No, Inflation Is Not a Product of Corporate Greed
No, Inflation Is Not a Product of Corporate Greed
Seventeen months ago, as the keys to the oval office changed hands, for all of the political animus and theatrics, one thing seemed a given: the US economy would roar back to vitality in historic fashion, a point of optimism in a nation of discord and incertitude. Yet hope would give way to ambivalence, which, in turn, gave way to serious doubt. Today, a pathetic 23 percent of Americans feel economic conditions are even “somewhat good.” The primary reason for such abysmal economic sentiment? Inflation.
As consumer prices have accelerated out of control over the past year, a new political narrative on inflation has emerged, one that alleges corporate impropriety as the primary catalyst. The motive for such a messaging shift from select members of the political apparatus is clear: a need to shirk accountability for evidently inflation-inducing policies. Unfortunately, the corporate greed narrative has apparently paid dividends to its progenitors, garnering increasing acceptance among the body politic at large. Indeed, according to one poll from Data For Progress, a majority of likely voters now believe price-gouging is a major contributor to heightened inflation. However, that inflation is brought about by corporate greed is a sophistic political lie in every respect.
Yes, corporations are greedy. People are greedy. It turns out that greed is a natural characteristic of the human condition. It always has been. Why, then, has inflation only recently exploded after 40 years of calm, now clipping along at better than four times the Federal Reserve’s target annual rate of two percent?
In May 2020, the Consumer Price Index (CPI) grew just 0.1% year-over-year. Are we to believe that corporations were simply feeling particularly benevolent, only to reverse course in dramatic fashion the very next year? Of course, that is preposterous.
But the prevailing evidence that peddlers of the corporate greed narrative have repeatedly cited is the reality that corporate profits are at historic highs. This is, in fact, true. But it is entirely irrelevant to inflation itself and is not even indicative of any measurably intensified greed.
The Producer Price Index (PPI), which measures cost increases for businesses, is up 10.8 percent from last year. With consumer prices rising at 8.3 percent over the same period, this frankly means that American businesses en masse are likely not even passing on the full extent of the higher costs they themselves are paying, to consumers. So how can this be, even as corporations are raking in record profits? The answer lies in a distinction that the corporate greed crowd will never make: the distinction between corporations and businesses.
In fact, just five percent of businesses are corporations. While the CPI measures the general prices that businesses are charging, corporate profits figures only measure the profits of large corporations. Yet it is chiefly small businesses that cannot afford significant increases in the cost of doing business because they have fewer resources than their larger corporate counterparts. Thus, it is highly probable that small businesses, which account for nearly half of American GDP, are primarily driving broad price increases, on no account of elevated greed, but rather as a result of an increase in their own cost of doing business.
Former Labor Secretary Robert Reich is perhaps the most prominent purveyor of the corporate greed doctrine of inflation. If anyone can point to resounding evidence of malign corporate price-gouging, it should be Reich. In an article laying out his argument for “corporate power” being the catalyst behind record inflation, Reich condemns multinational coffeehouse chain Starbucks for announcing price hikes earlier this year despite being “so profitable.”
What the twice Ivy-educated pundit fails to mention is that Starbucks’ Q1 2022 earnings were cut by more than half when compared to Q4 2021, despite revenue holding steady. Q2 2022 earnings dropped below that of even Q1. What’s more, the company reported lower earnings in 2021 than it did back in pre-Covid 2018, despite having higher revenues. Reich even conveniently ignores the fact that Starbucks recently revealed it would be raising its minimum wage to $15 per hour nationwide beginning this summer.
Evidently, Starbucks isn’t the insatiably gluttonous enterprise that Robert Reich would like you to believe it is. And this seems to be a common theme with many of the companies that he and others proffer as evidence of nefarious profiteering. But it still doesn’t answer for why corporate profits are at historic highs. First, it is important to understand that corporate profit margins are not significantly higher than they were pre-Covid. With that established, it is likely that inordinate growth in consumer spending since the Covid recession is largely to blame for record profits. Needless to say, when Americans drop unprecedented quantities of cash on consumer products, companies whose costs don’t rise significantly fare pretty well.
Certainly, it is understandable how the corporate greed dogma has caught on with vast swathes of the American public. Rancorous anti-corporate sentiment has been prevalent in America for years, and corporations, as such, make for quite convenient political scapegoats. But any effort to broadly place culpability for inflation on the private sector is demagoguery at best, and almost always attempted by ultracrepidarian activists rather than studied economists.
The reality is that the true offender behind record inflation is the US government. The Federal Reserve has inflated the money supply by over 40 percent since the beginning of 2020, allowing congress to hand out checks to the public and driving an unhealthy initial spike in disposable income. As consumers spent off this superficial wealth, prices soared and disposable income tumbled. Consequently, today, as inflation ravages the wallets of everyday Americans, disproportionately impacting low-income families, the personal savings rate has plunged to just half of what it was in early 2019 and is now rapidly approaching all-time lows.
American citizens are being forced to spend larger portions of their income on basic necessities and mundane lifestyle items, leaving less–or no–room for economically stimulating investment or leisure. The great evils of government–not corporation–inflation are every day becoming increasingly apparent.
