Debasing Credit

Comes an interesting comment on this post:

Gold is money however one of the reasons that the Roman empire fell apart is that the gold and silver was being diluted until the precious metals were worth less and less. What kind of controls are there to use gold as money? 

Here is the control against debasing money...  https://www.thefisch.com/

But of course the problem is not the gold, it is the hegemon.  It necessarily has no check upon itself.  Of course it will debase gold, and to get around people proofing gold, it replaces gold with malcredit, and can debase far more far faster.

In debasing currency they just add tin or copper to gold and slowly there is inflation, and real gold is driven out by the debased gold.  So it is with credit: solid, asset-backed non-usury credit (benecredit)  is crowded out by ephemeral unbacked asset-less usury-laden credit (malcredit).

Keep your definition straight and you can see the moving parts, and figure out the game.

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My Kind of Comet

The only way to fly!

Ethyl alcohol and a simple sugar known as glycolaldehyde were detected in Comet Lovejoy, said the study in the journal Science Advances.
"These complex organic molecules may be part of the rocky material from which planets are formed," said the study.
Other organic molecules have previously been discovered in comets, most recently in comet 67P/Churyumov-Gerasimenko, on which the European space agency's Philae found several organic molecules -- including four never detected before on a comet.

I know, I know, ethylene is he poison form, but getting closer....!   It's only a matter of time...

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How Apple Got Started

Steve Jobs was on the tail end of a world now largely unknown, but recoverable.  Indeed, it may become the default.  He was smart enough to spot the game and scramble in a changing world, and master it ahead of the other players. I still think, on his way out, he purposely set Apple on the path to dissolution.  A brilliant move.

Anyway, Jobs started Apple Computer with Wozniak (and Gates was starting up Microsoft in Arizona) about the time I first went into Communist China:

Apple Computer 1, also known retroactively as the Apple I, or Apple-1, was released by the Apple Computer Company (now Apple Inc.) in 1976. They were designed and hand-built by Steve Wozniak.^[1][2] Wozniak's friend Steve Jobs had the idea of selling the computer. The Apple I was Apple's first product, and to finance its creation, Jobs sold his only means of transportation, a VW Microbus,^[3] and Wozniak sold his HP-65 calculator for $500.^[4] It was demonstrated in July 1976 at theHomebrew Computer Club in Palo Alto, California^[5]

So how does it start?  Passion, suffering, getting computers right, to the point they sell their cherished possessions for a greater good, and then find joy in solving the problem that causes them pain.  Passion is pointless without the joy of solving the problem that causes you to suffer. Think of Apple today, and how businesses such as this got started back then:

Wozniak calculated that laying out his design would cost $1,000 and parts would cost another $20 per computer; he hoped to recoup his costs if 50 people bought his design for $40 each. His friend Steve Jobs arranged to sell 50 computers to the Byte Shop (a computer store in Mountain View, California) at $500 each. To fulfill the $25,000 order, they obtained $20,000 in parts at 30 days net and delivered the finished product in 10 days.^[7]

Perzactly, and what I have been teaching for thirty years now, since I've watched this slowly disappear.  Banks have conditioned people to foolishly believe start-up is about risk, it is not, no entrepreneur ever takes risk, and it takes money to get started up.  No it does not, it takes bene-credit, something now largely lost.  Then Jobs was given 30 days to pay on the parts necessary to start. (the parts supplier had credit, the manufacturer had credit, the materials processor had credit... the whole economy was on interest -free,  aset-backed credit.) Jobs did not even accept this credit until he had the orders to cover the production.  Start-up 101, so alien to what go $20,000 - $100,000 into debt to learn. (Back then there were really no student loans, since college could be paid for by what you earned in the summer. Nixon launched the program in 1972 - that year again - but it had few takers early on.)  Today Jobs would be asked to use a credit card to pay now for the parts.  Sounds simpler?  Credit fraud to use a credit card to buy anything for business start-up.  Read your contract.  And it is a suckers game, that EZ malcredit seems to, SEEMS TO, obviate the need to find customers first.  The path of perdition for the start-up.

