It’s not stagflation, but inflationary impoverishment

It is a matter of personal interest that it was my uncle, Iain Macleod, who invented the term stagflation shortly before he was appointed shadow chancellor in 1965i. It is no longer used in its original context. From Hansard (the official record of parliamentary debates) 17 November that year:

We now have the worst of both worlds —not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of "stagflation" situation and history in modern terms is indeed being made.ii

The inflation that Iain was referring to was of wages, which were averaging an increase of 6.2%, and rising, and stagnation in production, which had declined from an index of 134 to 131. It was this divergence that gave him the opportunity to invent this portmanteau word. It has now passed into more common use to describe an economy that fails to respond to the stimulus of monetary inflation.

Its use in this context is therefore different from the original. The idea that stagflation exists as an economic phenomenon is only really true for neo-Keynesians, who view inflation as economically stimulative, and its failure to stimulate perplexing. In this sense it is frequently applied to conditions today, where massive monetary stimulus does not appear, so far at least, to have brought about the economic growth that might have been expected from it.

The explanation why monetary stimulus has not worked as intended is not difficult to understand, but for neo-Keynesians it is unpalatable. This article takes its cue from the misapplication of the stagflation term to explain why Keynesian stimulation of the economy is bound to fail, and symptoms commonly but incorrectly referred to today as stagflationary are simply a reflection of the costs of monetary policy imposed on ordinary people.

It involves the reinstatement of Say’s law to its rightful place, not as Keynes misleadingly described it, that supply creates its own demand. It requires an understanding of why inflation destroys wealth, the opposite of the creation of wealth that a stimulus implies. And it necessitates an appreciation that GDP is no more than a misleading accounting identity covering only a minor part of the economy. I shall explain the relevance of these topics in turn, and why stagflation is an inappropriate description of some sort of intermediate condition between inflation and deflation...

- Source, James Turks Gold Money, Read More Here

Economics 101: Who Sets Prices?

Since the advent of nineteenth century socialism, politicians and economists in the centre ground have argued for a balanced approach, where vital services are provided by the state, and capitalism is left to provide the rest. Vital services in a modern economy are taken to include pensions, unemployment and disability benefits, healthcare and education. Most states also provide communications, such as rail and road infrastructure, electrical grids and perhaps telecommunications. They often own and operate on behalf of the people utilities, such as the railways, ports, electricity and water.

The rest they regulate. There is hardly a product or service in the private sector unregulated by government. So far as the public is concerned, they see the benefit of a state acting in its behalf, protecting it from the uncertainties in life, and from unscrupulous profit-seeking businessmen. People do not stop to consider that the state and its necessary bureaucracy is less efficient at protecting individuals than the individuals protecting themselves. Nor do they understand the enormous burden on them of having the state act in an economic role.

The central question, why the state is less efficient than free markets, is answered by understanding prices. Should they be set by the state, or by the consumer? The consumer exercises choice. The state intervenes to restrict choice. This article seeks to demonstrate why government services always come at a higher cost than the same services provided by free markets.

The position of Austrian economists

Last week, the Mises Institute published an article by Robert Murphy, explaining why Ludwig von Mises described the consumer as sovereign, and why Murray Rothbard contradicted Mises, and urged his followers to “reject the notion of consumer sovereignty as an inaccurate political metaphor”.[i]

Rothbard’s criticism appears to be semantic, based on a purist argument that the phrase confuses a political statement for an economic one. What von Mises actually meant is that in a capitalist economy all production of goods and services is aimed at satisfying consumer demand, and it is the consumer who ultimately decides what is bought and at what price. And we are not just talking of the retail sector. Retailers through their demand for supplies from wholesalers, importers and manufacturers pass the signals from consumers back up the chain, imparting valuations to the productive process and to the pricing of raw materials.