Meanwhile at the Fed....
Recently, the Fed raised interest rates by 0.25 percent, after another 0.25 percent hike in February. The interest rate is now at 4.9 percent. The annual consumer price index (CPI) has been decreasing in recent months and it was 6 percent in February. However, according to Shadow Government Statistics, if we measure the CPI by the methodology used in the 1980s (see how the CPI’s methodology was changed here), the CPI has also decreased in recent months, but it is barely below 15 percent.
After the collapse of FTX and the layoffs in the tech sector in November, the US banking sector is the one bleeding right now. The US has been living in an artificially ultra-low interest rate (or negative real rates) environment since 2001. This created a lot of distortions in the allocation of resources in the economy, by incentivizing companies and financial institutions to take huge risks. Plus, bank regulations made by the US government encouraged banks (through favorable accounting) to accumulate Treasurys and mortgage-backed securities (MBSs) since they didn’t take a haircut on those assets (and neither they were required to mark them to market). So, as those assets were losing value, banks could pretend there were no losses.
The US banking system was bailed out by the Fed shortly after the collapse of Silicon Valley Bank and Signature Bank and the Fed's balance sheet increased again (chart 1) and is now at $ 8.7 trillion (the peak was $ 8.9 trillion). The monetary base (M0) likely increased as well, but the data is not up to date.
The decrease in the CPI is mainly due to the fact that the monetary aggregates were contracting. As the Fed was no longer buying Treasurys and MBSs, the monetary base (M0) was not increasing and even underwent a small contraction since April 2022. Bear in mind that the bailout mentioned above is not yet an official quantitative easing (QE). That is, the Fed is not effectively buying banks' assets, but rather making loans to them using these assets as collateral (however, to do so, it increases the monetary base to make these loans and puts these assets in its balance sheet; so, it's the same effect).
Chart 1: Fed Balance Sheet (Green) and M0 (Red), 2020–23
Source: FRED; author’s own elaboration.
M1 and M2, which include money that actually circulates in the economy and which have actual influence on consumer prices, also contracted in recent months, after a significant increase in 2020-21.
Note: Murray Rothbard’s and Joseph Salerno’s true money supply (TMS) is a more precise measure of money circulating in the economy. TMS differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits and retail money funds).
If M1 and M2 increase significantly (like it did in 2020-21) alongside M0, then the CPI is likely to rise again. The increase in M0, by itself, does not cause consumer price inflation, but it does cause misallocations of resources in the economy (as the central bank buys rotten assets, preventing companies and financial institutions that are wasting resources (they make investments with no return) from going bankrupt and releasing those resources for potential sustainable investments. The expansion of M0 also causes asset price inflation (real estate, bonds and stocks).
This latest interest rate hike raised the IORB (Interest Rate on Reserve Balances), which is the main rate the Fed uses to influence the Federal Funds Rate (FFR), from 4.65 percent to 4.9 percent. In July 2021, the interest rate on reserve balances replaced the interest rate on excess reserves (the interest that banks received from the Fed on excess reserves they held with the Fed and which was the rate that the Fed used, since 2008, to influence the federal funds rate) and the interest rate on required reserves (the interest rate on reserves that banks are required to hold with the Fed). For details on how the Fed began to use the interest rate on excess reserves to influence the federal funds rate in 2008, read pages 61–68 of my article at Procesos de Mercado.
Note that the federal funds rate has been almost on the same level as the interest rate on excess reserves (and now as the interest rate on reserve balances):
Chart 2: Federal Funds Rate (Red), Interest Rate on Excess Reserves (Green), and Interest Rate on Reserve Balances (Orange), 2019–23
Source: FRED; author’s own elaboration.
The Federal Open Market Committee – FOMC stated:
The Committee anticipates that some additional [monetary] policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation [prices] to 2 percent over time.
However, it also stated:
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals.
This could be seen as an indication that the Fed rate hikes may be near the end. And we can never trust the FOMC’s projections.
And the fact that the Fed is increasing its balance sheet again already undermines its commitment made at the February meeting:
[...] the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
This same commitment was made in the last meeting.
An increase in interest rates means a decrease in the prices of fixed-income assets (like corporate bonds and government bonds) and a reduction in the present value of future revenues of companies (which makes their stocks go lower). In Q4 2022, banks registered unrealized losses. The total of these unrealized losses (including securities that are available for sale or held to maturity) was about $620 billion. Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry.
With the Fed raising rates once again, there could be more turmoil in the banking system and/or other sectors of the financial market as these losses tend to increase. The Fed is loosening monetary policy on the one hand (by expanding the M0) and tightening it on the other hand by raising rates. It makes no sense.
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Three Congressmen Introduce Gold Standard Bill to Stabilize the Dollar's Value
As America faces the twin threats of inflation and bank failures, three U.S. congressmen introduced a pivotal sound money bill that would enable the Federal Reserve note “dollar” to regain stable footing for the first time in more than half a century.
Rep. Alex Mooney (R-WV) - joined by Reps. Andy Biggs (R-AZ) and Paul Gosar (R-AZ) - introduced H.R. 2435, the “Gold Standard Restoration Act,” to facilitate the repegging of the volatile Federal Reserve note to a fixed weight of gold bullion.