As this economy crashes, who knows when (the sooner the better), we'll return to a rational, solid economic basis, or some will.  Few will notice, since they have no understanding of how it might work.  USA will be a country of 340 million fighting over scraps, and about ten million thriving off the radar.  Which is about the right size for a country, ten million.

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Online Exporting Food Seminar

If you need export sales for food or beverage or both now, you may attend an online, live, intensive seminar that is an hour a week for four weeks.

Course Objective: To find overseas business no more difficult than a domestic sale yet as profitable.

Week One - Orientation and Market Targeting

Week Two - The FOB MOQ US$ Prepaid Order Offer

Week Three - The Export Order Offer Website (passive marketing)

Week Four - Actively Marketing Your Products to Qualified Buyers

Bonus: Trade Show Booth Management

Schedule -

Fall Special Session 2015 

Tuesdays 11/3 - 11/24/2015 Four Sessions

Live Online 6 PM to 7 PM Pacific Time

(This would be 7 PM to 8 PM Mountain, 8 PM to 9 PM Central, 9 PM to 10 PM Eastern)

The course is delivered online live, you will access through your computer. If you have any questions please email me at john@johnspiers.com. Feel free to share this with friends, but register early.

Register here, don't worry about paying now, we'll bill you later.  You're good for it.

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Mish v Kotler, a Free Market Rebuttal

I read Mish every day, for his research is great and his analysis often good.  He is a capitalist (and I am not) and a recent post is a good opportunity to compare and contrast.

Mish rebutted a communist's criticism of capitalism, which is a tough job since communists get their facts straight (and fall down on prescription).  So read Mish's rebut of Kotler, and below is my rebut of Mish, which delineates the differences among capitalism, communism and free markets.  Mish's points are numbered, and in helvetica, mine are in times new roman.

Mish 14 Point Rebuttal 

1. It is capitalism that is responsible for improved standards of living over the decades.

Capitalism is state-sponsored, so it has winners and losers.  It is responsible for the improved standards of living of the winners.  We all love a system that works for us.  We are all victims of survivorship bias.  Only free markets can improve standards of living, and capitalism is no more free-market than communism.

2. The Fed and government bureaucrats, not capitalism is behind growing income inequality. That said, some degree of inequality is not only a good thing but a very necessary thing. People need to be rewarded for bringing new ideas to the market. Successful new ideas raise the standards of living of everyone, and income inequality creates the very incentive to market new ideas.

Right, but the patterns and practices enshrined in law to support capitalism are the result of capitalism.  Free markets are anarchic, and capitalism is not.  Mish begs the question when he says “people need to be rewarded...”  Prove it.  If your definition of wealth is personal accumulation perhaps, but the innovators motivation is rarely personal accumulation.  Straw man argument.

3. The inflationary policies of central bank planners is the primary reason people do not make a "living wage".

Inflation is inherently capitalistic.

4. Throughout history people feared automation. Yet every technological advance created new jobs. One reason for the acceleration of job losses now are the very "living wage" proposals espoused by those like Kotler that price humans out of jobs.

Automation requires higher paid people to maintain machinery and equipment.  Capitalism dispossesses those who love farming by means of collectivization through usury.

5. It's not the role of businesses, nor should it be, to be concerned with undefinable "social costs".

Economics is value neutral?  How come the Austrians use the term “moral hazard” when referring to investment.  In a free market, actors are exquisitely interested in social costs of their activities, for upon the weal of their customers all depends.  Only capitalists need be dull to costs, for their results are rape and pillage wherever it raises its ugly head.

6. It's not capitalism that fails to charge businesses for pollution costs, but rather governments.

Wait what?  The government is supposed to charge for pollution costs?  How?  Cap and trade?  In a free market, the costs of pollution are allocated strictly to the polluter.  Capitalism allows for the privatization of profits, the socialization of losses.

7. It is beyond idiotic to propose capitalism causes economic instability. It is governments and central banks that cause economic instability.

Now Mish, mustn’t bite the hand that feeds.  No government, no capitalism, for no hegemon to enforce the fraud of usury that is the heart of capitalism (accumulating capital for investment, either malinvestment or misallocation.)

