Subscribe now

There is too much dollar liquidity in the world, owing to uniformly easy US monetary policy since the Greenspan era of the Fed. If the BRICS countries succeed in moving more of their trade away from the dollar, then, to the extent that they succeed, ex-US dollar demand will fall. This will do two things; it will reduce the seigniorage the US is able to charge the rest of the world for the privilege of transacting in dollars (i.e. the US prints dollars and buys oil, other countries have to sell products to get dollars to buy oil), and it will reduce dollar demand which, ceteris paribus, weakens it. A weak dollar makes a weaker case for use as a reserve currency.

Basel III conferred tier 1 status to gold, which puts it on par with US treasurys when it comes to collateralizing a bank’s balance sheet. What that means is that gold is already in the running as a parallel global reserve asset. This is possibly why Russia, China, India, et al., have been stockpiling it for years and why, despite essentially no demand for gold in The West, gold continues to strengthen in dollar terms as it flows East and South.

That brings us to tariffs. They essentially do two things which provide support for the dollar. Tariffs reduce global dollar supply. Global dollar demand is relatively inelastic in the short run and so a reduction in supply will strengthen it. Tariffs are a tax and, as the saying goes, if you want less of something, tax it. Moving from a world with low and stable tariffs to one with high and rising tariffs slows global trade and therefore turns down the spigot of dollars flowing from the US to the rest of the world. Triffin’s dilemma demands the reserve currency issuer to export their currency, and therefore to run a trade deficit, so anything which closes that deficit fights against this dynamic. The second thing tariffs provide is a replacement for any loss of seigniorage income with an explicit tax. The US set into motion heavy international machinery to replace the dollar as the basis for international trade when it confiscated three hundred billion USD of Russian assets at the outset of the Ukraine War. Moving to a new monetary order is essentially inevitable at this point, it’s just a matter of when. Tariffs provide an income stream for the US which goes some way to replacing some of the loss of seigniorage.

If the US does not take a leadership position in the transition to the next global monetary order then it will have the new monetary order imposed on it. The only route for the US to retain its global monetary hegemony is to define the path to that new world order. If the US can do this correctly, it probably buys another couple hundred years as the global monetary superpower even as the BRICS nations inevitably develop a parallel trading regime that doesn’t rely on the US. Failure to achieve this could mean the US is subordinate to the BRICS nations as a monetary union even if it remains stronger than any one of the members individually.

In his interview with Tucker this past weekend, Bessent proclaimed himself to be a gold bug in his former life as a capital allocator. Combine this with Trump’s well known love of gold and global central banks stockpiling it, the new monetary world order could resemble a return to a gold standard. The current global monetary standard is based on credit. Credit is based on trust. Even the origin of the word credit, credere, means trust. In a low trust world, there is essentially nothing other than gold that can provide a basis for money. Why would you lend to (i.e. buy the sovereign debt of) a country which debases its currency and might confiscate your savings on a whim? Better to hold something which everyone recognizes as valuable due to its inherent physical scarcity that does not depend on any other nation for its value, not only something that holds its value in any given moment but which also holds its value through time.

I grant that I may be conferring too much 4D chess thinking to the current batch of US policymakers but I believe they are simply stewards of the inevitable. All currencies die. Ever heard of the solidus, denarius, or drachma? And, if you read carefully, the epic tome of money and credit, “A History of Interest Rates,” by Sidney Homer, one sad fact constantly emerges: all sovereigns eventually default, usually because of war, and this destroys their currency. Rather than explicitly default, policymakers seem content with sacrificing the market and the near term health of the economy for the long term continued global dominance of the currency. Tariffs are the opening salvo.

Subscribe now

I chose a solid human in the form of Matt Michie to join me on this venture. He and I are cut from the same cloth in many ways both as people but also as technologists. He also brought significant experience in building companies that I completely lacked which helped us get bootstrapped in a way that would be fair and relatively future proof. In particular, even though we were a tiny company with nothing but an idea and the ability to code, we set up a Delaware C-Corp with a four year vesting schedule for the shares. If we hadn't decided to wind down operations, this would have mattered a lot versus immediate 100% vesting. For example, if either Matt or I had continued on with Steelcut and if we had instant vesting, then the member who left would have an equal stake with the member who stayed and continued to build the company. This would have been wildly unfair to the person who continued so Matt was wise in building that structure into our C-Corp. We used Stripe Atlas which is actually pretty neat, not only to help us build this structure but also for things like guiding us through the process to file 83b forms with the IRS. If you build a startup, get with your accountant to help you file that form. Not doing so can cause a huge tax burden on illiquid shares down the line. Altas was also helpful in dissolving the company. They basically have a "Dissolve" button that takes you step by step through the process of filing the forms with the state of incorporation and paying whatever taxes and fees you owe. We will still need to file 2024 taxes for the company early next year but we already have the forms filled out from the data in Quickbooks. Everything is pretty straightforward on that front since we didn't have any revenue. In the end, I found that structure to be perfectly fine. It cost about $500 to get started with Atlas and about $900 to dissolve the company using the provider they recommended. Matt and I both lent the company $2,500 and even after the startup and shutdown expenses, we'll get a bit of that back. We owe this in large part to Matt's legendary AWS skills. Our AWS spend was on the order of $2/day in the beginning and only about $4/day at the end. Other expenses included buying the domains (Gandi.net), Quickbooks Online, hiring a bookkeeper to get us bootstrapped in Quickbooks, Github Organization and Copilot, Claude.ai, Google Workspace, and a registered agent to receive mail and give us an official address. Our burn rate was under $100/month.

When you start a business, people come out of the woodwork to help you. My dear friend David Cantu was a constant inspiration and source of guidance. Through him, I met Chad Cohen who is a veteran CFO who gave me great advice and connected us with some of his business contacts. (Check out his startup, Scala Advisors if you're in the market for a fractional CFO or other financial guidance for your startup.) I met with some of his contacts who offered a ton of useful guidance and insights. It's humbling how much help we got.

Working closely and intensely with another person was also humbling but also beautiful and educational. Matt and I live far from each other. In traffic it takes either of us an hour and a half to drive to the other's home to cowork which we tried to do weekly. We both believe that regular in person communication is better than text chat so we endeavored to have any deeper discussions in person. Happily, we were in complete agreement most of the time. In the early days, we even tried to rent coworking space but couldn't find anything suitable in a location convenient for us both. That said, we're both Gen-Xers but are early digital natives so online communication worked for most of what we needed to talk about. Most of our communication was in the form of Github pull requests and the ensuing code review.

Speaking of Github, I'm so impressed by how far it has come since the last time I used it seriously. I could not believe how good their Workflows are for running CI/CD tasks. Of course, you can use it for simple stuff like running your unit tests. You can also spin up containers to run your whole app to do end to end testing. It's incredible to be able to run such complex workflows that take significant amounts of CPU and RAM. I expect this sort of thing at a company above a certain size but it felt like we had big company development infrastructure for $88/year. Really impressive stuff.

More impressive than the automation tools from Github is Copilot. This is their AI coding assistant and it is actually scarily useful. They even support Vim as a first class supported editor which I wasn't expecting. I'm an inveterate Vim user so being able to continue with my comfortable working environment and getting LLM coding assistance was pretty incredible. At first, I felt like Copilot gave me 150% productivity but in the end, I think both Matt and I were able to produce the output of two small teams of four or five fulltime developers, particularly in problem spaces we are not yet experts. For example, I'm competent with SQL but Copilot + Claude gave me the boost to pretend to be an almost expert in the space. We managed our database migrations by writing idempotent SQL scripts. There's no way I would have been able to do that without LLM assistance or taking an interrupt to go read a hefty book on Postgres. The same goes for front end development. I am mostly a backend/low level developer by training and experience but LLMs put us right there with the best front end developers. Blip’s front end was a little rough around the edges but it would have been a lot rougher without LLMs giving us code that mostly adhered to best practices and, just as importantly, would run with only minimal modification. We live in a golden age of software development. Rather than worry about whether LLMs will take our jobs, I am excited for what amazing things little companies like ours will produce in the future. You no longer need to be a well funded startup or a big company to produce significant amounts of high quality software quickly.

I really like the Go programming language. My main expertise is with C++. C++ is like a beautiful kitchen knife. You can do anything with it but you risk getting cut if you get careless. Go is like a food processor. They pared down the language to the essentials. It has a minimalistic grammar and a very opinionated way of handling error conditions and formatting. But like a food processor, it is wicked efficient in its problem space and it saves you from the heartache of getting hurt by supporting you in ways C++ can't. Because they've stripped it down to the smallest it can be, it compiles incredibly quickly. Even at 7300 lines, Blip compiled in seconds with wgo which helped us iterate really quickly. Go also compiles the entire runtime and all of your code into a single statically linked binary which makes deployment extremely simple. Compare that to deploying something written in Python or NodeJS and you'll see the advantage.

I will also use HTMX again. In the first four months of development, we actually tried to build Blip in React/NodeJS/Typescript. What a nightmare that was. Our code ballooned to something past 10,000 lines and it still felt like we were only at the `hello world` stage of development. Matt mentioned that he had heard of HTMX but hadn't used it so I wrote an exploratory spike using HTMX and got us almost to feature parity in two weeks. What a breath of fresh air it is to write simple, declarative code and have it work the first time. After experiencing what the HTMX folks describe as 'hypermedia systems', I'm baffled that people still write web apps in React. You can write anything in HTMX + AlpineJS that you can write in React in less time, with fewer bugs, with a simpler runtime, in any language of your choosing, and, in the case of Go, with vastly fewer dependencies.

If you’ve worked with NodeJS, the above will be funny to you.

Onward!

I'm taking all of the lessons learned from writing Blip and am parlaying them into a new venture. It's probably more rare that a first startup takes off than it is for a founder to have to make a few runs up the mountain before building a product that people love and use. This time around, I expect things to go faster. Matt and I blazed a lot of trail and learned a ton. We are both fluent in several new tools. We went from zero to one with Blip. Going from one to N with the next thing will have a lower activation energy and a higher chance of success. I know Matt will be successful as he focuses his energy on his next adventure. I believe I will be also.

In my piece, War and Lies (bit of a grim title, that) I mentioned that I was putting Liberty Papers into hibernation to go work on building a startup. I’m proud to say the focus paid off and we’ve launched our first product, Blip - fast incident management, today.

Blip aims to make managing outages and incidents fast by bringing people who can help together quickly. If you manage a datacenter, first responders, or other group of people who respond to emergencies, we’d love to help you with your communication strategy.

Liberty Papers

I still crave to write and have ideas all the time that it pains me not to write about here. So much has been happening! While my sapling of a company still grows slowly, slowly, I will continue to be rather infrequent in posting here. I continue to be humbled by all the new subscribers and followers that trickle in. Thank you for sticking with me ♡

CBDCs are coming unless we prevent it. Their introduction has nothing to do with money and everything to do with controlling the populace. For every inch CBDCs encroach, that is an inch of liberty indelibly lost.