Upon passage of H.R. 2435, the U.S. Treasury and the Federal Reserve are given 24 months to publicly disclose all gold holdings and gold transactions, after which time the Federal Reserve note “dollar” would be formally repegged to a fixed weight of gold at its then-market price.
Federal Reserve notes would become fully redeemable for and exchangeable with gold at the new price, with the U.S. Treasury and its gold reserves backstopping Federal Reserve Banks as guarantor.
Monetary experts have noted a return to a gold standard would substantially curtail the economic damage caused by inflation, runaway federal debt, and monetary system instability.
“A gold standard would protect against Washington's irresponsible spending habits and the creation of money out of thin air," said Rep. Mooney in a statement.
"Prices would be shaped by economics rather than the instincts of bureaucrats. No longer would American families, businesses, and the economy as a whole be at the mercy of the Federal Reserve and reckless Washington spenders.”
The Gold Standard Restoration Act also makes several findings as to the harm the Federal Reserve System has inflicted on everyday Americans - particularly since President Richard Nixon “temporarily suspended” gold backing of America's monetary system in 1971.
H.R. 2435 points out: “The Federal Reserve note has lost more than 40 percent of its purchasing power since 2000, and 97 percent of its purchasing power since the passage of the Federal Reserve Act in 1913.”
Historians have observed that the elimination of gold redeemability from the monetary system freed central bankers and federal government officials from accountability when they expand the money supply, fund government deficits though trillion-dollar bond purchases, or otherwise manipulate the economy.
“At times, including 2021 and 2022, Federal Reserve actions helped create inflation rates of 8 percent or higher, increasing the cost of living for many Americans to untenable levels…enrich[ing] the owners of financial assets while… endanger[ing] the jobs, wages, and savings of blue-collar workers,” H.R. 2435 states.
Notably, Rep. Mooney's bill would also require full disclosure of all central bank and U.S. government gold holdings and gold-related financial transactions over the last 6 decades - a seemingly taboo subject surrounded by mystery and deception.
“To enable the market and market participants to arrive at the fixed Federal Reserve note dollar-gold parity in an orderly fashion... the Secretary and the Federal Reserve shall each make publicly available… all holdings of gold, with a report of any purchases, sales, swaps, leases, and any other financial transactions involving gold, since the temporary suspension in August 15th, 1971, of gold redeemability obligations under the Bretton Woods Agreement of 1944.”
In the years leading up to Nixon's panicked “temporary suspension” of gold redeemability, abusive U.S. deficit spending and currency debasement had prompted many foreign central banks to turn in their Federal Reserve notes for gold.
However, this disgorgement of America's gold holdings was largely conducted in secret.
That's why H.R. 2435 also requires the Fed and the Treasury to disclose “all records pertaining to redemptions and transfers of United States gold in the 10 years preceding the temporary suspension in August 15, 1971, of gold redeemability obligations.”
U.S. sound money groups and industry leaders are cheering Mooney's actions.
"Government cannot continue to spend and print on a massive scale without producing existential threats to the currency and our economy," said Lawrence W. Reed, president emeritus of the Foundation for Economic Education.
"The gold standard never failed America, bad ideas and bad politicians did. If we do nothing, disaster awaits us just as it drowned earlier civilizations that spent and inflated their way to ruin," Reed continued.
“Today's debt-based fiat-money system serves primarily to support big government and wealthy financial insiders - while the Federal Reserve's serial policy of currency debasement punishes savers and wage earners,” explained Stefan Gleason, President of the Sound Money Defense League and Money Metals Exchange.
“A return to gold redeemability would arrest the problem of inflation, restrain the growth of wasteful and inefficient government, and kick off an exciting new era of American prosperity,” Gleason concluded.
The full text of Rep. Mooney's gold standard bill can be found here. It was introduced on March 30, 2023, and referred to the House Committee on Financial Services.
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The Federal Rorschach
Look at this chart. What do you see?
Now this chart?
And this chart, what type of thoughts come to mind?
The above images show the same thing, the Fed’s balance sheet, the only difference is the time frame (from 2007, 2018, and 2022 until today). Looking at the charts, I see inflation in its historical definition, being the expansion in the supply of money and credit; I also see one of the world’s largest accounts receivable balances, which is unlikely to ever get fully paid off; I see money creation, counterfeiting, and currency debasement.
The balance sheet fully displays the record of the Fed’s monetary injections. For those who can recall, this is typically followed by financial ruin. It is through understanding the nature of central banking and the ebbs and flows of the balance sheet, where one can make a fair prediction as to what the future has in store.
Even if central bankers were moved by altruistic views, the mere fact they possess the ability to determine the national interest rate and manage the money supply makes them superfluous. Therefore, by taking market intervention where none is required, they only make matters worse.
What cannot be easily quantified, but should be considered, is the amount of effort the world spends trying to anticipate the Fed’s actions. If investors and entrepreneurs were able to focus on what the market will do next, instead of what the Fed will do next, the world would be a much better place to live, and resources would be allocated far more efficiently.