8. With his concern about "community commons", one can easily see Kotler is a dyed-in-the-wool socialist. The problem with socialism is, it does not work and never will.

Actually, community commons works quite well, Israel had 400 years of no one owning property as we know it,  Iceland too, all reverting to original allocation, the best free market example working on earth today, Hong Kong, no one is allowed to own land, American Indians make 99 year leases with the paleface, not sell them land... common ownership works quite well in free markets, but is impossible in capitalism, wherein personal accumulation is paramount.

9. Capitalism does not encourage high consumer debt. The Fed and central banks do, in the inane belief debt drives the economy.

Ungh...  the excess of the heights Mish deems improved standards of living cannot be achieved without the FED and central banks.  Capitalism depends on debt. Marvel at the malinvestments and misallocation, if it benefits you it is good, ignore the povery worldwide, whence it was mulcted.

10. Capitalism does not let "politicians and business interests collaborate to subvert the economic interests of the majority of citizens". Rather corrupt politicians willing to do anything to get reelected are the problem.

Capitalists are innocent bystanders in the actions of politicians and capitalist business interests?  hmmmm... internal contradiction.

11. Capitalism does not favor short-run profit planning, but tax laws might.

Taxes don’t matter in a free market.

12. In point 12, Kotler argues in favor of "anti-competition". Competition is the very essence of improved products and rising standards of living.

Mish you know that all government action is by means of regulatory capture, and the capitalists write the rules by which free markets are curtailed.  Funny how you ignored that, to only note that competition is good.  Kotler implies competition is good too.  A sore thumb this point.  Only free markets can properly regulate themselves.  You took a pass.

13. Capitalism does not focus on GDP at all. Misguided economists, politicians, and central banks do.

True, but his point is macroeconomic, and at the microeconomic, capitalists define wealth as accumulation, which is misanthropic.

14. Pray tell, whose "social values" do we need to consider? Mine? Yours, ISIS? Kotler's? Personally, I do not want some jackass or set of government jackasses, deciding what is socially right or wrong.

Capitalism is state-sponsored, so it has winners and losers.  It is responsible for the improved standards of living of the winners.  We all love a system that works for us.  We are all victims of survivorship bias.

While the capitalists and communists argue over social values, only the free market can reflect by human action, free from force or fraud of the hegemon and its minions, what values society possesses.

A pox on both their houses.

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Gold is Money for a Purpose; We Need Benecredit

Now recall these fantastic sums are merely nominal.

We just had another confirmation that banks are dealing in sums which they don’t understand themselves. A junior employee in Deutsche Bank (DB) paid $6 billion to a hedge fund which was the gross value of a position. He should have paid the net. That in a nutshell shows the uncontrollable exposure of the banking system which will lead to its downfall.

It really does not matter how fantastic they are, the show will be when the crash comes and all the people who feel entitled (literally) begin the 40 year march in the desert trying to be "made whole" on their "losses."  When you lose part or all of your property, paycheck, pension, Feel free to forward this by email to three of your friends.

Just take Deutsche Bank, their derivatives position is officially $75 trillion. The real figure is probably over $100 trillion but let us accept the $75T. DB’s equity is $83B. This means that just 0.1% loss on the gross derivatives position is enough for DB to go under. It is virtually guaranteed that any loss on their derivatives would exceed 0.1% of gross value. DB is also too big for Germany. DB’s derivatives position is 24 x German GDP and equal to global GDP.

It is not just banks, governments are as whimsically run as well.  Now, as I teach in my classes entrepreneurs take no risks, nor do I expect my customers will do so either.  For example, the schools with which I partner when lecturing are paid in advance by the students who attend my lectures (and I am paid out of the gate receipts.)  Nonetheless, I am often paid by warrant.

Why so?  Schools have too many revenue streams and too little control to know where they are financially at any given time.  They just hope that at the end of the month they can somewhat balance the books and do it again, until the games they play catch up.  But this is police departments, parks, one and all. And as a int'l bankers told me recently the business is extremely tough because everyone to whom he would lend money are simply lying about their circumstances.  That is capitalism, which is not the free market.

