China’s Monetary Tradition and the Origins of Money

Written by Joseph T. Salerno

In the introduction to this book, first published in English in 2010, I wrote: “The idea of sound money was present from the very beginning of modern monetary theory in the works of the sixteenth-century Spanish Scholastics….” Recent research has shown that the seeds of the theory of sound money were already present in Chinese writings centuries before the Scholastics.1

China was one of the first countries to develop a metallic money that was valued and exchanged by weight. Evidence suggests that this monetary regime originated during the Shang Dynasty (1766–1122 BC) or the Zhou Dynasty (1122–221 BC). China was also one of the first countries to use precious metals as money and may have invented coined money. The long experience with a purely metallic monetary system naturally stimulated Chinese state officials, royal advisers, and philosophers to investigate and debate the origins and functioning of such a system and the policies appropriate to its smooth operation. It is therefore not surprising that China developed a rich tradition of monetary thought, which extended over nineteen centuries (roughly 700 BC to 1200 AD). This literature on monetary theory and policy embodied ideas, insights, and controversies that would appear in European writings only centuries later. In particular, some contributors to this Chinese monetary tradition formulated the conceptual foundations of the theory of sound money, the topic of the present book.

While ideas about the development of money were expressed as early as the seventh century BC, the most prevalent view of money’s origin is attributable to a politician of the sixth century BC. Shan Qi (b. 585 BC) contended that money was invented by one of the ancient philosopher-kings to measure the value of goods. However, several Chinese writers later disputed this story and argued that money originated as a market phenomenon. Sima Qian (104~91 BC), Luo Mi (1165~1173 AD) and Ye Shi (1150~223 AD) basically argued that money grew out of the trading of commodities and could not have emerged in the absence of commodity exchange. Money was only later adopted by kings as an aid in ruling their countries. 

The first step in theorizing correctly about money is to understand that the value of money, like that of commodities, is never fixed and unchanging. Chinese philosophers who published the earlier Mohist Canons(468 BC~376 BC) grasped this crucial point. They recognized that metallic money, such as the “knife coins” then in wide circulation, was valued and exchanged by weight and argued that the real value of money, despite its fixed face value, was not stable but fluctuated inversely with the prices of commodities. When commodity prices were high, money was “light” or its purchasing power low; when prices were low, money was “heavy” or its purchasing power high. Thus, if monetary conditions were such that the nominal prices of commodities were abnormally high, the real prices of commodities were not high but rather money was “light” or depreciated.

In investigating the market conditions that determined the purchasing power of money, two eighth-century Chinese writers, Liu Zhi (734 AD) and Lu Zhi (794 AD), clearly formulated the quantity, or supply-and-demand, theory of money—eight centuries before the theory was introduced into European thought by Jean Bodin and the Spanish Scholastics. Liu Zhi argued that if population grew more rapidly than the money supply, the purchasing power of money would rise. Zhi reasoned that the growth of population would produce an increase in the labor force and, therefore, in the supply of commodities. As a result, the demand for money would grow in excess of supply and raise the purchasing power of money. He also deduced that high prices were a result of an “excess” of money and advocated a reduction in the quantity of money to increase its purchasing power. Liu Zhi’s contemporary Lu Zhi argued similarly that the quantity of money is a prime factor determining the prices of goods and the purchasing power of money. Thus, goods are cheap and money “heavy” when the quantity of money is relatively small, whereas goods are expensive and money “light” when the quantity of money is large. Lu Zhi inferred from his theory that government is therefore able to affect the height of prices by altering the quantity of money. 

Chinese monetary writers also focused on the proper institutional arrangements for coining money, because coinage affected the quantity and quality of money in the economy. At least four major debates on the coinage question occurred during the period 175 BC–734 AD. The main point at issue was whether the coining of money should be a private and decentralized business or a royal prerogative monopolized by the central government. Of great interest is the fact that in the third (457 AD) and fourth (734 AD) debates government ministers heroically proposed private coinage as a means of ridding the realm of a shortage of money.

My book is a small contribution to this great Sino-European tradition of sound monetary theory. I hope that its translation sparks interest among contemporary Chinese scholars in recovering and extending this tradition as first presented in the brilliant writings of their ancient predecessors. 