Rothbard agreed with this entirely. Rothbard’s criticism of consumer sovereignty appears to be a very minor poke at his mentor, but it also betrays a different approach to explaining price theory in his Man, Economy, and State from von Mises’s Human Action. We should bear in mind Rothbard addressed a predominantly neo-Keynesian audience, when the first edition of his book was published in 1962. In the first part of his book, Rothbard deploys charts and examples to show relationships between price and quantity of goods and enters into a discussion of supply and demand schedules. No charts can be found in von Mises’s earlier Human Action, though taken as a whole, the message is the same.

It is easy to confuse Rothbard’s approach to prices with the mathematical one taught by the economic establishment. But the mathematical economists take us in the direction of a static market devoid of evolution and shorn of the dynamics of time. This is where Rothbard differs from today’s mainstream.

The mainstream assumption is equational maths, illustrated by charts, is the way to go. If so, a computer replicating the calculus behind supply and demand curves could accurately model prices, something that is yet to be achieved, even allowing for developments in artificial intelligence. Those who think consumer demand can be replicated by algorithms fail to distinguish between a static economic model and the dynamic world which is ever-changing. This point is fully acknowledged by Rothbard in his approach. Furthermore, he understands, as von Mises did, that the British classical school with its theory, that prices are determined by costs of production, did not accord with reality.

A different approach is found in European subjective value theory, originally developed by the scholastics in the Middle Ages, and taken up by the likes of Cantillon, Turgot and Say. It was Carl Menger, the founder of the Austrian school, who linked the two approaches by explaining that it was marginal supply, satisfying the least important use for a consumer, that sets the price of a good. Therefore, a greater level of supply, by satisfying less important uses leads to a fall in price, while a reduction in supply only satisfies more important uses, leading to a higher price.[ii]

If it is use-value that sets prices, then clearly it is the needs and wants of consumers that decide them. Hence von Mises’s metaphor, that the customer is sovereign.

We are dealing with non-financial assets here. The buying and selling of financial assets should be regarded as a separate subject, where the roles of participants in an exchange are not so neatly delineated. But there is a crossover which must be mentioned: since Rothbard wrote his Man, Economy, and State the prices of commodities have become increasingly distorted by derivatives, which are no longer simply used to iron out seasonality in agricultural production. They represent an extra source of paper supply that is never consumed, but because little or no distinction is made between physical commodities and financial derivatives, an increase in the supply of the latter suppresses relatively prices of the real thing.

Even putting derivatives to one side, it is clear that the question of who takes the lead in determining prices has become a broader subject than it was when the concept of marginal utility was established by Menger in 1871.[iii] The subject, is of course, almost limitless. This article will be confined to some brief comments designed to put consumer subjectivity into a modern context.

The importance of price subjectivity

It is assumed for the purpose of this article that all price changes in consumer transactions come from the product, and not from changes in the purchasing power of money. In other words, in individual exchanges the exchange value of money is regarded as fully objective, and the value of goods and services as fully subjective. For money to function as money, this must be true, notwithstanding the changes in purchasing power for money that always occur all the time, as evidenced in the foreign exchanges and the continual fluctuations in the price of gold.

This means that all subjectivity in value must be confined to the goods and services involved in individual purchases. Within the objective/subjective framework, the seller desires money more than the goods or services being sold, whether he is purely a trader for profit, or a retailer. And if the buyer agrees to buy, at that moment he desires the product more than the money exchanged at the price.

There continues to this day to be confusion over what criteria sets a price. Is it the cost of exploited labour, as Marx proclaimed and is still accepted by modern socialists to this day, or is it the cost of production, as Adam Smith and the classical British school averred? Keynes ducked the issue. As stated above, Menger demonstrated it was neither. Monopolies aside (which I’ll come to in a moment) prices are set by what a buyer will pay, and that will depend on the value to him he puts on a product. 

The reason this is so is the buyer can always refuse to pay a price he believes is too expensive, while a producer must sell his product or face going out of business. And as a reality check, note that manufacturers usually think in terms of price points: a motor manufacturer will aim for a price that in its judgement the market will pay for a motor car of particular specifications, in the context of competitive offerings. Costs will then be adjusted to ensure the proposition is profitable instead of being price determined on a cost-plus-margin basis...

