Tuesday, December 14, 2010

My Severe Recto-Cranial Inversion (As Diagnosed by Karl Denninger)

Karl Denninger has taken a look at my most recent post regarding my take on his understanding of money and has apparently decided to stick his nose up my you know what and conduct an examination. Hope you feel comfortable that way, Karl.

Writing from that position must be difficult, but Denninger has chosen to do so and thus I will try to explain to Karl where his thinking has failed him, so that when he comes up for air he might understand.

Denninger writes:
Robert, of course, only counts inflation (and deflation) rates post-Fed. But that's dishonest. It's like saying "This is the fastest horse that has ever run the Belmont!" - but only looking at years after Secretariat ran away from the field - and all previous records.

Dishonesty ****es me off.
First, I didn't know we were in a post-Fed world. Second, if he means that I started counting since onlt the launch of the Fed, I did no such thing. Point that out to me Karl baby. You ain't going to find it.

Denninger then shows us this chart, which I am not sure what it means, other than that it is a chart of inflation, but based in dollars, continentals, who knows what, Denninger does not tell us.

But Denninger does continue tunneling and writes this under the chart:
What I said in that response is that a "gold standard" (or any other hard money) has a known historical correlation with extremely violent swings in the value of the currency.
How this undefined chart proves this, I have no idea, especially since the chart covers periods that range from when the continental circulated at near hyper inflationary rates, to the great inflation of the civil war to  great inflation of the 1970's--none of this had anything to do with gold or a hard money currency.

Then he writes:
While it is true that over long periods of time hard currency maintains purchasing power against the reference (whatever that reference is) that's a tautology and irrelevant. A currency that is convertible against a gallon of **** will always have the value of a gallon of ****. The real question is what is the underlying "asset" that backs the currency worth in utility terms. Gold, in that realm, has only somewhat-more utility value than said gallon of **** - other than incidental dental and industrial use it's primary "value" is that people like it.
Denninger is inventing an entire new language here, so bear with me while I explain. What Denninger really means by "reference" is that gold is "convertible" into a paper currency. He must have never read and understood any standard economics text, not to get and use standard terminology.

Then Denninger explains the "utility" of gold without understanding the regression theorem. No wonder he is so confused. (See Bob Murphy on the regression theorem)

Denninger goes on:

Wenzel seems to believe that somehow gold-backed currency "fixes" this.  He's full of crap.  The proof of this is found in the historical inflation/deflation chart above, along with the fact that there were horrifying deflationary depressions and inflationary races during the period of time that this land was on "hard money."
Of course, Denninger does not name any specific period when a  "horrifying deflationary depressions and inflationary races during the period of time that this land was on 'hard money,'"  took place, becasue there weren't any.

He continues, and this proves that Denninger is an idiot:
Nor is this history confined to the United States - the number of boom/bust credit cycles exacerbated by hard-money supplies that are manipulated by a tiny cartel is a matter of historical fact worldwide - from the South Seas bubble to TulipMania and more
The South Sea bubble and Tulipmania were all about printing paper money--there was no huge explosion of gold supply. See Doug French on Tulipmania. And see French on the South Sea Bubble here. 

You have to be completely ignorant of history AND be willing to make stuff up to write the above stuff that Denninger writes. It is totally off the wall.

Then he runs this chart:

Under the chart, Denninger writes:
That spread, incidentally (3%) is approximately that between output and credit since the 1950s - under The Fed. You choose only when you'd like the reversions to the mean to occur - not whether they will. This is 30 years worth (roughly 1980 forward) which is bad news, but this is what happens if you keep trying to deny reality no matter whether your economic system is based on a hard currency or not:
He provides no reference as to where he gets his data. And let me ask you, have you ever, ever seen such smooth curves over 30 years for any economic data?

I'm getting embarrassed that I am even debating this guy. The chart is bogus and if it was accurate data, what the hell would it mean? That nominal borrowing capacity of any economy grows at an exponential rate relative to nominal GDP. Not a chance.

He uses this nutty chart to then reach this nutty conclusion:
Since it is a mathematical certainty that the lending of capital will always result in two exponential functions (credit/money supply and economic growth) which have different exponents, and since the profit motive guarantees that the interest rate charged to lend capital will always be positive in real terms since nobody intentionally lends at a loss it is thus a mathematical certainty that these two functions will, over time, diverge and "run away" from one another.

The above two charts are mathematical facts and no amount of hand-waving or attempted obfuscation with so-called "hard money" nonsense changes them.

