The Cantillion Effect: Why Government Handouts & Paper Fututures Markets Eliminate Real Price Discovery

imagesBy SD Contributor AGXIIK:

As free or low priced money floods any economic system it skews the value of the FIAT and the goods paid for by this funny money.
The government pays out $1,000,000,000,000 (trillion) in transfer payments a year.  This is big money that has no effort, sweat or value recognition embedded in it.  It’s free money.

Similarly, in gold & silver, price discovery has been blown all to pieces because of another free money crowd, the paper traders.

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If we use 1913 as a base line, the year the Fed was formed, there’s is a lot to be said about commodity prices.  Nearly everything we use or consume is up by a factor of 20 to 1 or greater in the last 100 years.    We live in that price paradigm.  But precious metals don’t follow any of the standard pricing models of the last 100 years.   Prior to 1913, there was little inflation.  Wages did not grow a great deal.  One could run their life without worrying too much about inflation.  Gold and silver were the coin of the realm.  Today, everything is upside down.

We live in an era where Price Discovery is nearly impossible. And almost everything we buy is priced at the margins.
For instance, if you have health insurance and present your insurance card, there is no price discovery since the doctor and the insurance company do the little dance on how much the insurance firm will pay and once the magic number is reached, the Doc accepts payments.  I pay cash for almost all medical treatments due to a $5,000 HSA deductible.  That makes the price of medical treatment very discoverable.  Those treatments are anywhere from 50-80% less costly when paid in cash. My fanatacism on price discovery makes doctors uncomfortable but when I go into the office the first thing I say  is  ”What’s your discount for cash”
That creates immediate price discovery.

Without price discovery,  it’s pretty clear that medical costs are priced at the margin.  Any new treatment that is available quickly  drags up the price of the older treatments to the new level. That’s very profitable for the doctor but very costly to the insurance firm. hence the reason we see double digit increases in our health insurance, even for those who don’t use  the health care system extensively.

50,000,000 people receive SNAP and EBT card benefits. This is basically free money transferred from the government to the people who then use it to buy groceries.  The money is free so they have no need to engage in price discovery. That  almost means the grocery stores don’t need to be price competitive.  Whether its Walmart catering to this group or the local convenience store (an enterprize that knows intimately that there is no price discovery at the register), these companies know full well what we can only suspect..  The government pays out $1,000,000,000,000 (trillion) in transfer payments a year.  This is big money that has no effort, sweat or value recognition embedded in it.  It’s free money.   The prices at the grocery store reflect the Free Money syndrome. The stores prices according to the people who place no value on their Plantation Script.  Therefore the stores fall into the same trap, giving much less consideration to the private sector customers.  There is a 500 year old phrase for that-  It’s called the Cantillion effect.

As free or low priced money floods any economic system it skews the value of the FIAT and the goods paid for by this funny money.
If Campbell’s  prices its latest can of chicken noodle soup at $1.50, adjusted upwards for inflation, wages, machinery etc, that same can coming off an lower priced or  more efficient  assembly line is still  priced at a $1.50.  Which makes  soup, or for that matter any product including  oil, precious metals and health care to fall into that problem of being priced at the margin.  The price for everything is determined by the latest product to hit the shelves.  We can’t know the price since forces outside our control make that nearly impossible.  More taxes and regulations further destroy price discover.

So where are we today?   We can’t price oil in various tiers ranging from low to high costs and shop at the gas station who’s oil firm is extremely efficient.  The price of consumer goods has nearly no competition since 50,000,000 people don’t know or care how much they pay for soup.   We end up chasing the prices paid by the free money crowd.

Which brings me to the prices of precious metals.  There is only one group who is forced into price discovery.  That’s us, the  stackers. We pay the market price since every ounce of silver or gold is priced at the margin, the price the highest cost miner must charge to pull metals from the ground.   The lowest price miner does not offer discounts for their inventory.

But price discovery has been blown all to pieces because another free money crowd, the paper traders, are making billions in the paper silver trading pits.  They are making and forcing the prices.  The other factor is the purchasing power of the central banks and governments.  They also have access to free money. They either print it or use FIAT reserves to purchase hundreds of billions of dollars worth using OPM or the printing press.  They don’t care about price discovery since the inventory is cheap.  Even if it wasn’t cheap, they wouldn’t care.  They are using was essentially amounts to free FIAT to buy real money so price is not an object.