- Read the Full Article on James Turk's Gold Money Here

Artificial intelligence, or can machines think?

Artificial intelligence (AI) is seen as both a boon and a threat. It uses our personal data to influence our lives without us realising it. It is used by social media to draw our attention to things we are interested in buying, and by our tablets and computers to predict what we want to type (good). It facilitates targeting of voters to influence elections (bad, particularly if your side loses).

Perhaps the truth or otherwise of allegations such as electoral interference should be regarded in the light of the interests of their promotors. Politicians are always ready to accuse an opponent of being unscrupulous in his methods, including the use of AI to promote fake news, or influencing targeted voters in other ways. A cynic might argue that the political class wishes to retain control over propaganda by manipulating the traditional media he understands and is frightened AI will introduce black arts to his disadvantage. Whatever the influences behind the debate, there is no doubt that AI is propelling us into a new world, and we must learn to embrace it whether we like it or not.

To discuss it rationally, we should first define AI. Here is one definition sourced through a Google search (itself the result of AI):

“The theory and development of computer systems able to perform tasks normally requiring human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages.”

This description is laced only with the potential benefits to us as individuals, giving us facilities we surely all desire. It offers us more efficient use of our time, increasing productivity. But another definition, which might ring alarm bells, is Merriam-Webster’s: “A branch of computer science dealing with the simulation of intelligent behaviour in computers. The capability of a machine to imitate intelligent human behaviour.”

Now we are imitating humans, particularly when we add in the ability of machines to learn and adapt themselves to new stimuli. Surely, this means machines are taking over jobs and even our ability to command. These are sensitive aspects of the debate over AI, and even the House of Lords has set up a select committee to report on it, which it did last week.[i] Other serious issues were also raised, such as who do we hold accountable for the development of algorithms, and the quality of the data being input.

This article is an attempt to put AI in perspective. It starts with a brief history, examines its capabilities and potential, and finally addresses the ultimate danger of AI according to its critics: the ability of AI and machine learning to replicate the human brain and thereby control us.

AI basics

AI has always been an integral part of computer development. As long ago as 1950, Alan Turing published a paper, Computing Machinery and Intelligence, which posed the question, “Can machines think?”.[i] It was the concept of a “Turing Test” that determined whether a machine has achieved true AI, and the term AI itself originated from this period. The following decade saw the establishment of major academic centres for AI in the US at MIT, Carnegie Mellon University, Stanford, and Edinburgh University in the UK.

The 1980s saw governments become involved, with Japan’s Fifth Generation project, followed by the UK Government launching the Alvey Programme to improve the competitiveness of UK information technology. This effort failed in its central objective, and the sheer complexity of programming for ever-increasing rule complexity led to a loss of government enthusiasm for funding AI development. In the US, the Defence Advanced Research Projects Agency also cut its spending on AI by one third.

However, in the late-1980s, the private sector began to develop AI for applications in stock market forecasting, data mining, and visual processing systems such as number plate recognition in traffic cameras. The neural method of filtering inputs through layers of processing nodes was developed to look for statistical and other patterns.

It was only since the turn of the century that the general public has become increasingly familiar with the term AI, following developments in deep learning using neural networks. More recently, deep learning, for example used for speech and image recognition, has been boosted by a combination of the growing availability of data to train systems, increasing processing power, and the development of more sophisticated algorithms. Cloud platforms now allow users to deploy AI without investing in extra hardware. And open-source development platforms have further lowered barriers to entry.

While the progress of AI since Turing’s original paper has been somewhat uneven, these new factors appear to promise an accelerating development of AI capabilities and applications in future. The implications for automation, the way we work, and the replacement of many human functions have raised concerns that appear to offset the benefits. There are also consequences for governments who fail to grasp the importance of this revolution and through public policy seek to restrict its potential. Then there is the question of data use and data ownership. I shall briefly address these issues before tackling the philosophical question as to whether AI and machine learning can ultimately pass the Turing test in the general sense.