If you aren't familiar with Professor Werner's work, he is an outspoken opponent of central banks, despite being the father of quantitative easing and spending the majority of his life in their orbit. This whole video is incredibly useful but if you don't make it to the end, he repeats what I postulated in one of my very first pieces that CBDCs will likely be introduced via the bribe of Universal Basic Income. If this happens, it won't be a release from the struggle of providing for your family. It will be the yoke of bondage. And even if it seems like a healthy sum in the beginning of the rollout, it will eventually become a paltry sum as inflation erodes the real value of whatever nominal amount they begin with. Nothing could be more effective at impoverishing the populace than putting everyone on a subsistence wage that they can, and will, inflate away.

I want to keep this short because I want to release you in the hope that you'll watch the video. It is not only a cogent argument against CBDCs, it's also an excellent overview of how banking works and why we have inflation in debt based assets like housing.

"If you do not take an interest in the affairs of your government, then you are doomed to live under the rule of fools." -Plato

Politics is only just when it is based on compromise arrived at through conversation. In a good compromise, everyone gets some of what they want and everyone is a little bit unhappy.

Contemporary politics has devolved into microtyrannies where the party in power routinely imposes their will on the other party or the populace through coercion. Coercion is the opposite of compromise and, regardless of the outcome, can never be considered to be just. This modus operandi is emblematic of both of the main parties in the US and probably of all current parties in power globally.

It was not always thus. The word, 'parliament', literally means getting together to talk. The word arose in popularity around the time of the signing of the Magna Carta. Parliaments would be held between the king (the government) and the dukes (the governed). They would discuss, for example, the raising of taxes, usually for war. The dukes would be taxed only if they agreed to be taxed. In other words, they had to be convinced of the justness of the war or other goal and to the quantity of funding needed before agreeing to pool their resources for the cause.

Conversation and compromise are inconvenient. It takes time to have a discussion. You don't get everything you want if you come to the table open to hearing the other party. It is vastly more convenient to rule by fiat. Get rid of opposition by ignoring or circumventing it. This is how a just government can become a tyranny. This is the tendency and trend of politics in the US and globally.

And, it's understandable that politics has become so. Say what you will about politicians, they are often smart and thoughtful people. They exerted a great deal of effort to get into the position where they get to make decisions on behalf of others. They were probably idealistic about their dreams for a better and more just society and were motivated by those dreams to seek office. Once in power, they can theoretically justify to themselves imposing their will because they have spent a lot of time thinking deeply about the issues they raise. People who disagree simply haven't spent as much time thinking about the issues. It's more efficient just to do as they say.

The aesthetic of efficiency as a virtue is part of the problem. The United States is a very corporate country. Our culture and politics are very mercantile and capitalist in ways we may not even notice. Efficiency as a virtue is one of the ways this manifests. Efficiency is essential in business. Inefficient businesses die while efficient competitors thrive.

But efficiency is less useful in politics. Executive orders are efficient. Using a constitutional loophole about interstate commerce to reframe an initiative as a tax is an efficient hack. These maneuvers are clever. These maneuvers are efficient. But are these maneuvers just?

Is efficiency in government decisionmaking a good thing? If the alternatives are a) no decision on a given topic or b) a fiat decision, should we prefer b) because something is better than nothing?

That’s it for this short missive. My promise in these pages has always been to ask questions that hopefully make the reader think. That's why I don't propose solutions. As Picasso said, "Computers are useless. They can only give you answers." I aim to be useful. Now, back to my computer, until next time. I look forward to your comments.

“The most shocking fact about war is that its victims and its instruments are individual human beings, and that these individual beings are condemned by the monstrous conventions of politics to murder and be murdered in quarrels not their own.” -Aldous Huxley

“The opposite of war isn’t peace, it’s creation.” -Jonathan Larson

Liberty Papers 0.2

Liberty Papers 1.0

First, an update. I’ve joined a startup and have less time to focus on the world and comment on what I see there, here. I will continue to write. It’s far too cathartic and enjoyable to stop altogether. It will just become a lot more infrequent and sporadic. I am also postponing indefinitely my plan to turn on a paywall for this work. If I do ultimately monetize Liberty Papers it will be because I have redevoted myself to publishing at a rate that aims to justify financial sponsorship.

Liberty Papers is nearing the anniversary of its first post. It’s been an incredible period of growth for me and wildly educational. Thank you all for sticking with me as I developed my voice. Thank you for grappling with these ideas with me. Thank you in particular to the many people who have helped me in huge ways and small.

Now, a few observations before I put my pen into hibernation.

The US

It’s looking ever more likely that we’ll have the dubious pleasure of a second Trump term. I’ve thought since the beginning of the race that Vivek Ramaswamy was never running to be president; he was running to be picked as Trump’s runningmate. If that’s true and if he’s chosen, it could be a particularly entertaining four years with Trump distracting the media while Vivek runs through the halls of D.C. wielding a sledgehammer. The people who want to watch the world burn will have a field day. Bring popcorn.

If the democrats are playing 4d chess, they might welcome a loss to a second Trump term. Why not let him win and take the fall for the economic disaster fiscal recklessness has wrought? Trump would be all too happy to inherit a broken economy and a world at war. When democrats inevitably retake the Whitehouse in 2028, they can come in as saviors of the republic. If they win again in 2024, that could counterintuitively be bad for their brand if it means that an economic crisis happens on their watch. If that is their strategy, it’s going really well. They could also be in the process of snatching defeat from the jaws of victory as is their wont. Time will tell.

Either way, the people in the halls of power are behaving like the country no longer matters and are just getting theirs while the getting’s good. Another funding bill for Ukraine which they’ve already admitted mostly boomerangs to American businesses (read: grift) is such a cynical way to ride out the death of the dollar empire. Perhaps there is no other way it could go. New senators are embracing bitcoin. The pie must have become irresistible. I want to believe in America as an ideal but watching the country be looted while regular people are struggling is incredibly difficult.

The world

The choppy waters in the Middle East continue to get choppier. Every day seems to bring a new escalation. The Cold War never ended; it was just ignored because people were making money. Now that the global monetary order is unraveling, the Cold War has turned hot. Peace is the anomaly. War is the norm.

The “C” word

It’s becoming harder to resist the idea that Covid was a lab leak. And, if that’s the case, then China behaved disgracefully with their obvious coverup. It also means the American people (and all people) were lied to. Other revelations make it clear that people are systematically lied to by those they’ve entrusted with power. Trust in institutions is probably never coming back. Was it worth it?

The economy

The economy means less and less and the stock market means more and more. The panem et circenses of the modern era might be cryptos and the stock market. As long as the casino remains open and political outsiders have a lottery ticket in their hands and can thereby participate in the looting, perhaps the riots in the streets will wait.

Clearly, the economic data coming out of the BEA, BLS, and NBER are lies designed to keep markets calm and to retain the status quo, at least through the election. Redefining the word recession and reformulating inflation so that there is no recession and there is no inflation is just such obvious manipulation of the data designed to fuel the narrative. Economists and market participants continue to credulously believe them. Perhaps it continues to profit them to do so.

Money

Inflation has softened but these things are cyclical. Another wave is likely incoming but by then the meaningless metrics which track it may have been so thoroughly broken that the new wave won’t register very much. If there is a market crash and the Fed is forced to cut rates, the frenzy of markets and cryptos going up will distract people enough that they probably won’t care about the price of milk or eggs. Regardless, the currency is being debauched and, with it, civil society.

Unrest

All the factions of the earth seem to be at war: the aged against the young, men against women, rich against poor, neighbor against neighbor. There are no winners in war, only destruction. After the destruction is complete, we’ll have to rebuild. The world will have taken a big step backward. The world that we rebuild is unlikely to resemble the world as it is now. Will it be better? The answer to that question is not a foregone conclusion.

Hope

I believe in the power of the human spirit. People who are well fed want to share their table. People who have had success want to help others succeed. People who have been hurt want to prevent others from suffering similarly. When resources drain, people will survive. Sometimes that means they will behave badly as they currently are in pockets of society now. Things may get worse before they get better. But in the end, they will get better. Everything is cyclical. If we see a new trough, you can be sure we’ll see a new peak.

We are in an apparent superposition between economic perfection and economic breakdown. I still suspect a reckoning is incoming. We never truly paid the price for the credit crisis of the great financial crisis of 2008. We just papered over it, rewarding the bad actors. In attempting to abolish the business and credit cycles, the monetary policymakers have simply lengthened the period and greatly intensified the amplitude of these cycles. On the ocean, small waves with small periods are the norm and have a name; they’re called waves. Long period, high amplitude waves also have a name; they’re called tsunamis. If we get the economic tsunami that has seemed in the offing for the past few years, it will be nothing short of revolutionary. No amount of money printing will paper over this one. It may seem ridiculous to do so now but it’s probably not too early to prepare the boats.

In the early days, bitcoin promised adopters an offramp from the financial system; a kind of digital Galt’s Gulch where liberty minded individuals could go transact with each other the way von Mises intended. Want to buy drugs? Ok! No sales tax or capital gains. A world entirely free from The Man™️. Transact anonymously!

Narrative Two

Fast forward slightly and the narrative shifts. It’s not actually anonymous but it’s pseudonymous which is just as good! Number Go Up™️! HFSP™️! (Have Fun Staying Poor. Yes people were (perhaps still are) saying this. Can you imagine?)

Liberty isn’t freedom from The Man™️, it’s freedom from want! You will be able to buy whatever you want from those who fail to recognize this opportunity they’re missing!

The transformation was swift from libertarian crypto-utopia to a fervent belief in financial salvation. Philosophy became religion. Salvation from a crumbling global social order! The chosen people will be kings in the new utopia! Just buy this thing!

Narrative Three

Fast forward slightly further still and we entered a lull, the crypto winter. Adoption stalled. New recruits were needed to keep the Number Go Up™️ technology fueled. Enter Microstrategy, Grayscale, Tether, and all of the related shenanigans. This is not a ponzi scheme! Don’t buy the Tether FUD! Digital scarcity! Virtual gold!

In order to keep the game going, the bitcoin community needed to let go of the principled philosophical underpinnings of liberation and privacy and double down on the quasireligious belief in a future where every satoshi buys you a nice gentleman’s suit. WAGMI!™️ (We are going to make it!) Either you’re in (read: saved, chosen, choose your membership word.) or you’re out.

In the name of Satoshi Nakamoto,
                and the HODL spirit,
                                Ramen.

Narrative Latest

Fast forward to today and a thousand ETFs bloom. The unwashed masses and traditional Wall Street firms can own fractional shares or load up in size on this new asset class. You can put crypto-salvation directly into your 401k or your grandma’s IRA. Whatever you do, just buy more, but for a new reason: fees.

