Argentina Defaults and Repegs to the Dollar. But what happens when the US Defaults?

My latest article on TheStreet hits the homepage. Go me.

Here I explain, using Ludwig Von Mises’ monetary regression theorem, why any other country that defaults can quickly regain economic footing by pegging to the dollar and starting a new currency. But if (when) the US defaults, there will be nothing to peg the dollar to.

Except gold.

Here’s an excerpt.

NEW YORK (TheStreet) — Argentina defaults, and the cycle repeats once again, exactly as before. After defaulting, the government pegs to the dollar, as tracked in the PowerShares DB U.S. Dollar Index Bullish (UUP). Then it spends too much money buying votes, prints money to compensate (currency devaluation, no more peg), inflation results, the printing presses are shut on the verge of hyperinflation, government can’t pay its debts, it defaults, and everyone loses their savings and starts over, Fight Club style. Then someone else is elected and promises to peg to the dollar, and everything happens again.

The US Monetary Base Crosses $4 TRILLION, my latest article for TheStreet

In this article I explain why the ultimate inflation hedge is not gold, silver, gold miners, silver miners, commodities, silver options, or options in miners.

It’s actually 2016 GLD $225 call options, with a risk/return of a whopping 1379:1. That means for every $1,000 you put in, the risk is $1000, but the return is $1,379,000.

Talk about the ultimate inflation hedge.

Here’s an excerpt:

Go to the GLD 2016 calls and the farthest strike out is $225. Assuming a quintupling of gold in a two-year time frame (either from January 2014 or January 2015, as 2017 LEAPS in GLD will also be available come November) that puts GLD at roughly $625. $225 LEAPS on GLD are currently available for 29 cents, and only 6,688 contracts have been traded. Compare that with SLV’s 55,000 and this trade seems extremely neglected.

If GLD quintuples in two years, that puts the options at $400 a contract, for a return of 1,379-times, or an astronomical 137,800%. Meaning, for every $1,000 you put into 2016 or 2017 $225 GLD LEAP options, you will have $1,379,300. That is nearly twice the return on SLV LEAPS, putting the risk/return ratio at 1379:1, and that already takes into account that gold is generally half as fast in rising as silver.

I Don’t Want to Cover the Gaza War. Let’s Cover Big Macs.

Yesterday I came across one of the stupidest Jerusalem Post articles I have ever read. From start to finish, it is so completely filled with nonsense that even I was a bit shocked. If this doesn’t confirm to you that empirical econometrics is nothing but soothsaying astrological voodoo tarot reading drivel, and that calling an economist is akin to phoning the psychic hotline, then nothing will.

I present to you the conclusion, based on the “Big Mac Index” that the shekel is “6.9% too strong” because a Big Mac in Israel is 6.9% more expensive than a Big Mac in the US.

Here are two paragraphs from this diuretic gem:

The idea, according to the newspaper, is this: The price of a Big Mac captures a lot of what’s going on in a given economy, from labor to rent to the price of produce. Since Big Macs are just about the same in most countries, they should, according to the economic theory of purchasing power parity, cost about the same when converted into the same currency.

“Since a Big Mac costs 48 kroner ($7.76) in Norway and only $4.80 in America, the kroner is overvalued by 62 percent according to this lighthearted, protein-rich analysis, making it the most puffed-up currency in the index,” The Economist offered by way of example.

Let’s leave aside the futility of imaginary indexes and the unfounded assumptions that they are based on. Let’s just examine the pure illogic of the statement “If X is more expensive in Y currency by Z%, then Y currency is Z% too strong.”

If one day you buy a pack of gum for 5 shekels, and the next day that same pack of gum costs 10 shekels, did your currency strengthen, or weaken? Obviously, it weakened by 100%. So how on Earth can one make a claim that if something is more expensive in shekels than in dollars, that this shows that the shekel is strong? If anything it shows that the shekels is weak.

I’ll say it again. If it costs more money to buy the same stuff, it shows a weakness in the money and a strength in the stuff, not the other way around. It is such simple logic, I’m at a loss to explain it any more simply.

But nevermind that. The entire method with which this soothsaying economist came to this conclusion is the same as astrology. Making a statement that Big Macs “should be the same price everywhere” is the same thing as saying “When Capricorn intersects Jupiter and invades Aquarius at an angle perpendicular to Virgo while Pisces is giving birth to Cancer and Sagittarius is in a drunken brawl with Leo after accusing the latter of stealing his girlfriend, you should be expecting to choke on a raisin at 3:00am on September 28th.”

Big Macs neither should, nor should not be the same price anywhere. Big Macs in different locations are different goods. A Big Mac in Manhattan is different from a Big Mac in Wyoming. A Big Mac in Wyoming is cheaper. The prices of Big Macs have no special constancy regardless of location any more than real estate does. Just look at the $50 homes you can buy in Detroit these days.

