The Ins & Outs Of Whose Money Is It Anyway?
“Inside, Outside…. Leave me alone!
Inside, Outside … Nowhere is home!
Inside, Outside … Where have I been?
Out of my brain on the 5:15…”- The Who
There’s been a massive reaction to Credit Suisse analyst Zoltan Poszar’s note about the birth of a new Bretton Woods agreement.
Every investor in the world should read it. Zerohedge posted (behind their paywall) a lengthy analysis of Poszar’s musing along with some reactions from Wall St. It is well worth your time.
The people most freaked out about this note are the Keynesians who worship at the altar of what Poszar calls Inside Money — money that only exists inside the financial system, bonds, credit, dollars, euros, etc.
Austrians, like myself, have always understood that eventually Inside Money fails because it is ultimately nothing more than a Ponzi Scheme built on top of Outside Money — money that exists outside the financial system, like commodities and bitcoin.
Poszar makes his early case and then goes through the mechanics of what is happening in the financial plumbing of the world economy right now to prove the stresses are real and building quickly towards an implosion of Inside Money and an explosion of Outside Money.
Again, anyone with a passing acquaintance with Austrian business cycle theory and Mises’ Theory of Money and Credit always knew this day was coming.
Today’s “Inside Money” standard, known colloquially as the Dollar Reserve standard, is actually what I like to call “Milton Friedman’s Nightmare.” It is nothing more than a system of competitively devalued and inflated debt-based scrips running around drinking each other’s milkshakes until everyone’s glass is empty.
FYI, there are a lot of empty glasses around the world right now and more are being created everyday as the financial system turned predatory after the Lehman Bros. collapse in 2008.
It was then that the Central Banks and governments turned fully against the people sucking up more and more outside money by inflating inside money egregiously to control more and more of the real wealth of the world.
There is only one problem with that, however. Eventually, you run out of property to squeeze out of people’s hands. The more you take, the less people are restrained by little things like laws.
Eventually two things happen.
The first is what we’ve been seeing from Russia and China for the past twelve years — steady accumulation of gold and other hard assets, outside money, including the building of real manufacturing infrastructure as well as the financial infrastructure to house it.
The second is just over the horizon — the moment where all the legal claims to controlling outside money mean nothing when enforcement of those legal claims gets exposed as a bluff because there aren’t enough enforcers capable of keeping the looters from taking it.
Look, I’m as much a private property guy as you can possibly conceive of but I made my peace a long time ago with what those claims of private property actually mean in the very real sense to me personally and my limits of defending them.
I can lay claim of ownership to hundreds of acres of land. I can even have a deed that proves I bought it from someone else who had a legal document to ownership. That’s legal ownership. Now, real ownership is actually being able to defend that claim by constantly applying your time and energy.
I live rural, folks. I can tell you that where the roads lie and where the legal property corners are do not square with each other. And the reality is that when you live like that, little things simply aren’t worth your time.
But, if you are a stickler for this stuff, that means, for example, rousting squatters, pressing claims of borders if people cut the corner driving along the public easement, etc. But it’s your money you have to spend, your time. You have to put up the fence, or the pole or the sign. You have to ‘police’ that claim.
And if you don’t, do you really still have that ‘claim’ to that property? Legally yes, but de facto? Be honest with yourself.
Libertarian theorists have juggled this question around for years and it naturally comes down to as Hoppe would put it, “the private production of defense.” Are you willing to continue pressing that claim over property that you are not actively ‘mixing your labor’ with?
If not, then let it go and let someone else make better use of it.
I know this opens up a massive can of philosophical worms. That’s exactly the point I’m trying to make. When civilization breaks down, legal claims tend towards zero value.
Civilization breaks down through the systemic subversion of the agreed upon rules to the advantage of some at the expense of the other.
And what bigger subversion of the rule, “thou shalt not steal” could there be than a debt-based Ponzi scheme of inside money being used to suck up legal claims to most of the world’s valuable resources while actively suppressing the value of the competing outside money to defend people’s claims to it?
This is what Poszar is implying when he says we’re moving away from inside money to outside money. Inside money is created through rules and laws, not markets.
Outside money is created through labor, time and human ingenuity. It is tokenized human capital.
This is the real implication of Poszar’s note that we are approaching a new Bretton-Woods where outside money will replace inside money as the reserve asset of the financial system.
The West has stupidly picked a fight with the one country, Russia, that has the commodities needed to run the world and bring about this return to an outside money based system.
Poszar rightly argues that the inside money system only works if commodities trade within tight spreads, ie. almost zero geographic arbitrage. This is another way of saying, this shit money is ,only worth using if everyone has confidence of the system because commodity prices are not under real systemic stress.
It works because everyone still believes (wrongly) that the rules of civilization are mostly equitable and it’s possible to defend your property through its institutions.
Individual commodity markets can be subject to the vicissitudes of living — boom/bust cycles, weather, etc.. But when the entire commodity complex is under stress like it is now, that’s a ‘no-confidence’ vote against the inside money system.
That’s what we witnessed breaking last week with the London Metals Exchange shutting down futures trading in nickel.
Now let’s think through what we now know about this situation which has come to light since it first occurred and Poszar wrote his little note. We found out that the LME was shut down because one Chinese tycoon was caught massively short and his counter-party was one of the most systemically-important banks in the world, JP Morgan Chase.
Moreover, the LME didn’t reopen because he didn’t want to cover his short, but double down. And now the LME is trying to reverse all the trades that occurred on Wednesday.
Rules for thee and not for me. Oh look, someone thought all that inside money was actually worth something to claim outside money in the real world. How quaint.
