Interest Rates and Next Steps

 The Bank of Canada first wanted us to believe that they could hold inflation to 2% per year. This was supposed to be a maximum, not a target. Even while they were expanding the money supply by 33%, they said with a straight face that inflation (by which they meant us to understand price inflation) would be held to 2%. Our Minister of Finance wanted us to believe that prices would actually drop, presumably because demand would drop. Of course, one might expect that when people are staying home and not working as much, they might pare down their purchasing. Yes, one might expect that……if money wasn’t falling into their laps from mailboxes across the land. Suppose you are at a cash auction with 49 other people and that each of you has brought $10,000 to spend --- $500k in total. The most the goods being sold can fetch is $500,000. Now suppose, someone flits through the room, handing another $10k to each of you. What do you think will happen to the prices the auctioned goods will obtain?

So now, price inflation is galloping to catch up to monetary inflation and the Bank of Canada wants to do something about it. It’s the same story in the USA with the American counterpart of the Bank of Canada --- the Federal Reserve. Both central banks are now set on raising interest rates. But when price inflation is running at historic highs (if you adjust for the changes made to how the CPI is calculated), even a fairly large increase in interest rates will still leave real interest rates negative. That means lower than the inflation rate. So the central banks are raising rates modestly to encourage people to save. Somehow, people should be motivated by a negative yield.

Paul Volker stifled inflation 40 years ago by raising interest rates to 20%. I remember a forecaster named Morgan Maxfield predicting those 20% interest rates, and then Maxfield was killed in a plane crash. Will interest rates go up again to 20%?  I don’t see how. The difference between 40 years ago and now is that back then, government debt tended to be 30 year T-Bonds. Now a huge portion of it is one year T-Bills. Back then, mortgages tended to bear fixed interest rates, but now many have variable rates. Raising interest rates to a point where they would actually bring price inflation back into line (by inducing people to save rather than spend, thereby slowing the velocity of money) would bankrupt governments and render a huge portion of homeowners insolvent.

I think we are in for a long period of price inflation. If we enter into an economic depression, which could easily happen, demand might drop enough to bring prices down, or maybe it would be an inflationary depression. It will be interesting to see what happens.

Cash Is Not Wealth

 

I haven’t posted anything here for a long time. Life gets busy, and there seems to be many other ways to make a positive difference in people’s lives…..and that is what I really like to do.

I am concerned about a trend I see in Canada. Maybe it is elsewhere, but I have not been traveling during the Plague, so I cannot offer firsthand testimony. What I see here is the widening difference between being Have-Nots and what that very astute MP Pierre Poilievre refers to as Have-Yachts. 25 years ago it seemed to me that there was a veritable slave class developing, and that maybe the best way out of it for most people was education. I have long encouraged people, both young and old, to get more education. Aside from the process being good for maintenance and development of mental faculties, knowledge is power.

I see Canada’s GDP per person rapidly declining. We are now #18 according to a list I recently saw (https://statisticstimes.com/economy/countries-by-projected-gdp-capita.php). $42k GDP per person. And when you consider that GDP is about production, and not usability of the production, that makes matters worse. For example, if production is wasted or destroyed, it is still part of GDP. GDP can be very high in a war economy even though huge amounts of resources are being blown up and do not increase wealth at all.

Our per capita income is reported as higher than the 42k. No wonder, with all the cash being freely given to people, ostensibly as “stimulus.” It’s sad that our financial policy makers are so economically illiterate that they think cash injected into an economy whose debt is several multiples of GDP will actually stimulate the production of goods and services. So far as I know, there is no empirical evidence to support such nonsense. Instead, what we have is an increasing amount of cash chasing a decreasing amount of goods and services. The economy is choking, and our governments are stuffing more cash down its throat.

I am not against distributing cash, but it must be accompanied by measures to increase the production of goods and services if our standard of living is to be maintained.  We do not eat cash, cover ourselves with it, nor drive it. If 100 people show up at an auction with $10,000 each, prices to which the items are bid will be a lot lower than if someone suddenly gives each attendee another $5,000. Our economy is like the auction. We are driving prices up at quite the rate. Far beyond the annual 2% rate that the Bank of Canada claims as a target. We left 2% over the rear horizon quite a while back. Yet the Bank of Canada keeps on with the story that sounds like it was written by a Liberal speech writer.  It looks to me like we have entered into an inflationary depression. Admittedly, there are deflationary pressures such as low consumer demand and the possibility of a credit collapse, but I think the Bank of Canada, with its fake excuses, will keep pumping cash into the federal buckets.

In the short-term, the deficit between growth of money and decline of production has been closed by imports, but that is not a sustainable solution. The value of our money is only what our creditors assign to it, and the more money have versus our own production, the lower the value of the money because essentially a nation’s money is a claim on its production. Ultimately, the lower our production, the lower our standard of living.

Come to think of it, in some ways the standard of living has been dropping since I was a boy. We used to have physicians making house calls and milk delivered to the door (from a horse drawn wagon even!). We used to sit in the car while the gas was pumped for us and the windshield washed and the oil checked. We used to be able to phone businesses and not reach a computer giving us a string of layered messages, adverts and monotonous music. We used to be able to drop in at a CRA (at various times CCRA and Revenue Canada) office and talk to a real person face to face. We had wood furniture. We had stay at home moms because families could live on one income. We didn’t have our public parks (such as Beacon Hill here in Victoria) turned into squatter camps. We had grade schools with classes of under 20 students.

No, this country is in a slide, mostly under the stupefied watch of its “natural ruling party” --- the Liberal Party, which long ago divorced itself from liberal values so far as I can tell.

Squeezing the Silver Shorts

 I have been noting lately some of the discussion around the short squeezes related to GameStop and certain other stocks. Basically, GameStop short positions exceed the total float of GameStop shares, and a crowd on Reddit decided to bid the share price up so that the shorts would suffer a huge losses. And they succeeded. So then they got the idea to ply their tactics on stocks of other companies such as Bed Bath & Beyond and AMC, with some success with those stocks also.

Flush with the exuberance of inexperienced success, they seem to have lately decided to squeeze the silver shorts. In doing so, they have shown they do not understand the market. It’s one thing to take on the GameStop shorts. Quite another to go up against the silver shorts. Now they are trying to enter the big league. I have very little doubt that the silver price will be energetically headed north, but that process needs no help from the Reddit crowd. Silver tends to be produced largely from mines that are primarily base metal mines, driven by industrial demand. Yes, there are mines that primarily function on account of the silver in them, but a large part of supply is a by-product of mining other minerals. The economic slowdown has reduced such mining activity. In some cases, mines have closed directly as a result of covid. There is a shortage of silver production, just like there is of uranium. Further, the demand for silver as a critical component in several key industrial processes, besides jewellery and investment, is likely to outstrip supply for some years to come so far as I can tell. So yeah, silver doesn’t need Reddit.

The Reddit warriors can’t squeeze the silver shorts anyway. GameStop has a float of less than 50 million shares. If you are short and the price starts getting away, you have to buy stock. You could buy call options to accomplish the same thing, but the short positions were cumulatively so big that buying calls would have driven the options to unreasonable prices. Silver is different. If you are short silver, you can buy futures, options on futures, silver ETFs, and shares in silver mining companies to hedge against losses. You won’t have to get squeezed. Further, I think the main silver shorts have the ability to affect trading rules. These people are powerful. The Hunt brothers, multi-billionaires when a billion was something, found out 40 years ago just how powerful the silver short interests are. If the Hunts could be squished, so can the Reddit mass.

Nothing succeeds like success, but nothing goes to the head like success either.