In 2010 Dr. Bob Murphy wrote about this problem:
Knowing that the bank had the ability to inject massive doses of new money into the market, investors and businesspeople would have less faith in the long-run purchasing power of the money unit. They would spend time and devote resources to hedging themselves against erratic central banking decisions, rather than focusing exclusively on the "fundamentals."
This is exactly where many have been their entire lives. Way too much time and effort is dedicated to interpreting the latest policy stance, while mainstream economists largely seem incapable of envisioning a world without central banking. As for the masses, they appear to be unaware of the nefarious scheme we call monetary policy.
Despite no one being able to guarantee the size of the balance sheet a year from now, let alone by this Thursday’s data release, each new day brings the potential for a new crisis, and with that the opportunity for a new market intervention. Until the Fed is properly disbanded or at least incapacitated, we must continue to read their tea leaves, interpreting this Federal Rorschach of balance sheet expansion, Fedspeak, and historical failure.
To flourish during a period of dollar depreciation and economic catastrophe, it behooves everyone to at least try to predict the movements of our erratic and certainly compromised central bank. When looking at the balance sheet, everyone might see something different, but if there’s anything it helps reaffirm, it's that in the long run, the balance sheet, money supply, and most prices will only go up. This is all part of some grand design by the Federal Reserve in a financial system where those at the bottom pay dearly for those at the top.
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Bracket Creep: Delaware’s Hidden Income Tax
The recent acceleration of inflation in the U.S. has undoubtedly caused most Delawareans to see the difference between nominal or money income and real income or what their income actually buys. The loss in purchasing power of Delaware households because of inflation is compounded by the fact that Delaware, like several other states, has a progressive income tax and doesn’t adjust its income tax brackets for inflation.
Delaware’s income tax brackets have remained the same since 1999. So, when nominal household incomes rise, those incomes are taxed at higher rates. This in turn results in lower disposable household incomes. This phenomenon is referred to as “bracket creep.” The loss in real income or purchasing power because of bracket creep is in addition to any loss in real income that results if the rate of inflation exceeds the increase in nominal income.
In this essay, I examine the extent of bracket creep in Delaware between 1999 and 2019 and then review the implications of this bracket creep. Figure 1 shows the change in the price level as measured by the U.S. Consumer Price Index (CPI), the mean Delaware Adjusted Gross Income (MEAN AGI), and the revenue generated by the Delaware income tax (Tax Revenue) for the period 1999-2019. All variables are index values expressed as percentages of their respective 1999 values.
The data in Figure 1 indicate that the mean adjusted gross income over the period 1999-2019 increased at an annual rate of 1.79 percent or by 45 percent over the entire period. This was less than the rise in the consumer price index which increased at an annual rate of 2.06 percent or by 53 percent over the entire period. Hence, the mean adjusted gross income failed to keep up with inflation, resulting in a loss in the purchasing power of Delaware taxpayers.
This loss in purchasing power was further diminished by the increase in personal income tax rates as households were pushed into higher tax brackets by inflation. While the real average adjusted gross income of Delaware households declined over the period, the tax revenue generated by the personal income tax increased by an average annual rate of 3.31 percent and nearly doubled over the period 1999-2019. In other words, the state of Delaware was able to nearly double its revenue from the income tax without legislating any tax increases.
Sources: Data for the mean adjusted income (Mean AGI) are from the Federal Reserve Bank of St. Louis. Data for the Consumer Price Index are annual data for all urban consumers and are from the Bureau of Labor Statistics and data for the tax revenue are from the Delaware Division of Revenue.
Table 1 shows the impact that adjusting the tax brackets annually for inflation would have had on the tax liability of households with varying levels of taxable income for the year 2019. Column 4 of the table denotes the percentage by which the tax liability for households with varying levels of taxable income would have declined in 2019 if the tax brackets had been adjusted for inflation.
Table 1. Comparison of 2019 Tax Liabilities Under Current and Adjusted Tax Brackets
| |||
Taxable Income | Current Tax Bracket | Adjusted Tax Bracket | Percent Change |
$10,000 | $262 | $190 | -27 percent |
20,000 | 742 | 407 | -45 percent |
30,000 | 1,280 | 623 | -51 percent |
40,000 | 1,835 | 1,623 | -12 percent |
50,000 | 2,390 | 2,178 | -9 percent |
60,000 | 2,944 | 2,733 | -7 percent |
70,000 | 3,603 | 3,288 | -9 percent |
80,000 | 4,263 | 3,843 | -10 percent |
90,000 | 4,923 | 4,398 | -11 percent |
100,000 | 5,583 | 4,762 | -15 percent |
150,000 | 8,883 | 8,326 | -6 percent |
The data in table 1 clearly indicate that the failure to adjust tax brackets for inflation results in lower after-tax incomes for households at all levels of income. However, the most adverse effects are felt by households which had incomes of $30,000 or less in 2019.
Bracket creep creates a number of problems. First, it results in a loss in the purchasing power of taxpayers which reduces the amount of income available for savings and capital investment in the private sector. As the Austrian economist Ludwig von Mises noted "progressive taxation of income and profits means that precisely those parts of the income which people would have saved and invested are taxed away." This in turn leads to a decline in the rate of economic growth and a lower standard of living for future generations.
