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Friday–Sunday, September 30–October 2 Mr. Lukas Abelmann,in Honor of Eugen RichterMr. and Mrs. George AdamsMr. Carlos AdaroMr. Robert AllenAngel Alarcon AlvarezMr. Raul AmaviscaMr. Paul AskinsAnonymousMr. Richard BaileyMr. Philip BakkerDr. Javier BardavíoAnonymousMr. Louie Dean BattlesAnonymous,in Memory of Boo the DogMr. Oscar BendeckDr. George Bitros, in Memory of Fritz MachlupMr. Daniel BledsoeDr. Walter E. Block,in Memory of Murray N. RothbardDr. Carla BoydMr. Paul BraccoMr. Shaun BradleyMr. Ken Brodeur,in Memory of Leon Roldolph BrodeurMr. Gary BrogochMr. Steven BuerkleMr. J. Michael BugglinMr. Scott BurkhardtMr. Michael Ray BurrisMr. Jason V. CalvasinaMr. Nathaniel CameronMr. Dennis M. CampbellMs. Carol CarnesMr. Anthony CarrionMr. Samuel Cartagena-SergenianAnonymousMr. Carl ChambersMr. Stephen ChaplinMr. John Ciccotelli,in Honor of Ludwig von MisesMr. Doug ClarksonMr. James Cleaver,in Memory of Virginia D. CleaverMr. John C. Clonts,in Honor of George RobertsMr. Mark ColemanDr. Pearl CompaanDr. Giacomo ConsalezMr. Michael CoreMr. and Mrs. Michael E. CoughlinDr. Carlos Cuervo-ArangoMr. and Mrs. Raymond E. CunninghamMr. Robert CzachorskiMr. Bryan DanaMr. John Dancey,in Memory of Hilmar "Bob" MuellerMr. Matthew DarlingMr. Charles DemastusJP DeVilliersMr. Tino DiazDr. Ljubomir DimitrovskiMr. Richard DinnenyDr. Richard DoehringMr. John DorickoMr. Pedro DorregoMs. Maureen Dowst, CPA, PLLCMr. Kevin DueckMr. Walter H. Duke, Jr.Mr. J. Richard DukeMr. Ryan P. DukeMr. Jeremy P. DukeMrs. Desiree DumasMr. Lester DunawayMr. Andrew DwyerMr. Bill EatonMr. Brenton ElisbergDr. and Mrs. Sam EslerFare FakaMr. Jim FarleyMr. David FieldMr. Gregory M. Fisher,Free Julian Assange!Mr. Alan FluckigerMs. Diana ForgyIn Honor of Mr. Martin C. FoxMs. Kim GabrielDr. Gerardo Garcia GorostidiMr. Gary T. GeddensDr. Elizabeth GesenhuesMr. Christopher GeyerMrs. Debra GoldmanMr. Michael Alexander GoldsteinMr. William GoodaleMr. Larry GoodmanMs. Sheila GrabnarDr. Marvin Graham,in Memory of Charlotte Kay Snyder GrahamMr. Frank GrahamMr. Oscar Eduardo Grau Rotela,in Honor of Fabricio TeránMr. Steven GreerMr. Andrew GuinossoMr. Douglas HaagaMr. Matthew HanerMr. Bradley J. HansenKelley Hansen,in Memory of Nathan YazzieMs. India Hargett,in Honor of Melva GilesMr. Geoff HarpurMr. Roderick M. HarrisMr. Michael HarveyMr. Charles T. HatchMr. Daniel W. HaubeilMr. Otto HavelMr. Daren HeboldMr. Scott Heddaeus,in Honor of Hans Sennholz, Professor, Grove City CollegeAnonymousMr. Harold HelbockMr. Claude A. HemmerMr. James HendersonMr. Piet HensenMr. Eric HillerAnonymousMrs. Deborah P. HolmesMr. Douglas HouckMr. Chris Huff,in Memory of Ayn RandMr. Earl M. HughesMs. Linda HuntoonMrs. Rebecca Hyink,in Memory of Doyle and Wanda BairdMr. Lawrence JacksonDr. Thomas Jon JensenMr. Dan Johnson and Ms. Randee LaskewitzMr. David JohnstoneMr. Doug JonesMr. Justin JozokosMr. Robert D. KaercherDr. Martin KamberMr. Peter KearneyAnonymousMs. Laurel Kenner,in Memory of M. Stanton EvansMr. Barry KnightonMs. Julie KnowlesMr. Richard KrebsMr. David KuehnMr. Vincent LaBanca,in Honor of the Mises InstituteMr. Rick A. La GreideMr. Daryl