A Coin of Principles

A person whose principles are subject to change when they come under pressure has no principles at all. Bitcoin adherents hilariously promoted anonymity in its early days despite the entire blockchain being completely in the public domain. Blockchains are very forensically navigable data structures which is why this is hilarious. If I were a crime-fighting agency who wanted to make a honeypot to catch bad actors, I’d be proud to have invented and popularized something like blockchain.

In the very brief speedrun of reinventing banking, bitcoin has come full circle. Now that it has gone mainstream, it no longer exists as a concept. It has become just another security that will generate fees for Wall Street. Ashes to ashes. Dust to dust.

The promises of liberty or financial nirvana it might have provided are no more relevant than the faint echoes of a carnival barker after the caravan has left town. The admonishments that Nocoiners™️ should HFSP™️ have gone from a roar to a whimper. HFPT™️ (have fun paying taxes) is more like it.

The Price is the Product

Bitcoin did not bank the unbanked. Bitcoin did not revolutionize payments. Bitcoin did not become a savings vehicle for the masses. Bitcoin is and always has been a casino chip. You made lots of money? Great! That money was won from others who lost exactly that same amount, creating nothing of value. Oh, and how do you measure the value of your bitcoin takings? Yeah, US dollars.

The carrying cost of bitcoin is still negative as all of those servers solve math problems to keep it alive. The only way that works is if the price keeps going up. The only way the price keeps going up is to recruit new HODLers, ad infinitum. That is why the ETFs were born. This is Bitcoin’s Alamo. If the ETFs don’t generate new inflows from big money players, it's over.

Bitcoin doesn’t even need a real crisis to shake its religious adherents awake, it just needs a persistently lower price. How robust can such a thing be? What is the price, below which even HODLers lose their faith? Now that big money players can short and option the new cohort of mainstream instruments in size, how quickly could the price move in either direction?

Bitcoiners™️ care about one thing: getting rich. Bitcoin is a call option on human greed, nothing less, nothing more.

There is a beautiful, albeit circular logic to the whole thing. If the price goes up: see, we told you! If the price goes down: we’re so early, you have to get in now! Any theory can be applied, so no theory applies. Just buy it. Join us or die poor. This was never about any philosophical or technological ideal. It is now and always has been a cult of greed. Wall Street collects the alms.

Yes, and?

If it’s true that the point of bitcoin is that it has a price, maybe that is actually enough. Its proponents raise this as a sort of “yes, and?” by claiming that bitcoin is worth what someone else is willing to pay for it, which is absolutely true. It has a price, therefore it has a value, rather than the other way around.

If its value derives from its price, then bitcoin is a kind of fiat currency — crypto fiat, if you will. That’s not an indictment, by the way. Fiat currencies have had, and are having, a great run for more than a generation. In another piece, maybe I’ll put together an argument for why replacing one fiat with a another fiat is not an obvious step forward. For now, I’ll just say that the price as the product works until it doesn’t. When it finally doesn’t (if it doesn’t), then it will not do so, very quickly. The convexity of extremely convex options-like instruments cuts both ways. If it can rocket to the moon, it can rocket back to earth.

Caveat cryptor.

None of the contents of this essay, or any of my communications, should be considered investing advice.

Headline inflation levels have stabilized but there are signs of stress in recent economic data. One particularly worrying sign is increasing household credit card balances which could be an indication that people are funding their consumption on credit, just to make ends meet. If we have a resurgence in inflation or an economic crisis that leads to layoffs, it could be a very bumpy year.

The US has had it relatively easy during the Great Moderation and into the early aughts but the policies enacted after each of the crises in the past 30 years have set off dynamics which will ultimately lead to a decline in the quality of life for the median American.

This essay will get a little nerdy, as per usual. I promise to make it worth your while.

Subscribe now

Giffen Goods

Imagine you are a person who eats 6 pounds of rice and 3 pounds of chicken every week. You live paycheck to paycheck and carve out exactly enough money to afford to eat this way. Now, let's say the price of both of these things goes up by 20%. Rice goes from $5 to $6 and chicken goes from $10 to $12. Previously, you were paying $60 per week but now you are paying $72 per week, requiring you to borrow the extra $12. You decide this is an untenable situation and rework your meal plan by buying 8 pounds of rice and 1 pound of chicken which keeps you within your original $60 weekly food budget despite the higher prices. Your nutrition and financial situation have both disimproved but at least you aren't going into debt.

Notice what happened here — the price of rice went up and the amount you bought also went up. Naive application of the law of supply and demand would have predicted that the price of rice going up would have caused you to buy less of it. The phenomenon of buying more of a good despite the price going up is a form of substitution and the good itself is considered a Giffen good.

This is the kind of thing that is very difficult to surface in economic data. There was no change to our hypothetical person’s weekly expenditures so there would be no change in the aggregate data. They have to spend all of their time working and are very unlikely to have the time and energy to report this data or to complain to their elected representatives. They are too busy trying to get by. So, by the time we see aggregate credit card balances increase, this kind of dynamic is already happening beneath the numbers and the stress is overwhelming the most economically vulnerable people. That makes aggregate credit card balance data a lagging economic indicator of financial stress: by the time we see a move in the data, the stress has already been happening for some unknowable amount of time and the changing data doesn’t tell the whole story.

Everything is Energy

It is not only a physical reality (thank you, Einstein) but it is also an economic and social reality that everything is energy. Food is literal energy for our bodies and is just as much of an oil derivative as gasoline or jet fuel. Diesel is used to power the machines that cultivate the land and transport the produce. Petroleum goes into the NPK that prepares the field for planting, etc.

The fact that the United States can indirectly print oil because it owns the printing press for the reserve currency makes oil very cheap for Americans in a global context. More than likely, no one reading this essay is in the circumstance of our hypothetical person and hopefully never will be. Because energy is so cheap, most people probably never think about the price of oil or diesel fuel and how it impacts their lives. That is a convenience purchased by US dollar sovereignty. It’s also an imperfect and impermanent situation.

For a sobering look at the affordability of energy globally, have a look at this chart.

The US even gets a discount on the price of a barrel. WTI is USD72.72 at the time of writing versus USD78.43 for brent which moves the US from fourth to third in that chart. The median worker in the top four countries has to work fewer than three hours to afford a barrel of crude oil. The median worker in the median country on this list has to work almost two days.

Cataclysmic Catalyst

The event or sequence of events that brings this party to a stop is uncertain but war is a good first guess. If the US gets pulled directly into a hot war with any of the current belligerents, its treasury will drain just like the treasuries of Europe drained during the first two Great Wars. Trust in the rule of law backing the US dollar is already diminished by the Russian sanctions at the beginning of the Ukraine conflict. Direct involvement in war will likely damage the remaining trust irreparably. The ability to print oil will be taken away in that scenario and the US will have to pony up real goods in exchange for energy like the rest of the world. If any of this happens, America as a culture and as a concept will be completely rewired. Everyone will likely have to make adjustments.

How do we prevent this?

History is cyclical. I've become fully convinced that we as individuals can't stop this cycle any more than we could stop a tsunami by getting into the ocean. We can observe it. We can comment on it. But, ultimately, we have to let it wash over us and see where we are on the other side.

How do we steer through this wave?

The most important thing is probably to stay or become healthy and fit. We'll face physical challenges if our energy bounty diminishes and being physically resilient is just as important as being financially resilient. Personal liberty starts with personal health.

Prefer real things over financial things to preserve wealth. “Real” means different things to different people. Real estate is an obvious one but people also include art, wine, cars, gold, and bitcoin in their list of things which have real value. All of these things have their place but keep in mind that the newcomer in that list has not been truly tested by a real economic crisis and has historically been positively correlated to risk-on assets more than it has been anticorrelated.

One other thing that can help navigate through tough times is to turn your home into the kind of place you would want to “bug in.” Building a “bug out” bag is a fun hobby but if you get to the point where you have to bug out, things have gone fully Mad Max. Bugging in is a much higher probability outcome so being prepared to live comfortably for, at a minimum, multiple days without power, water, and access to grocery stores builds antifragility into your life. If you get to the point where you can bug in for a month, you’re probably covered for 99% of the possible outcomes. If you never need the things you stored up, great! Unclaimed insurance is still useful insurance.

Veblen vs. Giffen

As an aside, it is easy to confuse Giffen goods with Veblen goods. Both are goods whose demand goes up when their prices go up, but for different reasons. Veblen goods are things like sportscars and rare wines which people sometimes want precisely because they are expensive. Giffen goods are things people have to buy more of because other things which they would prefer have moved out of their reach.

None of the contents of this essay, or any of my communications, should be considered investing advice.

Buttons

Consider the humble button.

Subscribe now

You press a button and something happens. If you could look inside the electronic circuitry driving that button and see the flows of electricity and the software which handle it, you would find a surprisingly high level of complexity. In software, we would see a variable go from having a value of “0” to having a value of “1”. But software lives in a kind of manufactured digital unreality which is a convenience crafted by the blood, sweat, and invariably, tears of the unsung electrical engineers under the hood.

Follow me on a journey into this world of electronics. I promise to tell you how it pertains to central banking.

A button is ultimately an electronic switch. In one state, the flow of electricity cannot take place and in the other, it can. There is often a mechanical spring or other physical mechanism which prevents the switch from moving until the operator wants it to. A button could be a metal plate suspended above two contact points, for example. When the button is open, no current flows. When the button is pressed, current flows. But the physical reality is much more complex and beautiful than this simple description.

As the metal plate approaches the contacts, unreasonably complicated physics causes changes in the circuit before the metal plate even makes contact. Once it does make contact, it may physically disconnect and reconnect a number of times before settling in to the new position. After all of the chaos has transpired, the wires, contacts, and metal plate form one continuous circuit and are indistinguishable from a continuous wire. The software engineer sees X=0 change to X=1 but the electrical engineer sees something like this.

This can happen for a variety of reasons but ultimately it is a fairly solvable problem. The solution is called debouncing and can be conducted in a variety of ways. One solution which can be implemented in software or hardware is to put a low pass filter between the physical signal and the software signal. The basic operation of a low pass filter is to avoid trusting new values for the signal until enough new values corroborate that value. When the circuit sees its first transition from “0” to “1”, it doesn’t immediately react. It essentially waits until it has seen enough additional “1” values before committing the software variable to move to “1”. Eventually, the circuit trusts that it has seen enough oneness to believe the button has actually been pressed and then provides X=1 to the underlying software. If, on the other hand, the circuit returns quickly to “0” at the physical level, the software never sees X=1 and the circuit assumes that the transient “1” value was an anomaly. This increase in confidence of the button press comes at the cost of a delay in the reaction time. It takes time for the low pass filter to provide software with a guarantee that the button has actually been confidently depressed and isn’t just an electrical anomaly.