I’m not sure where this will lead too, whether its a  lower or higher price in the short term.   Anything we consume  or buy is ramping higher.  If health care goes up by 25%; food costs go up by 15% and oil jumps by 20%,  the law of entropy firmly states that gold and silver prices cannot  be held down forever. That’s why they call it the Second Law of Thermodynamics.  Entropy always wins.  The problem with that is that wars, civil unrest and great suffering will take place when the entropic reset takes place.
Even a non-scientist like me can see that.

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Comments

  1. Good post, AGXIIK.
    And those bags of junk-food chips sitting right behind the “We accept Food Stamps, EBT” sign make a statement as well.

  2. It’s truly remarkable that Cantillon was one of only a handful of stockholders in the Missippi Company who exited at the top of its exuberance because of his uncanny recognition as how circulating credit destroys price discovery in an entire economy. Even John Law couldn’t draw that distinction, which is why these goofballs in banking today, shouldn’t be so readily perceived as ‘rocket-scientists’, but more ‘idiot-savants’ only appearing exceptional by pure rote.

    Proving he truly possessed complete and exhaustively detailed understanding of the event he so adroitly extricated himself from, his nearly total treatise on economics stands as the original milestone of the discipline from which Adam Smith and Frederic Bastiat drew heavily upon in their own works.

    • Damn…a great piece of writing, followed by an outstanding comment! I can’t help myself, I’ve tried to swear offa this site many times, but kept coming back in search of SRSRocco gold….and now AGXIIK has crossed the threshold to heavyweight status.
      Looks like you’ve done it Doc! The riffraff appear to have scuttered, and the cream has risen. You’ve now got one of the best sites on the net. Posts and comments rock!
      PatFields: a pleasure to see another aficianado of the main man! Cantillon was that rare breed of cat who lived the same way he wrote – with excellence, and astonishing acuity of insight. Laws tried to hustle him out of France with threats of imprisonment, in order to save the ponzi scheme from destruction by investors imitating RC’s insistence on redemption of SS stocks for gold…remind you of anybody? Nothing new under the sun!

  3. Nice piece, AG! It is crystal clear that our society has evolved into a “gimme” state.  And of course, that never works.  The more given to those who REFUSE to better themselves in favor of taking what (crumbs) the government is willing to give always turns out badly.  Right now, over 47 MILLION people are on the government teat (EBT, housing, etc).  “Disabled” people (not including military) have QUADRUPLED in the past 18 months (derived mostly from unemployed filing for disabiity and Obama giving  it to them just to keep them on the teat). One day soon it could become necessary we deal with this, either for self-preservation against the takers or to ward off the government givers intruding ever more in our lives.  Keep stacking. 

  4.  fututures ?

  5. The Jim Grant interview also has solid data on this effect. Artificial interest rates are also wrapped up in this price discovery conundrum. The present rates have no bearing on reality; a rate reality that should be 5-6% today. When ‘shift happens’, look out. Rates, like any commodity that has had its price supressed, will shoot past its median rate of the last 200 years, easily spiking to 10% or more. I started my lending career just before short and long term rates went to 15-20%. There was a lot of thumb twiddling back then. Loans didn’t flow very well.

    • Pendulum moved are often like that, swinging past their mid-point out to some max, before they come crashing back the other way.  Yes, there IS an average in there somewhere but there are also extremes.
       
      Agree that Jim Grant is a special individual with considerable knowledge.  Too bad that his voice is not better heard in DC.
       
      Wife and I bought our 1st house in 1978.  We got an FHA loan at 9.6%.  That was a good rate back then.  Other loans were in the 12-13% range.  Yikes!
       

