Mish “Hard Money” Goes Off The Rails

I am occasionally stunned when someone who I thought had a good grasp of reality and reason goes entirely off into left field, powered by a thesis that has run out of track.

Mish, unfortunately, has succumbed to this sin in his piece "Fractional Reserve Lending Constitutes Fraud"

He alleges (after waving his arms around):

Fractional Reserve Lending constitutes fraud. The case is irrefutable.

Bluntly: Bullshit.

Let us distinguish between two separate items: Money and Credit.

We shall first define them:

• Money: The product of either growing something, mining something or manufacturing something.  "Money" is actual wealth, and comes into being only through creation.  Ultimately, all money is traced to the only "free lunch" that exists in this solar system, that is, the power of The Sun, although in many cases (e.g. mining) the activity is in fact discovery of previously-created wealth (by the actions of The Sun) levered through human endeavor.
• Credit: The granting of purchasing power predicated upon a future promise to pay with money.

Mish’s (and others) claim that "all fractional lending is fraudulent" implies that one cannot pledge money to secure credit.

That’s obvious BS; let’s put forward a concrete example.

I walk into the forest (grow) and cut down trees (mine) which I then process into lumber (manufacture.)  I dig up some iron ore (mine) and turn it into steel nails (manufacture.)  With these two items I now construct a house (manufacture.)

That house (and all the products that I used to make it) are in fact money.  They were the product of mining, growing, and/or manufacturing.  Each of these acts is in fact the creation of money.

That house, has a representation of money in its utility value.  That is, the shelter value that it has for a group of humans – it provides a place to eat, sleep, take a dump and take shelter from the elements.  That utility value is at its maximum at the point of completion and from that day forward requires further inputs of labor to avoid deterioration; absent that input it will eventually (over many years) crumble into dust.  That is, the house undergoes (as do all things) the natural process of entropy (the process of going from order to disorder.)  We denote that money value in a currency, in this case, "dollars."

Now I have a house, which I pledge as collateral for a loan.  That loan is credit, but that credit is in fact issued against the security of money. 

Borrowing against that house is thus fully secured, not fractionally-reserved, lending.

If you noticed in my previous Ticker I specifically referenced The Monetary Base.  This was not a mistake nor was it an "aside"; it is, in fact crucial to get this definition correct or everything from that point forward will be wrong.  To repeat:

Monetary Base: The monetary base of all credit-based monetary systems is the sum total of all unencumbered assets against which one is both able and willing to borrow.  (No, it is not "M1", "M’" or any such nonsense.)  If you run into a so-called "Economist" who claims to have letters after his name yet makes the argument that "base money" (or any such thing) is the monetary base in a debt-based system find out where he got those letters from and petition them to revoke his degree; he fails at the fundamental skill of logic and deduction, yet it is a near-certainty that he carries proof that his claimed position is wrong in his wallet (a credit card, which spends identically to the dead president it resides next to.)

The "hard money" folks (and many "fiat money" folks) are wrong because they are attached to an ideology that has been subsumed in ALL credit-based monetary systems – an anachronistic ideology that they have elevated to idolatry yet is in fact FALSE.

The ugly part of this willful suspension of mental capacity is that each and every one of these people personally proves the falsity of their foundational premise every single day with their actions in the real economy!  They buy and sell using credit, proving in their personal life the fungible nature of both, yet they reside in a home and drive a car that in fact are money – that is, the product of mining, growing and/or manufacturing.  It takes a profound level of intentional blindness and mental incapacity to refuse to admit that which is shoved in your face literally on a daily basis.

I have repeatedly said that if you start from a false premise every single conclusion you reach from that point forward will be wrong.

The false premise that all of these people adopt and defend against overwhelming proof that they’re wrong is that "the monetary base" is some sort of currency, whether fiat or specie. 

This is a false belief in all credit-based monetary systems as it violates the fundamental axiom of what a "base" is – it is that which underlies or underpins what follows.

Yet it is patently obvious that the base upon which a credit-based monetary system rests is in fact the prior productive output of that society – that is, the unencumbered asset base that can be pledged as security for the issue of credit.

Currency is an abstraction; even in a "hard money" world it contains a "promise of conversion" that is in fact a promise, not the conversion itself.  Further, the "hard money" folks define "money" as that which is inexorably linked (e.g. gold and currency convertible into gold on demand) yet they ignore every other output of production as "money" – even though such outputs ARE, in fact, money!

Consider what happens when you adopt a correct view of the monetary base:

• Lending someone $9,000 to buy an $18,000 car (they put the other half down in case) is in fact not a fractional loan.  The lending is in fact fully-secured and thus bears no fractional reserve of any sort.  The same is true when one lends $200,000 to buy a $300,000 house.  The house and the car embody ACTUAL MONEY as both are the fruits of production and thus fully secure the credit issued in such an instance.  Yes, some of their "price" (in dollars) is speculative – but not all, and so long as one does not invade the actual monetary value of these created items no fractional lending has in fact taken place.
• Lending someone $9,000 on a credit card where that loan is 100% backed by excess capital is also not a fractional loan – there is exactly $1 of excess capital (actual money) against every dollar lent out.

Mish and others like him are wrong because they have their premise incorrect.  This incorrect base premise leads to shrill calls for that which will not work (hard currency) and in fact has a thousand-year plus history of not working to stop depressions and other serious economic imbalances.

Yet despite over a thousand years of history none of these people ever examine their premise to discover why these so-called "fixes" never, ever work.  They instead wave their arms and try to come up with all sorts of other "explanations" for things like the Panic of 1873 and the Depression beginning in 1929 instead of examining the foundation of their premise and recognizing it’s infirmity.

Idolatry is dangerous in all it’s forms, and nowhere is it more dangerous then when so-called writers and pundits fail to recognize that which is sitting right under their face.

There is an old saying that there are two constants in the universe: Death and Taxes.  To that some add a third that seems particularly appropriate in this case: willful blindness, otherwise known as idiocy.