- Source, Gold Money

The Worst Man In Modern History

It seems extraordinary that in defiance of all factual history and philosophical knowledge anyone should celebrate the bicentenary of the birth of Karl Marx. More than anyone, through wrong-headed ideas, he bears responsibility, indirectly admittedly, for the deaths of an estimated one hundred million people in the last century, and the severe suppression though economic and social servitude of fully one third of the world’s population. And if you also include those who have suffered under the yoke of Marxist-inspired modern socialism, the philosophy that says the state is more important than the individual, you could argue nearly the whole world is influenced by Marxian philosophy today.

That might seem an extreme statement, but you only have to ask almost anyone anywhere, which do they consider is more important, the individual or the state, to see if this supposition is correct. The only explanation for the continued adoration of the man is that with such universal influence, there are bound to be legions of supporters remaining, ignorant of and blind to the reality. However, during his lifetime – he died in 1883 – he was hardly known. It wasn’t until the Russian revolution thirty-four years later that Marx began to be taken seriously.

How did Marx achieve this powerful posthumous position? It was not through his economics, though they are often quoted and form the core principles of his Communist Manifesto, but through his philosophy, old ideas from forgotten men such as Hegel (1770-1831), which he rehashed into a socialist philosophy that is still accepted by many today, despite the accumulated evidence against it. The difference with Hegel is Hegel strove to establish that historical evolution would lead to increasing individual freedom, while Marx strove to prove the individual played no role in historical evolution.

Hegel argued that all reality is capable of being expressed in rational categories and can be reduced to a synthetic unity by dialectic reasoning within a system of absolute idealism.[i] In plain English, he concluded we all take our cue from our social and cultural surroundings and circumstances, and that they in turn are set by historical events. This became the basis for Marx’s extreme philosophy of class structure, which, in common with Hegel, denied any role to the independence of human thought.

His philosophical stance was comprehensively set out in his book, A Contribution to the Critique of Political Economy, published in 1859. The fundamental principle behind Marxism is stated early in the preface, where he defines his deduction from the Hegelian dialectic: “It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness.” In other words, social organisation takes precedence over the individual, and it therefore follows that the individual is subordinate to the social organisation.

It follows from this logic, Marx argued, that the classes that formed on the back of material interests forces members of those classes to think and act in their narrow class interests and not independently in their personal interest, there being no such thing. For Marx, ideologies evolved on class lines, where the interests of the minority, the bourgeoisie, dominated. And as the bourgeoisie profits from the labour of the proletariat, it is in their interest to keep the proletariat suppressed. The accumulation of wealth in the hands of the bourgeoisie was entirely due to the exploitation of the proletariat.

Marx’s world was a black and white one of haves and have-nots, the exploiters and the exploited. As Emmanuel Kant (1724-1804) had said, “If one man has more than necessary, another man has less”[ii]. The only way this apparent wrong could be righted would be through the collapse of the capitalist system, which led to these imbalances in the first place. The final solution was a classless society of the proletariat, handing them the means of production administered on their behalf by a revolutionary government.

If proof was needed, it came for Marx in the increasingly disruptive economic slumps over the course of his lifetime. Slumps hit the proletariat hardest, leading to unemployment and starvation. Initially, Marx was convinced that with the slumps getting progressively worse, a communist revolution would eventually be triggered, and the socialists (i.e. Marx himself) would take command from capitalist governments on behalf of the proletariat. Unfortunately for Marx, this never happened, and he increasingly turned in favour of a violent revolution to hasten the ultimate solution, reflecting his growing impatience and desperation.

Above all, Marx despised, even hated other socialists with an irrationality that can only have been fuelled by fear of competition. This hatred remains with us today, with communists loathing all forms of national socialism. Marx’s line of reasoning also freed him from criticism, because dissenters were always labelled bourgeoise, and were therefore dismissed as arguing on class lines. They were unmasked as bourgeoise, whatever their dissenting view, and therefore not qualified to comment on matters that affected the wider proletariat. The only answer was for the bourgeoisie to join the proletariat or to be made to do so, then their interests would be forcibly aligned.