  6. Great read AGXIIX but it made me a little pissed off at the freebies and the Silver Price Manipulation but I’ll get over it and go and buy me some silver rounds and a $9.00 pack off cigarettes. Lol

  7. Good article, getting to the true problem with Fiat currency. Governments can manipulate currency to suit political and ‘financial backers’ causes. The future markets have been completely bastardized and in no way represent the original purpose. How can you have a free market where true prices can be discovered and exchanged when it is manipulated for political reasons. There are valid reasons for a central bank, but its got way out of hand. Powers need to be repatriated to government so that the common man can decide what is good for the common man. But in these times a president can be anything he wants through money and power but the common man can not rise beyond the station which he was born within. Land of the Free? Really, I expect so much more. Now they want to disarm you, don’t put up with it, so speaks a friend from across the pond.

    • “How can you have a free market where true prices can be discovered and exchanged when it is manipulated for political reasons.”
       
      JACKPOT!!!  This is THE essence of the economic difficulty that the US and much of the Western world faces today.  Economic decisions are being made for political reasons.  This is precisely what the USSR attempted.  They were able to hold it together for about 75 years but then the wheels came off.  Like the wheels on our own cart, no one knows when they will come off.  But we do know from what is being done their coming off IS inevitable.  If we look at the US and its economy since the Bretton Woods agreement was signed in 1944 and then add 75 years to that, we arrive at 2019.  Hmmm… not that far away, although, I think that this may be a bit optimistic by 4-5 years.

  8. @silverrrrr & @Marchas45, here is something that will really get under your skin if you have issues with .gov handouts; even moreso if you despise the Baby Boomers:
     
    Those not yet eligible for Social Security are increasingly applying for another, comparable kind of income support that often goes to people who expect never to work again: disability benefits. More than one in eight people in their late 50s is now on some form of federal disability insurance program.
     
    But before you kick these people when they’re already down, check out the linkey about just how fvcked people over 50 are, when they lose their job:
    http://tinyurl.com/ct2os93
     

  9. Baby Boomers. 
    Hmmm.
    Wifey says I’m the first part.  At the firing range, I’m the second part. 
    At 60 years,  income dribbles in.
    With BHP  **** dribbles out
    Maybe my blasters really are compensating for something. 
     

    • So, what are you saying, AG?  That anyone who wants to piss and moan about us boomers should spend some time in our Depends?  lol
       
      Oh, well.  If they REALLY think about it sometime, they will come to the thought that we had just as much influence over the Gov back in the day as they do now… which is to say, F*** ALL or Jack S**t, however it works for ‘em.
       

  10. And the fed keeps flooding 85 billion a month in “free dollars” to the very same banks that are controlling the silver and gold prices.

  11. Great article, AG… very well done.  If there is anything in there that I would argue with you about it is…
     
    “The prices at the grocery store reflect the Free Money syndrome. The stores prices according to the people who place no value on their Plantation Script.  Therefore the stores fall into the same trap, giving much less consideration to the private sector customers.”
     
    I have found that while there is an influence on prices due to this, the grocery stores in my area are fiercely competitive.  Sales are many and varied.  Coupons abound.  Good deals can be found via 2 for 1, buy 1 get 1 free, and other bargains.  We frequently stock up on goodies that are usually $1.89 each or more when they are on sale 10 for $10.  All of these combine to make saving money while food shopping to be a sport that my wife and I relish.  The chase is almost more fun than the eating but at least we know that we can eat pretty well and still not pay an exorbitant price.  We also shop at Costco and get additional savings via their quantity discount prices.  Their meat is superb.  Wife refuses to buy meat elsewhere because the other stores in our area have the occasional shoe leather quality beef that neither of us appreciates.  We’ll buy some hamburger at other stores because it is pretty hard to screw that up but we always get the lowest fat type we can find.
     

