This is not the 21st century I was promised, where technology liberates human creativity, communications, and money itself. That was always the Silicon Valley dream in the early 1990s. Now we have governments from Melbourne to Beijing, Washington to Tokyo, using the tools of technology to modify human behaviour in a thousand small ways. Or punish it in simple ways: with death or jail.
But the purpose of today’s Rum Rebellion is not to go on a rant about how the centralisation of power and money are related, and how technology amplifies both trends at the expense of personal freedom. That’s one of the themes of my speech at the upcoming Sprott Natural Resource Symposium. The purpose of today’s Rum Rebellion is to give you a preview of three main points I’ll make later this week.
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First, you’re living through a monetary regime change. Think of it as a kind of high-stakes contest for who controls what money you pull of your wallet or put into your bank account. Since 1971, the world has been on a fiat dollar standard. That means the US dollar is the world’s reserve currency — the one people prefer to save and transact in across borders — but that the dollar isn’t backed by gold or silver.
What is it backed by? The full faith and credit of the US government. That’s a government that ran an $864 billion deficit…in the month of June alone! Uncle Sam’s deficit is $3 trillion in the last 12 months. And it’s on its way to being 20% of US GDP.
That’s impressive, even for an empire in serious fiscal decline. And yes, the spike in the deficit is directly related to the government’s shutdown of the economy and the big boost in emergency payments to businesses (mostly connected corporate insiders) and individuals (nearly 50 million Americans who’ve lost their job, some of whom may never get it back).
Take the pandemic out of play. History shows that a sudden (not quite exponential) rise in the public debt-to-GDP ratio almost always leads to a money crisis in a fiat money regime. This is the point Peter Bernholz makes in his book: Monetary Regimes and Inflation. Once the public throws its support behind politicians who believe that deficits don’t matter, the monetary regimes papers are stamped. It’s only a matter of time — and how badly inflation destroys the financial wealth of the dwindling middle class.
Coins are disappearing from circulation
To get sound money again, you need lower deficits, lower taxes and freer trade. In the meantime, I expect the opposite of Gresham’s Law to take place. Gresham’s Law is that bad money drives out good, when the state gets to determine what money you must use (legal tender laws). Gresham’s law is at play when people are forced to accept money as two equal things (coins with different metal value) that are not equal at all.
The opposite side of that coin is Thier’s Law. Named after a 19th century French politician and financial official, Thier’s Law is that when given a choice, people prefer to use and own money that retains its value. Good money drives out bad! This happens when the legal tender becomes so obviously worthless that people can be no longer forced to conduct transactions in it.
There’s a lot more to the story. I’ll have to save the rest of it for conference attendees. But as evidence that Thier’s Law may already be at work, I point you to the shortage of physical coins in the US. Officially, coins are disappearing from circulation because people aren’t circulating them at grocery stores, petrol stations, or retail outlets. The pandemic-induced chokehold on the economy has led to a decline in the velocity of money!
Or people are hoarding the coins. Not because they have any value beyond the face value. There is little to no silver content in most of today’s coins. Brass, nickel, copper, zinc, or some other combination is what most coins are made of. But if most people don’t have meaningful savings in the bank, much less a hoard of emergency cash, coins become the nearest thing to ‘financial prepping’.
US banks willing to pay interest for coins
The coin shortage has become so pronounced in some parts of the US that banks are willing to do something they’re not even doing for savers: pay you interest for your jars of coins! Community State Bank in Wisconsin has offered citizens a premium over the nominal value if you bring in your jars of spare change. They’ll pay you an extra five dollars for every one hundred dollars’ worth of coins you bring in.
But local banks may find themselves in competition with central banks offering retail accounts, according to Yahoo! Finance. It says Japan is ‘seriously considering to issue a central bank digital currency’. The central bank digital currency might include the possibility of citizens having an account directly with the central bank. Academic advocates say this would give monetary policy makers an even more powerful tool over influencing individual behaviour with interest rates.
For example, the central bank could effectively impose negative real interest rates on cash balances held at commercial banks but offer a small positive interest rate if you switched your account to the central bank. They could use the concept of ‘timed money’ to increase consumption by making your savings lose a certain amount of value each day. Or have government payments — only available to the central bank digital account holders — expire if they go unspent.
All of these ideas have been suggested in academic research about how to have greater control of money through technology. My point is that control of the money through technology is really a means to control and modify your behaviour. Based on what? Based on what other people think you should be doing.
Masks are about social control
If you think that kind of thinking isn’t possible in Australia, It’s already here. Victoria’s Premier Dan Andrews issued another diktat mandating the wearing of masks in public in Melbourne. He said, ‘It’s a relatively simple thing but it’s also about embedding behaviour, which I think is just as important on the other side of this second wave as it is in bringing these case numbers down.’
He got it mostly right. It’s not about ‘embedding’ behaviour. It’s about creating a visual symbol of compliance with the state and creating a culture where non-compliance is socially ostracised and financially punished. Masks are about social control.
Don’t get me wrong. I wear a mask here in Colorado if a business requires it. It’s their business, not mine. And I wear it around workers who may have no choice but to risk exposure to infected strangers in order to put food on the table or pay rent. It doesn’t cost me anything and it might make them feel safer.
But don’t have any doubt that people in politics and public policy see the wearing of masks as a way to force compliance. It’s not a nudge in the right direction. It’s a shove to the back or a knock upside the head with a billy club. The pandemic has become the perfect cover for more shoving into behaviour others think is best for you.
Chairman Dan tipped his hand. He said, ‘We’re going to be wearing masks in Victoria and potentially in other parts of the country for a very long time. There is no vaccine to this wildly infectious virus and it’s a simple thing about changing habits, it’s about a becoming a simple part of your routine.’ A very long time could be…a very long time.
If Andrews gets his way, it would probably be forever. A permanent state of emergency because of a pandemic (this one, the next one, the one after that) permits the suspension of normal due process, of laws made by legislatures instead of executives, and of the gradual supplanting of constitutionally embedded personal liberties that are not compatible with emergency measures of state control.
Keep them scared. Keep them indoors. Keep them apart and isolated. And train their personal habits to do what their told. See how much they can take. And then push a little further. That’s what this pandemic has become.
Markets, in the meantime, are fake. The Fed and liquidity explain the highs in the US. As prices signals for the coming economic collapse and war with China (in which Australia itself may be physically threatened), markets are useless. More on China coveting Australia’s natural printing press — its gold mines — next week.
Editor, The Bonner-Denning Letter
PS: If you’ve signed up for the Sprott Natural Resource Symposium 2020, make sure to check out Shae Russell’s booth. Shae’s an expert on gold and mining stocks and correctly rates getting her own virtual booth. I’m going to stop by for a Q&A during the show, assuming I can get my Wi-Fi sorted out here in the back country of Colorado. Stop by and say hello yourself if you get the chance.