In addition, bracket creep requires taxpayers to pay a higher percentage of their incomes in taxes without requiring any action by the state. Instead of forthrightly increasing taxes, the state relies on inflation to push households into higher tax brackets in order to increase tax revenue and the size of government. As Thorndike noted bracket creep is “a convenient way to raise more revenue—painful for the hapless taxpayers but painless for the gutless lawmakers.”
Higher income tax rates also incentivize higher income individuals and households to migrate to lower tax states. In fact, an increasing number of states are lowering or eliminating their income taxes to stem out-migration and spur in-migration and economic growth.
Finally, since higher income households are already in the highest tax bracket, bracket creep tends to make the after-tax income distribution more unequal as lower income households are pushed into higher tax brackets over time. It also discourages less skilled lower income workers from entering the workforce, resulting in lower labor force participation rates. This negative effect is particularly important for a state like Delaware because of its relatively low labor force participation rate. Delaware’s labor force participation rate of 60.2 percent in December of 2022 was in the lowest quartile of U.S. states. Given this, It behooves Delaware to look for ways to incentivize, not disincentivize, higher labor force participation rates.
It's time for Delaware to adjust its income tax brackets for inflation each year to prevent the negative consequences of bracket creep. If the executive and legislative branches of Delaware’s government want to take more of the taxpayers’ money, they should be required to do so by transparently raising tax rates. This is not such a novel concept. Even the U.S. Congress recognized how deceitful the use of bracket creep was as a means of raising revenue. As a result, in 1981, it voted to pass President Reagan’s Economic Recovery Tax Act which included a provision to adjust tax brackets for inflation.
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Tennessee Governor Signs Bill to Protect State Funds with Gold and Silver
Tennessee Gov. Bill Lee has signed a measure into law that would empower the State Treasurer to invest state funds in physical gold and silver.
House Bill 1479, introduced by Rep. Bud Hulsey, passed out of the House of Representatives on Monday with a 98-0 vote. A week later, the same bill received a 33-0 vote in the Senate.
In an exclusive comment to the Sound Money Defense League, Rep. Hulsey said, “Gold and silver have been real currency for the past 5000 years. [Passing HB 1479] not only provides a hedge for the State, but gives us varied options while facing a shrinking dollar and the threat of CBDC’s.”
Passing with strong grassroots support and backing from the Sound Money Defense League and Money Metals Exchange, the bill defines “bullion” and “specie” and provides that “subject to appropriation, the state treasurer may purchase and sell gold or precious metal bullion or specie that will be directly owned by the state, and in the custody of the state treasurer.”
Additionally, the twin bills would allow the state treasurer to “make and enter into contracts, trust instruments, agreements, and other instruments with a person to effectuate this section, including, but not limited to, financial institutions, accountants, auditors, attorneys, consultants, and other contractors.”
Lastly, the measure calls for “physical gold and precious metal purchased under these acts to be custodied by the state treasurer in a state depository, and maintained in a vault within the state depository's banking facilities in accordance with accepted industry standards for secure storage, and within the geographical boundaries of Tennessee.”
States that help set up the infrastructure to protect state funds with the monetary metals will help further to bring gold and silver into use as an alternative to the inflationary paper-money system, as well as buttressing state funds, many of which are invested in risky paper assets.
Rep. Hulsey continues to be a powerful voice for sound money in Tennessee, earning him the 2022 Sound Money Legislator of the Year award last year for his tireless work on eliminating Tennessee's state sales tax on gold and silver.
After ending the state sales tax on gold and silver, Tennessee shot up the 2023 Sound Money Index rankings to earn a 9th place finish. Tennessee also recently ended its state income tax on sales of all capital assets, including gold and silver.
Several other states are considering their own sound money bills this month, including Alaska, Idaho, Maine, Missouri, Mississippi, South Carolina, Vermont, Iowa, Kentucky, Oregon, and more.
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The Instability of Stablecoins
At the Austrian Economic Research Conference (AERC 2023) event in Auburn, Alabama, behind a wooden podium once used by Ludwig von Mises, I presented my paper: The Instability of Stablecoins.
Whether it’s called a pyramid, ponzi, shell game, or a grand delusion containing fraudulent elements, there’s something peculiar going on in the stablecoin industry; almost too familiar, and it requires explanation...
As of time of writing, CoinMarketCap shows the top three stablecoins by market cap being: Tether (USDT), USD Coin (USDC), and Binance USD (BUSD), valued at $79 billion, $33 billion, and $8 billion respectively.
These stablecoins work as follows:
You have $100 USD. You deposit this money with the Circle company (operator of USD Coin). In exchange, they create 100 USDC coins and give them to you. You are now free to use the coins at your discretion by holding them in a digital wallet, depositing on a crypto exchange, sending to friends, or making purchases online at participating retailers.
“Stability you can trust,” is a heading on USDC’s website, as explained:
Known as a fully-reserved stablecoin, every digital dollar of USDC on the internet is 100% backed by cash and short-dated U.S. treasuries, so that it’s always redeemable 1:1 for U.S. dollars. USDC reserves are held in the custody and management of leading U.S. financial institutions, including BlackRock and BNY Mellon.
