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The market for honesty: is $10,000 gold fair value? (highlights are Zerohedges)

Last week, the Swiss National Bank (SNB) pledged to buy ‚unlimited? amounts of foreign exchange to prevent the Swiss franc from further appreciating. In other words, it is willing to print 'unlimited? quantities of Swiss Francs, tolerating an 'unlimited' debasement of its currency. Why would the Swiss of all people, one of the world’s few remaining 'sound money' proponents make such a commitment? Because unlike its main ‘competitors’ in the market for currency (the major central banks), which are either debasing with abandon or looking as though they’re about to, Switzerland had been rewarded for its rectitude with an uncomfortable share of the world’s flight capital and a painful currency overvaluation. So the SNB has given up trying to be honest in a dishonest world.

So let me explain why I believe printing money to be a fundamentally dishonest endeavour. Think about how it works. When the central bank, at zero cost, increases the monetary base by 1%, where does that money go? Answer: into the market for government bonds. Since printing the money to buy government bonds costs nothing, government revenues are obtained ostensibly for free. Of course, it buys those bonds in the secondary market rather than from the government directly, and the pretense of an arm’s length transaction between government and central bank is thus maintained, with all parties claiming a separation of monetary and fiscal policy. But it’s only a pretense.

By issuing bonds to itself the government seems to have miraculously raised revenue without burdening anyone else. This is probably why the mechanism is universally adopted throughout the world’s financial system. Yet free money does not, and cannot, exist. Since there can be no such thing as a government, or anyone else for that matter, raising revenue "at no cost" simple logic tells us that someone, somewhere has to pay.

But who? This is where the subtle dishonesty resides, because the answer is that no-one knows. If the money printing creates inflation in the product market, the consumers in that product market will pay. If the money printing creates inflation in asset markets, the purchaser of the more elevated asset price pays. Of course, if the printed money ends up in asset markets even less is known about who ultimately pays for the government’s ‘free lunch’, because in this case the money printing sets off its own dynamic via the perpetual Ponzi machine that is the global financial system. The ‘free lunch’ providers will be the late entrants into whatever asset-bubble or investment fad the money printing inflates.

The point is we can’t know who will pay, only that someone will pay. Thus the government has raised revenues without even knowing upon whom the burden falls, let alone telling them. Compare this to raising explicit ‘honest’ taxes, which are at least transparent. We know who levied the sales tax or the income tax, when it was levied, when it is payable, and how much has to be paid. The burden of this money printing, in contrast, seeps silently into the economy, falling indiscriminately but indubitably on unseen, unknowing victims.

The economic hardships this clandestine tax operation imposes are real and keenly felt. But because no one knows from where it comes the enemy is unseen. Thus, during great inflations, societies turn on themselves with each faction blaming another for its malaise: the third century inflation crisis in ancient Rome coincided with Diocletian’s infamous persecution of the Christians; the medieval European debasements coincided with surging witchcraft trials; the extreme Central European hyperinflations following WW1 saw whole societies blaming their Jewish communities. More recently, the aftermath of the historically modest asset inflations in the tech market and the US real estate market have seen society turn on "fat-cat CEOs" and "greedy bankers" respectively.

By now, some of you might feel this all to be irrelevant. Surely, you might be thinking, the plain fact is that there is no inflation. I disagree. To see why, think about what inflation is in the light of the above thinking. I know economists define it as changes in the price of a basket of consumer goods, the CPI. But why should that be the definitive measure, given that it’s only one of the many possible destinations in money’s Brownian journey from the printing presses? Why ignore other destinations, such as asset markets? Isn’t asset price inflation (or bubbles as they are more commonly known) more distortionary and economically inefficient than product price inflation?

I believe economists focus so firmly on product prices in their analysis of inflation not because of any judgment over the relative importance of one type of inflation over the other, but simply because CPI-type measures of inflation are easier to see. In doing so, they resemble the fabled driver who lost his keys one evening and was found looking for them under a streetlamp. When asked by his wife why he was looking there when he’d probably lost them further back, he replied “Because here it’s easier to see.”

We know that revenue cannot be raised for one person without costing someone else. We know that money printing generates revenue for the public sector. So we also know that money printing must be a tax. We know that the magnitude of that tax – the inflation rate – can be reliably measured by the increase in the rate of base money growth. Since we don’t know which markets new money will end up in or even when, we know we can’t reliably count on measures of inflation in those markets to tell us what the ‚inflation rate? is. Thus, the only reliable measure of inflation is the expansion of the monetary base. So to those who say there is no inflation, I give you the following chart.

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