The price of a Big Mac is determined by two things, and two things only. Supply of Big Macs, and demand for Big Macs. Not the cost of making a Big Mac, not the greed of the McDonald’s franchise owner, not the price of Big Macs anywhere else in the world. Only the supply of Big Macs in a given location, and the demand for Big Macs in that given location.

If the average price of a Big Mac in the US is 6.9% lower than the price of a Big Mac in Israel, that only means one of two things. Either the supply of Big Macs in relation to the demand in the US is 6.9% larger than in Israel, or the demand for Big Macs in relation to the supply in Israel is 6.9% higher than the US, or a combination of the two factors, yielding a market-clearing price 6.9% higher than the market-clearing price in America.

That’s it. That’s all it says. It does not say anything about the shekel, and it certainly does not say that the shekel is “too strong“.

Then why write this nonsense, that besides not having any scientific basis, the conclusion even based on dumb premises is flipped on its head?

It’s because economists work for governments and central banks. Governments need money to fight wars. If they can get in your head that the currency they control is “too strong” then they can print more and use it to fight more wars.


Why I’m an Anarcho-Capitalist, but Love Minarchists

Being an ideological purist, absolutely logically consistent, is easy. Well, not exactly easy, but once you make the commitment to draw your red lines of libertarian logic according to the singular axiom of the Non Aggression Principle (NAP) and live by it, once you make that fateful decision and swallow the blue pill, or the red pill, or whichever Matrix pill it is, the rest is easy. Once the Free Will decision is made so to speak, you’re home free. You go issue by issue, instance by instance, and you sort everything out accordingly with no exceptions. While you may be left with a few difficulties as to what fits where (like does abortion constitute violation of the NAP, or can people voluntarily sell themselves into slavery or not), you are still living by a single principle by attempting to categorize everything into either violence or nonviolence logically, and live accordingly.

In one sentence, there remain zero instances where you are compromising your values, and that both makes you impervious, as well as isolates you into that void of impracticality.

I am an anarcho-capitalist libertarian, which means I take the NAP to the extreme, to its logical conclusion. No initiatory force against the innocent, not by anybody, not even the State. That means no State.

And yet, there are two men in this world who have shaped my thinking more than any other, at least in terms of giving me new direction, and neither of them are anarcho-capitalists. They are both, in fact, minarchist libertarians. The kind that believe in minimum government for the purpose of keeping the bad guys (NAP violators) away and discerning between good guys and bad guys.

Minarchists are always caught in a hopeless logical contradiction with themselves, which they can’t and don’t (usually) deny. They believe in non-aggression, but they also believe that a certain amount of aggression is necessary in order to keep out the aggressors. This infects their philosophy, thinking, and eventually political planning with a true contaminant. An anarchist can just privatize everything in his head and stay consistent. A minarchist…it’s not that easy.

Minarchists have to draw a line somewhere between necessary aggression (a so called minimum) and evil aggression (anything beyond minimum). But there is no logical line to draw, no objective border to trace it. It is a line based only on their own intuition of what must be and what must not be crossed. It is highly personalized, totally subjective, and nearly impossible to keep steady.

For the anarchist, there is no army, only private security companies with clear market tests on what is legitimate and what is not. There is no police, only private insurance companies that take a real market risk every time they arrest someone on a suspicion or a call. And there are no public courts subject to an arbitrary law written by politicians and bureaucrats, only private judge businessmen trying to get a reputation for fairness from all clients involved in a case on every side, with only the NAP to guide them, and whatever other voluntary contract may exist between the parties involved in a suit.

But for the minarchist, there is an army, and every decision it makes must be guided, ultimately, by bureaucrats and politicians making subjective judgement calls. (Should we bomb Gaza? How and with what? How many civilians getting killed is acceptable? When is too much? Politicians have to decide these things, not the market.) There is no alternative because there is no profit motive as there are no voluntary customers. There is a police force operating on monopoly, and the minarchist must draw a line somewhere as to what this monopoly has the power to do and what it cannot do, what is considered abuse. How do you draw the line? You just do. Somewhere. There is a public monopolistic court system, and the minarchist must decide what its powers are and when it must yield to individual liberty.

On each of these issues a minarchist must decide, draw a line somewhere, and stick to that arbitrary line for dear life. There is always a clear and present danger that the line he draws will move, inexorably, to the side of more power, slowly but surely, and grow from there into a monster. This is what happens to almost all libertarian-leaning minarchist politicians at some point. Some sooner, some later, they all fall into statism because the system itself wants power and will vacuum everyone towards that direction with insuperable force.

Well, almost insuperable.

As I said, there are two men, both minarchists, who have shaped my life in terms of direction more than any other. One is Ron Paul, and the other is Moshe Feiglin. I disagree with them about a lot of things. In fact I argue with Moshe constantly, pretty much whenever we have a conversation. (Ron Paul I have not had the privilege of arguing with personally.) But what they have in common that no other minarchist politician has (none that I know of) is that they draw their lines of power from within their own personalities, subjective though they are, and they do not cross themNot ever.