They didn’t include Silicon Valley Bank as a leading institution, but more on that in a moment.
Tether and Binance tout similar claims. According to Tether’s main page:
All Tether tokens (USD₮) are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves.
According to Binance’s main page:
All reserves are held 100% in cash and cash equivalents; hence customer funds are always available for 1:1 redemption.
Sounds promising! The depositors simply exchange US dollars for newly minted stablecoins, supposedly always redeemable, on demand at a rate of 1:1 with US dollars. Hence the term stablecoins.
The natural due diligence to follow is to examine each company’s reserves to see what exactly comprises their asset base. Here’s Tether Holdings Limited Independent Auditor’s Report on the Consolidated Reserves Report, as of December 31, 2022.
Unfortunately no footnotes were provided that elaborate on what comprises Corporate Bonds, Funds & Precious Metals, Other Investments, or Secured Loans. However, readers should see the potential problem, which, Dr. Jonathan Newman recently articulated when referring to the banking sector:
When banks practice this kind of maturity mismatch—potentially immediate-term liabilities (deposits) backed by long-term assets (loans and Treasury securities), it is called “fractional reserve banking.”
The propensity for there to be a “run” on a stablecoin or discounting the price below 1:1 on the US Dollar should be considered an ever-present threat.
During the week of AERC, the banking crisis dominated news headlines. After a tumultuous weekend, on Monday, March 13 CNBC wrote:
Last week Circle said that $3.3 billion of its cash reserve is with SVB. After the bank’s collapse, USDC lost its $1 peg, falling as low as 86 cents on Saturday, according to CoinDesk data.
Despite the Fed not being in the business of bailing out stablecoin operators, USDC coin was saved because the Fed unveiled a multi-billion dollar bailout for collapsing banks. The intervention secured USDC’s cash reserve and the coin went back to par with the US Dollar.
Yet the pyramid is still being built!
As illustrated through BlockFi, a crypto exchange that filed Chapter 11 as of November 28, 2022, who once paid interest on stablecoin deposits just like a checking or savings account, customers could deposit their USDC at BlockFi and earn a rate of interest.
Unfortunately, these weren’t term deposits, as the fine print details:
You may make a request for complete or partial withdrawal of principal from your Crypto Interest Account at any time.
Once again there exists the same maturity mismatch between liabilities (customer’s stablecoins) due on demand against what could only be longer dated assets (e.g., US treasuries) providing interest income to BlockFi… until the scheme imploded.
In a world full of hope and desperation, in which demand deposits have become a risky endeavor, this offers very little confidence; first we must hope the crypto exchange can honor the deposit, then that the stablecoin company can honor the deposit… and in 2023 we must now hope the bank can honor the deposit!
Stablecoins offer valuable insights into how a truly free banking system could look; understanding that in a truly free banking system, there would be no bailouts. While lots can be said about stablecoins, the real systemic threat doesn’t lie within these private companies voluntarily offering services to customers. Rather, the real instability will come from an involuntary, legal tender, forced upon society – stablecoin – known as a Central Bank Digital Currency (CBDC)... Coming soon whether we like it or not.
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QT or QE: What Is This?
Leave it to the Federal Reserve to throw a knuckleball when the batter is expecting a fastball. These last few weeks have been just that, with the Fed saying nothing of abandoning their Quantitative Tightening (QT) position while engaging in what appears to be a Quantitative Easing (QE) position.
The general public may be familiar with the term QE, but it’s nothing more than inflationism as public policy, with known detriments as old as money itself. But inflationism or currency debasement doesn’t sound as appealing as Quantitative Easing, and so selling economic destruction as a cure-all is more of a successful branding initiative than anything else.
In the last two weeks, the Fed has almost completely undone a year of balance sheet wind down, conjuring up $400 billion as of last Thursday’s data release.
The problem is that QE or QT is not “economics” per se. There’s no credible theory behind money printing nor are there any guidelines which determine what exactly constitutes these terms.
If the terms QE/QT are broadly given to the direction of the Fed’s balance sheet, then we could say that in the last two weeks, they’ve been doing QE, since the net change to the balance sheet was positive.
However, if the terms are more narrowly defined to only mean the change in US Treasury holdings and Mortgage-Backed Security holdings, then we could say that the Fed is still engaging in QT, since they are still rolling off these securities. The net balance sheet increase has only been due to lending programs that temporarily help banks out of this current crisis.
Yet the magnitude and length of time must also be considered.
On Monday CNBC announced that First Citizens Bank will purchase “around $72 billion of Silicon Valley Bank assets at a discount of $16.5 billion.” The role of the Fed and FDIC is instrumental to this bank merger, with the final cost of the bailout still not known.
The [FDIC] regulator added that the estimated cost of SVB’s failure to its Deposit Insurance Fund (DIF) will be around $20 billion, with the exact cost determined once the receivership is terminated.
By simply making available new funding programs for banks and FDIC, it appears the threat of bank runs has subsided, for now. And if we’re really lucky, the Fed’s lending schemes are nearing the end, stopping at only a few hundred billion and not several trillions of dollars.