I’m sure this situation will eventually work itself out. But, let’s be clear here, the LME is now effectively done as an exchange. Just like Black-Faced Hitler destroyed the concept of private savings in Canada a few weeks back because some truckers made him look like the little bitch that he is, the LME undermined global confidence in it as a way to coordinate supply and demand for important commodities through price and time.
It is also just like the US State and Treasury departments making a mockery of the concept of foreign exchange reserves and the value of anyone’s savings held in something other than their deplorable, little hands?
Now let’s connect some other dots shall we?
Because here’s the thing everyone has forgotten going back 10 years….. Who owns the LME?
It ain’t London. It ain’t New York. It’s China. And they bought it 10 years ago.
For those wondering when China was going to make its move to support Russia in this financial war, I think it happened on March 8th when they shut down the LME. What do I mean by this?
Let’s set the Wayback Machine to last year shall we? Do we all remember Archegos Capital? Bill Hwang’s ridiculous one-way portfolio of CFD’s for momentum meme stocks which pulled in nearly every Western Prime Broker into a vortex so powerful it shook the entire financial system to its core?
Back I noted that just prior to Archegos blowing up, Ukraine had “declared war on Russia by making it Ukrainian security policy to retake Crimea.” and prominent members of the US State dept. calling Taiwan “a country.”
So I asked this question:
“If you were the Chinese and you were now in a hybrid war with the U.S. how would you send a message back across the Pacific?”
By blowing up a test financial nuke like Archegos was my conclusion.
So, now here we are a year later with a real hot war in Ukraine. The West is screaming at Russia for abrogating legal agreements and the UN Charter. The Russians watched the US and NATO unilaterally pull out of such treaties previously under the last three presidents, knowing full well that ‘legal claims’ to anything at this point aren’t worth anything if they cannot be enforced.
The war in Ukraine is a manifestation of my second effect of stealing real wealth through inside money.
Ukraine is steadily, inexorably being swallowed up by Russia’s Special Operation there, establishing new facts on the ground which make a mockery of all of these previous legal arrangements to property. Russia just pulled up the boundary markers and said, “They are here, now.”
And the question everyone has been asking is, “What are the Chinese going to do about all of this?”
Well, I think, they just did.
Why would the LME allow this guy to amass this insane position in Nickel futures when he’s clearly not interested in taking delivery of the metal (the whole purpose of commodity futures trading in the first place). He’s just a speculator. So, position limits don’t matte all of a sudden? But, if I’m China I allow this to get out of control, knowing all it takes is the application of a pittance of newly-minted inside money to blow up the whole nickel market.
And with it the validity of the LME as a futures exchange.
I’m having a hard time not seeing this as China just fucked the West completely by destroying the validity of the LME.
It could just be, like Archegos, an initial round of financial system blackmail. Today nickel, tomorrow…. gold?
Regardless, it just broke the confidence of the LME as a clearinghouse for commodity traders.
This means that we’ve seen the peak of the LME/CRIMEX control over the gold and silver markets as capital will now shift away from London to Shanghai. Remember, Shanghai has a well-established futures exchange for what? Gold and oil. And what does that oil contract represent? Medium-sour oil, the most plentiful of which is {drumroll please!}… Russian Urals grade.
And now the global financial markets, which are dependent on the fiction of paper gold (‘inside gold’) as the real reserve asset of the system inflated to extreme numbers, >200 oz paper to every 1 oz of physical reserve, are vulnerable to the worst kind of deflationary shock we’ve ever seen.
Poszar gave us the clues with his note.
The Petrodollar is the M0 of global trade. Paper Gold is the M0 of the financial markets on which the current asset pricing system is based. Inside money is deflating, outside money inflating.
Wall St. realized the petrodollar was dead ages ago and that the move for them now was to get ahead of the game and into the other outside money worth considering, bitcoin. Of course, they want to recreate the old paper gold trade with bitcoin to keep their inside money games going. But, I don’t think that’s going to be enough to save them.
The FOMC is staring at an existential choice this week. How much do we raise rates in the US knowing the deflationary shock it will have on asset prices, especially since the ECB just signaled it’s getting on the tightening bandwagon?
Because if the Fed is aggressively hawkish on Wednesday that is your signal that Congress’ new spending blackmail will not be funded with cheap inside money anymore. The cost will be higher than the US can afford and stay solvent. If they aren’t then they caved and it’s time accelerate personal plans of de-dollarization to defend what property you have left.
Russia and China should control the Gold and Oil trades now. They will be the price-makers. We will be the price-takers. They are about to change the denominator in the global forex markets from the USD (inside money) to gold/oil (outside money).
What we have to realize now is that real price discovery for gold and oil are going to shift quickly away from London and Chicago and towards Shanghai and Moscow. Expect announcements from Russia and China deepening the relationship between the MOEX and Shanghai for coordinating metals and energy futures trading to improve liquidity on both exchanges.
It’s the right play, honestly.
Biden going it alone against Russia on banning imports of Russian oil is a move to destroy the U.S. energy markets and our economy. It is pure scorched earth policy.
Now Biden et.al. are looking for ways to freeze Russia’s gold so they can’t spend it. What these congenital morons do not realize is Russia isn’t going to SPEND ITS GOLD, it’s going to ACCUMULATE EVEN MORE OF IT.
Freeze it all you want guys, you won’t be in power in eight months. Right now Wall St. and the Fed have to step in and demand a change at the top of the US government to oust these insane Davos vandals or the US is toast along with the smoking hole that Europe is already.