PID Controllers

Another incredible technique from control theory is PID control. The basic description of a PID controller is it is a process which tries to maintain a variable at a fixed value but does not do so rigidly. Rather, it glides the variable back to that value after any deviation from its setpoint and it does so over a period of time. Example PID controllers are the thing that keeps an elevator exactly level with the floor despite how many people get on or the propeller thrust of a drone. Elevator cables stretch. Drones experience wind. PID controllers compensate.

PID controllers have an inbuilt sense of anxiety. That is to say, if they deviate slightly from their setpoint, they move back toward it relatively casually but if they deviate significantly, they try to get back more aggressively. Depending on the underlying physical reality being modeled, this can be a source of numerous engineering challenges.

Underdamped, overdamped

The characteristic motion of a variable back to its desired setpoint is called damping. PID controllers try to model their underlying physical reality (eg. inertia) through this mechanism. The inertia of an elevator is prodigious so its PID controller would require one level of damping whereas a 300 gram drone has an entirely different inertia and would require an entirely different level of damping.

When a PID controller is overdamped, it takes too long to return to its setpoint. Consider a person getting into an elevator with a heavy beverage cart. An overdamped PID controller would see the floor of the elevator sag and would take several seconds to return the elevator’s floor to be level with the building’s floor. In the mean time, people exiting the elevator could trip as they try to step up to get on their floor. Lawsuits ensue. An overdamped drone which is upset by the wind would tend to fly off in the direction it leans rather than re-level itself in place.

Underdamping is also a problem and can have potentially disastrous consequences for physical systems. An underdamped elevator would try to return to floor level far too quickly and could put undue strain on the motor, or worse, could actually move too quickly and launch the passengers upward toward the ceiling. An underdamped drone would wobble out of control and crash.

Central Banking

“What does any of this have to do with central banking?!,” I hear you reasonably ask.

International monetary flows are physical realities whose dynamics are very difficult to see. Nevertheless, they experience inertia, have momentum, create pressure, and in many other respects resemble the flow of electricity through a circuit. In electronic circuits, things happen very fast — on the order of microseconds. This is both a problem and an advantage. The problem is that we don’t have much time as engineers to deal with changes. The advantage is that we can build tools like oscilloscopes to see these changes. They repeat at a high frequency which the oscilloscopes can capture. Once we can visualize the undesirable dynamic in our design, coming up with a solution is often a matter of course.

Flows in the international monetary system happen at a glacial pace by comparison and, unfortunately, there are no international monetary oscilloscopes we can use to see the oscillations and perturbations with any fidelity. Even though we can’t see the complex and beautiful dynamics, they are, nevertheless, always there.

The button in the case of monetary policy is the US Federal Reserve’s recent rate hike. On time scales which are relevant to monetary policy, it’s as if they pressed a button which launched a highly underdamped PID controller into action. Or, maybe, we’re still in the bounce of the button press.

Based on their press conference last month, they appear to have broken something. Likely, some key metric has overshot their target and their dovish pivot is their underdamped response. The oscillations which are taking place in the international financial plumbing have incredibly low frequencies and long periods. Whereas electronic systems have oscillations at the microsecond scale, oscillations in something as large as the international financial plumbing of the world have periods measured in months or years.

Like a brand new driver experiencing a turn at an uncomfortably high speed, the Fed is oversteering the global financial system into the next crisis. Beyond recognizing that these oscillations are beginning to take place, the ultimate outcome of this dynamic is anyone’s guess. Worse, most of the observers of these dynamics will linearize the data they’re seeing. As friend of Liberty Papers, Doomberg said in their excellent recent conversation with Adam Taggart of Thoughtful Money, “People in the industry are notorious for drawing tangent lines to sine waves.” This was applied to the oil and gas industry in that conversation but the same risk exists for observers of macroeconomic phenomena.

The Federal Reserve has set off a huge, slow, and powerful oscillation which they are ill equipped to control. What will break next? I’m afraid we’ll find out soon. Unfortunately, soon could be months or years away. By the time the crisis recently set into motion arrives, very few people will be able to connect the causality back to the actions policymakers are making today. New mistakes will be made which will set into motion new oscillations, ad infinitum.

Subscribe now

F.or O.ur M.arket C.onfusion

Every so often, the entire market watches as the high priests of finance make pronouncements and scours over their every word looking for tiny changes to the narrative that might impact their investing worldview. A shift in a word here or a different colored tie there could cause huge moves in markets. We used to care about the thickness of Greenspan’s briefcase. Sometimes, central bankers even embrace the symbolism.

This week, Jerome Powell took to the podium to pronounce on the decisions arrived at during his meeting with the bishops at his Temple of Eccles. The denotative message was fairly consistent with what he has been saying during this entire hiking cycle which began in March of 2022: data dependence, dual mandate, etc. But the connotative message and the unsaid, along with a few shifts of phrase, were what markets and journalists keyed in on. Yes, rates will be higher for longer but the policy interest rate is "at or near its peak for this tightening cycle." The roar from the crowd was instantaneous and deafening. If we’re done for this hiking cycle, then the bias for future rates is down. The market took this happy forward guidance and did the needful. Interest rates all along the yield curve were driven dramatically downward.

In monetary policy, there are a lot of mistakes but no accidents. The pattern over the last forty years is that they will keep pressing their runbook until something breaks. After the breakage, they leap into action to preserve the financial system, usually by reversing the policy they held into the breakage. The unintended side effects of this response plant the seeds of the next cycle. Repeat. James Grant puts it more poetically: the Fed plays the roles of both arsonist and fireman.

The Fed held their policy rate low for more than a decade after the Great Financial Crisis and this did not result in monetary or consumer inflation, although we did have inflation in financial assets. They have been on this hiking cycle for barely more than a year and are already declaring mission accomplished despite the widespread belief that shifts in policy act with "long and variable lags." If low rates didn’t cause inflation why should we believe that this abrupt change to higher rates has quelled it, especially in so short a time? Is it possible that inflation has come back down for other reasons, irrespective of interest rates? During the press conference, Michael McKee asked a great question.

Mr. Chairman, you were, by your own admission, behind the curve in starting to raise rates to fight inflation and you said earlier again the full effects of our tightening cycle have not yet been felt. How will you decide when to cut rates and how will you ensure you’re not behind the curve there?

This is where Powell spiked the football while doing a jaunty dance, metaphorically speaking. He spoke to the dual mandate of price stability and full employment being in "better balance" and said the need to press hard on the policy rate has subsided. McKee followed up with another great question.

When you begin the cutting cycle, will it be essentially run the same way you do it now with raising rates where you basically do trial and error, cut and see what happens or will you tie it to some particular measure of progress?

Sick burn. Well played, Mr. McKee. Powell’s response was to admit they haven’t thought that far ahead. Yikes.

Mission Accomplished?

The Fed got lucky with inflation. It has come down but it has done so for a lot of reasons that have nothing to do with their policy rate. Declaring victory reveals something about their hand which they keep close to their vests: they’re worried. They understand that they are losing control of the bond market and fear that if they continue to press, a la Volcker, that they’ll break something. So they declare victory when victory is far from certain and ride into the new year on a high note. It’s all a fiction. Inflation is likely to return in a second wave, bigger than the first. Their policy tools aren’t going to be able to address the second wave any better than they were able to address the first. They have to convince the market of their fiction in order to keep the game going. Powell isn’t Paul Volcker. He’s John Law.

The Visible Hand

All government intervention is stimulus; some of it is just dressed up to look like regulation. The question is who receives the stimulus. The years of historically low interest rates were stimulus for financial assets. The past year and a half of rising rates were stimulus for people with access to liquidity. This rate reversal is stimulus for people who traffic in sovereign debt.

The Arrow of Time

There is essentially no more important financial metric than time. Compounding interest, the time value of money, and discounting future cash flows all revolve around time. Interest rates put a price on time. Should we really live in a world where the most important price is set by a cadre of political appointees? Or is it possible to let interest rates be determined by the supply and demand dynamics around the actual people whose time is being priced? What if the Fed left interest rates alone? Or better yet, what if the Fed didn’t exist because they weren’t needed? Their dual mandate is: stable prices, which they seem unable to effectively control: and full employment, which they have no business being involved with. What if we let employers deal with full employment and the rest of the world price their own time?

Further Reading

If you read one book on this subject, make it Liaquat Ahamed’s "Lords of Finance." If you want to continue further, check out G. Edward Griffin’s "The Creature from Jekyll Island." The history of the Fed is sordid and their track record, doubly so. We got along without it before 1913. Prior to the establishment of the Fed, periods of inflation were followed by relatively symmetrical periods of deflation, which resulted in a long run average which plausibly resembled stable prices.

Oh, and no one had to tune in on a beautiful Wednesday afternoon to listen to and parse the pronouncements of monetary high priests in order to try to understand markets and plan for the future.

Subscribe now

An Argentine friend who lives in Buenos Aires and is a working age person with a birth year that starts with “2” provided most of the context for this piece. Another excellent source is BowTiedMara, in particular, his recent appearance on Milkshakes Pod. In that podcast, Brent Johnson reminds us of Warren Harding who presided over the "Forgotten Depression." President Harding responded by cutting the fiscal budget by 50% and by cutting taxes. What followed were the roaring 20s. I hope that Argentina experiences a similar renaissance. Time will tell. The world will watch in real time as they experiment with Austrian economics, if Milei can manifest even a fraction of his audacious plans. If he fails, this precedent will likely be used by neo-Keynesians for decades as a cautionary tale against laissez-faire economics. May he succeed.

Fiscal and social conservative

Milei is interesting primarily because of his economic views and how radically divergent they are from Peronism or Kirchnerism but it has to be said that he is deeply conservative in other ways. He revealed during his conversation with Tucker that he believes that life begins at conception and is completely against abortion. He's about as far as you can get from woke without falling off the end of the scale. He’s against affirmative action.

But, his biggest beef is with socialism. Milei wants the government to do less. A lot less. He's against all forms of government intervention including wealth redistribution. The history of Argentina and Peronism has demonstrated that those in power tend to redistribute wealth to themselves and their friends. Strong central authority corrupts. The antidote is reducing the size and strength of that authority. This is why Milei's signature prop is the chainsaw and his catchphrase: "Afuera!"

Afuera!

The principal entity under his chainsaw is the central bank. Inflation has run 400% this year. His plan to arrest it is to dollarize. According to the "impossible trilemma" any country that pegs its currency to the US dollar or outright adopts the dollar, necessarily imports US monetary policy. If your monetary policy is in the hands of another country, then your country doesn't need a central bank. If he succeeds at dollarization then his plan is sensible and will be accretive to his budget cuts. If he is not able to dollarize and yet gets rid of the central bank, that could be interesting.