The minarchist always has the open temptation to give in to more power, because he allows a minimum in for police, army, and courts. In all of Ron’s political career, he never moved that line. Never. He kept it firm, and no pressure could move it one inch. And though Moshe’s minarchist line is not the same line as Ron’s (lines of minarchy can never be the same because they are all subjective by definition) Moshe’s line, so far, has not moved, despite all the pressure applied by politicians surrounding him like sharks.

Is Moshe’s belief that the State is a “useful tool” placed in the hands of the “sovereign nation” a mistake? Yes. He’s wrong. The State is not a tool controlled by the nation, but simply a weapon wielded by politicians in order to steal from individuals in the nation. The nation is not sovereign, only the individual is, though nations exist insofar as the way we treat and relate to each other as human beings. And I believe a metaphysical nationhood exists in the Jewish people, but that’s a matter outside of political law.

But so what? That’s what he believes, so all that’s left to trust is his intuition. If he believes the State is not being used as the tool he says it should be, he will fight the State, and that’s good. Usually his intuition is right on the money.

It’s easy to be an anarchist. Everything fits into one category or the other. There is no temptation of power because your mission is to abolish all of it in every form. There is no minimum of power that is acceptable, so nothing is tempting once you swallow the pill. Your personality is never really tested because you can just categorize everything logically, from within a system that resides outside yourself.

But being a minarchist is much harder. You have to accept some power and then draw a line. That line has to come from you, your own personhood, your own identity, your own strength, with no logic or anything externally objective to keep it steady, because there is no logic with which to draw that line. It’s all a judgement call. And the longer you can keep that line steady, the longer you refuse to move it within your own philosophical system, the stronger your personhood is. That’s why, as deep as my respect is for anarchists, and I have anarchist mentors who I really love, my respect for true minarchists is of a totally different kind.

Judaism has examples of both approaches, and it is clear to me that God prefers minarchists over anarchists. This is not to say that minarchists are correct. They’re not. But they are what brings the world forward into freedom on a mass scale, much more than anarchists. Anarcho capitalists are the philosophers always in the background. We draw lines in logic and never cross them. Minarchists, the real minarchists that draw red lines in their own blood and never cross them, are the leaders of men. The true intermediaries to liberty.

Here are two examples. One is Eliyahu, the equivalent of an anarchist. Absolutely uncompromising, no middle ground, correct about everything but fired from his job of being prophet. Literally the only prophet to be deposed by God while he was still alive, at least alive on Earth. He couldn’t lead the people spiritually because all he saw were violations and zealously stamped them out. Moshe Rabeinu is the example of the minarchist, totally unconcerned with his own power, didn’t want an internal police force initially or a public court system, just himself, probably because he trusted no one else with power. But a public system was forced on him by his father in law, and he ultimately accepted the idea with God’s sanction.

The successful leader between the two is obviously Moshe Rabeinu. Eliyahu failed.

The other example is more abstract, and that is Parah Adumah, the red cow. The ashes of the red cow purify the deepest tumah, ritual impurities caused by dead bodies. But preparing them, a step necessary for the people, makes you tameh itself. The message being that in order to lead humanity, you can’t rely solely on logical consistency like Eliyahu did. You’ve got to get dirty and then draw your own lines about how dirty you’ll get. The lines have to come from you, something inside you. You can’t rely on an external system to draw them for you. Otherwise, you can’t lead.

What does God want in the end? I believe it’s anarchy, in the end. A system where there is nothing, no power broker at all, between His creation and Himself, where the Jewish people act as a sort of voluntary middleman priesthood for the world, but with no coercive power over anyone.

But in order to get there, we need a בר הכי, some minarchist, and those are not the men who philosophise and draw lines based on an external system. They are the men that draw lines from within themselves and keep them there on the strength of their own personalities alone.

Moshe chides me that that I can’t always see everything from a totalitarian perspective, but that’s the thing. I can. He can’t. Because I’m not the leader. I’m just the theorist, someone to point him in the right direction, maybe. At least that’s what I aspire to. Maybe at some point I’ll perform some function of tearing down something (hopefully the damn Bank of Israel I hate so much), but only at his pace and with his go-ahead.

Let me at it freely and I’d tear the whole damn thing down in a day because my logic is stronger than my intuition. I’m an Eliyahu who can’t control himself if left to my own devices, and my hatred for the system is too acute for me to suffer letting it live a single second if I were ever in the position of being able to tear it apart on my own.

But I can afford to be that way, because I have assigned myself a leader, someone whose intuition I trust more than my own, even though he’s wrong about many things that I’m right about.

And in the end, Judaism forces me to be a minarchist, of a sort. To draw a line from my own personhood instead of from something outside myself. To have just a little intuition of my own. I circumcised my son without his consent, and thereby broke the NAP, the holy of holies of libertarian law. I hated it. I cried. And then even I, the uncontrollable libertarian radical teeming with hatred of the State, drew a line from within to circumscribe power. I did, and will do brit milah, and that’s it. I can’t explain why in any logical terms other than God told me to. And I will not go any further than that into the realm of power over other men. Not ever.

Not one inch.