We cannot gloss over the inconsistencies here, where on the one hand the bourgeoisie can only pursue a rigid class interest, yet its members are capable of the independent interest required to migrate to another class. And we must also mention that Marx himself, along with his supporter Engels, was a member of his so-called bourgeoisie, so according to his own strict doctrine, was unable or unqualified to align himself to the proletarian interest.

Marxian dogma was riddled with such inconsistences. Partly, this was due to the state of human knowledge at that time, and which formed the basis of any dialectical debate. Darwin contemporaneously proposed his evolutionary theory, pronouncing that humans evolved from the apes, and therefore were merely a higher form of animal, not a species apart favoured by God. This played neatly into Marxian philosophy.

It was also before the development of psychology by Sigmund Freud and Josef Breuer. It was believed that all human brains were the same, just as we have other internal organs with specific functions within the corpus. The concept, that humans differed in their intelligence, their acuity, was unknown. Even mental illness was believed to be a disorder emanating from the body. To Marx the philosopher, drawing on Hegel’s dialectical approach, it could have seemed logical that we are all the same, and that the obvious social differences are down to our upbringing in one or the other class.

He never defined class, which is too slippery a concept to pin down. Instead, he separated humanity into the exploited majority, the proletariat, and the minority that controls the proletariat, the bourgeoisie. He expected the proletariat to eventually rebel, forcing the bourgeoisie into the lower class, to be ruled over by a socialist administration. He believed that this would happen, because under capitalism, the impoverishment of the workers was inevitable, leading to a workers’ revolution. Yet, at the same time, he believed in the iron law of wages, most associated with David Ricardo. According to this law, wages were set by the availability of labour and the payments required to subsist. Higher wages than this basic level would lead to an increase in the availability of labour over time, while lower wages would reduce the labour pool. In this way, the cost of labour was expected to rebalance at a subsistence level. Labour was regarded as a simple commodity, whose supply was regulated by its demand. However, Marx’s belief in the iron law of wages is at odds with his supposition that the proletariat would be gradually impoverished. You cannot subscribe to both.

Subsequent improvements in economic knowledge have disproved both theories anyway. Marx’s approach was to arrogantly assume workers are unthinking work-slaves, which they are not. They are individuals with individual aspirations, and as Freud and Breuer showed later, they have brains separate from the corpus, with individual mental abilities that govern the corpus. Marx even despised the trade unions of the day, arguing that striking for higher wages was colluding with members of the bourgeoisie by negotiating with them, when instead they should be seeking their destruction. His thinking had evolved from the proposition that the destruction of the bourgeoise class would occur naturally in time, to encouraging a violent class revolution to bring it about. Workers going on strike compromised both alternatives.

Marx also cooked up a theory of dialectical materialism, a concept based on Hegelian dialectics and the materialist philosophy of Ludwig von Feuerbach (1804-72), whereby the material productive forces were meant to propel society through the class struggle towards socialism. Materialism, in this sense, is the doctrine that all changes are brought about by material entities, processes and events, and that all human ideas, choices and value-judgements can be reduced to material causes, which one day will be explained by the natural sciences.

Marx, the man, and Engels, his financial backer, came from the bourgeoisie, and had nothing in common with the proletariat. Their motivation was fundamentally dishonest. After expecting the destruction of the bourgeoisie through an evolution out of capitalism, they actively sought a violent revolution, and there can be little doubt that they impatiently expected to emerge as the leaders of the new order. They despised other socialists, who were seen as rivals. Far more famous in Marx’s time was Ferdinand Lassalle (1824-64), who shared the basic Hegelian philosophy, but helped Bismarck defeat the liberals in Prussia. To Marx, this cooperation with a government was anathema, just as national socialism was to Marxists in the next century.

To Marx, world communism could only have one leader and other socialists must be denounced. As von Mises wryly put it, the worst thing for a socialist is to be ruled by a socialist who is not your friend.

