The government strikes back

Wednesday, 26 June 2019
Adelaide, Australia
By Bernd Struben

A society that does note recognise that each individual has values of his own which he is entitled to follow can have no respect for the dignity of the individual and cannot really know freedom.’

Austrian economist, Friedrich Hayek

You’re probably familiar with Austrian economics.

It’s a branch of economics most of Port Phillip Publishing’s editors lean towards. A branch spawned by Carl Menger with the publication of The Principles of Economics in 1871.

In short, Austrian economists believe that individual choices should be at the heart of economic policymaking. Not maths heavy economic models that more often than not fail to provide accurate forecasts.

Why?

Because people are all different. Yes, even unequal. And they don’t act as a single group to reach optimal group outcomes. Or even optimal individual outcomes.

A quick example.

Let’s say the farmgate price of milk doubles without impacting demand.

Conventional economic modelling would suggest the dairy farmer’s revenues are also set to double. But Austrian economists would argue otherwise.

Sure, the farmer can keep doing exactly what he’s doing and double his income. But maybe instead of doubling his income he’d be happier working fewer hours.

He may then cut his workload in half and earn the same income as before the milk price doubled. Or maybe, motivated by good old greed, he decides to work even longer…do an extra milking each day…to take advantage of the higher prices.

The point is, we don’t know how each individual will respond to changing circumstances.

We do know that when left unmolested, individuals in a free market system will almost always deliver a better outcome than a lumbering government.

Armed with this knowledge Friedrich Hayek (quoted up top) and fellow Austrian economist Ludwig von Mises were among the first to forecast that communism was doomed to fail.

Their reasoning was simple. A centrally planned state would never have sufficient information about what drives individual citizens to make their decisions. That lack of knowledge and the inefficiencies it breeds would lead to progressively greater failures until the system collapsed.

Yes, yes, I hear you saying. But why the economic history lesson?

Because, like communism, the world’s fiat currencies could be destined to fail due to the inefficiencies and vagaries of central planning. And this potential loss of control has lawmakers across the world tossing in their sleep.

More after the markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 179.32 points, or 0.67%.

The S&P 500 closed down 27.97 points, or 0.95%.

In Europe the Euro Stoxx 50 index finished down 11.21 points, or 0.32%. Meanwhile, the FTSE 100 gained 0.08%, and Germany’s DAX closed down 46.13 points, or 038%.

In Asian markets Japan’s Nikkei 225 is down 140.17 points, or 0.66%. China’s CSI 300 is down 0.15%.

In Australia, the S&P/ASX 200 is down 8.23 points, or 0.12%.

On the commodities markets, West Texas Intermediate crude oil is US$58.80 per barrel. Brent crude is US$66.75 per barrel.

That puts WTI up 1.6% overnight. The price rise is partly due to concerns over a potential flare up in tensions with Iran. And partly by an unexpected decline in US crude stockpiles.

From Bloomberg:

Futures jumped almost 1% in New York within minutes of an American Petroleum Institute report said to show U.S. inventories dropping by 7.55 million barrels, more than twice the median drop predicted by analysts in a Bloomberg survey.’

That’s the first large unexpected fall in US inventories in a while. Though the API data still needs to be confirmed by the US Energy Information Administration, which will happen overnight our time.

Yet the real news here is that despite the big drop in inventories and the very real possibility of supply disruptions in the crucial Gulf of Oman oil corridor, WTI still hasn’t broken through US$60.



chart image
Source: Bloomberg
Click to enlarge

If war does break out, god forbid, oil prices would likely skyrocket.

But if tensions ease or remain on simmer, and Russia opts out of production cuts at next week’s OPEC+ meeting (as I expect), crude could tumble 15–20% from here.

There are a lot of moving pieces to this puzzle though. Invest with care.

Turning to gold, the yellow metal is trading for US$1,415.95 (AU$2,033.83) per troy ounce. Silver is US$15.31 (AU$21.99) per troy ounce.

In the world of cryptocurrencies, one bitcoin is worth US$12,443.15.

The Aussie dollar is worth 69.62 US cents.

The anti-financial system

In Monday’s Port Phillip Insider I wrote how bitcoin and other cryptos are a real poke in the eye for global governments.

Indeed, back in 2016, crypto guru Sam Volkering had already labelled bitcoin the ‘anti-financial system’.

The freedom to use whatever currency you want doesn’t sit well with our power hungry bureaucrats. How can they manipulate inflation, control the money supply, and dictate the yields you get from your cash savings…if you’re not using their money?

The simple answer is they can’t. Which is why we’ve seen governments around the world struggle with how to regulate or outright ban these newfangled digital currencies.

To date they’ve done so with limited success. But that’s not stopping an intrepid band of US pollies from trying to criminalise political donations made with bitcoin.

From CoinDesk:

Minnesota House Bill 2884, introduced by Rep. Rick Hansen (D), Rep. Jamie Becker-finn (D), Rep. Raymond Dehn (D), and Rep. Peter Fischer (D), wants to outlaw “from any source a contribution or donation of any digital unit of exchange, including but not limited to bitcoin, that is not backed by a government-issued legal tender.”

And the bill has teeth. It states that, ‘A person who knowingly accepts any digital unit of exchange in violation of this section is guilty of a felony.

Cue the ominous Darth Vader music. And throw in the creepy heavy breathing while you’re at it.

I’m not sure why donations must be in ‘government issued legal tender’. But I have a fair idea what our good friend, Austrian economist Friedrich Hayek would have said if he were alive today.

Here’s what Hayek had to say about governments and money, ‘The root and source of all monetary evil is the government’s monopoly on money.’

The Minnesota Democrats may not know that they’re barracking for the ‘root and source of all monetary evil’. But much of the rest of the world appears to be waking up to that fact.

At least if the surging price of most cryptocurrencies is anything to go by.

For simplicity’s sake, we’ll just stick to bitcoin today.

With a market cap of US$221 billion, bitcoin is more than 500% ‘larger’ than the number two crypto, ether.

And bitcoin’s price charts are looking more parabolic each day.

Just have a look at the one-week price chart below (in US dollars):



chart image
Source: CoinDesk
Click to enlarge

At time of writing one bitcoin is trading for US$12,334.15. That’s up 11.4% since I penned yesterday’s Port Phillip Insider.

But it’s not just having one good day.

Bitcoin is up 35.8% since last Wednesday (Aussie time). And it’s now up 234.3% since 1 January this year.

Not bad for a quasi-legal, non-government issued tender.

As I wrote to you earlier this week, there are a lot of similarities between bitcoin’s current bull run and its stellar performance in 2017. That was when it peaked over US$19,500 in December before tanking through much of 2018.

Of course, there are absolutely no guarantees bitcoin and its crypto cousins will keep marching higher through December this year.

If you’re looking to invest in the crypto space, make sure you’re fully informed. That won’t eliminate the risks of investing in a highly volatile market. But it can help to mitigate them.

The best place to start is here.

Cheers,
Bernd