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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