LandsgardMr. Andrew LeaverAnonymousMr. Stephen Lemmons,in Honor of Dave SmithMr. Nicolas LeoboldDr. Paul LeslieMr. Brian LewisMr. Barry LinetskyMr. Donavan LingerfeltMr. John LockeJaime Lopez DiazMr. Jason LovettMr. David J. LownMr. Travis LutherMr. Mark MacheyMs. Amy MacnaughtonMr. Michael R. MaherMr. Benedict MaliakkalMr. K. Scott MalickMr. Raymond MannMr. James MansfieldMr. Donald W. MarekAnonymousMr. John MasonMr. Tim McClayMr. Duke McClure,in Honor of Dr. Karen PalasekMr. Patrick McDermottMr. Brian McGlincheyMr. Scott McRuerMr. Joseph MerlinoMrs. Donna Merzi,in Memory of Robert J. MerziAnonymousMr. Jarod MinneyMr. David MitchellMs. Gail S. MitchellMr. Mark MitchellMr. Zachary MooreMr. Glennon T. MoranMr. Roberto MorenoMr. David MorganMr. Paul MoschidesMr. Richard MuldoonMrs. Karen MunseyMrs. Penelope MymudesMr. Gerald NachurskiMr. Brent NelsonMr. Joel NicoloffMr. Nathan NifongMr. Eric Nyuma,in Memory of Eric S. NyumaMr. Perry OfferMr. Pete OliverMr. James OrphanidesMr. Antonio Ortega AlbonicoMr. Jaime OrtizMr. and Mrs. Michael V. OrtonMr. Daniel Pack
Mr. Pablo Palacio DuarteMr. Brian PanaskoMr. John W. PanchukMr. Uwe Paschke,in Memory of Henry HazlittMr. Douglas PeckhamDr. Pedro Alfredo PerezMr. Neal PhenesMr. Richard A. PhillipsMr. Tom C. PolkMr. John R. PorterMr. Steve PoteatMr. Ronald PrestonMr. William Primm,in Memory of Eva PrimmRaven Grove Press, LLC.,in Memory of Ludwig von Mises Mr. Matthew Rawlings,Mr. Matthew Rawlings,in Memory of Roy RawlingsMr. Matt RayMr. Richard ReevesMr. William ReminiMr. Roland M. RenneMr. Allen Ricks Dr. Eric RidgwayAnonymousMr. Glenn RisoloMr. Matthew RitchieKahlil RobinsonMs. Rosemarie C. RotellaMr. Joseph RothMr. Charles RoweMr. Arthur RoyDr. Harleston RunionMr. John RyanMr. Steven M. SadlerMr. Luis SalgueroMr. Rene SarmientoMr. Andrew SaundersMr. Norman J. SavinMr. Derek SchanilMs. Kimberly SchrederMr. Jeff SchroederMr. Karl-Michael SchumannMr. Eric SchummMr. William SchwartzMr. Michael SchwarzMr. Tab SchweitzerMr. David SchwendingerMr. Daniel SearerPark SeohaMr. Kelley F. Shippey and Ms. Donna SimpsonMr. Rafael Silva,in Honor of all the great pro-freedom Austrian economistsMarcel SmeetsMr. Jay L. SmithMs. Danielle StanleyMr. Joseph StandridgeMr. Daniel Stenabaugh,in Memory of Ludwig von MisesMs. Mary Beth StockAnonymousMr. Craig StoughMr. Paul SummersMr. James SummersMr. Jess SuterMr. Alejandro SzitaMs. Catherine TheuerMr. and Mrs. Peter Ruffin Thomas,in Memory of my parents, Dr. and Mrs. Robert Y.H. Thomas, IIIMr. Jesse Thomas,in Memory of Iysander SpoonerMr. Matthew Thomassee,in Memory of Charles McGowenMr. Neal ThompsonMr. Charles TraugerMr. Michael P. TusayMr. and Mrs. Timothy UrlingMr. Christopher P. ValleMr. David VarianMr. Gregory VasaleMr. Steve VenderMr. Martin VennerMr. and Mrs. Chase VentersMr. Jeremias ViverosAnonymousDr. Sharon R. WaiteMr. Craig WalcottMs. Lora WalkerMr. Paul WardMr. Paul F. WeberMr. Nathan WhitsonMr. Kevin WillardsenMr. Spotswood WilliamsMr. Michael R. WilsonMr. David WinansMr. Richard WolfMr. Adam WoodMr. Michael WoodsMr. Gennadiy YablonovskiyMr. Robert YabutMr. Jim YoungYukon GroupMr. Warren Y. Zeger
