?
And then for that matter, let’s extend this now. So you go to a fancy restaurant and you check your coat. You have this expensive for a coat and you check it and you get a little ticket stub that says 12345 on it. If the word for the ticket stub is coat, then what is the word for the garment may differ that protects you from the cold weather outside. So we just have so many conceptual confusions around all of these things. So anyways, because of that confusion, people can’t really feel somehow unnatural or wrong or whatever. The bank is issuing credit because it’s one thing for people to say, okay, the bank issued credit, I get that credit paper of some sort. But the fact that that credit paper is viewed forget legally. Yes, the banks have a legal privilege to deem that three money have that be treated as money. But conceptually is what comes first. Epistemology comes first. It was believed by everybody to be money, and that’s why they passed a law that declares it to be money. And nobody really has beef with that law. But yeah, that’s how it works. Everything in the financial universe today is credit.
And the only real difference between a 30 year treasury dollar bill is duration and interest rates. And so that’s why there’s so many debates about how do you measure the money supply M, zero, M, one, M two, MZM, true money supply, Australian money supply, MZM, money zero maturity. All these different definitions is because what’s the difference between this kind of credit and this kind of credit? It’s like we’re debating how many Angels danced on the head of the pin. We’re just shaving ever finer gradations of the same kind of thing. And there are no answers to that. It’s all credit. It’s duration, it’s interest rate, and who’s your counterparty? So if you have a bank account, then your counterparty is the bank, which is an additional credit risk on top of the Fed and the government, which is whatever risk that it is, of course, and our current system deemed to be risk free. To another pet peeve of mine, that’s called risk free. And of course, it is not free of all risks. That were private issuer, there would be a securities regulator somewhere that said, you can’t call that risk free.
Ben: Well, Keith, the next question is, I think kind of related to this kind of irredeemable and credit kind of topic that we’re on, which is from Austin Jones on Twitter, does lending increase the dollar supply? So balance sheet expansion? And when I pay off debt with dollars, does that reduce the supply of dollars? Balance sheet contraction. So is the amount of non extinguishable debt roughly equal to the quantity of dollars?
Keith: I have to think about it. I’m not sure I agree with the framing necessarily. I think I’ll just say that’s a more complex question. I’ve been writing a paper on that have written a paper on it which is not published yet, and I don’t think I can give an answer that is any kind of justice in you in this format.
Dickson: Congratulations to Austin Jones. You have gotten the first deferred answer from Keith. All right, here’s one about interest rates in particular. There’s a lot of prelude here. I’m going to kind of jump to the real question. Yes, here we go. Higher interest rates have this potential effect where they can actually cause lenders to pull back and refuse to lend due to risk aversion or whatever other reason. And he references the September 2019 repo rumble. And then I’m quoting the question here. This situation is precisely where the otherwise free marketers may become central bank sympathizers in the Walter Baguette, if you’re familiar with that, author the Walter Bagehot way, which is to lend freely at high rates on good collateral, the prospect of having a lender of last resort to smooth out liquidity troubles and provide currency elasticity sounds reasonable. What, if anything, do you disagree with in this argument?
Keith: Well, on the surface, the obvious one is it’s giving them the one ring on the promise that I would only use it in the utmost end of high interest rates on good collateral. And if you ever seen Denithor and Lord of the Rings, just don’t believe a word of it. But I think there’s a deeper answer, which is everything the government does is doing by force. It is a non economic actor. And that’s, in fact, how does the future not a bug. That’s the whole point of having a government do it. If there was an economic reason for it, there would be an economic actor that would do it uncovered in a free market. And in fact, before the Fed, the banks had things like clearing houses, and for that matter, they had JPMorgan who, if there was a crisis, would organize a bunch of bankers that would do exactly that, land at higher interest rates with good collateral. The promise is always in everywhere by using force just this once and in this narrow way, which will be strictly confined to statute and whatever. Right. So the Federal Reserve Act in 1913 did not authorize the Fed to buy treasury bonds.
It was supposed to be the lender of last resort. But lender is really kind of a misunderstanding. They were the re-discounter of real bills, and real bills are credit that isn’t lending per se anyways. And what they do is almost immediately begin violating the law and violating that statute. And they were buying treasury bonds and Congress later in the later Federal Reserve Act, retroactively legalized what the Fed had been doing. So that’s the second thing. The first is do you trust them with the one ring? The second thing is they exceed the statutory authority. But the root of it is they’re using force on the promise of getting an improved outcome over what would happen with only economic actors pursuing their self interest in the free market with nobody having the right to coerce anyone else. And the answer is, if you need the coercion, what it means is there’s something that’s uneconomic about it, which means there’s something value destructive, something distortive. Well, value destruction is one thing you’re making. Actually, it’s a negative sum game. You’re actually on net impoverishing people in the economy, although, of course, the impoverishment isn’t uniform. A few people get richer, everyone else gets poorer.