Again, “if” the money the Fed loaned is paid back promptly, and “if” the banking crisis subsides, the balance sheet should resume its downward trajectory. Then history would consider this as still part of the QT phase. Conversely, if this lending program is only just the start of much longer and larger programs to come, history will show QE began two weeks ago.
Regardless of whether this is QT or QE, we remain in uncharted waters with nothing but a promise of a bigger storm ahead. Should these lending schemes be hailed a success, then it stands to reason that when the next bank fails, the Fed will go back to the same playbook, again and again…
As for what tomorrow brings, no one knows. But Minneapolis Federal Reserve Bank Neel Kashkari continues to have no shortage of foresight for the problems he helps create, as told to CBS over the weekend:
He said that banks holding commercial real estate assets could also see losses in the future.
And in his own words saying:
But right now it's unclear how much of an imprint these banking stresses are going to have on the economy.
Noting that it was too early to determine the impact on inflation.
Clearly the Fed remains on standby, ready and willing to create money to prop up failed banks, at the same time staying committed to reducing its holdings of US government and mortgage debt. And so, the Fed really is the lender of last resort, functioning only in terms of “need” for the big banks. So long as no bank asks for money from the Fed, the Fed won’t give them any. But the minute a bank needs the Fed, the Fed will be there like any other insurance company… with an infinite amount of cash on hand, prepared to inflate dollars at little cost to them, but at a big cost to society.
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Ginning Up a Fake China Threat
Critics of the increasingly bipartisan consensus of conflict with China face a difficult task. For the (fake) China threat is not a single concrete thing that can be pointed to or otherwise signified. Rather, as a manufactured thought climate produced by a series of interlocking incentive structures, like Kafka’s Castle it looms inscrutable but no less ominous.
Upon close inspection, however, the inner workings of the (fake) China threat reveal nothing new about the anatomy of the state.
First, it serves as a legitimating device, a new reason for the continually climbing defense budgets, new toys for generals and admirals, overseas bases, the meddling by comfortably ensconced state department officials in the affairs of other states, and the existence of an intrusive national security apparatus. Stoking the fear, representatives of the state spin conflicts they seek as looming threats to everyday Americans in order to justify their continued position of power over them, with a well-funded network of think tanks and the corporate press helping prescribe the acceptable limits of public discourse in order to marginalize dissent.
Second, the (fake) China threat serves as a convenient scapegoat for the end results of the bad policies Washington itself pursued. America deindustrialized? China’s fault. Millions of Americans hooked on drugs? China’s fault. The Saudis and Iranians don’t want the Americans around anymore? China’s fault.
Et cetera.
There is one element of truth to the (fake) China threat, however. That is, the existence of an independent China (or Russia) is a threat to Washington’s accustomed privilege of being able to do more or less whatever it wants wherever it wants.
But the existence of an independent China is already a fact.
Refusal on the part of Washington to accept it will cause more than theoretical problems.
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Bank Busts Lead to Sweetheart Deals
Amidst the wreckage of bank failure grow lucrative deals. Shares of New York Community Bank Inc. surged with the announcement that the FDIC had made NYCB a “sweetheart deal” as the deposit insurer “priced the assets to move quickly,” wrote Wedbush analyst David Chiaverini in his upgrade of the stock, as reported in Bloomberg. “In exchange for the $2.7 billion discount on acquired loans [assets], plus the interest income earned on the loans and securities, NYCB will give up only $300 million in equity appreciation rights to the FDIC,” added the Wedbush analyst.
Plus, the takeover didn't include Signature's $4 billion in crypto-related deposits, included all of Signature's branches, and some of its loan portfolio, reports Business Insider. Emphasis was added because Signature didn’t have to take any bad loans.
"With New York Community's addition of certain deposits and assets of Signature's Bridge Bank, NYCB's balance sheet could be improved with less reliance on higher-cost wholesale funding. NYCB's loan-to-deposit ratio should decline from a high 119% in Q4 with the assumption of Signature deposits, while $12.9B in loans were bought for $2.7B, which equates to a 79% haircut," Bloomberg Intelligence analyst Herman Chan commented.
The FDIC killed two birds with one stone with the move, moving cherry-picked assets and deposits from a failed bank (Signature) to one that was overleveraged (119% loan-to-deposits) and possibly headed for trouble (NYCB).
Of course, sweetheart deals are nothing new. Post the 2008 crash, Rialto (a division of homebuilder Lennar) bought a 40 percent share of $1.2 billion in loans from failed banks for 40 cents on the dollar, with the FDIC carrying a loan for $1 billion of the deal at zero interest for seven years.
This was called a partnership, however, when a government entity carries its partner’s share at zero percent interest for seven years that term doesn’t seem to apply. The RE Action Committee explained at the time:
Lennar (Rialto) acquired indirectly 40% managing member interests in the limited liability companies created to hold the loans for approximately $243 million (net of working capital and transaction costs), including up to $5 million to be contributed by the Rialto management team. The FDIC is retaining the remaining 60% equity interest and is providing $627 million of non-recourse financing at 0% interest for 7 years. The transactions include approximately 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.