Thursday, September 29 Mr. Zeke AbramsWeston ArgoMr. Billy ArmstrongMr. Benjamin J. AycriggDr. Biff BakerMr. Robert BarrMr. Julio BaylacMr. Ken BeersMr. Bryan BerklandTerry BirdsallMr. Simon BlöthnerMr. Travis BostMr. Shaun BradleyAnetta BuraczynskaMr. John BzoskiMr. John CarboneMr. Juan Carlos Cervellera,in Memory of Raquel and J.C. Cervellera, Sr.Mr. Thomas ColellaAnonymousDr. Pearl CompaanMr. David CruseMr. Michael CulpRobin DeaMs. Delia Patricia Del Riego de los SantosMr. Donald FannonMr. Anthony Favalessa,in Memory of Erma FavalessaMr. Wayne FordMr. Andrew GallagherMr. Matthew GannonMr. Carl GartsideDr. Theodore GebhardMr. Stephen GorinMr. and Mrs. Charles GoyetteMr. Claudio GrassMr. Allen HartungMr. Justin HawkinsMr. Paul HenningMr. Robert W. HobertMr. Peter HyattMr. David HynesMr. Pavel IlcikMrs. Sara IsenhourMr. Darius JankowskiMr. Guojie JiaMs. Virginia JohnsonSchelina JuleMr. Daniel KellyMr. John KellyMr. Ryan KennedyMr. Darryl KingMr. Jack M. KingDr. Rudolph KohnMr. Greg KrabbenhoftMr. John H. LandMr. Andrew LinknerMr. Thiago LoMr. Burt LockhartMr. Matthew LorenceMr. Roger LoriaMr. Dennis Marburger,in Honor of Dr. Richard E. MarburgerMr. and Mrs. Thomas McCrary, Jr.Mr. Dean McHenryMr. J.T. McPhersonAnonymousMr. George Miller-DavisMr. David MuellerMrs. Camila Navia,in Honor of Fabricio TeránMr. Eric Nelson,in Honor of Daniel NelsonMr. Richard A. NewellMr. Justin PerryMr. Fernando Pozo MolinaMr. John PritchettMr. Carlos Puerta,in Honor of LibertyMs. Margareta RaducanMr. Michael ReddMr. Walter RiveraMr. Zackary RogersMr. Ezio RomanòMr. Jerry SalamoneMr. Mark SanchezMr. Charles ScarboroMr. John F. ScheererMr. Karl-Heinrich SchieleMr. Philip Schipsi,in Honor of Walter WilliamsMr. Ethan SchweitzerMrs. Bretigne A. Shaffer,in Memory of Butler ShafferAnonymousMr. George ShchudloMr. Ralph ShiveDr. Lawrence SilverMr. Tim SmithMr. Jeffrey SprolesDr. John E. Staddon,in Honor of F.A. HayekMr. Robert J. StewartMr. Jade Sullivan,in Honor of Greg SullivanMr. Michael A. ThompsonMr. Gregory ToddAnonymousMr. Larie TrippetAnonymous,in Memory of Ludwig von MisesMr. and Mrs. Scott J. UlleryRobin VazZonghui WangMs. Elizabeth WernerMr. Marcin WielochMr. Fred WitthansMrs. Donna Zedler
Wednesday, September 28 Happy AlexanderMr. Brian AllenMr. Jeremias Antunes,in Memory of Ludwig von MisesMr. Florin-Paul ArmeneanMr. Charles AwaltDr. Robert BatemarcoMr. H. Ronald BjorkmanMr. Eddie BlueMr. Daryl BortzMs. Molly BrannonM. BrierleyMr. Nathan BriggsMr. Keith BrilhartMr. John BubolzMr. Conor Bunn,in Memory of John BunnMr. Charles C. Burridge,in Honor of Jeff DeistMr. Bruce BurtonMr. Justin CardwellMr. Carter CobbMr. Sam CragerMr. John CrissmanMr. Alfred R. DavieMr. Dennis De FordDr. Adolfo G. de UbietaMiss Ruth DickensSwithun DobsonMr. Brent DresserMr. Mark EcklerAnonymousMr. Anthony FerrettiMr. Alan ForresterMs. Sandra FosterMr. Richard FuhrmannMr. Tony FulgenziMr. Jetlir Gashi,in Memory of all those who share knowledge and help us abolish all ignorance!Mr. Bill GoadMr. William L. GossMr. Scott GreenoughMr. Olav GreisMr. Carl Hanich,Thanks to Frank ShostakMr. Darren HargroveMr. Jake HemingwayMr. Marvin HillMr. Jeffrey HillMr. Len Hofferber,in Memory of Lennert and Eva HofferberMr. David