Maybe they get poorer by so small an amount they don’t notice it per se. So everyone thinks about, well, this is fine, it works. But that is necessarily what’s going on. Anytime you’re messing with money, the term structure, the yield curve, interest rates, anything that is messing with that is also creating gross distortions to all sorts of incentives in all places in the economy. And that’s probably the grossest damage that’s done incentivizing people to do that which wouldn’t otherwise do. And so you think you’ve done good because you fixed the problem that there’s. Why is the bank short of capital? Well, one of the ways that you’re creating this distortion is by offering a moral hazard to the banks. So in a free market, the banks know that the bank run you are finished. It is called bankruptcy. And the equity holders lose everything. And so they don’t want to lose everything. So it forces them to be more conservative. If you now say the government is going to play this role of lender of last resort, whatever you want to call it, you’ve offered a moral hazard that says, hey, play it a little faster and a little looser than you otherwise would because we got your back.
And so the getting your back part gives the bank a green light, gives them license to behave in a more unsound way than they otherwise would. And the consequences of that can be enormous, much greater than any of the proponents of this whatever really realize when you look at the true cost of a boom and bus cycle, when you look at the true cost of misallocation of capital, which ultimately means the destruction of that capital, the building of things for which there isn’t any real demand or there isn’t a real pool of savings to finance, and the abandonment of those things half built, and whatever the cost of that is off the charts, stupefyingly big.
Dickson: This is the classic case where in attempting to step in and solve a problem, all sorts of new problems are introduced, and the net destruction is actually greater because of that interference than if they had just hung back and let the market take care of it.
Keith: Right. And the question is, are they fixing the problem or are they tamping down the symptoms? So the problem is a bank or a couple of banks got themselves into trouble. Actually, the corrective is to let them go bankrupt or let them at least suffer some losses. And instead the lender of last resort is pretending to fix the problem. But actually what they’re doing is preventing symptom from taking place, preventing the correction. And so then the underlying cause is allowed to grow. So it’s kind of like, for whatever reason, you don’t get any sleep. One night, and the next day you load up on caffeine. And so for some reason, you don’t get sleep that night, and the next day you decide to load up on cocaine. I mean, how far can you take this pattern? Well, you’re just correcting the fact that the person you’re fixing a problem, which is the person that’s tired and unable to focus in the morning. Lots of what you think you’re doing, but actually you’re doing something much worse than that. And you’re focusing on the scene and ignoring what Bassett called the unseen.
Ben: Right. And I think also, too, we were talking about that fat tail at the end for why people might want to own gold. If you fix that one problem, the symptoms of that one problem, you might actually be increasing that fat tail at the very end, which is almost imperceptible in the current moment, but in the future, very dangerous.
Keith: Right. So you actually have a situation where one bad decision forces your hand to make another bad decision and another another. And I like to use the example of suppose a bad guy is running from the cops and runs into a blind alley and then is trying to scale the wall at the end of the blind alley, and he barges in on somebody else who then takes him as a bad guy and shoots him. Okay. But he felt he had no choice because he was trying to get away from the cops. But if you back up and you see well, he’s running from the cops because they didn’t want to get arrested on the misdemeanor charge. Why was there a misdemeanor charge? Well, because he reached into a cash register and no one was looking, scooped out a lot of bills and then was running, and then they called the cops on them. Well, why was that? Well, his rent was late and he was about to be evicted. Why was that? Well, because he quit his job and said, I can work, blah, blah, blah, blah, blah. And in a fit of anger, he quit his job.
Why was that? Because he made a previous irrational decision that put him in a horrible mood. So when he went to work, he was messing up, and his boss said, look, I’m sick and tired of you screwing off coming and late. You have to do this. You see, each poor decision leads to a worse circumstance, which then the person only feels that he can only just keep going deeper and deeper and deeper in and compounding what had been originally relatively small. Bad decision, Keith, a series of bigger and Badger decisions that ultimately led to his death getting shot by breaking into somebody’s backyard or whatever. Anyway, it’s the same thing, Keith. Look at the magnitude of the problem of the fed right now is trying to stave off, which is the end of a very long chain of bad decisions that go all the way back to 1913. And actually even older than that.