This mathematical fact in turn makes recessions mandatory to restore balance during which imprudent lenders and borrowers both go bankrupt. We choose only whether we allow the free market to act in this fashion or whether we distort that market and make the inevitable swings worse than they would otherwise be.
Basically, what he is saying here is that borrowers don't take into consideration that they will have to repay their loans with interest. Not just a few borrowers, but all borrowers and that, because of this, the system fails.

Where is his proof of this? Just take his word for it.

With this "proof" he then puts me in league with Bernanke:

Wenzel, along with others, believe that "if we only had hard money" we'd avoid bubble dynamics and thus avoid the inevitable pain. He and others who similarly believe this crap are dead wrong and the history of economics proves it. That he and others (including people like Bernanke) refuse to extract their head from their ass long enough to recognize that fifth grade mathematics controls the inevitable economic cyclicality that must occur in any monetary system where one can lend capital - no matter the monetary base - is alarming.

These facts are both so obvious and so easy to understand with just a few minutes with a calculator or Excel that it leaves me with no option but to conclude that those who refuse to publicly accept and propound this fact are doing so for some ulterior purpose or motive.
He then babels on with no reference to anything, and with a complete failure to understand how even a "stable" price program can distort the capital structure:

The Fed's mandate to regulate credit and monetary aggregates along with the mandate to maintain stable (dictionary: unchanging, constant) prices, both of which are black-letter law, if followed, results in a pricing environment with modest swings above and below the "zero line" in inflation.

This in turn results in both stable long-term currency value and avoids the monstrous "boom/bust" swings between inflation and deflation that are inevitable when one has hard-backed money with the monetary base under cartel control.

That The Fed has not done it's legally-mandated job does not mean that the propounded alternative that these people look toward would work better. It would in fact be worse and the proof of this is found in the historical record - it was done their way for an extended period of time and it was worse.

Yes, we have a major problem with The Fed. Yes, The Fed is broken. No, the solution is not "hard-backed" currency where the backing is controlled by a cartel, thus giving the cartel holders - the big banks - the ability to perform even more theft than they're performing now!
Anyone going to Denninger's site is just getting their minds confused with bizarre, glowing in the dark, dribble---not suitable for anyone over the age of three. And given the language he uses, he obviously has to be kept away from the kids, so just let him play with himself.


  1. Denninger does okay work, but this is what happens when you don't have a clear foundation to ground your ideas and arguments on.

  2. What exactly does KD do okay work on? Most of his posts ramble incoherently. He has, however, mastered the use of italics, bold-italics, all-caps, bold all-caps, and the all important underlined-bold-all-caps, without which, one could scarcely make oneself understood.

    He excels also at name calling, because reasonable people could never, ever disagree with KD.

  3. Wenzel,

    I wish you had discussed the role FRB plays in all of this, with the enabling factor of central banks as "lender of last resort". That's what his entire confusion stems from-- he doesn't understand the business cycle, because he has no sound theoretical framework to interpret all his charts.

    The one thing that was common throughout all the periods he showed is fractional reserve banking, and the unbacked credit expansion it entails.

  4. Karl Donglicker is a HACK.

    Wenzel, nice job deconstructing his sorry ass.

  5. Denninger is a low-brow crank. He is sometimes entertaining (like a foul-mouthed clown).... occasionally collaterally insightful..... but always a pompous, dim-witted, self-important windbag.

    I was quickly banned from his anti-intellectual sand-box during the 2008 presidential campaign.... I had the temerity to defend Ron Paul, and when his attempts to out-maneuver me mentally failed, he opted for the blunt instrument of an ip-ban....

    I hadn't thought about him for quite some time, but it did cause me to revisit his his little cesspool to see if the exchange was still up.... and it was, though the most heated parts of the exchange are now buried behind his pay-wall.

    For a broad understanding of his lack of mental cohesion, these links might be illuminating.... or a little entertaining. I am 'circpros' in the exchange.....



  6. He actually references those two links I posted in a comment on an interview with Ron Paul just a few minutes ago:


    He seems to have softened his anti-paul rhetoric a bit over the past few years, but his positions still convey an unsophisticated understanding of the topic of sound money, the nature of fractional reserve banking and illustrates the ever-present sense of self-importance to which I previously alluded.....