Attorney Bryan Knight, in 2011, called the Private-Public Investment Programs (“PPIP’s”), such as Lennar/Rialto “ the biggest waste of government spending and most damaging program to the American public.”
Knight wrote:
Rialto was given a $600 Million interest free non recourse loan by the Federal Government to purchase assets of failed banks. Therefore, Rialto has no risk in collecting on assets because no interest is accruing and Rialto is not liable to pay back the loan since the loan is a non-recourse. This gives Rialto even more incentive to refuse loan workouts and to collect asset management fees. It is not rocket science, a bank that has risk of taking a loss is more likely to work with a borrower. Here Rialto has no risk.
How the FDIC hands out favors is described perfectly by Patrick Newman in his book Cronyism writing:
Cronyism [is] when the government passes policies to benefit special-interest politicians, bureaucrats, businesses, and other groups at the expense of the public.
He continues:
The rewards of cronyism take the form of monetary gains, particularly increased incomes and profits for individuals and businesses, or psychic gains from greater power and authority.
The case of Silicon Valley Bank is especially egregious cronyism. Joseph Wang, the CIO at Monetary Macro who previously was a senior trader on the Fed’s open markets desk told Roger Hirst on Real Vision:
So, the bailout of Silicon Valley Bank was, in a sense, the bailout of millionaires and billionaires who weren't the clientele of Silicon Valley Bank. Those are guys who mismanaged your cash badly and wanted to bail out. Now, if you were going by the rule of law, you'd say that yeah, you guys. You can take it, and these are the rules. But these guys were also politically connected and very loud in social media and in the press. And so, they have influence and they can, I guess, encourage the government to bend the rules in their favor.
Winston Churchill and later Rahm Emmanuel famously said “Never let a crisis go to waste.” Cronyism never does.
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Artificial Intelligence Enhances Consumer Sovereignty
Despite the fears that Artificial Intelligence will disempower consumers, companies find it easier to keep up with ever changing preferences of consumers by applying AI technology. Companies apply AI to the infinite areas of business operations, production, pricing, customer experiences, and manufacturing processes. Firms are racing one another to integrate AI applications into their business practices to meet consumer needs.
The reality is that consumers do, in many ways, steer the production and prices of economic goods and service offerings. The consumer is sovereign in a market economy; unfortunately, some still think otherwise. Why? Because artificial intelligence is mediating streams of knowledge between buyer and seller, exposing consumers to changing market conditions, prices, and circumstances. There is an antimarket camp; this camp is not keen on the fact that consumers steer the direction of pricing and production. The result is that AI integration into business practices is strikingly on the consumer's side.
As far as businesses entities are concerned, unsurprisingly, a 2023 customer poll found that "the majority of consumers (73 percent) believe there is potential for impact on customer experience, particularly in digital settings," according to Businesswire. With firms increasing their uses of AI in operations, finance, sales, and production, it becomes apparent that the simplest input into AIaas will likely tilt toward maximizing consumer demand. Techcrunch said in a recent article, "Every organization has their gold-standard employee, and AI learning can analyze employees' traits and behaviors in customer interactions, raising the bar for all." Another tool to used to maximize human productivity within a company! On the bright side, “AI can learn from top performers and share what makes them so great,” The author added, "Every employee can be a top performer.” Ludwig von Mises said, "the consumer is sovereign and cannot be replaced in a marketplace economy." Similarly, a recent Forbes article projected positive AI trends in 2023 and beyond; the author listed ten trends to look for in the use of AI in 2023, except one of the most important, unsurprisingly, the betterment of consumer sovereignty. Consumer sovereignty is not coercive in the exchange relationship between buyer and seller. Instead, it happens “only by serving the consumers, since again, the sale is voluntary on the part of both producers and consumers,” according to Murray Rothbard.
Along with AI technologies, human touch, and interaction are required and expected in many buyer and seller transactions. However, AI will assist business owners in a big way, providing enhanced customer experiences via the use of AI-powered websites, apps, manufacturing, et cetera., and other services that consumers demand. Despite all mounting evidence showing that AI-enabled applications can address customer uneasiness in a market economy because AI is a consumer-centric tool that maximizes consumers' market information, the antimarket camp does not believe that the consumer is sovereign. We must understand that AI is a maximizing tool with generative output data. In other words, AI will allow consumers and producers to spontaneously adjust their actions in market cooperation. Artificial intelligence adapts to consumer preferences and learns the top choices within data input units over time. AI learns via natural learning systems, which virtually enlarges its storage that adjusts to preferences and parameters of pricing and production, especially in reducing cost and adopting price changes.
Therefore, the economics of information – perfect or imperfect information – does not hold in the epoch of AI—spontaneous information dispersed with the aid of AI technology between buyer and seller reigns supreme. However, the spontaneous flow of information aided by AI goes against the precepts of mainline economics that support the economy of information and the so-called equilibrium. AI is an institution of the extended order in a market economy; it drastically changes the perfection or imperfection of information, spontaneity, or stagnate forms of knowledge of market conditions. AI enables consumers' sovereignty by enabling firms to reach and satisfy customers in different places, times, and circumstances giving sellers and buyers more or less information and vice versa, precisely as F.A. Hayek and Mises have preached for so long.
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