As you can imagine all this debasement causes a problem for anyone who tries to use the dollar as a unit of measure. So economists have proposed a solution. They adjust<\/em> the dollar.<\/p>\n Like physicists who assume that pulleys are frictionless and massless, only with less realism, they assume that consumer prices would be constant but for the relentless debauchery of the central bank. So they use consumer prices to adjust the dollar.<\/p>\n Prices are measured in dollars, which are adjusted using prices. If this seems circular, well, it is.<\/p>\n There are many problems with developing a consumer price index. First is what to include. A 20-year old may not care much about the cost of health care, but if he drives a muscle car, he may care a lot about the price of gas. A professional who lives in the central business district may not drive, but the majority of his income goes to pay rent.<\/p>\n But assume that, somehow, economists agree on the right items to include in the basket, and this basket can somehow determine monetary debasement. For example, they add apples, oranges, gasoline, and fuel. Never mind what Mrs. Lowell said in fourth-grade-math class. You absolutely can add apples and oranges! The license to commit this crime against mathematics is granted with one\u2019s PhD in Economics.<\/p>\n Anyway, next come the so-called hedonic<\/em> adjustments. Sure, the argument goes, a car in 2019 is more expensive than a car was in prior years. But the car today has a gazillion air bags, a satellite navigation system, and Bluetooth. So the price is somehow adjusted<\/em> for these extra features.<\/p>\n We would call the consumer price index a farce, but we would not want to be unkind to Monty Python. If you are getting a picture of pseudoscience, that\u2019s it. The adjusted<\/em> dollar gives all the appearances of providing a reliable measure of value, the way Hollywood gives all the appearances of a battle in space. We have news for you, Star Trek physics isn\u2019t real.<\/p>\n So the net result is that the mostly-falling but sometimes-rising dollar (i.e. debasement with volatility) is pronounced \u201cfit for purpose.\u201d All businesses may be managed by profit and loss statements, based on the dollar as numeraire. Never mind that Keynes and Lenin saw it clearly in 1922: debauching the money impoverishes everyone generally, but enriches a few (who are hated by the others, as their enrichment is arbitrary and unjust). Today\u2019s otherwise-free-market advocates (other than in money and credit) don\u2019t understand what debasement with volatility does as well as did those (evil) geniuses.<\/p>\n Keynes and Lenin said<\/a>, \u201cThere is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.\u201d<\/p><\/blockquote>\n Otherwise-free-marketers provide cover. They say that the dollar must be adjusted<\/em>, but of course the dollar used on every profit and loss statement is not adjusted<\/em>. If a business spends $900 and earns $1,000, then it has a profit of $100. There is no incentive to adjust<\/em> the $1,000 revenue downward or the $900 expense upward. There is no way for the business manager to even know if this unadjusted<\/em> profit is illusory.<\/p>\n If it is illusory, then that means the enterprise is destroying wealth. But if there is a profit, then that means managers will be rewarded for a job well done<\/em>, with bonuses. And the enterprise will obtain more resources, and hire more people to scale up. To accelerate its destruction of wealth.<\/p>\n Unlike the problem of rising consumer prices per se, this problem can wipe out a civilization if it is allowed to grow big enough.<\/p>\n There is another way that our failing monetary system causes enterprises to destroy wealth, which is separate from the unstable unit of account we describe above.<\/p>\n Think of how a manager makes a decision whether or not to grow a business line, or develop a new one. He adds up all the costs. And then compares the total to the estimated revenues. It\u2019s pretty simple. To grow the line, estimated revenues must exceed estimated expenses.<\/p>\n The interest on borrowed capital is a significant expense. This expense decreases every time the interest rate falls. In our mad regime of irredeemable currency, the trend has been to fall since 1981 (corrections, like the one most-likely just finished, notwithstanding).<\/p>\n Could King Canute make the tide go out? Can Congress pass a law to set the speed of light at 3 X 10^7 meters per second? Can the central bank really turn a wealth-destroying activity into a wealth-creating activity?