Introducing Yield Purchasing Power

By: Keith Weiner | Tue, Oct 25, 2016
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The monetary debate seems artificially limited. On one side is Federal Reserve policy based on discretion. On the other is policy based on rules. It's Keynes vs. Friedman. It's central planning of our economy based on the reactive whims of wise monetary planners vs. central planning of our economy based on the proactive rules written by … wise monetary planners.

On the rules side, there is a sub-debate. Should we have central planning based on unemployment and the Consumer Price Index (as now) or switch to central planning based on another metric such as GDP?

Whether one is on team Keynes or team Friedman, whether one is on sub-team Friedman CPI or Friedman GDP, everyone seems to take something for granted. That is, the quantity theory of money. If the quantity rises, then prices follow. However, since prices (especially commodity prices) are not really rising, this would seem to give more leeway to the monetary planners, to inflict more monetary policy on us.

There is something about this which few acknowledge. To increase the quantity of dollars -- which is not money, but that's a whole 'nother discussion -- the Federal Reserve buys bonds. Whatever effect this may have on the price of a new Chevy, it obviously affects the price of the Treasury bond. It pushes the bond price up. Since the interest rate is a strict mathematical inverse of the bond price, we have an obvious conclusion.

The Fed is pushing down the rate of interest.

We can say that the interest rate is the collateral damage. The Keynesians and Friedmanites, in their zeal to increase the quantity of dollars, support or at least ignore the falling interest rate. OK, but who cares about the interest rate? You should care. Everyone is impacted by the 35-year global trend of falling interest rates.

The falling rate ushers in a kind of hyperinflation. You won't see it by looking at prices, or purchasing power. If you look at the value of your portfolio and divide by the cost of living, you may be lulled into a false sense of security.

You will see the hyperinflation, if you look at it another way. Instead of the liquidation price of assets, consider the yield on assets. Instead of selling off the family farm to buy groceries, think of operating that farm to grow food. Can you live on the crops you produce? Or must you liquidate piece of it, just to survive?

The same question applies to any capital asset including a bank balance. Is it possible to live on the interest?

In the cold harsh light of yield purchasing power, we can see the erosion of our capital base. Since civilization itself depends on capital accumulation, this erosion is a retrogressive force dragging us back to another dark age.

I gave a 45-minute presentation on Yield Purchasing Power at American Institute for Economic Research in Great Barrington, MA on October 14, 2016. I am grateful to the Institute for recording video of my presentation plus extended Q&A. The video is here.

 


 

Keith Weiner

Author: Keith Weiner

Keith Weiner
keithweiner.posterous.com/

Keith Weiner

Keith Weiner is CEO of Monetary Metals, a precious metals fund company in Scottsdale, Arizona. He is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare, a software company sold to Nortel in 2008, and he currently serves as president of the Gold Standard Institute USA.

Weiner attended university at Rensselaer Polytechnic Institute, and earned his PhD at the New Austrian School of Economics. He blogs about gold and the dollar, and his articles appear on Zero Hedge, Kitco, and other leading sites. As a leading authority and advocate for rational monetary policy, he has appeared on financial television, The Peter Schiff Show and as a speaker at FreedomFest. He lives with his wife near Phoenix, Arizona.

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