1.Zheng Xueyi, Yaguang Zhang, and John Whalley, “Monetary Theory from a Chinese Historical Perspective” (NBER Working Paper 16092, June 2010). The following discussion is drawn from this research paper.

Fed Drains $485 Billion in Liquidity from Market via Reverse Repos, Undoing 4 Months of QE, Even as QE Continues, Total Assets Near $8 Trillion

Article written by Wolf Richter of Wolf Street

May 27, 2021

This morning, the Fed sold a record $485 billion in Treasury securities via overnight “reverse repos” to 50 counterparties, beating the prior record set on December 31, 2015. These overnight reverse repos will mature and unwind tomorrow morning. Today, yesterday’s $450 billion in overnight reverse repos matured and unwound, and were more than replaced with this new batch of $485 billion in overnight reverse repos.

Reverse repos are liabilities on the Fed’s balance sheet. They’re the opposite of repos, which are assets. With these reverse repos, the Fed is sellingTreasury securities to counterparties and is taking their cash, thereby massively draining liquidity from the market – the opposite effect of QE.

In past years of large reserves following QE, banks shed reserves via reverse repos, reducing reserves on the balance sheet and increasing their Treasury holdings, to dress up their balance sheet at the end of the quarter, and particularly at the end of the year. Reverse repos declined after the Fed started reducing its assets during Quantitative Tightening in 2018 and 2019. But the current record spike is taking place in the middle of the quarter, a sign that the enormous amount of liquidity is going haywire:

This is a crazy situation that the Fed backed into.

Even as liquidity is going haywire, and as the Fed trying to deal with it via reverse repos, the Fed is still buying about $120 billion per month in Treasury securities and mortgage-backed securities, thereby adding liquidity.

But with its reverse repos of $485 billion, the Fed undid four months of QE!

The Fed could stop buying securities altogether and reduce its balance sheet, which would also drain liquidity from the market. But the Fed cannot do that because it said it would be slow and deliberate in announcing changes in its monetary policy, and that it might eventually talk about talking about tapering, so it can’t just suddenly do an about-face.

But this liquidity-haywire situation appears to be an emergency that needs to be addressed now, and so the Fed is addressing it through the backdoor via the overnight reverse repos.

At the same time, the Fed continues QE. Its total assets were of $7.90 trillion on its balance sheet as of May 26, released today, were down by $19 billion from the record last week, following the typical pattern. These assets include $5.09 trillion in Treasury securities and $2.24 trillion in mortgage-backed securities (MBS):

The Fed has discussed this liquidity issue during the last FOMC meeting and summarized some of the discussions in its meeting minutes. It noted that “a modest amount of trading” in the reverse repo market took place at negative yields, meaning that there is so much demand for Treasury securities, and so much liquidity chasing them, that the holders of liquidity were willing to lose money to obtain Treasury securities. This threatens to push related rates into the negative, such as SOFR (Secured Overnight Financing Rate) which is the Fed’s reference rate to replace LIBOR.

The Fed, sitting on $5.09 trillion in Treasury securities, has been stepping into the reverse repo market, selling Treasuries overnight to satisfy this demand for Treasuries and keep yields from meandering below zero.

The tsunami of liquidity.

Everyone has their own theory as to why there is so much demand for Treasury securities. But one thing we know: the banking system is creaking under a huge amount of liquidity.

Bank reserves on deposit at the Fed – a liability on the Fed’s balance sheet, money that the Fed owes the banks and that it pays the banks currently 0.1% interest on – ballooned to a record of $3.98 trillion on April 14 and have since then zigzagged down a smidgen. On the Fed’s balance sheet released today, they were at $3.81 trillion. This is a sign of just how much liquidity banks are swimming in:

The drawdown of the Treasury General Account.

The government sold a gigantic amount of debt last spring, adding $3 trillion to its debt in a few months and kept the unspent amounts in its checking account – the General Treasury Account or GTA at the Fed, which is a liability for the Fed, money that it owes the US Treasury. The balance in the GTA ballooned to $1.8 trillion by July 2020, compared to the pre-crisis range between $100 billion and $400 billion.

The Mnuchin Treasury started spending down the balance in the checking account by borrowing a little less. By early January, the GTA was down to $1.6 trillion.