Dickson: Last question on money and banking. Before we get to random fun questions, every dollar asset on someone’s balance sheet exists as a corresponding liability on someone else’s. Does this mean that the dollar has no equity, that it’s actually worthless?
Keith: Well, in a certain sense, whoever the debtor is has equity. So they have a value of their. Well, they can have non financial assets, right? They can have buildings and factories, gold Bitcoin, whatever. So there can be positive equity. Yes. However, as the interest rates keeps falling, the value of all the equity becomes increasingly inflation. I love the term. Unfortunately, it was coined by an economist who I don’t care for, John Kenneth Galbraith. And the term is the bezel. The bezel is the not yet discovered corrupt or fraudulent parts. So the Fed is puffing up at the prices. People call it the wealth effect, but they generally believe it’s real wealth. And I say, no, that’s not real wealth anymore. Then cheese whiz from a spray can is cheese. If you ever been to Europe and had real cheese, that ain’t it, right? So that creates this puffed up phony thing that puffs up the equity, or at least appears too. And then all the puffed up component is subject to sudden catastrophic leaks where the errors let out. Suddenly you find out what things are really worth.
Ben: We’ve entered the random fun zone. We were going to fire through some of these questions. Okay. Are there recordings of the lectures that you gave at the New Austrian School of Economics when you study under Fekete? In some of his lectures, I’ve often heard him reference a lecture from Keith. Yet I can’t seem to find that series. This is from Austin Jones on Twitter.
Keith: There may be, but if there are, I’m not sure how to trace it down. There was a guy who was recording a series of videos. I think it was on CD at the time, or maybe DVD. I’m not sure what became of that or how much of that material was preserved. I’m sure he sold a few at the time. The master still exists. If he’s still in that business, I’m not really sure about that.
Ben: Austin Jones, if you can find those, you’re the man of the hour. Okay. Number two, is there a single best essay or book on the need for a gold standard before you’re soon to be, hopefully written one. And is there a single best resource on the history of money.
Keith: Single best book on the need for the gold standard? A lot of people have written about that. Hayek obviously talking about competitive currencies. It’s pretty obvious to me that and if we market gold wins, it always does. And I’m Rand’s book, Capitalism Unknown Ideal. A young Ellen Greenspan wrote a book, but it’s a chapter, but it’s a pretty long one on gold and inflation. I forget what. The title of the essay was very worthwhile reading, and you can see that in later years he not forgot, but evaded more about the need for the gold standard than most people ever learn. But in a certain sense, I don’t feel like those things have really done it justice, which is why I’ve devoted so much time and energy looking at both the virtues of the gold standards. I wrote a five part series called Unadulterated Gold Standard to clear a lot of confusions about what was and what wasn’t the gold standard, and then to talk about how it works and have an elegance that I’m not sure was appreciated at the time and certainly long forgotten. Now.
Ben: Which living economist would you most like to speak with and which no longer living economist?
Keith: The no longer living economist would have to be Menger. And I would need a translator. I’m not aware that he spoke English, and I definitely don’t speak more than a few words of German. Living economist? I’ve spoken with several whom I respect. I have to give that some more thoughts. I’ve kind of made a point of reaching out and meeting people that I wanted to meet and talk to, which is how I originally discovered Fekete. I want to meet this guy. That’s what I did in 2009.
Dickson: I feel like within that answer is a silent backhand to the entire economics profession. It needs to improve.
Keith: I definitely have my disagreements with them, but I still have respect for a lot of people. But I think the question is kind of like, who do you single out as Einstein as the Menger or Mises of this generation? And I’m struggling a little bit with that.
Dickson: All right, just a few more questions here. Here’s a good one. Are entrepreneurs really making a mistake at the personal level when they work on an unsustainable project in the boom part of the boom bust cycle? For example, take Joe Austrian. He might be fully aware that there’s a housing bubble fraught with moral hazard, but he makes a great earning digging sewer ditches or working construction on building all these houses if he’s able to get out before the bus. Is there really anything wrong with that?