  12. Ed B I was thinking about Baby Boomers and I guess the best way to answer that is  “It depends”  Literally. 
    In reality I like the boomers since I’m smack dab in the middle of that demographic.   You might even say I enjoy the company of my age group since they have matured pretty well.  A lot of us spent many years enthralled in the  Sex, Drugs and Rock N Roll, and Disco era.  We Boomers have also been dealt a big hit to our complacency through the last 10 years of stock market drops, tech and property bubbles and the strip mining of our accumulated wealth.  It’s as it we are having to pay for our youthful excesses. But I digress. 
    I also miss the Greatest Generation;  people who made their own greatness through  their way they handled adversity.  In some  ways I want to pay forward their sacrifice, which is  individual and personal quest of mine.  The Boomer Generation is a complex one and would require a library full of books to outline it.
    I liked your counter to the price discovery essay re the  grocery stores.  The big box retailers like Costco and Walmart force reasonable price discovery but it seems like the local supermarket works overtime to challenge our abilities to ferret out the best prices. We used to be able to shop and know the local grocer offered his products at a reasonable price.
     I notice at our local store, Raley’s,  they just did a major remodel and are trying to hit pricing that’s competitive. We are a captive market as well, being a very small and ioslated village.
    Gas prices are consistently 50 cents more per gallon that Costco or other retailers in the urban centers of Carson City or Reno. There is no way a load of gas costs 50 cents more to deliver to the 3 local stations including a Circle K and 7-11. 
    The Raley market is medium sized and in their remodel (I know the GM) their pricing borders on lunacy.  Every shelf and aisle has sale prices but they are without rhyme or reason.  Every item in ON SALE in big letters.    It takes what brain power I have to price shop and compare the sizes and which is the best price.  But there is one consistent theme.  Everything is up at least 10% and sometimes 20% since the remodel. It’s like the magician distracting the crowd with a beautiful assistant while he magically makes your wallet disappear.
     It’s as if the remodel created a new look, fooling the unaware consumer into thinking that we are getting a better deal at the register.  Even sale items are up in price.  Price discovery is close to impossible in an uncompetitive market but this is ridiculous.  And the natives are NOT happy about this.  Those without solid math skills and a knowledge of how markets baboozle the consumer into buying the pricier items, well placed on the shelves, don’t get a deal.  It is a good bit of trickery
    The coupons and two for ones are great marketing techniques, getting people into the stores on special shopping days.  If you buy carefully,  and it’s clear you do, you can extract some real bargains and then leave the store without falling into the trap of buying the highly profitable goodies that sit on the shelves shouting ‘Buy me, I’ll make your life so wonderful’
    Remember when the days when you could buy a car and there was no haggling?  The poor dealers have to practically give the car away at invoice, or lower, to get your business. I ended up hosing the Subaru dealer a couple of years ago and they practically begged me to buy a bunch of add-on features. I felt so sorry for beating them up I did buy one service.
    But the local coin store and thrift store have signs saying  “We don’t haggle”  Yikes.  That made my head spin.
    But the key point I’m trying to make is that is takes some serious thinking to discover prices.  We Boomers may be the last generation who stood astride the fixed price/anything goes price models.  I do have some concern over the abilities of the poorly educated, the lower income classes and the easily duped to get a reasonable deal. It’s almost as if merchandisers of any product, even to the various states offering deals on taxation rates like Texas, find that people are becoming increasingly dumbed down and easier to manipulate. 
    The price of money and interest rates are still very opaque but we stuggle to find bargains there. Bankers are masters in the science of deception in those matters. There is technology like smart phones, apps and the ability to get prices instantly so the every day price discovery may be revolutionised.
    I still use the low tech approach—3 lbs of mush—to do that. But  there’s still the huge black holes; the essential ones,  so massive they blot out sun light. The costs of  health care, taxes, regulations,  and laws that challenge our abilities and those are what really get my interest. 
    Thanks always for your commentaries that dial into the heart of posts.
    Fugly? I like that one.

  13. Nice post !
    I am a Baby Boomer growing up in New Orleans with the legal drinking age at 18 and Bars were open all night,I could buy a Quart of Jax, Flagstaff ,Schlitz ect in any Bar at 18 or the equivalent age for $1.50-$1.75 anywhere. At the Liquor stores about $1.25..Today I don’t drink alcohol ,but if I did I could buy a 40 oz for $ 0.99..Boones Farm wine about  the same price also. A TV’s the Larger ,Better Quality and super cheap.Kinda makes me wonder  why?
     

  14. GOLD AND SILVER CANNOT BE HELD DOWN FOREVER! GREAT POST! When the inevitable runaway inflation sets in, economic chaos on a colossal scale will occur. Remember, the goal of the Illuminati scum is THE OVERTHROW OF ALL CIVILIZATION. They know what is going to happen.

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