The Yellen Treasury formalized the drawdown and in early February announced that it would bring the balance down to $500 billion by June. This turned out to be too much too fast, and it now looks like August will be the month when the drawdown reaches the $500 billion mark.

On the balance sheet the Fed released today, the balance as of May 26 was down to $779 billion. Down by $821 billion since February, $279 billion to go:

The drawdown of the GTA has some implications for the markets: this is money that the government will spend but doesn’t have to collect in taxes or borrow; it already borrowed it in March through June last year. And the Fed mopped up this debt with its $3 trillion in asset purchases. So the drawdown means that the government has been spending this money that the Fed had already monetized in the spring last year.

All of this has big implications for the markets. These are huge amounts, in terms of reserves on deposit at the Fed, the drawdown of GTA at the Fed, and now the reverse repos at the Fed, all of them liabilities at the Fed, all of them representing different aspects of the massive flows of liquidity that are now bouncing off the walls.

Currency experts say cryptonotes are in our future

By Arthur L. Friedberg of Coinworld

A paper by Franklin Noll, president of Noll Historical Consulting and an expert on American monetary history, and Andrei Lipkin, a Belarussian consultant on bank notes and cryptocurrency, who originated the term “cryptobanknotes” in 2017, takes a close look at bank notes and how they relate to cryptocurrencies. 

Their conclusion is that the forms of currency are not mutually exclusive. “Smart Banknotes and Cryptobanknotes: Hybrid Banknotes for Central Bank Digital Currencies and Cryptocurrency Payments” is a paper that will be presented at the Seventh Joint Bank of Canada and Payments Canada Symposium on Sept. 16.

The premise is that cash as we know it will not be around forever, but neither will it go away quickly. Bank notes will be around for the foreseeable future, and what is needed is a transitional device to ease the transition from 19th century cash to the digital currency of the future.

The answer is a hybrid bank note — a physical note on paper or polymer that can transfer its value over an electronic network. It would have all the characteristics of a traditional note so it could be used in traditional cash transactions, but when needed, its owner can use the electronic network to transfer the face value off the note.

Two basic forms are envisioned, a smart bank note and a cryptobanknote. Smart notes are further explained here. (I will address cryptonotes next week).

The paper defines a smart bank note as being like a traditional bank note in that it bears intaglio and offset printing on paper or polymer, and like a traditional bank note it can work offline, hand to hand without a network or electricity. The difference from traditional bank notes is that there is the option of using it to transmit its value over an electronic network, letting it act as an electronic payment vehicle.

The smart note would communicate with a network via an embedded radio-frequency identification microchip. When desired, the note’s value can be transferred off the note, for example, by smart phone or point of sale device. Using the same devices, the value of the smart bank note can also be transferred back from a network onto an “empty” or valueless smart banknote. The status of the smart bank note, whether it contains its face value or is empty, is indicated by a tactile and visible icon made of electronic ink. 

This icon could involve an existing design feature or a new one integrated into an existing design. An example authors Noll and Lipkin give is a $10 U.S. smart bank note. The chip, or status icon could be the current Statue of Liberty torch on the bill’s face. If the user wants to make an electronic transaction — say, to their bank account, a relative, or at a place that does not accept cash, the note is touched to a phone and the value is transferred over the network. Since the note is now “empty” of value, the Statue of Liberty torch icon disappears, showing visually and by touch that the smart banknote no longer has value.

To put the value back onto the note, the user can turn it in to a bank or merchant that will recharge it and put it back into circulation. Or, the user can personally do the same thing. Either way, the Statue of Liberty torch would reappear, showing that the note has regained its value, and it can continue circulating hand-to-hand.

A future Federal Reserve note could feature an embedded radio-frequency identification microchip, appearing as a design element similar in appearance to the Liberty torch on the current $10 denomination.Images courtesy of United States Mint.

China Reiterates Cyrpto Bans from 2013 and 2017

Regulators cite the dangers of speculative trading

Article by: Muyao Shen

The National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China reiterated their stance on banning crypto services.

The three entities published a note Tuesday confirming bans originally implemented in 2013 and 2017 that bar financial and payment institutions from providing any services related to cryptocurrency transactions and saying that initial coin offerings remain illegal.

“Virtual currency’s prices have soared and plummeted recently, resulting [in] a rebound of speculative trading activities of virtual currency,” the report said. “It has seriously damaged the safety of the people’s investment and damaged the normal economic and financial orders.”