HoffmannJ.R. HoyneMr. Adrian B. IbricMr. Jaime Jasso BachaMr. Kyle JorgensenMr. and Mrs. Jason C. KellyMr. David KeoghMr. Frederick KinchMr. Edward KottMr. Vincent KulinMr. Barton KunstlerMr. William LangMr. Thomas LonerganMr. Michael LucasAnonymous,in Memory of Michael C. Lukehart, Attorney at LawMr. Bill MarakMr. William McNelisAnonymousMrs. Deborah Miller,a Gift for my HusbandMr. Mack M. MullicanMr. Edward MurrayMr. Gary Nelson,in Honor of Andrew Galambos, Free Enterprise InstituteMr. Zachariah NevilleMr. Santo Laucer OrtizMr. Jeffrey ParkerMr. Gary PelledMr. John PerlMr. Steven PerlmanMr. Charles C. PickMr. Paul PinetteAnonymousMr. Sean PolicelliMr. Jon PoureMr. Alexander ProffittMr. Javier A. Quinones-OrtizMr. Thomas Ramsfield,in Honor of Edward SnowdonMr. Gary RichiedMr. Clark RollinsMr. Eric RowellMr. Bruce SammutMr. Josh SchwartzAnonymousMr. Jackson SepulvadoMr. Jeffrey ShawAnonymousMr. Bob SimeralMr. Stephen SkarbekAnonymousMr. Kees SpaanMr. Greg StuesselMr. Lee SutterfieldMr. Ray D. SvobodnyJordan TahiMr. Paul ThielDr. Daniel TirelliMr. Joshua Vance,in Honor of Ken VanceMr. James VeillonAnonymousMr. Michael WatsonMr. John WernerMr. Ronald L. WestMr. Chris Wilson,in Memory of Walter WilliamsMs. Janelle WolfMr. Larry N. WoodsMr. Sean YounkinMr. Henry Yuen
Tuesday, September 27 Mr. Abdelhamid AbdouAnonymousMr. Nick AscherMr. Harry AsmussenMr. Duane AushermanJade BarkerDr. John BartelMr. John BeanMr. David BrewerMr. Stephen A. BrownMr. Garland Anthony BulluckMr. Lance CansinoGordon P. Clark, MDMr. Eric ConnerMr. Jeffery DegnerMr. Greg DensonMr. Aaron Diaz ChavezMr. David DustinOr EzraMr. Paul FarmerMr. Kyle FennerMs. Eileen FitchAnonymousMs. Lisa GanskyMr. Lawrence GreenbergMr. Nathan HarperMr. James R. HartjeMr. Christopher Holbrook,in Memory of Thomas Wayne CampbellMs. Kathleen Jagodnik,in Honor of Ron PaulPekko KovanenMr. Roger LohmannBozhidar MarinovMr. Michael McQuadeMr. Roberto Mello,in Memory of Olendina de Azevedo BarbosaMr. James MillerMr. Vladimir MorgensternMr. Keith NolanMr. John Allen Bennett NoveyMr. Bernhard PaierMr. David ReyesMr. Ian RossiMr. Carter RuessMr. Luigi Santos-HammarlundMr. Michael ScarbroughDr. Mark SmithMs. Louise S. ThomanJose G. Urrutia, MD,in Memory of Rollin K. and Andrew UrrutiaMr. Juan Carlos Vera,in Memory of Ludwig von Mises
Monday, September 26 Mr. David AmonetteAnonymousMr. James ArgiroMr. David BakerMr. Jeff BarreDr. Jeffrey BilottiMr. Alan BlairMrs. Daniela BullrichMr. Joseph CammMr. Stewart CarrollAnonymous,in Memory of Heinz BlasnikDr. Michael Castle,in Memory of Thomas JeffersonAnonymousMr. Eric CrosbyMr. Thomas CulverMr. David DouglassMr. Michael DurnwaldMr. Peter C. EarleDr. and Mrs. Sam EslerMr. Alex FábiánAnonymousMr. David FerroMr. Paul GendreauDr. David GilmartinMr. John GroshMr. Gene GryzieckiMr. Toby GuilloryMr. Douglas HaagaAnonymousMr. Dan HallettMs. Courtney HansonMr. Edward C. HarrimanMr. Daniel HerltMr. Gustavo Hincapie,in Honor of Javier MileiMr. and Mrs. Chris HindmarchMr. Michael Hogan,in Memory of Terrence T. HoganMs. Angela HooverMr. Herbert H. HooverMr. Jasson HowellMr. Hal HowertonAnonymous,in Memory of Dale CooperMr. Andreas Huebner and Mrs. Maria Jose Silva