  7. I think Denninger, in using the "Exponents are Reality" graph is attempting to point out that when credit expands faster than GDP (which is itself a suspect measure anyway), it is unsustainable. Which is correct. But has NOTHING to do with gold or silver at all. Since credit has expanded faster than GDP for decades now, a crash is inevitable. But Denninger, being short on the kind of consistent and sound foundation that Austrian Theory provides, doesn't understand that fiat money and fractional reserve banking not only enable this kind of stuff to happen, it encourages and even mandates it.

    Yet he goes on and on, in support of both, with the same kind of true-believer attitude of a firm Marxist who claims true Communism would be awesome and just hasn't really been tried. So, fiat currency is just dandy, as long as it is managed responsibly (yeah, right) and fractional reserve banking serves a useful purpose, as long as loans are fully backed by assets (come on!).

    Also, as Robert has pointed out many times, Denninger is obsessed with price stability, which is a meaningless metric, as price indexes can be (and are in practice) flagrantly manipulated. Ie, it was clear, if housing prices were included in the CPI (and not owner's equivalent rent) that prices were massively inflating at the time, but because the rise in housing prices was seen as good (!), it was ignored.

    From what I understand historically (and I'm no expert), the kind of wild price swings Denninger rants about as being tied to specie (which makes NO SENSE AT ALL anyway) has more to do with failed attempts at fiat money and/or central banking (the Bank of North America, the First Bank of the United States, the Second Bank of the United States, John Law in France, the South Sea Bubble, Tulip-mania, the list is just endless). None of these episodes have anything to do with gold or silver.

    The only documented case I know of of high inflation during a gold standard monetary regime is when Spain imported massive quantities of gold after discovering the Americas. A single, very unusual exception.

    Also, Denninger has stated several times that the British tried to convince the early federal government to adopt gold, to benefit the British, but I don't remember him providing any proof of this. Certainly, the British had a lot of gold at the time, being the superpower of the day with a robust economy. So what? And the US shouldn't have adopted gold because of that?

    Actually, a lot of the problems with gold and silver as money in the 19th century US was due to the efforts to support a bimetallic standard. As a result, the country suffered through periods of being gold- or silver-poor due to outflows when the ratios got out of whack with world markets. Plus there were constant tweaks with numerous coinage acts.

  8. After reading French's account of Tulipmania, it appears there was quite a large increase in the supply of PMs, stemming mainly from awful policies of surrounding countries and the large amounts coming back to europe from the new world.

    From French
    "The story of Tulipmania is not only about tulips and their price movements, and certainly studying the "fundamentals of the tulip market" does not explain the occurrence of this speculative bubble. The price of tulips only served as a manifestation of the end result of a government policy that expanded the quantity of money and thus fostered an environment for speculation and malinvestment. This scenario has been played out over and over throughout history.

    "But what made this episode unique was that the government policy did not expand the supply of money through fractional reserve banking which is the modern tool. Actually, it was quite the opposite. As kings throughout Europe debased their currencies, through clipping, sweating or by decree, the Dutch provided a sound money policy, which called for money to be backed one hundred per cent by specie. This policy, combined with the occasional seizure of bullion and coin from Spanish ships on the high seas, served to attract coin and bullion from throughout the world.

    "The end result was a large increase in the supply of coin and bullion in 1630s Amsterdam. Free coinage laws then served to create more money from this increased supply of coin and bullion, than what the market demanded. This acute increase in the supply of money served to foster an atmosphere that was ripe for speculation and malinvestment, which manifested itself in the intense trading of tulips."

    Paper money continued to be backed by bullion, it was just the huge increase in the amount of bullion that fostered all the speculaton, not to mention the fact that government policy allowed the canceling of futures contracts for cents on the dollar. It's all incredibly interesting to me, as it seems to be really an isolated set of circumstances in history, where the supply of PMs does indeed shoot up due to surrounding countries policies and discovery of vast new sources.

  9. Anonymous, I stand corrected. There are now TWO accounts of bubbles/price inflation due to massive PM influxes beyond what the market calls for. However, the Dutch and Spanish episodes are certainly related (I think Holland was even Spanish territory at the time, or at most newly independent). In any case, these events where the PM supply increases so much are VERY few and far between. All it proves is that ANY massive increase in the money supply will cause bubbles. Once again, only PM-backed money throughout history has been most (but not 100%) resistant to such problems. Fiat money, while it can work, in theory (and Denninger is absolutely obsessed with the idea), will NEVER work in practice, simply because the power to regulate legal tender money is so awesome and easy to abuse.