In 2013, China’s central bank barred financial institutions from handling bitcoin (BTC, +3.35%)transactions, according to a notice from China Securities Regulatory Commission.

And then again in 2017, the central bank in China declared initial coin offerings as illegal, which caused bitcoin’s price to fall.

Robert’s two cents: The last line of this article assumes that was the cause of the price fall. Yet, there is no proof supporting this claim. Its highly possible, in fact more probable, that the market correction with BTC has more to do with its volatility during its growth phase rather than simply one or two persons speaking out against it. This is a fallacious presumption.

Inflation Is Great If You’re Already Rich

Written by Doug French

he 4.2 percent Consumer Price Index (CPI) bounce for April sent a chill through some traders and financial commentators who had expected a tamer number like a 3.6 or 3.9 percent from last year’s covid price level air pocket. 

The MarketWatch headline screamed, “U.S. Inflation Soars in April to Thirteen-Year High, CPI Shows, and Reveals Fresh Stress on the Economy.” Barron’s was slightly more relaxed: “Surging Inflation Is Hammering the Stock Market. Why It Isn’t Time to Panic Just Yet.” Then there was Nobel laureate Paul Krugman, who tweeted, “So, the inflation report wasn’t a nothingburger, but it was sort of a White Castle slider—not a very big deal.”

Before the 4.2 percent print, John Authers posted a piece on Bloomberg, “Markets Give Powell a Break. It May Be Transitory.” “It” being CPI. “Transitory” being a term Powell uses often, a.k.a., “don’t worry, be happy, this too will pass.” 

With all of this teeth gnashing over CPI and money supply, Nobelist Krugman offered up what he calls “Krugman Wonks Out: Return of the Monetary Cockroaches,” where he says, “[C]ockroach ideas, false beliefs that sometimes go away for a while but always come back.” The false belief according to him is that increases in the supply of money lead to inflation, meaning price inflation.

We must remember what Ludwig von Mises wrote, “What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless.”

So while Chairman Powell claims to be adhering to the Fed’s mandate of stable prices, stable prices in a world with the division of labor and technology running step for step like Affirmed and Alydar in the 1978 Belmont Stakes, prices should be falling, making everyone, especially those at the bottom of the economic food chain better off.

Tragically, Powell sees it another way. Reuters reported the Fed chair as saying that “low inflation hurts American businesses and households and constrains the Fed’s ability to offset economic shocks with easy monetary policy.” Nothing could be further from the truth.

Professor Jörg Guido Hülsmann wrote in Deflation and Liberty,

In a word: the dangers of deflation are chimerical, but its charms are very real. There is absolutely no reason to be concerned about the economic effects of deflation—unless one equates the welfare of the nation with the welfare of its false elites. There are by contrast many reasons to be concerned about both the economic and political consequences of the only alternative to deflation, namely, re-inflation—which is of course nothing but inflation pure and simple.

Given the retirement of the Contra Krugman team of Tom Woods and Bob Murphy, I’m left to point out that what Krugman can’t see must not be. Where’s the hyperinflation, you zombies and monetary cockroaches? He said we cried wolf ten years ago and are doing it again.

Now, he fingers the crypto crowd for the money-printing panic. He claims to be patient, but those who seek escape from the government’s currency and are arguing “[f]iat money is doomed because the Fed won’t stop running the printing press” are wrong, he says, because “nothing like that has happened in the U.S.”

But it has happened and is happening. Murray Rothbard explained, “[A]n increase in the money supply can only dilute the effectiveness of each existing money unit, and therefore must be “inflationary” in the sense of raising prices beyond what they would have been otherwise.”

“What they would have been otherwise” being the key. Were the Weimar Republic or recently Zimbabwe or today’s Venezuela sophisticated economies ripe with technology and the division of labor, creating efficiencies and pushing down prices? No. Those governments printed money, and their people had nowhere to escape the falling currency but by buying up consumer goods, creating shortages, clearing shelves, and forcing up prices until their entire economies fell apart.

Everyone has seen pictures of empty shelves in Venezuela. Meantime, the one-year return on the Caracas stock exchange is 1,804.92 percent according to Bloomberg.

Venezuela’s well-to-do survive and possibly thrive, while the poor starve. And, for Nobel laureates and Fed chairmen that’s just fine.