Remaining with the peso and eliminating the central bank would mean that interest rates would be determined by the market. The policy rate for leliqs is already 250%. If they let go of control of rates and keep printing money, the current rates may eventually seem low. Dollarizing is practically a prerequisite for closing the central bank. I hope he succeeds at both.

The view from the ground

I have a sample size of one, but my contact in Argentina is very politically clicked in and so I'll assume some amount of ergodicity and consider her perspective relatively representative of the spirit of young, working age people. Young people in Argentina LOVE Milei. They are the ones getting crushed hardest by inflation. A typical salary is $600 a month. Rent is $300. Electricity $200. Food $200. Almost no one can live independently from their parents when they enter the workforce.

Milei has built credibility with this cohort in part by donating his salary to a different person every month and posting about it on social media. They trust that he actually cares about them. He wants to make the streets safer so people can go out without fear. He wants to remove impediments to work like the onerously high monthly tax on cars. In almost everything I heard from my friend on the ground, young people in Argentina want what young people everywhere want: freedom and independence to make their way in life under their own power. Unemployment is 40%. Ultimately, young people are the source of growth for an economy. I hope they are unleashed.

People are fed up with corruption and politicians who want to turn citizens into dependent vassals: "We seek to put aside corrupt governments that create citizens dependent on a state that condemns them to poverty in exchange for a vote that perpetuates them in government." What's going on in Argentina is no less than a quiet revolution in the form of the hope placed in Milei. If they aren't successful with a quiet one, you can expect a louder one.

Javier Milei takes office in one week. It will be nice to see an elected leader with more than a passing understanding of the power of the invisible hand or the principle of supply and demand.

Congratulations and godspeed, President-elect Milei.

This is my favorite time of year both because of the mild, contemplative weather and the accompanying feeling of gratitude for my life and for the year as it winds down. Of course, the food focused holidays are also joyful and getting to celebrate them with friends and family is a highlight of the year.

The level of gratitude I feel for the help I've received and the kindness I've been shown on the journey leading up to and during the building of this writing business causes me discomfort in its inexpressibility. My twin goals are to be worthy both of the help and grace I've received and to be worthy of your time and readership as subscribers.

During the very early days of barely 100 subscribers, Grant Williams retweeted my article about AI, which doubled my subscriber numbers in a single day. It was surreal. Later, I was listening to Palisades Gold Radio with Jesse Felder and heard him mention an article that sounded a lot like the piece Grant retweeted. It was a humbling moment.

Grant has been a friend, mentor, and huge source of inspiration. He even did me the kindness of a one to one call to answer some of my questions. Naturally, I squandered much of the time due to copious fangirling at the opportunity to meet someone I admire so highly. He nevertheless provided me with a great deal of wisdom during that call.

On the left side of the graph below, you can see the tweet from Grant that put my writing on the map. Growth has been steady ever since.

The Doomberg Team have been with me from the beginning as friends and mentors. They have retweeted many of my essays and regularly restack my notes to this day. They were the first to make time to meet with me when I wasn't even sure if I was going to start writing in public. I had a lot of trepidation and never wanted to be a public person. I learned a lot and still think about the lessons they shared with me. One thing that rings in my ears every week, “you'll either earn an audience or you won't.” I work toward this every day. That quote is my north star.

Sir Steven Wilkinson who writes Pitchfork Papers has been an inspiration and, I shall be bold, a friend to me as I've worked to build this business. He promotes my writing in notes and recommendations which is an incredible honor. I consider Pitchfork Papers to be a literary touchstone which causes me to slow down and think deeper, to think slower, and to breathe for a moment in quiet contemplation.

I'd like to thank my fellow writers on Substack and the team at Substack for their partnership in building this great community of thinkers, entertainers, and journalists which has already elevated the level of public discourse. The conversation here is civil and thought provoking. This is not an accident. They built it that way. We’re building it that way.

I'd like to thank my parents who have been superfans from the beginning. My mom listens to the audio version while gardening and my dad reads in his studio. They are often the first to like the posts and give feedback. Of course, their voice is present in the writing itself as my loving midwestern upbringing comes through in both the things I choose to write about and in the values I hold dear. I’m very lucky to have grown up in the American Heartland and to have these lovely people as parents.

Many friends have guided my work and given feedback but I’d like to shout out my friend and mentor, David Cantu, who has been a constant advisor and sounding board. He has given me feedback and encouragement which has shaped this blog in subtle and profound ways.

Finally, I would like to thank you, my reader. You have provided feedback, encouragement, and most importantly, your valuable time to read, think, and engage with these essays. Thank you ❤️

After reading "The Gold Cartel" by Dimitri Speck some time ago and listening to the good folks over at Mining Stock Daily, among others, I have become open to the idea that governments manipulate the gold price. Maybe it's just the US but more likely, it's a covert game played by all of the world's central banks.

Ok, fair enough.

The paper market also has a distortive effect on the price and is used way more for speculation than it is by producers to hedge their production.

Alright.

I'm not an insider so I treat those as asterisks on gold as an investing vehicle. There's one thing that puzzles me enough that I think about it often and that is the relationship between gold and oil. At first blush there doesn't seem to be any relationship at all.

Subscribe now

The part that mystifies me is the ratio of gold to oil, particularly over longer periods of time.

The huge spike in early 2020 was due to the price of oil (the denominator) going to zero on its way to a low of negative thirty eight dollars a barrel.

The strange thing about this ratio is how it always seems to return to a value around 22. Is there some natural reason why one ounce of gold should be the same dollar price as 22 barrels (880 gallons) of oil?

Of course it takes oil to harvest gold from a mine but why is this ratio so steadfast and why does that steady ratio persist over periods of years? Neither gold nor oil revolve around stable values over similar timescales so why should their ratio?

Gold market manipulation

Long time observers of the gold market point out how the New York open of trading systematically causes the gold price to get hammered down after whatever happened during the Asian trading hours. This diurnal dynamic is the source of much speculation so it won't hurt much to add my own take. Could the US be intervening in the gold market to maintain the gold-oil ratio at some predetermined level? And, if that's the case, are we already and have we been for many years on a oil-gold standard?

If that is the case, then it damages the bull argument for the price of gold in US dollar terms. Gold might be a great trade in other currencies as the inflation they import from the US wrecks their currencies and bond markets while gold and the dollar remain synchronized to some extent. But for American investors or anyone else who saves mostly in USD, gold could essentially be dead money as it has been for multiyear periods during the last couple decades. This isn't exactly a bear case because the macroeconomic forces which tend to be bullish for gold remain in place but it is a mitigating factor if it’s part of the gold price dynamic. Alternatively, if the US does maintain a quasi-peg to gold, then this could be a great time for US investors to build a position before the peg breaks.

Is the bull case bullish?

At the heart of the bull case for gold is that US monetary and fiscal policy profligacy, which seem to be sustained by a collective suspended disbelief that the US could ever lose its hegemony. This is far from assured. All historical hegemons have eventually evaporated. What would make the US different on long enough time scales?

If continued recklessness causes the dollar to be unseated as the world's reserve currency, what does that mean for the American investor? The international investor? Whatever comes next is likely to be controlled by America's adversaries who have all been stockpiling gold and other commodities. Yes, the gold in your IRA may have gone up in value, but at what cost?

Americans take for granted that they can get on a plane and fly to far away places for a holiday. What happens if the gold-oil ratio remains roughly where it is when gold doubles or triples? How much will that ticket cost in USD terms? How much to fill the gas tank of a big car?

Owning gold is essentially an insurance policy against the sudden devaluation of the dollar versus real things but what about everything else that's priced in dollars including salaries? If the gold bulls get what they want from the gold price, they may not get what they want from the world that emerges on the other side.

Hyperinflation

Despite sharing a common root, inflation is fundamentally different from hyperinflation. Inflation, like the kind we've experienced for the past couple of years, is a supply and demand driven change in the general price level. Hyperinflation is the destruction of a currency in real terms. They can exist simultaneously but hyperinflation is a far worse problem.

Adam Fergusson's book, "When Money Dies," is an excellent chronicle of the hyperinflation that visited Weimar Germany. One of the key observations he made is that, for the people of Germany, it didn't feel like their money was dying, at least at first. It just felt like the rest of the world was abusing their pricing power and taking it out on German citizens. As prices on everything went up, labor unions clamored for higher wages. Lenders went broke as the real value of their loan book trended toward zero in months at first and eventually days. There was even a period when workers would be paid in the morning, then given time to go shopping for essentials before beginning the workday. This helped mitigate the rise in prices that would have occurred during their shifts.

The hyperinflationary spiral persisted until Weimar central bankers repegged the currency to a hard asset, namely land, in the form of the rentenmark. This period amounted to a repudiation of all debt and a collapse of the currency. In a very real sense, the country was economically rebooted. Aside from a few savvy speculators, it was a uniformly difficult and stressful time to live in Germany.

Eventually, the deutchmark was completely destroyed and German civil society along with it. There was even a new mental illness called zero stroke, where patients had a compulsion to write endless sequences of zeroes. Inflation is bad but hyperinflation is truly terrible. Anyone hoping for hyperinflation so that their digital ducats or their gold holdings go “to the moon” probably don't know what they're really wishing for. They may do well financially in relative terms in that event but the whole of society may be in complete disarray for years if not decades afterward.

Depegged

If the US is intervening to maintain a stealth peg to the gold-oil ratio, will they let it go if they start to lose control of the currency or, more importantly, the bond market? That would amount to yet another devaluation and at least partial default. If they do let go, what happens to the ratios of those newly unpegged things? To say this could be a financial supernova is only a slight exaggeration.

No one I listen to or read is talking about what the world could really look like on the other side of a global currency crisis. Most are only talking about the financial consequences. Will there be social unrest? Will ambitious populists take advantage of the moment to bring about a new global conflict?

Whatever happens to markets may be minor compared to what happens to civil societies or even civilization itself.

None of the above or anything in Liberty Papers should be considered investing advice.

For years now, the so-called value investor has had a heck of a time. This discipline tries to make sense of markets using tools like discounted cashflow analysis (DCF) to figure out if a company's stock is under or overvalued. Well known investors have done quite well using similar disciplines and gives credence to the tool's usefulness.

In the world as it was between the GFC and 2022 while the Fed and other central banks kept interest rates near or below zero for multiple years on end, DCF was without any true anchor to reality. You sort of need a hurdle rate of interest for the tool to make sense.

We now have a hurdle rate after the recent rate hikes, but it may be too early to return to classical methods of valuation. The financial world remains in suspended disbelief about the return of gravity to markets.

Subscribe now

End of an era

The liquidity lottery that ensued during those years produced such casino-like entities like cryptocurrencies, ridiculous companies with eye watering valuations, and innovative stock options strategies which seem to exploit loopholes in best practices, if not legality, in order to multiply the effects of this ocean of freshly minted money with nowhere to go.

