The unintended consequences of a broken pricing system

The unintended consequences of a broken pricing system

Commodities: The start of a new supercycle Reading The unintended consequences of a broken pricing system 8 minutes Next Paper vs. physical gold

I am on the side of history that supports the notion of real money—sound money in the form of gold and silver. Like our ancestors did with sound fiscal policy, spending and debt in check and currency backed by gold. When our middle class was still growing and held the majority of the wealth, there was a much higher standard of living, and the wealth divide between the haves and have nots was never an issue as it is now.

I am not sure how you as a reader may feel, but I want to be a substantial part of the haves and owning gold and silver since 2005 has allowed me to have better-balanced wealth, diversified wealth, and contrarian wealth. Unsound money policies and the glutinous printing of money are insidious reminders of how we have lost our path to wealth, with inflation becoming the silent killer of our buying power.

When the Bank of Canada or any other Central Banking authority in the world inflates their country's money supply, the resulting debasement of people's money manifests itself in higher prices that people are paying for material things and services they need or want. It is only August of 2021, just over one year into a horde of astronomical money printing in Canada, yet everyone is already experiencing inflation for themselves.

Take, for example, the considerably higher prices for gasoline at the pump. (Up almost 40% in 12 months) The price jump is not receiving much media fanfare at all but it sure is heck is a sign that we are entering a phase in our economy where people are beginning to comprehend that all that "free" stimulus money wasn't as free as the government said it was.

Examine this concept a little closer and what you will see is that there is another sinister consequence of an inflationary expansion of the money supply. Inflating the money supply causes consumers and businesses to do things they would not otherwise do because the inflationary policy distorts market signals.

For example, consider real estate. (Up near 30% across all of Canada, YoY since 2020) The Bank of Canada policy to maintain artificially low interest rates has kept borrowers lined up for miles in blind auctions, overbidding wars and FOMO battles. Money remains artificially cheap as the bank makes this part of its inflationary policy. Cheap money keeps interest rates artificially low. So what have people done? They went out and spent like drunken banshees thinking it will be like this forever. In the case of real estate, it means monthly home payments could be carried at relatively low costs, almost assuring in this climate that the equity alone and NOT the rental income would net the investor a tidy gain. Under normal interest rate circumstances, many of these same investors could not afford to do this.

At the same time, recognizing the increased demand for housing, construction companies begin growing operations. They add staff and expand infrastructure with capital expenditures, new equipment, increased land, and borrow money to build additional housing projects.

But the dilemma is that it's a distorted market signal that is triggering people to move in a financial direction in which they should not be moving. From the outside, consumers and suppliers appear to be moving in a rational direction. However, on the inside, the reality is that there isn't adequate wealth to sustain this new activity. People are continually tempted to act due to the artificially low-interest rates, not because it is a sane, rational decision. (Think of Recency bias and also FOMO-Fear of missing out) As a result of this behaviour, and there are more examples than this one, we, as Canadians, are in the ironic situation of living in one of the most unaffordable countries for real estate on the entire planet.

At some point, this synthetic inflation-induced bubble will burst, which causes the irrational investing behaviour to be exposed. Homeowners will (not might) default on loans. Homebuilders will (not might) go bankrupt. Banks will (not might) lose money on their loans and foreclosures. The recession (or depression) will arrive. (Think 2007/08 – Subprime Mortgage Disaster)

Not surprisingly, our politicians do not accept any blame. They blame the problems on the banks or the construction firms, or the consumers themselves. But the truth is that the fault lies with the inflationary policy of the Central Bank of Canada.

The price system (in its entirety-and subsequently the way all things are priced) is a complicated message-delivering system that is fundamental to a free market. Prices come into being through the subjective valuations of the participants in the market. We need this system to function correctly, or as close to tradition as possible, so that people can make sensible judgements on what financial actions to take, what investments to make and how to spend their hard-earned dollars.

But once the government embarks on an inflationary policy, the price system becomes misleading, as it is now. It becomes a rotten messaging system that causes people to function in harmful ways, even though they might not recognize it at the time. A broken messaging system leads to a cascading effect of other irrational pricing and decisions that inevitably take us further from reality or tradition or baseline data, as it is now. (For example, in real estate. Not only do we have gobs of foreign dollars aiding and abetting this situation, but we have a complete lack of available supply or oversupply to heel and calm the situation=More FOMO and more Recency Bias feeding into already irrational behaviours.)

The answer is not to place a ban on the Bank of Canada's inflationary policies. The answer is to take money completely out of the hands of the government: no more Central Bank decision and veto control, no more inflation. In a total free-market monetary system, people rely on the market to determine the best medium of exchange. The Nobel Prize-winning economist Friedrich Hayek called this idea "the denationalization of money."

Will this happen? Maybe some of you read this expecting me to say something else, but in our lifetime, probably not. Let's hope you are on the side of those who can afford to live and live well in this current situation. Having something to balance your paper is always smart and less common. But it is necessary. Be it land, collectibles or our favourites at Delta, physical Gold and Silver, I believe your wealth strategy should reflect the finest of all assets within a category. Gold and silver are among the most excellent, most liquid and easily storable hard assets on the face of this planet. The fact that right now you are reading this tells me that you are probably aware of this.

The free market, in my humble opinion, delivers the best of everything, yet history is proving to us that our governments create the worst of everything (Grain of salt as we throw shade on this system. We are a country with one of the best healthcare systems in the world but outside of that???). A free-market monetary approach would produce the best, soundest money. By separating money and the state, people would no longer have their money debased through inflation, and they would also have the price system restored to its proper messaging role in a free market.

Gold and silver were once part of this. Now history is repeating itself. I mean, why else would central banks around the world (with the exception of Canada's) hide the fact from you that their greatest assets are not the paper currencies or bonds or systems they have but the gold they hold in their vaults. What you do with this information is your choice, but we are always here to support you if called on.

Yours to the penny,

Darren V. Long

Delta Harbour is strictly a precious metals dealer and not a financial services company or financial adviser. Delta Harbour does not provide specific advice relating to investments but instead assists as experts in the buying, selling, storing, and servicing of investors' needs regarding physical gold and silver products. Due diligence should be taken with all investments. We highly recommend you consult the people you trust in your financial matters prior to owning precious metals.