The US has inflation. It benefits the rich, at the expense of the poor.

“Inflation is the true opium of the people and it is administered to them by anticapitalist governments and parties,” wrote Mises.

What Krugman can’t see is that people are escaping the Fed’s money creation by buying stocks, bonds, real estate, crypto, NFTs, and who knows what all. While it might not be hyper, yet, the Fed is providing an overdose of what Mises called true opium.

Let’s Level the Playing Field between the Dollar and Competing Currencies

Written by Michael Milano

To be a reliable and useful medium of exchange, money must be durable, portable, divisible, and recognizable, but also scarce. The privileged power of the state to manipulate the scarcity of money has had disastrous consequences for national currency systems throughout history. While money, like everything else, is subject to the subjective valuations of consumers—as noted by Mises—money’s exchange value is “the most important kind of value, because it governs the social and not merely the individual aspect of economic life.” Legal tender laws and other regulations imposed on currencies cause value discrepancies to arise.

Indeed, when states intervene to impose “official value” on money, true market preferences can be partly observed in the workings of Gresham’s law. Gresham’s law is conventionally described as “bad” money drives out “good” money, but a more accurate definition per Rothbard is that “money overvalued artificially by government will drive out of circulation artificially undervalued money.” Imagine a specie-based economy that issues a coin containing one ounce of gold. Facing mounting debts, the government substitutes copper for a more valuable metal in the minting process while maintaining the coin’s denominational value. According to Gresham’s law, once citizens recognize the inconsistencies in the precious metal content, they’ll opt to spend their artificially “overvalued” newer coins while hoarding their artificially “undervalued” older coins.

Whereas “overvalued” money was created in the past by physical debasement, “overvalued” money today is the result of reckless monetary and fiscal policy. Over the course of the pandemic, the money supply, M2 according to the Federal Reserve, increased 29.7 percent, from $15.405 trillion in February 2020 to $19.979 trillion in March 2021. Since the advent of the Federal Reserve, the purchasing power of the dollar has dropped by over 96 percent (i.e., $1 today is the equivalent of $26.14 in 1913). Unbridled quantitative easing has further amplified inflation worries and global doubts about the stability of the dollar.

Legal tender laws in the United States require the public to accept payment for debts and taxes at the dollar denomination shown on the bill. This form of coercive price control has established the dollar as the economy’s unit of account. Similarly, burdensome tax regulations bolster the “overvalued” dollar by constructing barriers of use for its rivals.

The Case of Cryptocurrency

We can see the effects of these regulations at work today in how cryptocurrency is used.

According to the IRS, bitcoin and other cryptocurrencies are considered property for taxation purposes. Thus, the act of buying goods and services with BTC is identified as a realization event that requires the purchaser to declare any gains recognized from their BTC cost basis. Disregarding scalability concerns, onerous requirements that force users to track gains and losses for all transactions ultimately prevents BTC from serving as an effective medium of exchange.

On the other hand, if there is real market demand for various cryptos, government regulations designed to discourage the use of anything other than the “official” money will cause the demanded “unofficial” monies to become “undervalued” currency.

Thus, in accordance with Gresham’s law, the in-demand cryptos would be hoarded, rather than circulated at large. In the bitcoin community, for example, this mentality is personified by the Hodl meme encouraging bitcoin users to simply hold, rather than spend, bitcoin. A feedback loop has been generated where greater levels of fiat inflation have led to wealth flooding into BTC, further strengthening the perception that BTC is a reliable store of value. This mentality has been embraced of late by numerous corporations, who have transferred portions of their cash reserves into BTC (e.g., Tesla, MicroStrategy, Square, and MassMutual).

Thanks to so many government restrictions on the use of potential monies that aren’t the dollar, we can only guess as to what the relationship between dollars and bitcoin would be in a functioning marketplace. To find out, it would be best to level the playing field by eliminating legal tender laws and onerous taxation requirements. This would allow individuals to actively assess true differences in purchasing power.

This is unlikely, however, because elected officials depend so much on inflating the supply of dollars for political gain. Whether Democrat or Republican, politicians within our current system overwhelmingly perpetuate the welfare-warfare state—and this would be much more difficult with market-based money not subject to easy inflation by central banks.