In financial and business cycle timescales, one year is just a moment. So, the fact that interest rates have gone up from zero to five percent during that time may as well have happened all at once. Of course, all at once would have been even more stressful for the financial system, particularly the banks, but for the market as a whole, this was a stepwise increase.

Gravity returns

Interest rates are akin to financial gravity. For fourteen years, we played Enders Game with the markets. Now the gravity has been turned back on. Market instruments have inertia so things remain largely as they were a year ago, give or take. Financial gravity is exerting its inexorable pull but the market is behaving as if things are unchanged. Wile E. Coyote is over the cliff but hasn't yet looked down.

Honest analysts continue to try to analyze the market honestly. This is to their credit, but, in many ways, we've never been here before. I'm intentially trying to avoid saying “this time is different” but it really might be. Interest rates were at 5000 year lows. That's not a typo. Check out Sidney Homer's, A History of Interest Rates, if you want to read the fascinating details. The rate of interest rate increases has also never been this rapid. These two firsts combine to put us into unexplored territory. The diligent analysts continue to use traditional metrics to try to make sense of markets but we're sort of flying blind at this point.

The dollar black hole

Whether the S&P is up or down in a given day doesn't land on me as any sort of useful indicator despite how closely market participants watch it. Same for the VIX (volatility index.) Goodhart’s Law seems to have worked its inevitable magic on most of the closely tracked metrics and drained them of usefulness as indicators of anything actionable.

The only metric which seems to be really interesting for now is the dollar index, DXY. And as an adjunct, the interest on the 10 year US Treasury (the benchmark price of time) and its difference from the Fed Funds rate, are also useful. Of course, these metrics are all closely related through mechanisms which are out of scope for this essay. (For great thinkers in this space, consult Zoltan Poszar, Brent Johnson, Luke Gromen, and Michael Kao.) Brent calls the current dynamic, “The Dollar Milkshake.” Michael Kao coined the term, “The Dollar Wrecking Ball.” Both are useful metaphors.

Regardless of how you think about it, the world orbits around the dollar. Like a black hole at the center of the financial and economic universe. When it moves, everything else moves in terrifying and beautiful synchrony.

I agree with Brent that the dollar going up adds stress to the system and the dollar going down preserves the status quo. If there are any sort of big financial meteors headed for the finance universe, it will show up in dramatic moves in the DXY.

QTR's latest alliteratively titled essay lays out some of the concerns pretty succinctly. Housing, commercial real estate, autos, and zombie companies are all industries which exist by the grace of debt. Add to this student loans which are now in repayment and you have a maelstrom of debt of extraordinary proportions. As Jim Grant says, “All debt is eventually repaid. The only question is who pays, the borrower or the lender.” A crisis in any one of these industries will most definitely not remain contained within those industries. Each one is systemic in its own way.

Regardless of where and how the denouement of this extraordinary monetary and economic experiment ends, it seems to be gearing up to be historic. If something can't go on forever, it won’t.

Regardless of whether the Fed responds by raising interest rates or quantitative easing or any of the myriad responses we saw during the early months of 2020, it probably won't matter. They've lost control of the narrative. A disruptive market event will be the moment for the international adversaries of the US to pounce. It will be more useful to watch how they respond than how the monetary mandarins in the US respond. The world order is shifting. No one has convinced me they have any real idea of what awaits us on the other side.

Ok, so what?

The only strategy that makes sense to me for preserving one's wealth is stillness. Getting caught up in FOMO and trying to chase the last vapors of any rallies is a fool's errand. Pushing time horizons out as far as comfortable seems wise. Obviously everyone's situation is different. This is not investment advice, etc.

Lots of people advise holding gold to preserve wealth through time. It has a solid historical track record but so far it seems to be lagging the predictions of many of its advocates. Time will tell. If you're aurum-curious, Sir Steven Wilkinson wrote a beautiful piece about his relationship to the relativistic element.

Other than that, being physically healthy, personally resilient, and creating a home environment that is robust to outages all seem like useful hedging strategies for what might be on the horizon. Preparing for a one month outage akin to a big earthquake is probably enough to handle a first or second standard deviation event. Beyond that, we're all sort of groping in the dark.

Humans got through the fall of the Roman Empire, the Black Plague, the Holocaust, the nuclear Holocaust in Japan, and other civilization altering events. How apocalyptic must those have felt to the people of the time?

That's not to diminish the suffering that visited the people who lived through those events. It's more of a comment on human resiliency. We're nothing if not survivors. Everything we do in a given day is in service to our personal survival and the survival of the species. The coming decade is very likely to be tough, but humans are tough. We'll get through this one, too.

Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

This is a beautiful sentence but a little obtuse for us modern readers so let's break it down.

First, it's a study, not of businesses, consumers, and governments as such but of human behavior generally. It is the study of behavior in the context of scarce resources. We all need food, energy, and shelter. How do we decide that you live in a mansion on a private island while I live in a suburban condo? And finally, those resources have alternate uses. For example, the same wood that becomes a plank in the wall of my condo could just as quickly become a part of some scaffolding or even consumed as fuel.

At the heart of this definition is the idea of scarcity. Without scarcity, there is no need to economize. The need to economize the use of scarce things gives rise to the study of how humans accomplish this. That's economics.

“Post Scarcity”

With every new advancement, the usual suspects trot out the old idea that eventually we'll live in a post scarcity society; that humans will have solved, once and for all, the ability to provide general abundance and that we won't need to economize when it concerns the basics of human needs. Examples of this in recent times are the argument that AI will replace so many jobs and will usher in such profound advancements that we'll need to provide a Universal Basic Income to everyone in order to create a fair and just society. This is Marxist hogwash.

Subscribe now

Firstly, AI will be transformative but will likely be far less profoundly impactful than people think. And, rather than destroy jobs, it will create many more opportunities to ply human creativity than we had before. In short, AI, and all such improvements, create wealth and human activity accelerates. Thinking otherwise makes the mistake of assuming that economies are "zero sum." More on this later in the essay.

In the 19th century, the Luddites feared that their livelihoods would be ruined forever by new knitting machine technology yet after its introduction the number of people "engaged in the spinning and weaving of cotton had risen from 7,900 to 320,000, an increase of 4,400 percent." (Hazlitt p. 50)

The rise of the internet did result in the displacement of, for example, newspaper field reporters who have gone on to do other things but the number of new jobs created by the internet is basically uncountable. It is certainly far larger by orders of magnitude than those who were made obsolete in the short run.

New technologies, far from destroying employment, create vastly increased opportunities for humans to create new things.

Zero Sum, Negative Sum, Positive Sum

In game theory there is the idea of a "game" or some other kind of exchange or transaction being either zero sum, negative sum, or positive sum. Zero sum games are games in which, for you to win, I have to lose by the exact same amount. Poker is a zero sum game. A negative sum game is one in which, for me to win, you have to lose by a greater amount. Playing any game against a casino is negative sum, by design. Next time you go to a casino, just look around you at the opulence of the building. Money built that. They got the money from the negative sum games which are played to the players' collective detriment.

A positive sum game is one where both parties can benefit from a given exchange. Let's say you have a loaf of bread which you value at two dollars. I value it at three dollars. If you sell it to me for $2.50, then we both walk away with an increase in personal value of fifty cents. This is a strange concept but this is actually how economies work and is an example of wealth creation at the individual level. The micro wealth creation events like this one, taken in aggregate, show up in a country's gross domestic product (GDP). The untold part of that transaction is that before the bread existed, the breadmaker had to make it by acquiring the materials, energy, and labor to do so. The person with the money to buy it also had to conduct their own economic activities to acquire that wealth, and so on. That cascade of transactions are also positive sum, nearly by definition. None of the transactions would take place if either party thought that it would damage their wealth and so the mere fact that they took place is evidence that they were accretive to each party.

One of the greatest fallacies in popular economic understanding is thinking that economies are zero sum games. This is possibly the most dangerous fallacy because of the behaviors it can cause. If we assume that other people gain at our expense, then it could make us think only of ourselves when it comes to economic activity. It almost a priori justifies cheating or stealing. So called "reparations" like those conducted at the Gucci store in Beverly Hills make a certain kind of sense if you assume that everything in that store was created at the expense of other people.

If, on the other hand, we think of economies as positive sum games where everyone can create and build wealth, then we're motivated to participate in that creation with the confidence that the value we create will be rewarded. Wealth doesn't come from other people, it comes from what we create. When someone pays us for it, they are acknowledging that what we created is something of value.

One example of this is attending a Taylor Swift concert. Before that concert, there was nothing. After that concert, people were happily entertained. Nothing was taken from any of the concertgoers except for the money. They wouldn't have paid their money except that they believed that they would get entertainment of greater value. After everyone goes home, everyone involved is improved. If we could accurately measure the precise amount of wealth that was created through all of the vendors, venues, and patrons and then conducted monetary policy to print exactly that much money, that money printing would not be inflationary. In a very real sense, Taylor Swift prints money. She does this by creating enormous value.

Economic Fallacies

In his book, Economics in One Lesson, Henry Hazlitt breaks down the common fallacies which seem constantly in the public discourse from ancient times to modern. One by one, he dispels them with logic and examples. The lesson at the heart of his book is simple and he is able to put it down in one sentence.

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

In other words, looking through more time or across more space (and people) than may seem obvious at first blush of any economic proposal is the proper way to understand any economic policy. The book is well worth a read and at 200 pages is easily a weekend or vacation read over a cup of cocoa by a cozy fire.

Economics is actually simple

If we train ourselves to detect the fallacies and challenge ourselves to look through the first order effects of any economic policy, the right thing to do often aligns with our common sense. Minimum wage laws are controversial and pervasive but the unspoken fact is that the true minimum wage is always zero. In other words, if we put a price floor on labor, then those who would happily work for less than that floor but do not provide sufficient value at that price will simply not be hired. Minimum wage laws for low skill labor are why in 20 years, there will be one person operating the machines inside of McDonald's and the building will have become an elaborate vending machine. The rest of the people would have been dismissed. This may have been an inevitability anyway but without minimum wage laws, McDonald's would have less incentive to do it right now. With minimum wages as high as they are, they have two options, raise prices or lower costs. Or both.

Sophists and politicians will argue passionately against the arguments in Hazlitt and other great books like Thomas Sowell's Basic Economics. If you disagree with the sophists or argue against them, you're likely to be met with ad hominem attacks or even cancellation. After all, how could you fault the looters of the Beverly Hills Gucci store. Don't you care about their wellbeing? This is another instance where light application of courage across a large enough swathe of the population and the bullies and sophists will back down. Knowledge saves us from fear. Let them scare you and they win.

Conclusion

Understanding scarcity and the concomitant need to economize, as well as being willing to imagine second and third order effects of economic policies, are all it really takes to defeat the economic sophists who would run roughshod over society to deploy their personal version of utopia.