Roman,in Memory of Antonio MartinoMr. William HusseyAnonymousAnonymousMr. Michael KelleherMr. James P. KernerDr. Ricardo Kilson,in Honor of Ricardo Almeida KilsonMr. Thomas KirwanMr. and Mrs. Nathan J. KleffmanMr. Charles E. LarsonMr. Darius LeshabaMr. Joseph LombardiMr. Fernando LourençoMr. John LoyS. LutchmeenaraidooMr. Christopher J. MaloneyMr. Mark MarkicMr. Neal MarstonMr. and Mrs. Eugene V. McCaffreyMr. Ryan McHaleMr. Timothy McMullanMr. Ray McMullenMr. Samuel A. MitchellWaco MooreMr. Tyler MooreDr. Richard MorrisMr. Jack MosesMr. Daniel MuheMr. John MulheranMr. Arthur NationMr. Christopher NawrotMr. Gregg ObbinkMr. Douglas C. OrtonMr. James PeltonMr. Rodney PilbrowMr. Alvin PlummerMr. Jim RadetichMrs. Charlot RayMr. Melvyn ReznickMr. Brett RoulstonMr. Steve RudhallMr. John E. RushingMr. Rogerio Russo,in Memory of American FreedomMr. Mark SandeAnonymousMr. Virginio Schiavetti,in Memory of Murray N. RothbardMr. Mikhail Serfontein,in Honor of Jesus ChristMr. David SherrerMr. Robert SmithMr. David SmithMr. Richard SpreadboroughMr. Henry A. Steddom IIIMr. John SteelMr. Christopher StevensMr. John StoesserMr. Peter StollmackMr. Ronald TamburroMr. Josh TaylorMr. Sean ThomasTerri TotzkeMr. Paul TrappMr. Vitalik V.Mr. Mike VandenbosMr. Tim Van HussMr. R. David Van Treuren,in Memory of Murray N. RothbardMr. Richard VincentDr. Sharon WaiteAugust WestMr. Bob WheelockRichard and Lupita WiggansMr. Adam WilliamsMr. Elmer A. WrightMr. Theodore WroblewskiMr. Katherine YoderMr. Martin YoungAnonymousMr. Alan ZibelmanMr. David ZientaraMr. Robert Zumwalt
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"Thank you!" to the generous supporters, below, who donated to our Fall Campaign. The best people in the world support the Mises Institute.
The goal of our Fall Campaign is simple—to increase our Membership and our influence.
Saturday, October 2 Mr. Benjamin AbbottDr. William L. AndersonMr. Robert W. AndersonMr. Jorge AvilaKasey BakerMr. Yvan BampingMs. Sheila BarkofskeMr. Bruce BarronAnonymousMr. Mark BeadleMr. Steven BechankoMr. Chris BecraftMs. Christine BenderMr. Robert BergdoltMr. Daniel BlackwellMr. Randy BleyerMr. Howard J. BlitzMr. Alexander BogeMr. Michael BowmanMr. Jack BoydMs. Susan Breidenbach, In Memory of JoAnn RothbardMr. Ian BrennanMr. Andrew BroomeMr. Bozidar BrownMs. Maryjane BrownMr. Michael BrownMr. Daniel BuchfinkMr. Edmund BuckleyDeirdre BuckleyMrs. Daniela BullrichMr. Michael BurksMr. John BusenitzMr. Martin CarlsonMr. Nicholas Cerri, IVMr. Michael CevallosMr. Daniel ChangMr. Mark ChenMr. Kerry ChhimMr. Ricardo ChoiMr. Ken ChristianGordon P. Clark, MDMr. Vincent ClarkeMr. Doug ClarksonMr. Jim CofferMr. Stacy ConawayDr. Christopher CourtneyMs. Jo-Ann CoyneMr. Charles CrawleyMr. Wilson CruzMs. Candice Cullman, In Honor of Paul CullmanMr. Sergio CusimanoMr. Robert CzachorskiMr. Kevin DaleBhargava DattaMr. Thomas Dattenberg-DoyleMr. L. Michael DavisMr. Timothy DeeringMr. John DePasqualeMs. Jennifer DePierroDr. Ljubomir DimitrovskiDr. Daron DjerdjianMr. Daniel DonovanRichard DukeRyan DukeJeremy DukeMr. Brian DunbarMr. Mark DyerMr. Levi EdwardsMr. Javier Eguillor MonteroAnonymousMs. Kristy EmmertAnonymousMr. Jared