Marx and Engels despised both nationalism and national socialism, because they sought a global revolution so there was no place for national characteristics or cooperation with governments. It was, in effect, their bid for world domination, cooked up in the reading room of the British Library. A decade after the Communist manifesto was published, Marx stopped advocating peaceful revolution, in favour of civil war in all countries to destroy the bourgeoise class. Marx and Engels sought to provoke and benefit from it. The plotting with Engels increasingly took that direction and Engels studied military science in preparation for his role as commander-in-chief.[iii]

Despite Marx’s theories and subsequent plotting with Engels, Marxism was exposed by events, even from the outset, as a failure. In the years following the publication of the Communist Manifesto until his death in 1883, despite the boom and bust cycles following the middle of that century, the lot of the proletariat improved immeasurably. Something was going horribly wrong with Marxist predictions, and the chief architect had passed away into obscurity. He had, however, set the template for Lenin, who took up the Marxist banner with the Russian revolution thirty-four years later.

We now know what happened, though much of it was kept from us until the Berlin Wall was dismantled. Just as Marx strove for a global communist revolution, destroying nation states as well as the bourgeoisie, Lenin had the same Marxian objective. It persisted into the post-war era, with the annexation of Eastern Europe, and persistent attempts to undermine Western Europe. Soviet spies were everywhere. Not only did we have the Cambridge five, and left-wing economics professors promoting socialism in the top universities, but even Harry Dexter-White, a very senior US Treasury official who founded the IMF and the World Bank, was a Soviet spy.[iv]

Marx was a dead-beat plotter, who should have simply sunk into obscurity. But like Keynes in the following century, he made his half-truths sound eminently plausible. His training as a philosopher imparted a respectability to his theories. Even at his graveside, Engels eulogised him thus:

“Just as Darwin discovered the law of development or organic nature, so Marx discovered the law of development of human history: the simple fact, hitherto concealed by an overgrowth of ideology, that mankind must first of all eat, drink, have shelter and clothing, before it can pursue politics, science, art, religion, etc….”

How can you not respect, even adulate a man expressed in these terms? You cannot say that a philosopher, who discovered the law of development of human history, who recognised that man needs food, water, shelter and clothing is wrong, or bad. This is in strict contrast with the title of this short essay, that Marx was the worst man in modern history. If it hadn’t been for developments long after his death, this epitaph would not be worth challenging. There have been far worse perpetrators of human misery in their lifetimes, with a roll call that goes back to the beginning of recorded history.

No, the reason Marx was a thoroughly bad man, even evil, was he plotted not just the domination of one country, but the whole world by advocating the destructive forces of civil violence. He was a poor parody of a Bond villain. And as is the case with all socialists, he wanted total domination. You could take the view that he was a latter-day Don Quixote, delusional and mad, and that Engels was a sort of financial Sancho Panza without the wit. This would be incorrect. Marx was a failure as a philosopher, and instead of rethinking and recanting, he moved from a position of preparing himself for a leading role in what he saw as inevitable, to advocating violent social destruction.

It was Marx’s wrong-headed philosophy that led to the deaths of a hundred million souls, perpetrated by those he inspired, as well as the enslavement of most of the population of the Eurasian land-mass. And if we are to identify his catastrophic error in the simplest terms, it was the brief sentence in the preface to his A Contribution to the Critique of Political Economy, referred to above. If instead he had correctly concluded that,

“It is the consciousness of men that determines their existence, and not their social existence”

the world would be a far better place today, with ordinary people free to have delivered economic progress to their fellow men and women without bearing the burden of Marx’s failed philosophies.

He is my nomination for the worst man in the modern history of humanity, and we should remember this and only this on the bicentenary of his birth.

- Source, James Turk's Gold Money

Crude Oil: The Next Five Years

OPECs 2016 shift back to its former strategy has led to a sharp decline in global inventories and a rally in spot prices. It has also reintroduced the problem that OPEC spare capacity deters global oil companies from investing in future production. This problem is now exacerbated by increased hedging activity from shale oil producers. As a result, non-OPEC output ex-shale will start to decline in about 2-3 years, just when shale oil production begins to struggle offsetting ever increasing decline rates. We believe the next big move in oil will be in longer-dated prices, which will need to go higher in order to secure future supply.