Unfortunately, this understanding is somewhat rare. It is particularly rare among the affluent and their offspring. Growing up wealthy sort of shields a person from an intuitive understanding of scarcity. Unless they have excellent parents who remember what it was like to live with relative scarcity and are inculcated with those learnings, they may become adults who ignore the idea that scarcity exists, or at least minimize its importance. This may be why urbanites and their children are a common source of progressive utopian economic thinking or why we have the saying, “From shirtsleeves to shirtsleeves in three generations.”

When someone promulgates an economic idea that goes against your common sense, that is a clue that it is probably employing one of the fallacies outlined in Hazlitt. Even if you are not an economist, both Hazlitt and Sowell are accessible and enjoyable reads. Let one be your armor and the other your shield against the sophists who would destroy part of the economy to achieve their personal gains at your expense.

Subscribe now

This past week, we had a trifecta of inflationary happenings. First, a little comedy from a Nobel Laureate.

Trifecta Part 1 - Krugman Comedy

This observation, from the same person who predicted that the internet would have approximately the same impact on the world economy as the fax machine.

After Ben Bernanke won the Nobel Prize in Economics for his research on banking crises, the prize has taken an ironic turn and the honor it bequeaths has been wildly diminished. Krugman does nothing to disabuse me of that feeling.

Trifecta Part 2 - Yellen, yellin'

"America stands behind Israel, period." -Janet Yellen

Wilfred Frost quoted Paul Tudor Jones in his interview with Janet Yellen. Jones' observation was that,

"This is the most threatening and challenging geopolitical environment that I've ever seen. At the same time, the US is the weakest fiscal position since World War II with debt to GDP at 122%."

Frost followed that with this question:

"Can America, can the West, afford another war at this time?"

Her response is one for the history books (emphasis added.)

"I think the answer is, absolutely. Um, America can certainly afford to stand with Israel and to support Israel's military needs and we also can and must support Ukraine in its struggle against Russia. And, look, the American economy is doing extremely well. Um, inflation has been high and it's been a concern to households. It's come down considerably. At the same time, we have about the strongest labor market we've seen in 50 years with 3.8% unemployment. And, at the same time, um, America, the Biden Administration has passed legislation that is strengthening our economy, um, in the years to come for the medium term, um, we have three historic pieces of legislation, the bipartisan infrastructure act, the chips and science act, and the inflation reduction act and, um, we've seen a burgeoning of investment especially in manufacturing, um, an industrial renaissance in the United States and, um, we're creating good jobs, especially for people who've been don't have a college education, who've been, um, left out of, um, really economic progress in the United States. So, the United States' economy is in a good place. Um, in terms of the fiscal situation, I don't know where 122 comes from. The US federal debt to GDP ratio is about 98% at this point and the interest expense which is a more relevant statistic still remains manageable. Now, it is true with higher interest rates and those higher interest rates may persist, although that's not clear, um, we have to be careful about our fiscal path. But President Biden is commited to a sustainable fiscal path. You know, we've raised, ah, 60 billion dollars, um, to strengthen the Internal Revenue Service. Um, there are enormous, um, uncollected taxes that are due. The so called 'tax gap' is estimated at 7 trillion dollars over the next decade and finally we're modernizing and strengthening our Internal Revenue Service so it can better serve Americans and also collect the taxes that are due. So, our fiscal situation is, um, by no means unsolvable. We have to be attentive to it. President Biden proposed a budget with 3 trillion dollars of deficit reduction at the same time it has investments in the United States. Now globally it's certainly true that there are challenges, um, as your quote, um, points out but I mean what's evident is that the United States is serving, um, as a global leader in addressing very serious challenges facing the global economy and the countries that, um, I've talked with are very pleased that we're doing that."

Should we be glad those countries are pleased?

I include the ums and ahs not to poke fun but to give a sense of Yellen's own difficulty in projecting the Biden administration's talking points. She is trying to be very precise and adhere to the party line. She is faithful to the narrative they are trying to create. She is lying. In my previous piece, I encouraged readers to resist the lies. This is an opportunity to put that into practice.

Firstly, let's cover her dispute over the 122% debt to GDP ratio. Her own organization's website lists the federal debt as 34 trillion dollars. Her former employer lists GDP as 27 trillion dollars. That puts the debt to GDP ratio at 125%. Paul Tudor Jones says 122%. Yellen says 97%. I'd say PTJ is closer.

Second, she says the labor market is strong and the economy is strong. The hilarious revisions to the data would argue against this. The thing to notice in that data is that all of the numbers are revised significantly downward. The other thing to notice is how they do "seasonal adjustments," particularly for January and July. In January, the US lost 2.5 million jobs but the seasonal adjustment put that at a gain of 517 thousand. Similarly, in July, the economy lost 883 thousand jobs but the headline number was a gain of 187 thousand, revised up to 236 thousand. The only reason these numbers matter is because significant market players watch them. In order to avoid getting caught offsides by the market response, market participants need to watch the numbers. It’s basically a Keynesian Beauty Contest; you don't just need to know what you believe to be true but you also need to know what other people in the contest think is true. Going a layer deeper, you need to think about what they are thinking that you are thinking and so on. The numbers out of the BLS and BEA are largely made up but they matter because people still ascribe value to them.

The "burgeoning of investment" Yellen is talking about are the recent fiscal programs to support domestic manufacturing. This is supportive of the economy but it is supported by the taxpayer. The taxes that are being used to support these programs cannot simply be modeled as new economic activity because it is money that would otherwise be in the hands of the taxpayer, i.e. regular people. Those people would stimulate the economy or the capital markets with what was taken in the form of taxes so we need to look at both sides of the ledger. New jobs are created in one place while they fail to materialize in another.

Yellen speaks about the interest expense as the more relevant statistic saying it "still remains manageable." As rates have risen, the interest expense on the federal debt is over one trillion a year. The data for this chart ends in Q2. Interest rates are up about 1% since then. As the debt rolls over and needs to be refinanced, that interest expense will continue to rise even if debt remains where it is. With a federal deficit of 1.5 trillion, the effects will be compounding. “He who understands [compounding interest], earns it ... he who doesn't ... pays it.” Yellen does tip her hand slightly when she speculates that "those higher interest rates may persist, although that's not clear." Does she know something we don't about the path of monetary policy? She did mentor the current Fed chair, after all.

So with all that, to declare that "America can certainly afford to stand with Israel and to support Israel's military needs and we also can and must support Ukraine in its struggle against Russia," is glib in the extreme. War is inflationary. Our economy is not nearly as strong as the manufactured economic numbers pretend. Something will have to give.

Trifecta Part 3 - Beggar Thy Neighbor

While the US is funding wars on two fronts, China is quietly working to export their inflation (or resist importing inflation from the US) by printing money to support their banking system. The yuan is a managed currency and this is part of its management. Printing money would tend to devalue a currency relative to others which would tend to import inflation from the rest of the world into China but they are keeping interest rates very low which would stem the flow somewhat. China imposes capital controls so the market value of the yuan versus the dollar is not a true market determined value. Nonetheless, they are building up defenses against the inflationary impulse that will very likely arise from the US's fiscal, monetary, and war funding postures. Globally, any country printing more money adds liquidity to the system overall and is inflationary for the global economy in the long run.

Part of the current global conflict is monetary and it's showing up in the currencies. Central banks and sovereign treasuries are at the forefront of that war.

What does it all mean?

I've gotten the feedback that my writing could be more accessible, especially where it concerns economic nerdery so I'll try to bring this all down to earth.

The short answer to what this means is inflation is here to stay. Fighting a two front proxy war with a likely third in its gestational phase is inflationary.

We got lucky that last winter was mild and energy prices were also mild but this winter, we may not get so lucky. Mild winters are often followed by harsh winters. If energy prices go up, the prices on everything go up which erodes the value of everything else in relative terms. This would be inflationary.

Massive fiscal deficits are massive private sector surpluses. The US continues to print money to run the economy, counteracting the contractionary monetary policy. Newly printed money is inflationary.

Because they went up so far so fast, interest rates are actually stimulative for the time being. The short term effect of the higher interest rates has been that idle cash has been put to work earning that sweet new interest rate. The money to pay that interest is being printed. This is inflationary.

The debt that will eventually need to be refinanced at higher rates has largely not been affected by the higher rates because, on average, their terms remain in place from before rates went up. That means that monetary policy will eventually be tighter as that debt gets refinanced but for now, it’s business as usual. The impending denoument may be dramatic.

Supply chains which were disrupted by the pandemic are being reconfigured. Suppliers are relocating to friendlier jurisdictions, so called “friendshoring”. In other words, moving medicine manufacturing from China to Arkansas or Brazil, while stimulative for the American or Brazilian worker, will drive up prices for medicines. Reshoring and friendshoring are inflationary.

Shifting power generation from cheap nuclear or fossil fuels to green alternatives requires a huge amount of investment and the power which they generate is more expensive. Climate policy is inflationary.

Combine this with the understated nature of the BLS and BEA inflation numbers which, despite their best efforts, would be understated anyway as manufacturers and suppliers engage in cost cutting which doesn't immediately affect the observable price or quantity of the goods, and you have unaccounted for upward pressure on prices. I.e. Inflation. Monetary disintegration.

All financial crises are ultimately credit crises. When the impact of higher interest rates finally does bite, we could see something significant, perhaps of a magnitude to rival the Great Financial Crisis. If that happens, the Fed will likely reverse interest rate policy. The near term effect of that would be an abrupt change in liquidity as all of the cash that is currently happily earning more than 5% interest flows elsewhere. Counterintuitively, easier monetary policy could be deflationary in the short term but then unleash wild inflation in asset and consumer prices in the medium term.

Who knows where that all leads? Some say the dollar's status as a global reserve currency is in its final days. Things that can't go on won't go on but they can last far longer than people expect. As I've written previously, losing the reserve currency status might not be all bad. Regardless, we unfortunately live in interesting times. Be careful out there. Things are likely to be bumpy.

I'll break from my usual tenor and speak directly to the “camera” — I have hosted a dinner party at my home which was attended by an Israeli family and a Palestinian family. It was extremely friendly and copacetic. I believe peace is possible. It isn't the people who are in conflict but the regimes. After this conflict and the necessary grieving period are over, I wish for peace and forgiveness, though I understand and appreciate how hard it is to fathom the possibility of that right now.

"Beauty will save the world." -Fyodor Dostoevsky

"Beauty is truth, truth beauty" -John Keats

Subscribe now

We've had in our notes to write about beauty for several months and are inspired to write about it now as a partial response to Ted Gioia's recent piece on the subject. His essay, and his brother's also excellent video essay, are both about beauty generally but primarily about beauty in art specifically. At the heart of Gioia's essay is this bombshell,

"Now you can begin to understand why beauty is dangerous. It's the closest thing to anarchy and liberation in our public lives."

In other words, beauty is antiauthoritarian.