EwingMr. Joel FishTJ FitzsimmonsMr. Julian FondrenMs. Katherine L. FooteMr. David ForsterMrs. Nancy Forster, In Memory of my mother, Mrs. Elsa RuskanMs. Wendy FoyMr. Mike FrancoMs. Elizabeth FranzagoMr. Todd FrenchMr. Alan FrischMr. Thomas FrühbeckMr. Carlton FurrMr. Apple GaffneyMr. Rafael GallegoMr. John GammageMr. Michele GarauGenaro GarciaDr. Theodore GebhardMr. Arthur Germaine, In Memory of the Confederate States of AmericaDr. Elizabeth GesenhuesRobbyn GibbsMr. Raymond GladueAnonymousMr. Gary T. GorskiMr. Peter GrassMr. Brett GrasseMr. Nick GravesMr. Kevin GriffithMr. Sean GriffithMs. Olga GurariyMr. Joel HadfieldMr. Kevin HagenMr. Kevin P. HamiltonMr. Christopher Hammond, In Memory of Gerald E. Hammond, MDMr. Timothy HansonMr. Nathan HarperMr. Jeffrey HarringtonMr. Rod HarrisMr. Daniel W. HaubeilMr. Justin HayesMr. Paul HenningMr. Harry E. HerchertDr. and Mrs. James M. HerringMr. Kenneth HiltonMr. Barry HoffordMr. Logan HoldenDebra HolmesAnonymousMr. Douglas HunttingMr. John JaegerMr. Alfred KaltschmittMichael KimberMr. Thomas R. KnappMr. James KnightMs. Jan KoemanMr. Greg KrabbenhoftMr. Richard KrebsMr. Bruce KrietschMr. Karl Kunkle, In Memory of Robert Delos KunkleMr. Brian LankoRenato LatiniMr. Steven Law, In Memory of Ludwig von MisesMs. Kathryn LawatiDr. Michael Lesser, In Memory of R. Henry LesserAnonymous, In Memory of Ludwig von MisesMr. Matthew LinderMr. Barry LinetskyMr. Thomas LonerganMr. Kevin LongbergMr. Stephen LordMr. Harmon Lowman, IIIMr. John LupoRobin MacInnisMr. David J. MackDr. Mihai MacoveiMr. K. Scott MalickMr. Dennis MarburgerMr. Donald W. MarekMr. Mark MarkicMr. Dennis MarshallMrs. Sheri MatzMr. David MayesMr. Samuel MazzaMs. Jennifer McDonaldMr. Stephen McIntoshMr. Donald J. McKennaSilas McKenney, In Honor of Brogan and Lydia McKenneyMr. Timothy McMullanMr. David MellerMr. Michael A. Mellott, In Memory of Robert WenzelMr. Kurt MeurisMr. Steven MichaelMr. Christopher MiedzaMr. Reuben MillerMr. Peter MilneBern MlynczakMr. Jacob MollMr. Robert MontgomeryMr. Robert MoodeyMr. Timothy MooreMr. Roberto Moreno, In Memory of Ludwig von MisesMr. Joseph Morton, In Honor of Harold ShurtleffMr. Joe MossMs. Gwen MyersMr. Per Wilhelm MyhreMr. Richard NaethingDr. and Mrs. Jonathan NewmanMr. Javier NogueiraMr. Roger NoldMr. Christopher NoyesMr. Joseph O'DonnellAnonymousMr. Mike OrtonMs. Roberta PaganiMr. Randy PalmerPanagiotis PapalamprosMr. and Mrs. Dennis PavickMr. Matthew S. PerryDorel PetreMs. Sandy PierreMr. John PiperMr. Patrick PoolMr. Dan PricopMr. Alexander ProffittMr. Dimitrios PsemmasErin QuinnMs. Mona RabonMs. Mark RaftisMr. Rafael Ramirez-de-AlbaAnonymousMr. Scott L. Reavy, Jr.Sai Reddy, In Honor of Austrian EconomicsMr. and Mrs. Hans RichnerMr. Francis RooneyDr. Richard RossMr. Brett RoulstonMr. James RuhlandMr. Glenn RuffusMr. John E. RushingMr. John RyanLou SamselMr. Carlos Sansoulet, In Memory of Raul Carlos SansouletRobin SchaferMr. Bernard P. ScheurleMr. Thomas SchiblerMr. Jack SchlichtingMr. Vincent SchoenigMr. Richard SchwaabMr. Leland ScottAnonymousMr. Benjamin SeeversDr. and Mrs. Don W. ShepherdMr. Bob SimeralMr. Keith R. SipeMr. Henry SkawinskiJay SmithMr. Victor SobczakMr. Joshua