The Insurance Industry and Gold

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Courtesy of Sandeep Jaitly @ New Austrian School of Economics:

Abstract

Can we assume that insurance companies will be able to do what they claim they will do under the ideology of fiat? If it seems not, what can be done to improve the situation? This essay aims to investigate the general situation of the insurance industry, likely problems that might evolve and potential remedies.

How does a general (non-life) insurance company operate? Say our company, InsureCo., provides automobile and housing insurance. InsureCo. takes in premium from their clients and pays out when required. The sum of premium earned but not required for pay outs comprises what is known as InsureCo.’s ‘float’ (or reserves.) The judicious investment of the float would give the management extra leeway in pricing v. peers. Without the imposition of fiat ideology, the float would most likely be invested in (gold coin) bills of exchange – a good that can be exchanged at ease for gold coin if required for pay-outs in order to compensate the insured for losses incurred at any moment and ahead of the bill’s maturity. If InsureCo.’s float became much larger than any pay- out that could be required, longer maturity assets such as (gold coin denominated) equity or property might be considered.

General situation

Under the imposition of fiat ideology, premium is taken in fiat and the float invested – on the whole – in government securities. InsureCo. is regulated and must keep a strict percentage of their total assets in ‘riskless’ government bonds. InsureCo. subscribes to government bonds at issue, holding to maturity earning fiat income in the interim and reinvesting the proceeds in the next issue. In a falling rate environment, each successive purchase of government bonds generates successively less income. InsureCo.’s are open – meaning the fiat ‘value’ of goods insured isn’t capped.

At some point, as fiat ideology precipitates market closures (beginning with the most marketable good; gold) InsureCo. will not be able to pay-out on claims for lack of ability; the fiat government bonds or fiat deposits on InsureCo.’s ‘asset’ ledger cannot be exchanged for the [combination of marketable] goods required for the pay- out. This is not likely to be because the fiat ‘price’ of the goods required is too high but because they’re unavailable for fiat at all.

Disappearing markets Continue reading

ECB launches bold measures including negative interest rate to boost eurozone

We are entering what is commonly termed the ‘batshit insane’ phase in European monetary policy, negative interest rates, though there is plenty more to come. This means that the bank charges you to hold cash held on deposit, encouraging you to spend instead of saving, keeping the Ponzi schemes going and to fight off deflation. If this is the case, it’s the perfect reason to buy gold and silver.

Looking at bond rates within ECB countries over the past 200 years or so, we are cruising through batshitinsaneville but no one really cares or understands, expect puppies and balloons when this all comes to fruition.

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Courtesy of The Guardian:

The European Central Bank unveiled an unprecedented package of measures on Thursday in a dramatic attempt to inject life into the eurozone’s flagging economy and ward off a damaging deflationary spiral.

In a historic first for the troubled region, the ECB boss, Mario Draghi, and his colleagues on the governing council cut the deposit rate for the region’s commercial banks to -0.1% from zero. Continue reading

BONDS MAY BE DEFYING DIRE FORECASTS (Part 2)

BUT THEY ARE NOT DEFYING LOGIC
(Part Two)
Antal E Fekete
New Austrian School of Economics

Courtesy of Professor Fekete.com:

In Part One of this two-part series I have argued that Keynes inadvertently ignored the rule asserting that the rate of interest and the price of bonds vary inversely and, as a consequence, his conclusions concerning employment, interest and money are irreparably faulty.

In this second part I shall argue that the policy of open market operations of the Fed causes deflation rather than inflation as intended. The authors of the policy have inadvertently ignored its effect on bond speculation. This was true in the 20th century; it is true in the 21st century as well. The Fed’s monetary policy is counter- productive. It is trying to foster inflation through its bond purchases, but what it in fact does is fostering deflation through capital destruction. It is responsible for the coming depression, just as bond purchases of central banks were responsible for the Great Depression of the 1930’s.

The fact is that the policy of open market purchases makes bond speculation risk-free. Speculators forestall the central bank and front-run its bond-buying program. Gradually the central bank is losing control. Bond speculators are now in charge. The central bank is trying to call off the bond-buying campaign, in vain. Like the Sorcerer’s Apprentice, it is desperately trying to find an ‘exit strategy’ only to realize, too late, that it hasn’t got the magic word.

The interest-rate structure goes into a free-fall, causing prices to fall, too. One can see that at the heart of the problem is the fact that the central bank (deliberately or inadvertently) ignored the rule that the rate of interest and the bond price vary inversely. Continue reading

BONDS MAY BE DEFYING DIRE FORECASTS

BUT THEY ARE NOT DEFYING LOGIC

(Part One)
Antal E Fekete
New Austrian School of Economics

Courtesy of Professor Fekete.com:

The title of Sy Harding’s article (Gold Eagle, January 31) says it all: “Bonds Defy Dire Forecasts”. But as I have been saying for years, bonds have not been defying logic, Greenspan’s cliché “conundrum” notwithstanding. The behavior of the bond market has been consistent with Keynesianism. By his compassionate phrase “euthanasia of the rentier” Keynes meant the reduction of the rate of interest, to zero if need be, as part of the official monetary policy to deprive the coupon- clipping class of its “unearned” income. Perhaps it is not a waste of time to repeat my argument why, in following Keynes’ recipe, the Fed is acting contrary to purpose. While wanting to induce inflation, it induces deflation.