OPEC once again changed strategy...

In 2016 we published a note with the title “OPEC at the crossroads” (June 06, 2016). In that note we described the difficult choice OPEC had to make: Should it continue to let the market play out as it did for the past couple of years, hoping that low prices will push out or at least curtail the shale oil producers over the long run; or, should it return to its former strategy and try to balance the market. While OPEC seemed initially reluctant to do the latter, in late 2016, the OPEC members changed their mind and agreed to curtail output. The new stated strategy sounded much like the old: OPEC would curtail production until global inventories normalized.

...which lead to a dramatic decline in inventories...

As we have explained before, OPEC cannot influence the price of oil directly. It can only manage inventories. What do we mean by that? Longer-dated oil prices are set by the marginal cost of future supply, or in other words, what long-term price is needed in order secure future supply? Spot prices can fluctuate widely around this longer dated price, depending on how much inventory there is1. Hence, by letting inventories decline, OPEC can push the curve into backwardation, which is exactly what happened since the production cuts. Importantly, by the time OPEC decided to curtail output, the market was already balanced and inventories were drawing in line with seasonal patterns. The production cut pushed the market immediately into a deficit. As a result, global inventories have been drawing over 300 million barrels more than normal since mid-2016 and days of supply cover is back to normal levels.

...pushing the crude oil price curve into backwardation and spot prices sharply higher

This led to a USD30/bbl rally in crude oil spot prices. In order to fully understand this price move, it is important to highlight the strong inverse relationship between inventories and time-spreads. A commodity price curve tends to trade in contango when inventories are high and in backwardation2when inventories are low (see Exhibit 2). The reason is that in an environment of low inventories, consumers of a commodity are willing to pay a premium for immediate delivery. For example, an airline is willing to pay a premium for jet fuel delivered today rather than in six months if jet fuel inventories are low. If the airline runs out of jet fuel, the planes will be grounded, which will be much costlier than paying a premium for prompt delivery of fuel. In contrast, when inventories are very high, consumers of a commodity are not worried that they could run out of this input good. Because it costs money to store commodities (storage cost, insurance costs) and there is a time-value attached to money, consumers of a commodity prefer to get delivery only when they really need it. As a result, spot prices will trade below forward prices in such an environment.

The sharp decline in oil inventories over the past two years lead to a massive shift in time-spreads. In early 2016, the Brent curve was in steep contango. Prompt month prices traded USD15 below the 5-year forward. As of today, it is trading USD15/bbl above the 5-year forward (see Exhibit 3). 

Longer dated price remained practically unchanged for the past two years. Hence, the entire move in the spot price was due to the shift in the curve, which was driven by the inventory decline. Importantly, the change in the spot prices does not imply that the market somehow changed its view on how much it costs to produce oil. Longer-dated prices, which are set by the marginal cost of future supply, are still below USD60/bbl. 

This means that the market still believes that USD55-60/bbl gives enough incentive to producers to make the necessary investments to meet future demand. The spot price rally thus was simply due to the decline in inventories.

- Source, James Turk's Gold Money

Gold and Silver Solutions to Monetary Madness

Over the past several months it has become quiet clear that we had best be seeking solutions for this ongoing monetary madness that will safe guard our our individual needs and future wealth preservation. This is not a great mystery nor is it some "theory" dreamt up by basement dwelling lunatic. All one needs to do is read the headlines around the world and the picture is as clear as bright sunny day.

- Source, The Daily Coin

James Turk: You don't invest in gold, gold is money

James Turk, globally recognized expert on precious metals, joins Kuzman Iliev and Vladimir Sirkarov in the Boom and Bust show on Bloomberg TV Bulgaria to discuss a wide range of investment topics - monetary policy, the new reality of negative nominal yields, investment strategies for wealth preservation, what to consider when investing in gold and how to prepare for turbulent times.

- Source

James Turk: Gold, Silver and the Coming Economic Crisis