Now the fellow with the article cited summarizes thus:

Physical gold (and some silver) is the best protection against both hyperinflation and deflation. Remember with a deflationary implosion, no loans will be repaid and the banking system would not survive. Thus gold will be money as it has been for 5,000 years.

Yes, but so what?  Money is gold, but money is not the problem.  All those nominal figures are tallies of credit, not money.  We do not have a monetary problem, but a credit problem.  The problem is malcredit, and hyperinflation thereof, wherein a $32 million skyscraper in downtown Seattle is valued at $640 million, by the hyperinflationary calculations.  Whole lotta pension funds depending on the nominal income from that nominal valuation.  Come the crash, the building value goes back to $32 million, rents adjust to real world, but the debt is nominally there (perhaps $600 million?)   Those pensions may seize the property, but the rents on a $32 million building are not going to cover the expectations of pensioners, or at best at ten cents on the dollar.  Ouch!

Gold is money for a purpose, the purpose of liquidating a debt and a relationship.  People in business do not need money, now should want it, for we are building relationships, not liquidating them.

The solution is not to get out of currency and into money ("buy" gold) but get out of hyperinflated assets into the means of production.  Get out of malcredit and into benecredit.  Start a business in which you begin to generate benecredit, an asset the hegemon just cannot mulct.

Be like Russia: get rid of debt, build up your productive capacity and your rolodex.  Network with the others who get it.  Whatever happens, don't join the mob trying to recover assets to which people feel entitled.  Start making your own.

Wealth is not accumulation, but the range of goods and services you can access by what you earn on your own.  Prices are going to drop dramatically as we get into this crash.  Just as students who are drowning in debt will not be in a position to get an education that matters, so will the unemployed trapped in home they cannot afford nor buy a cheap car to escape since their last one was repossessed and they cannot get more malcredit (or even benecredit for that matter).

On the other hand the self-employed will access just about anything and everything they want and need at very low prices.  Too high for those who accumulated much in the way of tallies, but astonishingly cheap for those who are actually producing what customers want.

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Malinvestment and Misallocation

Misallocation previously showed up as a misspelling in auto-spellcheckers, now only malinvestment does so.  That too will change in time.

Lacy Hunt uses the term misallocation here.

Misallocation in investment is say, building too much sewage processing capacity for a city.  If the city needs a bridge, but the money is allocated to more sewage capacity than necessary, we have misallocation.  Now, someday the city will grow and use the sewage processing capacity, but in the meantime we are short a bridge and processing plant sits idle.

Malinvestment is more controversial, for it is someone's pet project.  Obviously those bridges to nowhere are malinvestment, they will never be used, those cities built in China that remain empty, or a $10,000 hot tub set-up used three times and abandoned in the back yard is malinvestment.  Malinvestment is still rated "no such word" in English, even though the Anglo world has mastered the process.

Now, above I stated  "the money is allocated to"...  and this is where it gets tricky.  No money is ever involved.  The cost of the projects either way is underwritten by asset managers (managers of tallies ascribed to others.)  For example, CALPERS is the California Public Employees Retirement System.  CALPERS has putatively $300 billion dollars in asset values.

OK, but dollars are tallies, not money.  As those "public employees" have tallies ascribed to their accounts for services rendered every two weeks, the CALPERS nominal value tallied ever rises.  CALPERS then invests these tallies by trading the tallies for assets such as skyscrapers in downtown San Francisco.   A nominal $100 million in tallies is passed to developers and Calpers owns the building and gets the rents, hoping for a gain.

All is well and good until the building begins to reflect market values, that is gets "marked to market" a market clearing step not allowed in 2008 and not allowed to this day.  Accounting rules were changed to hide the facts, and so it is now far worse than 2008.  Eventually there are cascading cross defaults wherein everyone gets creamed in their balance sheets.

Hapless retirees have pieces of paper with amazing numbers on them, but they are pretty much worthless, all of that "land-banked" real estate comes back on the market and valuations drop, rents drop (yippee for the self-employed!) yet the landlords are still taxed, because those do not drop,  and paychecks get further hammered by new taxes and wages begin to drop or unemployment is expanded.