Keith: I always try to be clear and say the Fed forces us to play this game. And to my answer earlier reality, the market, the world works the way it does, and if you want to change it, you have to recognize how it is currently. And so I blame the Fed for a stupid game and not the players. I don’t really have any blame, like in a sense of wrong. Now, that said, I think you’re playing with fire because you think you can get out early. Maybe you can, maybe you can’t. Number two, it becomes very tempting to think that the boom is actually your own smarts and skills, and it does take some smarts and skills to succeed even during a boom. Don’t get me wrong. But you may start to an old adviser of mine used expression sniff your own farts. A little bit earthly, but still keeping it family friendly, I think. And then I do kind of have a bit of an objection. I’m kind of on a different level of somebody who wants to produce entertainment content that’s realistic and celebrating destruction, producing video games like Grand Theft Auto. I don’t really selling marijuana.
I know that it’s legal. It’s legal. I get it. You’re making money. I get it. I certainly want nothing to do with the business like that. And I wouldn’t quit selling houses on the same level as selling marijuana or producing Grand Theft Auto. But there are degrees of it. And to the extent that you understand the game, is that the best place, is that the best and highest use of your time? Do you find personal purpose in that area? And I would ask questions around that.
Dickson: Great. Okay. We’re going to end with The Lord of the Rings, so I’m going to shift those to the end. In your opinion, what is the most overused word in finance? And you cannot answer with money or credit. So it’s one of those words. When you hear it, you’re like that word. I do not think it means what you think it means. But you can’t save money or credit can’t save money or credit.
Keith: Risk or risk free, I guess. Maybe inflation. There you go. That’s probably okay.
Dickson: You’ve got only three articles or three essays that you can recommend to someone to give them the most kind of fully orbed understanding of your body of work.
Keith: When gold backwardation becomes permanent. Number one, Using gold bonds to avert financial Armageddon. Number two. And I’m trying to think there’s so many other good ones. But in terms of at that level, like the seminal Keynes article, those would be the two for sure. Something like Bitcoin and hyper deflation because it talks about the unit of measure and this idea of a steel meter stick versus rubber bands, a Lighthouse versus shifts that are sinking and tossing and storms. What is used to measure what and that it’s not commutative. If A is measuring B, you can’t say that B measures A. It doesn’t work that way. And I think that was an underappreciated idea.
Dickson: Awesome. We will include those in the show notes in case you want to go get those articles. All right. Lord of the Rings time. There are different theories out there are different theories out there.
Keith: Lord of the Rings. Okay.
Dickson: I’m curious to hear your theory. So what is the essence of the evil power of the One Ring and what lies its evilness? How would you answer that?
Keith: I think it was in the prologue of Peter Jackson’s rendition of the first movie, where Kate Blanchett says the dark loved Sauron seeks the power to dominate all life. And I think that’s what ultimately was power over others, the power to compel. And what makes it so interesting, we talked about this on part one. Is it’s fantastical in a certain sense, but it deals with real human beings. It wasn’t some other worldly. Evil is defined as something between the elves and the Wizards or something like that. No, it was a very real thing. But there are some people who seek power over others and that’s the power to compel stubborn need to bend. Right. And that’s exactly what we see today. Whether it’s central banks, whether it’s lockdowns, whether it’s taxes, whether it’s whatever. It’s always forcing somebody else to obey what you want them to do. And if he doesn’t want to do that, then you pick up a gun. And the ring was sort of an allegory for a gun, a nuclear bomb, a tank, whatever form of power applies in your era.
Dickson: The ring was that the power to bend others to his will, I think was how it goes. Yeah, that’s great. That’s great. For those interested, I did fact check your answer on Tom Bombadil from the last one. I did. I consulted the one Wiki to rule them all. We don’t have time to go into it on this episode. But for anyone that’s curious out there, Keith’s answer was the answer is unknown. But Keith’s answer was the generally accepted theory for who Tom Bombadil is mostly true. Yes. Five points to use Keith for that. Well, that is all the time we have for today. This concludes the second part of our aka series. I want to thank everyone in the monetary metals community again for making this happen. We could not have done it without you all. Thank you so much for submitting these questions. It was a lot of fun. We hope you had as much fun listening to this as we had putting it together. And yes, this was our first foray into video. If you have any tips or suggestions or feedback on how we can make these videos better, please let us know.
You’re welcome to like, share, subscribe, and follow us on all the major social media channels and wherever podcasts are found, as well as on our website. And I think it’s only fitting that we sign off this episode with a Lord of the rings farewell. So I am going to send us off into the night here with I think this is from the fellowship of the ring when they send the fellowship off. So farewell and may the blessing of elves and men and all free folk go with you. So thank you, everyone. We will see you again on the next episode of the gold exchange podcast.
Additional Resources for Earning Interest on Gold
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