<\/p>\n No, of course not. They can only force you to behave as if reality is other than what it is. They can distort your perception, as we wrote two weeks ago<\/a>.<\/p>\n When the interest rate drops, that does not turn a wealth-destroying activity into a wealth-creating one. Obviously. However, it can make such activity appear<\/strong> to be wealth-creating.<\/p>\n When the interest rate drops, that does not turn a wealth-destroying activity into a wealth-creating one. Obviously. However, it can make such activity appear<\/strong> to be wealth-creating.<\/p>\n Think about that. Take as long as you need. If you understand this, you understand more than 99% of economists.<\/p>\n An activity, which you can see destroys wealth in black and white, suddenly becomes wealth-creating. Simply by a drop in interest rates. For example, at 8% interest the expense of borrowing $1,000,000 is $80,000 a year. If the activity only generates $75,000 in gross profit, then you lose $5,000 a year. But if the interest rate is cut in half, now you pay only $40,000 a year in interest. But the gross profit remains the same $75,000. Now it looks attractive because instead of losing $5,000 you make $35,000 a year. So you borrow the $1,000,000 and expand the business.<\/p>\n As an aside, each time the rate is lowered, it\u2019s not just you who borrows to expand production. It\u2019s everyone else, too. So you take on $1,000,000 in debt and annual interest expense of $40,000 to chase $75,000 profit. But you find it\u2019s more like $50,000 because more suppliers enter the market.<\/p>\n Our key point is that the rate of interest moves the line between what is profitable and what is not. If the rate is too high, then some wealth-creating activities will not be financed. Society is poorer than it should be.<\/p>\n If interest is too low, then some wealth-destroying activities are financed. Destruction is profitable, and so it scales up. Society itself is doomed.<\/p>\n What is the right rate of interest? We can define it in general terms. The right rate is the rate where the marginal borrower is creating wealth.<\/p>\n And how is the right rate determined and set? Forget everything that the otherwise-free-marketers say about this. There is no way for a central planner to know the right rate. And no good way to set it, even if he did know it, without wreaking other havoc.<\/p>\n The rate has to be set in a free market. That means the unadulterated gold standard<\/a>, which is free not only from the central planning of central banks but from all other government distortions, such as forcing banks to load up on government bonds.<\/p>\n In a future article, we will expand on why these two statements are true principles: (1) there is no way a central planner could set the right rate, even if he knew what it would be, and (2) only a free market can know the right rate.<\/p>\n <\/p>\n The price of gold went up four bucks, and the price of silver rose 32 cents. Silver has been going up in gold terms since the middle of last week, when the gold-silver ratio peaked at just under 87. It closed this week at just under 82 (a lower ratio means silver is more valuable). 87 is quite an extreme level. So it\u2019s natural for there to be a move back down. But is this move durable, and likely to continue?<\/p>\n We will look at that when we discuss silver\u2019s supply and demand charts.<\/p>\n Let\u2019s look at that picture. But, first, here is the chart of the prices of gold and silver.<\/p>\n
\n<\/h4>\n
\nSupply and Demand Fundamentals<\/strong><\/h4>\n
![\"\"](\"https:\/\/www.thesavvystreet.com\/wp-content\/uploads\/2019\/01\/Gold1.png\")
\nNext, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here<\/a> for an explanation of bid and offer prices for the ratio). It fell sharply again this week.<\/p>\n![\"\"](\"https:\/\/www.thesavvystreet.com\/wp-content\/uploads\/2019\/01\/Gold-2.png\")
\nHere is the gold graph showing gold basis<\/a>, cobasis<\/a> and the price of the dollar in terms of gold price.<\/p>\n![\"\"](\"https:\/\/www.thesavvystreet.com\/wp-content\/uploads\/2019\/01\/Gold-3.png\")
\nKeep in mind that this is the February contract, which is under selling-pressure as it approaches expiry. The gold continuous basis is basically flat. So this week, no real price move and no real supply and demand move.<\/p>\n
![\"\"](\"https:\/\/www.thesavvystreet.com\/wp-content\/uploads\/2019\/01\/Silver.png\")
<\/p>\n