This all comes from lending money at interest, or on steroids, lending credit at interest.  Simply delegitimize it.  Like a gambling debt.  The hegemon has no interest if it is paid or not.  And who should go first, except the hegemon, for who is the biggest game in usury?

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Usury In India

If mis-defined as charging some high fee, usury is outlawed in India, but it goes on.

While some claimed that even now the usury menace continued with the support of local police and government officials, others argued that with no banks or private firms ready to lend them money without collateral security, usury was a ‘necessary evil’ that helped them survive.

Mustn't outlaw usury, just delegitimize it among the hegemon workers. If there is no force to back up the fraud, then it will evaporate, when the money gain is no longer enforced.

Some of the victims plead they need the abuse, and they would the first to not pay interest.  They are the first to focus on the loan and interest, and in that measure they do not hear their customers.  Listen to their complaint: "When we have low sales.... we get into trouble..."

No, you ordered fruit based on overhead costs, not market needs....  "I need to borrow this much to buy this much to sell this much to make a profit."  Sell out of what you can afford to buy with your own resources, and wait out the others who are in a fools trap of borrowing at interest.

You'll win.

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How Come Gold & Silver Are Not Used as Money?

You'll hear people, even PhDs in economics, say gold and silver is not money, you cannot buy anything with it.  You cannot pay for a meal in a restaurant with it, you cannot buy a house with it, or a car or a washing machine, or pay a babysitter with it.

This is particularly astonishing to hear from people holding doctorates in economics, for in econ 101 they teach Gresham's Law, bad money drives out good (and my corollary - bad credit drives out good credit.)

Who would use gold or silver to buy anything when you can use funny money, USA currency, or the whimsical tallies, to effect a title transfer?  Of course it is not used in a false economy! Who would be willing to lose good money into a false economy, to likely never see it again?

I was speaking to one PhD, not yet fifty, who had no idea we once had silver coins as currency.  Had no idea that paper currency was once backed by silver and gold (I carry one of each to show people.) Had no idea that back in the 1960s you could buy a gallon of gas for 20 cents, or two silver dimes.  Today, you can exchange those two silver dimes for USA currency/funny money, 2 or 3 bucks, enough to buy a gallon of gas.  Real money keeps its value.

Gold and silver is not used as currency because people are conditioned to accept less.  Much less.  In fact, it is the law.

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WalMart: It's Over

WalMart has begun its return to Bentonville, Arkansas, an odyssey begun in 1962. The neat idea of price cutting, "stack 'em high and watch 'em fly" was one of those unforeseen right time right place things when ten years later Nixon took the world off the gold standard (lite).  It was perfectly positioned to borrow asset-less credit and use it to call forth misallocation by aggregating more production to itself.

Wolf Richter dissects Walmart's big stock price drop.  Wolf notes financial engineering.  Read the comments too, he has smart readers. 

As banks lent asset-less credit (malcredit) there was no rational limit on how much Walmart could buy at ever-lower prices as USA factory owners committed the folly of price cutting (page 221 of my book) as they accepted Walmart orders.  With lower costs on product compliments of the banking fraud explicit in lending malcredit, not money, there was no limit to where a genius cost-cutter like Sam Walton could work:

1. Financial engineering.

2. Product

3. Land

4. Buildings

5. Logistics

6. Employees.

The economic policy of the USA is get big or get out.  By being the biggest and baddest in this regime, Walmart was the winner. The irony is collectivism's biggest beneficiary are right wing ideologues.  Or perhaps the lesson is not lost on right wing ideologues.

The losers were the countless smaller factories in USA that, as mentioned above, cut prices to gain Walmart volume business. Family businesses (as well as family farms.) I watched these companies increase sales and go out of business in the 1970s and 1980s. Greed kills. I was in China watching as Walmart buyers could take the demand data from USA, wherein the USA supplier had been squeezed to death (another story from my book, how Levitz choked Kroehler to death) to China and get the Chinese management and state-enterprise subsidies to ever cut costs (labor rates has never had anything to do with international trade) and inevitably build that country's infrastructure.