Perversely incentivized, these politicians promote expansionary monetary policies that benefit special interest groups while pandering to their electoral base. As noted by Hayek, “[W]ith the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people.” Depriving the state of this exclusive power would force accountability first and foremost. If the threat of violence and imprisonment were stripped away, the public could freely evaluate the quality of different currencies and act accordingly.

Financing Infrastructure Spending with Corporate Tax Increases Would Stunt Economic Growth

Written by: Alex Durante, Huaqun Li, and Garrett Wilson

Original Article link here:

The Biden administration’s American Jobs Plan (AJP) proposal to fund infrastructure spending relies on a bet that the benefits outweigh the costs of a higher corporate tax burden. Using the Tax Foundation model, we find that this trade-off is a bad one for the U.S. economy, resulting in reduced GDP, less capital investment, fewer jobs, and lower wages.

To show the combined effect of infrastructure spending and different financing options, consider a stylized example of $1 trillion in additional infrastructure spending evenly spread over five years. New infrastructure will accrue returns over time, raising economic output. We assume a 5 percent return for public investments, consistent with assumptions by the Congressional Budget Office. The infrastructure spending could be financed entirely through the issuance of new federal debt, or alternatively by increasing the corporate tax rate, or by imposing new private user fees or excise taxes (such as the federal gas tax).

We find that financing $1 trillion in new infrastructure through additional borrowing would raise long-run GDP by about 0.2 percent. New borrowing raises long-term interest costs for the federal government, both because of the immediate infrastructure spending and long-term maintenance costs, but it does not result in substantially higher interest rates or crowd-out of private investment. However, much of the borrowing would be financed internationally, so the returns to that financing would accrue to foreign investors, reducing American incomes (GNP) in the long run by 0.1 percent.

Economic and Revenue Impact of $1 Trillion in Additional Infrastructure Spending and Three Financing Options

Financing OptionsBorrowing (issuance of federal debt)Increase the Corporate Tax RateImpose User Fees or Excise Taxes
Long-Run Gross Domestic Product (GDP)+0.2%-0.3%+0.1%
Long-Run Gross National Product (GNP)-0.1%-0.2%+0.1%
Capital Stock+0.2%-0.7%+0.1%
Wage Rate+0.2%-0.2%+0.2%
Full-time Equivalent Jobs+36,000-48,000-50,000
Long-Run Annual Conventional Deficit, 2031 Dollars-$67$0$0
Long-Run Annual Dynamic Deficit, 2031 Dollars-$52-$39+$6
Source: Tax Foundation General Equilibrium Model, May 2021.

On the other hand, financing the new infrastructure with an increase in the corporate tax rate reduces long-run GDP by 0.3 percent, because it raises the cost of corporate investment. It also reduces GNP by 0.2 percent, lowers the capital stock by 0.7 percent, reduces employment by 48,000 full-time equivalent jobs, and reduces wages by 0.2 percent. While this option would be deficit neutral in the long run on a conventional basis (which holds GDP constant), on a dynamic basis annual revenue would drop by $39 billion in the long run due to a smaller economy.

A third financing option is to rely on private user fees, such as tolls, or excise taxes, such as a higher gas tax. We find that this financing option would raise long-run GDP and GNP by 0.1 percent, but would reduce employment by 50,000 full-time equivalent jobs. Financing infrastructure through user fees or the gas tax would create a better connection between the usage of the new infrastructure and tax collections. Taxes imposed on consumption (in this case, consuming infrastructure services) tend to be less damaging to GDP.

Our modeling illustrates that the financing method for infrastructure matters, and that corporate tax increases would be one of the most counterproductive ways to finance the infrastructure spending, ultimately shrinking the U.S. economy, incomes, and available jobs. It is also worth noting that public investment tends to deliver only half of the economic returns as private sector investments (5 percent for public investments, versus about 10 percent for the private sector), which is an additional opportunity cost worth considering.

Modeling notes: We assume the infrastructure requires an increase in depreciation-related outlays to maintain the assets over time. Roads and bridges are assumed to have more than a 50-year life, and require about 2 percent of their initial cost in annual maintenance. We target the amount of financing that would be required to cover the long-run costs of maintenance and interest payments.