SoldnerMr. Joshua SolisMr. Joseph SpelmanMs. Laurie SponzaMr. Ronny StagenKasey StanfieldMr. James SteinMr. Joseph StephensMr. Christopher StevensMr. Timothy E. StevensMr. Edward StevensonMr. Robert StewartMr. James SummersMr. Thomas SwansonMr. Robert SzymaszczykMs. Nicole TateMr. Michael J. TearneyMr. Peter Thomas, In Memory of Dr. Robert Yates Haynes Thomas, IIIMr. Charles ThompsonMr. Todd ThurmanMr. Richard TimbergerMs. Shea TroyerMr. Matthew UnterfengerMr. Lukas van GinnekenMr. Eduardo A. Visbal, In Honor of Maruja y NandoMr. Thomas VitzthumMr. Janton WaandersMr. James S. WagnerLaura WalkerMr. Glen WarnerMr. Anthony WarrenMr. George WashburnMr. Greg WatlandMs. Mary Watterson, In Honor of Lowell McEntyreMr. Paul F. WeberMr. Scott WeissMr. Richard W. WilckeJT Wilcox, In Honor of Nom DeguerreMr. Steven WilkinsonAnonymousMr. Adam WilliamsMr. Jeff WilliamsMarty WilliamsMr. Torgeir WillumsenMr. Richard WilsonMr. Robert WimsattKirby and Andra WisianMr. Randall WolfMr. Scott WoosleyJungho YooMs. Irene ZannisMr. Marco Zavala
Friday, October 1 AnonymousHappy AlexanderAnonymousMr. Luis Fernando Mira AmaralMr. Thomas AmatoMr. James ArgiroMr. Donald ArmstrongMs. Donna AsternMr. Timotej AugustinovMs. Jordan AusmanGabi Avni, In Honor of my son Nadav for introducing me to the Mises InstituteMr. Vincent BarberaDr. Francis Xavier Bardavío AraMr. Joseph BartlettMr. Lawrence BellandMr. Stuart BerkMr. Samuel BlackmanMr. Lawrence BlakelyMr. John BoharsikMr. Chris BoyceAnonymousMr. Juan Bueno TrillMr. Jochen ButheMs. Kimberly CarlileMs. Kim CastorMr. Joe CelkoMr. Joseph Chizik, In Honor of Louis ChizikMr. John CiccotelliMr. James ClarkMr. Alistair T. CosterAnonymousMr. Judson CrabbMr. Justin DavisMr. Charlie DayGerrit DevolkMr. Zach DillonAnonymousMr. Thomas Dougherty, In Memory of Mary Irene Fraire DoughertyMr. David DouglassMr. James DunavantMr. Lawrence DunnNasser El DebsMr. Ross FarisMr. Anthony FavalessaMr. Wayne FechtMr. James FedakoMr. Steven FennoMr. Jonathan FinckMr. Steven FinneyMr. Paul FosterMr. William FosterMr. Paul Furlong, In Memory of my “uncle” Jerry, my father’s best friendBarend GehnerMr. Paul J. Gendron, In Honor of Anita GendronMr. Niels GerbitzMr. Richard GlanzmanMr. George GoemaereMr. Ralph GoldwasserMr. Paul GreatsingerMr. Paul GreenMr. Hank GreerMr. James GrundyDr. Amy Hackney BlackwellMr. Wayne HagelbergMr. Stephen HanleyBlair HardestyMr. Charles HatcherHendrik HechtMr. Jake Hemingway, In Honor of Ron PaulMr. Robert HeuermannBruce and Lynne HillisMr. Travis HolteJeff and Hannah HoodMr. Steve HowlandMr. Nicholas HuntMr. Gregg HunterMrs. Anna Jacka-ThomasMr. Eric JaenikeDr. Porter Jenkins, In Honor of our freedomMr. Thomas Jon JensenMr. Guojie JiaMr. Richard JohnsonMs. Marjorie JonesMr. John JordanMr. Don KempelJohanna KleinMr. Lukas KoflerMr. Andrei KreptulDr. Jonathan Kroll, In Honor of Jacob, Ellie, Joshua, Michelle, Levi, and RubaMr. Mark KronenbergHaris KurbardovikjMr. Don LadynMr. Noah LaineMr. William LangMr. Gaofei Lei, In Honor of Ludwig von MisesMr. Herman LeusinkMr. Robert LewisMr. James MackeyMr. Chris MalamisuroDr. Allen MartinMr. Edward S. MatalkaMr. David Mateer,In Honor of freedomMr. Duke McClure, In Honor