Walmart is not the only one, every mass-merchandiser, big box retailer now on top played this same game, Toysrus, Lowes, Office Depot, Safeway, Best Buy, Petco, Barnes and Noble, The Gap, you name the category, the biggy played the game.  And every one is in trouble now, because the malcredit game has reached its limit, something everyone knew would happen, but no one could say when.

When.  Now everyone agrees it is over.

This roll-up process wherein the biggest borrower crushed the smaller retailers decimated the family businesses that were the USA economy.  Those families also hired employees to help out.  To be destroyed by this juggernaut was inevitable if you made the mistake of joining in and participating in the force and fraud of accepting malcredit.  Countless small businesses simply moved up market and thrived, another phenomenon I outline in my book.  But those who tried to play the discount game were wiped out.  Critical to your survival was how you defined wealth:  personal accumulation, or the range of goods and services one could afford with what they earned.  Also, people who saw business as a lifestyle and not a money making opportunity always have the advantage.

And as an aside, never in the history of USA has a single American job been "exported."  What happens is as a factory becomes outdated, the new factory with all the new processes and systems is built overseas, with new labor needs. The USA worker does not know how to do the new job, but his dis-employment is useful for diverting attention by claiming his wages are too high, that foreign workers are paid less, as if wages matter in overall costs. As a part of financial engineering,  overseas activity is necessary to book profits overseas in order to avoid USA taxes.  Our biggest importers/exporters also pay negligible taxes, for the all perfectly legal tax exemption programs. It works to blame it on USA labor for he lack of jobs.  Blame the victim. The argument misses the point: the jobs are gone because our only choice, democrats and republicans agree, get big or get out, USA is a collectivist state. All of capitalism's patterns and practices are ordered to collectivism.  The right and left wing obscure this by calling this fraud "the free market" and such moral crimes as NAFTA and TPP "free trade agreements."

The solution to this is to no longer protect by hegemon force the fraud of lending credit, creating malcredit, which has driven out benecredit.  Now that is not going to happen, indeed, quite the opposite.  McDonalds, Boeing, Microsoft, Walmart, and all the companies whose welfare depends on force and fraud are looking to the super-secret TPP program to save them, just as NAFTA was a boost in protectionism in the 1990s. Democrats and republicans alike overwhelming supported NAFTA, and after the election, will pass TPP, no matter who wins.

I do not recommend criminalizing the fraud, merely delegitimizing it by withdrawing the state violence necessary to maintain it.

Bad money crowds out good, bad credit crowds out good credit.

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Predatory Lending To Small Business

So the destruction, begun in 1972, of somewhere between 5,000 and 25,000 years of small business finance provision, has hit small business hardest.

According to a February 2015 Federal Reserve study, a majority of businesses less than five years old and less than $1 million in annual revenues were unable to secure credit in the prior year.

With the destruction of benecredit, and the introduction of the internet, new predators emerged to feed on the now naked small businesses..

Marketplace lenders don’t hold deposits, but act as middlemen between lenders and borrowers. The loans are issued through a bank: Lending Club and Prosper issue loans through Web Bank, and Kabbage through Celtic Bank. Both banks are chartered in Utah, a state with a complicated system for establishing interest rates on loans that enable marketplace lenders to legally charge interest rates as high as 36%.

But the new predators are dying as fast as they showed up...

Pratt is referring to the May 2015 decision by the U.S. Court of Appeals for the Second Circuit in the case of Madden v. Midland Funding, LLC. The court ruled that non-banks could no longer rely on federal preemption under the National Bank Act to override state usury laws. In other words, online marketplaces would have to adhere to state usury laws. The state usury interest rate in Utah is 10%. About 12.5% of Lending Club’s loans exceed that interest rate cap, says Pratt.   

You have not heard about that case anywhere else, but I have commented on it several times. Sometimes the courts just completely screw up and do the right thing.  This case is one of those inexplicable examples of a judge getting it right (from a small business, free market point of view.) Maybe the Supreme Court will wrong the right.

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