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Finding A Middle Ground Between Keynes And Von Mises

|Includes: SPDR Dow Jones Industrial Average ETF (DIA), GBTC, PHYS, PPLT, PSLV, SGOL, SIVR, SPY, URTH
Summary

Today we have a world economy more or less controlled by bankers.

Loan growth has meant lower for longer is needed for growth and to protect the underlying collateral.

Placing individuals with purely market based (trading) or academic background is warranted in government planning.

What is good for the gander is not always good for the goose as rising tides are lifting only some of the boats.

In this blog post, I will dust off the tired Austrian vs. Keynesian monetary argument as I think neither works except in a vacuum. 

While I completely understand why Keynesianism is what most people fervently believe -- ie that falling prices are the enemy of all people, in this article I will argue that the free market should be in control 95% of the time and should only be "massaged" when prices for things like stocks are down by a large enough amount.

When monetary "boldness" and the efficient market hypothesis are combined, no stimulant goes unpunished -- you see the price is the price and our wizards in central banking can easily control the denominator eternally with the stroke of a keyboard. I disagree and feel that bubbles or prices that are too high distort things to the point that the impending clearing mechanism to pop bubbles creates the problem. In other words, those in power (the rich, the well connected, the central bankers, etc) think it is the dive in prices that is the issue while I think it is the higher diving board causing the risk to the common citizen and the public at large. If you write enough call options, someone in power can eventually find a way to make them expire in the money. 

The classic hard money vs. Keynes argument supposes that poor people don't have any money and therefore do not care about inflation as much as they do about their own job prospect. I find that Phillips Curve argument to be outdated in a world where almost all gains go to the top .1% of the pie. In other words, this is not your FDR Keynesianism at work, this is a system of juicing markets for capital gain.

It is my view that neither pure fiat Keynesianism nor pure gold backed Austrian economics work in practice. Only in a vacuum do these controversial ideas work, and there needs to be a continuum for either system to be viable. The "soft money" view is the pervasive view and in my opinion has not created "the greatest economy ever" but instead has led to stagnation, huge debt burdens, and a system where capital has been allocated poorly due to the lack of a free market. As Henry Ford put it "people want sound money." Trump came in during a time where most people felt that the central bank stimulus espoused by Democrats had benefited the rich at the expense of the people. Trump was going to fix the problem. By stepping on the gas, the system has lurched back into growth, but for how long is the real question we should ask ourselves as investors.

In my more fiscally conservative view, the push for more debt and more QE has created an even higher diving board, if you will. What a Draghi or Kuroda couldn't figure out is that printing money is a form of tyranny. It is a heavy handed top down autocratic tool. It has "saved the banks" at the expense of savers, pensioners, and free markets. Falling prices and riots may be the only cure at this point, lol...

I wish the Keynesian's well but would point them towards the Bancor he proposed which tied currencies to a basket of raw materials not thin air mathematics alone. I do not think there should be Gold only. I think you have rules -- if the stock market drops 50% or more, printing can be allowed or a lower peg. Under the current system the bulls and bankers have control of the press and have basically implemented Hitler's "long sale uptick rule" worldwide. The system is broken.

We will likely go into a depression eventually because rigging everything doesn't work. Only markets can allocate resources properly. Now, I do like some of what Elizabeth Warren talks about with regards to taxes on people with over $50MM in assets, but I think it should go directly to the poorest 5% of the country directly and not through our corrupt government first who will allocate it to themselves in one way or another at the expense of the governed. 

I know the risk free rate is closer to the rate at which gold and land prices rise and not the yield on negative debt, say, if I were in Europe. Quantitative all time high meddling has made a discount ed cash flow calculation very difficult... A project finance npv <1 is quite hard to find if treasury debt goes negative for example, but with 23 trillion of debt treasuries are certainly not risk free. Maybe gold's rate of return (historically around 7% per year) should be used instead, or bitcoin's rate of return over the past five years should be used as the discount rate if you hate gold. Negative debt is not only not risk free, it's a guaranteed loser and therefore is risky.

As far as investing is concerned, I think a correction is overdue. However, I am sticking with my allocation for most investors of 2% in leap or 1256 put options as a hedge with 30% in US equity (SPY), (DIA) 20% in foreign large cap equity (URTH), 10% in gold (PHYS), (SGOL) silver (PSLV), (SIVR) and platinum (PPLT), 10% in timberland, 10% in cash flow positive real estate, and 20% in short term T Bills. 

The rise of bitcoin (OTC:GBTC) is quite concerning for the central planning community. With alternatives besides stocks, the banking and finance sectors face an end to the stimulus gravy train. If more money printing cannot create a higher diving board, capital flight happens and the jig is up. Best wishes and stay safe out there!

Disclosure: I am/we are long everything including puts but not SPY DIA etf's.