Authoritarianism requires crafting a narrative. Crafting a narrative is a euphemism for lies. Lies, especially lies which the authoritarians require the subjugated to repeat as if they believe them, give power to the authoritarians and are the opposite of beauty. "Beauty is truth, truth beauty."

So beauty is a revolutionary concept which deprives people in power of their lock on control. It does this through its alignment with truth. Beauty and truth are self evident. Their authentication does not come from an external source; it comes from within the beautiful or truthful thing. This is what makes beauty dangerous -- it erodes the power to control.

This idea helped us at Liberty Papers crystalize our mission: we want to be a source of truth in the world. We want to use truth to push back against the authoritarian tendencies of people in power. Please hold us accountable for this. If we fail to deliver truth to our readers, we have failed at our mission.

What inspires us most about this idea that the experience of beauty is a rebellious act is how accessible it is to ordinary citizens. No one has a monopoly on beauty or truth. People can promulgate unbeauty and lies in order to misdirect or hide the truth but ultimately, once they fail to maintain their highly manicured narrative, truth and beauty will effortlessly reassert themselves. The other part of the equation is that we all get to choose what we believe. If we arrive at a truth through reason which conflicts with the prevailing narrative, and if we have the courage to stand by our beliefs, then simply by holding that posture, we deprive authoritarians of their power.

They can tell us that we must repeat their mantra but we can say no. This makes Truth dangerous to Power. This makes Beauty dangerous.

We will go further: we assert that the highest moral achievement in a human life is to maximize beauty. This doesn't necessarily need to take the form of producing art, music, or literature. This can be defending the truth when it's attacked. This can be choosing kindness when it would be easy to be cruel. This can take the form of making the fair choice when we are in a position to take advantage. This can take the form of a leader taking responsibility for the failure of their team while ascribing to the team successes which the leader procured for them. "Beauty will save the world."

In his Nobel prize lecture, Alexandr Solzhenitsyn questioned Dostoyevsky's assertion that "beauty will save the world" asking "whom has it saved?" He eventually concludes that it is not an observation but a prophecy. People who would use lies to control the people have all of the weapons, all of the tools, all of the media, and all of the power. But they can't defeat beauty and they can't defeat truth. They can only craft a narrative which obfuscates or misdirects people away from these things. It is therefore the responsibility of writers, Solzhenitsyn asserts, to constantly resurface and defend beauty and truth against narrative attacks.

In his video essay, Dana Gioia says "Beauty is a true and powerful way of looking into the nature of reality. Beauty is therefore one of our most powerful and natural ways of knowing the world... It leads us by pleasure to knowledge and by knowledge to love." It's difficult to grasp hold of the concept of beauty so it becomes natural to tether it to another ephemeral and difficult concept like love. But what the poet Gioia says about beauty is similiar to what Solzhenitsyn asserts. Namely, that beauty guides us to knowledge and truth and by it we are transformed and the world is transformed. Beauty is therefore power. It is the power that undergirds liberal society and our ability to value things like individual freedoms while simultaneously acknowledging personal responsibility.

The Declaration of Independence winds up with "We hold these truths to be self-evident..." The concepts that follow need no justification. They are true. We know them to be true. They emerge from beauty.

Solzhenitsyn ends his historic speech with words that land on us like a tremendous responsibility.

"Falsehood can hold out against much in this world, but not against art. And no sooner will falsehood be dispersed than the nakedness of violence will be revealed in all its ugliness – and violence, decrepit, will fall."

Resisting authoritarian encroachments is as simple as it is beautiful. Seek beauty in truth. Say no to the lies.

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years. These nations have progressed through this sequence:

From bondage to spiritual faith;

From spiritual faith to great courage;

From courage to liberty;

From liberty to abundance;

From abundance to selfishness;

From selfishness to apathy;

From apathy to dependence;

From dependence back into bondage.

-Alexander Frasier Tytler (emphasis, added)

The benefits which Tytler describes in that memorable quote are not always monetary. The tyranny of the majority is also used to bully away things the majority doesn't like. The problem is that who the majority is and what they don't like changes over time. Sometimes they like affirmative action, abortion, charter schools, drugs, guns, civil rights, privacy, welfare, business, unions, war, and sometimes they don't.

The party in power can only ban or tax things, both of which result in less of those things. New laws rarely, if ever, create greater access to something or some new freedom. So, over time, the normal operation of a functioning democracy is to slowly erode the rights and liberties of the populace as the behemoths on each side of any issue get power, exercise that power to impose some new controls, and then lose power. The individuals in society who are stuck in the middle of this clash of titanic forces which are largely out of their control, simply watch as their liberties are slowly taken from them, usually under the auspices of creating a safer society.

The main takeaway here is to resist when your enemies are losing their freedoms. Eventually, they’re coming for yours.

Subscribe now

Mrs. Powel: Well, Doctor, what have we got—a Republic or a Monarchy?

Doctor Franklin: A Republic, if you can keep it.

The erosive power of the tyranny of the masses is part of what the framers had in mind when they created a Constitutional Republic first and a Congress of the People second, the first to safeguard the individual liberties to pursue life, liberty, and happiness and the second to hammer out the nuance of running a functional government.

The framers had the right idea but they seem to have underestimated the erosive power of time and the unbounded growth of the governmental machinery which has metastasized on a glut of taxes and inflation for the past 247 years. Giant loopholes like the "Commerce Clause" have been exploited by policymakers to expand the definition of federal power, each expansion being yet another small or not-so-small encroachment on individual liberty.

So, how does this end? Are democracies mortal as Tytler asserts? Are they fated to inevitably collapse under the moribund weight of an ever more desperate populace raiding the public purse? Or is it possible to push back against this dynamic and wrest control of the republic back toward its Constitutional designs and away from hungry special interest groups? If that is possible, what would it take?

Architecture for reversal

We need look no further than the current prosecution of Trump to see if there is evidence of restraint by the party in power. Rather than simply undo the policies of Trump, the current administration is not only continuing them but they are attacking him politically in the hope of preventing him or anyone like him from ever holding public office again. This seems to be a tacit warning to anyone else who would seek to threaten the Uniparty's control. Regardless of what we think of Trump as a candidate or as a person, the political machinery that is attempting to undermine him should scare us all. It is a powerful, unthinking, and ruthless machine. Even if it is arguably pointed at a worthy foe currently, we should be wary that it may not always be thus.

Where are we headed?

If a reversal is not possible, then where does this eventually lead? Tytler claims that fiscal failures will lead to dictatorship but is it a direct path and is it inevitable?

Looking back at Athens, the path of devolution seems to have taken a turn through oligarchy before being subsumed into the Roman republic's particular brand of tyranny. Contemporary and subsequent commenters described the kind of democracy as practiced in Athens as the poor tyrannizing the rich or a kind of collective tyranny. Still it serves as a well studied historical example of how a democracy can evolve and so is instructive here.

If one of the paths of democratic devolution takes us through oligarchy, we can find a ready example of this in the insider trading by improbably wealthy elected officials. A friend of Liberty Papers covers this better than we can here in their latest piece.

So, between our elected officials ignoring their duties to the people while enriching themselves, and internecine political conflict between the parties in power, while special interest groups fight over scraps of benefit and control, there is little evidence that hope for a reversal should be considered anything other than a pollyannaish denial of reality. We're headed somewhere but it is not back to some halcyon vision of a fairer past, unfortunately. At least, not directly.

Time wounds all heels

As optimists, it pains us to end this piece on a negative note. But the inexorable arrow of time again asserts itself. Thermodynamics and the tendency toward entropy is not to be trifled with. It seems we will need to play through the slow collapse of our once great nation.

Everything dies. Money dies. Societies die. Civilizations die. It's extremely regrettable that we must watch as the greatest political experiment to date also dies. Let's just hope that what emerges on the other side is something better and is at least as robust, if not more robust, to the powerful erosive forces of time and human nature.

If you can keep your head when all about you

Are losing theirs and blaming it on you

-Rudyard Kipling, from “If”

Subscribe now

Courage is a difficult term to pin down. Most people call to mind a person facing down a dangerous threat or dauntlessly engaging in a high risk activity but courage is a much more frequently applicable and common skill.

The kind of courage this piece is about is the latter kind. It’s the courage to disagree when people are piling on to trash a person not present in a conversation, the courage to call out misconduct that others are consciously ignoring, or the courage to stand fast in one's beliefs when people in power are micturating down our backs while telling us it's raining.

It's this brand of courage that hardens our minds against propaganda and puts the ferrite into our moral compasses. This is a skill as well as an attribute and is much more frequently useful than the more obvious kinds of courage.

Inspiration

The inspiration for this essay came from some of the commentary on our recent pieces. (Please keep the comments coming! The engagement is increasingly stimulating and is part of why we began this essay project.)

Times change, attitudes change, and narratives change, but one thing that never changes is the use of fear by people in power to divide the population and control a narrative. We've seen this recently with the fear mongering around AI, Aliens (I can't believe we have to discuss this), and Energy We also see this around the gun issue, most recently in the authoritarian actions by the Governor of New Mexico.

Instilling fear into the populace activates brain patterns that seem to circumvent careful and nuanced reasoning and is an extremely useful tool for propagandists who simply want people to think a certain way, behave a certain way, or consume a certain way.

Fight or Flight

Fear triggers our sympathetic nervous system which is involved in the fight or flight response. It is hard wired by nature to respond quickly because it is responsible for getting us out of danger. The path from stimulus to action is short and does not involve the parts of our brains devoted to slow contemplation or reason. This is also probably why it is vulnerable to hacking by skilled propagandists. Once they learn what inspires fear in us, they need only present the thing they are trying to control as a source of that fear and they can produce the desired response.

This is possibly also why online discourse devolves so quickly into virtual shouting. A troll or politician need only raise a hotbutton issue which is connected in some way to fear and let the heated discourse take on a life of its own. A modern day apple of discord.

Courage is Defiance

Ask most people and they will tell you that propaganda does not work on them. They are astute and see it coming and so are unaffected. This may be true to some extent or another in most people but each of us has our vulnerabilities.

The surest sign that someone has found one of our vulnerabilities is when we have an emotional reaction to some piece of information, positive or negative. Schadenfreude at some powerful person getting their comeuppance, a grave new threat facing humanity, the possibility of war, or a danger to our children are just some example pathways into our emotional center. When something plants itself there it takes effort to slow down our thinking and control our emotional response in order to allow our reasoning mind to grapple with the subtleties of whatever issue is at hand. Without a concious choice to do this, our baser instincts may take over.

Having the courage to remain skeptical of emotional information regardless of its source is harder than it sounds. We don't always see it coming and our brains can be too fast to catch ourselves.

The world feels like it is on the precipice of a dark and tumultuous time where information may be the primary weapon. It's never been more important to develop a practice of mastering our fears in order to be able to parse the professionally crafted narratives from objective truths.