Silver Price: Eyes on $28 as Demand Exceeds Supply

Silver price is higher as its industrial and safe-haven demand rises. Investors are now keen on FOMC meeting minutes on Wednesday.

silver price

Inflation concerns

On Friday, silver price was higher as a reaction to the stagnation of April’s retail sales. Analysts expected a reading of 1.0% compared to March’s 10.7%.  Besides, Fed officials like Governor Christopher Waller and Vice Chair Richard Clarida have downplayed inflation fears. In the ensuing sessions, investors will be keen on the FOMC meeting minutes scheduled for Wednesday. Fed maintained a dovish tone in its recent interest rate decision.    

Industrial demand

Unlike its lustrous cousin – gold, silver is more than a hedge against inflation. Due to its durability and electrical conductivity, it has various technological, electrical, and industrial applications. The reopening of economies and shift towards the green economy has heightened silver’s industrial demand. According to the Silver Institute, the metal’s industrial demand in the current year is significantly beyond its supply. On the supply side, it is risen by 8% in 2021 compared to the prior year’s -4%. In comparison, its demand has soared by 15%, which is significantly higher than 2020’s -10%. A continuation of this trend is likely to push silver price higher.

Silver Price Technical Outlook

Silver price has continued with its uptrend on Friday’s session. On a larger scale, the uptrend has continued since late March. On 30th March, the precious metal had its price drop to the lowest level since mid-December 2020. Subsequently, it been on a rebound journey characterised by several pullbacks and sideway trading moments. Over the past one-and-a-half months, it has risen by about 16.61%. At the time of writing, it was up by 0.74% at 27.60.  

On a daily chart, silver price is trading above the two and four-week exponential moving averages. Besides, it is within an ascending channel, which substantiates the bullish outlook. I expect the precious metal to rise further as bulls target 28 in the short-term and 30 towards the end of the second quarter.

In today’s session, the price is likely to rise to past the psychological 28 to 28.38. At that point, it will find resistance along the channel’s upper border. It may then pull back and trade sideways along 28 before moving higher. Notably, that has been an important resistance level since August 2020.  

Article originally featured here

Inflation: More Evidence

Recall the definition of inflation: “Any Increase in the economy’s supply of money not consisting of an increase in the stock of the money metal.” ~Murray N. Rothbard, Phd from “What Has Government Done to Our Money?”

After understanding the definition of inflation, review the chart listed here in this article. It shows the growth of the monetary base since January 2008. Clearly, the trend for monetary base expansion demonstrates an upward trend since 2008. This can be explained by all the bailouts, repo agreements, stimulus packages, and etc that have been done during this time period by the Federal Reserve and US Government.

People conflate the notion of increase in prices as inflation. The increase in prices occur after the monetary base has been expanded beyond the amount of money metal. Note: Prices can rise due to other factors, such as increased scarcity for a resource. That is not the focus of the article.

As more monetary base units are printed, beyond the money metal in storage, each unit in circulation becomes less “valuable”. At this point, it requires more monetary base units to purchase goods and services. This is why prices rise from the increase in the monetary base.

This is why Gold, Silver, and Bitcoin is so appealing to investors. These assets allow for investors to hedge against inflation, and store value for future consumption across time. Their current amounts can not be increased by a governing body.

Source: St Louis Federal Reserve

USD Purchasing Power and Current Issues with Inflation: Why buy Gold, Silver and Bitcoin

Featured below is a graph showing the “Purchasing Power of the Consumer Dollar”. This graph shows the output of the purchasing power of the dollar since November of 2006. Notice the downward trend of the purchasing power of the dollar.

This should be a concern for savers of dollars, and it should be a wake up call to action to make moves to insure their assets are beating the trend of inflation.

Recall: Inflation is the expansion of the monetary base(money supply) that is greater than the actual amount of metal stored. In this case, the metal considered would be gold or silver.

Consider all the stimulus packages, bailouts, monetary injections, repurchase agreements, and other monetary/fiscal policy measures that have been done since 2006. While that is under consideration, think about the growing United States Government debt. If any economist is telling you inflation is low, they are not being honest. Per the definition of inflation, it is here.

This is why the smart money is on Gold, Silver, and Bitcoin. This is why serious investors, who are concerned with inflation, need to look at these assets to hedge against inflation.

(source: FRED.St Louis Federal Reserve. Time expressed in number of months)