The main tenet of Keynesianism is that the government has the power to manipulate interest rates as it pleases, in order to keep unemployment in check. Keynes argued that the free market economy was unstable as it was open to the swings of irrational investor optimism or pessimism that would result in unpredictable and wild fluctuation of output, employment and prices. Wise politicians guided by brilliant economists − such as, first and foremost, himself − had to have the power “to prime the pump” (read: to pump up the money supply) as well as the power to “fine-tune” (read: to suppress) the rate of interest. They had to have these powers to induce the right amount of spending needed to put people to work, to entice entrepreneurs with ‘teaser interest rates’ to go ahead with projects they would otherwise hesitate to undertake. Above all, politicians had to have the power to unbalance the budget in order to be able to help themselves to unlimited funds to spend on public works, in case private enterprise still failed to come through with the money.

However, Keynes completely ignored the constraints of finance, including the elementary fact that ex nihilo nihil fit (nothing comes from nothing). In particular, he ignored the fact that there is obstruction to suppressing the rate of interest (namely, the rising of the bond price beyond all bounds) and, likewise, there is obstruction to suppressing the bond price (namely, the rising of the rate of interest beyond all bounds). Thus, then, while Keynes was hell-bent on impounding the “unearned” interest income of the “parasitic” rentiers with his left hand, he would inadvertently grant unprecedented capital gains to them in the form of exorbitant bond price with his right. Continue reading

Analysis of the Yield Curve

Courtesy of Sandeep Jaitly @ FeketeResearch.com:

One of the greatest conflicts that prevented the establishment of a credible theory of interest was that between the time preference & productivity schools. Fekete, looking back to Menger, synthesised the two schools to produce the only coherent & complete theory of interest.

Looking back to Menger’s observation of the existence of a bid/offer spread as opposed to a monolithic price, Fekete combined the productivity and time preference schools via marginal analysis with marginal time preference and marginal productivity of capital. Ludwig von Mises admitted only time preference – and not marginal time preference at that – as the basis for the formation of interest. This was an oversight and not in keeping with the Menger’s established form of marginal analysis.

Space – via marginal productivity of capital – and time – via marginal time preference – were united in Fekete’s theory of interest. Marginal time preference is expressed via the marginal bond holder. The marginal bondholder is the first to refuse to exchange gold coins for bonds in view of the (bid) rate of interest falling below their time preference. The time preference of the marginal bondholder is defined as marginal time preference. In a similar fashion, marginal productivity of capital is expressed via the marginal entrepreneur. The marginal entrepreneur is the first to refuse to exchange bonds for capital goods in view of the offered rate of interest being above their (potential) productivity.

Marginal analysis coupled with Menger’s original observations, can be extended further to determine the theoretical shape of the yield curve under an unadulterated gold standard: discussion of which occupies the faculty of The New Austrian School & Fekete Research. Would it be flat? Would it have an upward bias? Continue reading

Coordination of the Natural Social Interaction

Courtesy of Sandeep Jaitly @ Fekete research.com:

The aim of this paper is to show that the monetary/financial system that develops is a representation of some form of productive social interaction. The monetary system is the consequence, not the cause, of productive social interaction.

Money is defined as that substance which is the ultimate extinguisher of any debt. As a consequence the substance(s) used as money must have perceived value in and of itself. Menger described the iterative procedure by which a substance was promoted to money by the people themselves in ‘The Origin of Money (1892.)’

There is no record of the date at which humanity first gave value to gold and silver because the Sanskrit literature that first referred to them cannot itself be accurately dated. However, we can be sure about the mechanism that resulted in their promotion to the monetary metals courtesy of Menger.

The substance which is promoted to money will necessarily have very high inventory to primary production ratio (also known as stocks to flow ratio.) This arises from the fact that incremental additions to one’s personal holdings of this substance do not affect one’s personal terms of acceptance of this substance. This substance must exist, just as the largest number amongst a set of numbers must exist.

If one arranges all commodities on earth by the stocks to flow ratio, two metallic commodities stick out markedly: gold and silver. The extent by which these two metals differ from the next substance in terms of stock to flow is astounding and testimony to the exceptionally long period of time over which humanity has valued these two metals. There can be no other explanation.

With the monetary substance chosen, the evolution of the financial and payment system – merely a mirror of the natural ‘social interaction’ that arises from the fact of our own existence – can begin.

Economic activity is a base synonym for ‘social interaction:’ the farmer sending wheat to the miller who sends flour to the baker who makes bread for consumption. The crude extractor sending oil to the refiner who sends on refined petroleum distillate to the retail pumps. These are all examples of social interaction. Interaction that is not related per se to the medium used for money. Interaction that occurs by the very nature of our existence. Interaction that must recur for the maintenance of our existence.

A defined amount of the monetary substance is the unit of account of multiple aspects of this social interaction. An extended social procedure stretched over countless millennia itself gave birth to the monetary media, so it is quite clear to see that neither the monetary substance itself, nor the amount in existence, would influence that social interaction.

Social interaction occurs in different ‘forms’ and ‘frequencies.’ For example, the sale of bread by the baker is pretty much guaranteed whereas the sale of the new jet engine to the aircraft company is not. This is an example of differing forms of social interaction.

The construction of an airport takes a different period of time (usually) to the construction of a residential home. This would be an example of differing frequencies of social interaction. Continue reading

Slump in debt trading sends shockwaves across City firms

Courtesy of City AM:

BANK shares fell yesterday as fears mounted that global bond trading is facing a prolonged decline, after Deutsche Bank swung to a surprise loss in the final quarter of 2013.

The German lender joined Goldman Sachs and Citigroup, who last week reported weak fixed income trading revenues.

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Deutsche Bank’s shares dived another 5.4 per cent, and sent shockwaves through markets – other firms heavily involved in fixed income also saw their stock fall.

Icap’s shares dived 4.31 per cent, while fellow broker Tullett Prebon’s edged down 0.85 per cent.

Barclays saw its shares dip 2.01 per cent and RBS fell 1.29 per cent – it still has bond market exposures despite slimming its investment arm. Continue reading