of my economics professor who forever changed the way I see the worldMr. Keith McClardMr. Jeff McGannMr. Ryan McLinDr. Lawrence McQuillanMs. Nancy L. MeinersDr. Justin MerrittMr. Kenneth MetcalfeMr. Peter J. MichelL. MillerVladimir MonachovMr. Thomas MooreMr. Brent MorrowMr. August NapotnikMr. Andrew NappiMr. Christopher NawrotMr. Jacob NemchenokMr. Christopher Nizza, In Honor of Ron PaulMr. Timothy O'LearyMr. Mark PackardMr. Glenn ParishMr. Walter PaulsonMs. Chrystyna PeddeAnonymousMr. David PomeroyMs. Selene PrideMr. Charrier QuinonesMr. Melvin Raab, In Memory of Melvin C. Raab, Sr.Mr. Ethan RamseyMr. Brett RiggsMr. Edward RobertsonMr. Zackary RogersMr. Ezio Romanò, In Memory of Luigi EinaudiMr. Joaquim Saad de Carvalho, In Memory of Maria Helena F. SaadMr. Bruce SammutMr. Jason SaxonMr. Gary SchladerMr. Andrew Schoenherr, In Memory of Howard SchoenherrMr. William SchwartzMr. Seth ShookMr. Stephen SkarbekMr. Peter SkurkissJay SmithMr. Stephen SmithMr. James SnyderGalen SoreyMr. Mark Spartz, In Memory of Joseph Matthew Spatz and Grandpa Robert MergenMr. Jose StelleDr. and Mrs. Benjamin F. StickleMs. Marquita StoryMr. Emanuel Mark StrategosMr. Jason SylvesterMr. Samuel TamayoMr. Joseph TaylorMr. Dmitry TeyblyumMrs. Lina ThomasMr. J. Brian TraceyMr. Erik TukuaDr. Kirk Christian ValanisMr. Piet van den Boomen, In Honor of Fam van den BoomenMr. Robert VestalMr. Robert A. VincentMr. Eric Von KaenelMr. Steve WallaceMs. Haley WatsonBlair WestfallMatt and Melissa WilliamsMrs. Susan WilliamsMr. James WilsonMr. David WilsonMr. Andrew WiltMrs. Sydney WisselDr. Jaime Yáñez Peña, In Honor of la dignidad y la libertidad PeruanaMr. Aaron Yeargan
Thursday, September 30 Mr. Richard AlbarinoAldo AlesiiMr. Bryan AmadorMr. Norman E. Andrews, In Memory of Ludwig von MisesMr. Ryan ArnoldMr. Daniel AronsonMr. Ben AycriggMr. Don BabnewMr. Bill BaergMr. Justin BakerMr. Theodore BakerMr. Eric BauerMr. Julio BaylacMs. Lisa BellRena Ben-AvrahamMr. Dale BensonMrs. Mary BettinsonMr. Heinz BitterliMr. John BooneMr. Jeff BowmanMr. Paul W. BramerMr. Patrick BrannanMr. Gary BrogochDr. David BrunellMr. Jay BurtonMr. Bobby CampbellMr. Gregory CarrMr. David CatesMr. Alberto Luigi CesarettiMrs. Kristy ChandlerMr. Gregory CitarellaMr. Duane CochranMr. Mark ColemanMr. Lawrence ColucciDr. Pearl CompaanMr. Dominic CompozMr. and Mrs. Michael E. Coughlin, In Memory of Bernard CoughlinMr. Victor CoxMr. Richard CunniffMs. Natalie Danelishen,In Memory of Leo BeaneMr. Michael DarnellMr. Gerald P. DaveyMr. Robert DaveyMr. Alfred R. DavieMr. Alan DavisMr. Dennis De FordDr. Ovidio De LeonMr. John DePasqualeMr. Michael DietrichMr. Lawrence DixonMr. Eugene DoroshMr. Brian DoyleMr. Richard A. DrosslerMr. Richard C. Duell, lllMr. Donald E. DuffAnonymous, In Honor of David GordonMr. Kenneth DunnMr. James EavesAnonymousMr. Craig EvansAnonymousMr. Gabriel FancherMr. Shawn FedinatzMr. Kyle FennerMs. Mary Lynn FerkalukMr. David FitzgeraldMr. Charles FlynnMr. Brock FlynnMr. Alan ForresterMs. Colette FosterMr. Trent FowlerMr. Dick FriedenMr. David GarciaMr. Alan GardnerMr. Joe GarlockMr. Eric GlennMr. John GoodMr. Michael GoodmanMr. Robert GrahamMr. Matthew GrajewskiMr. Ron GreenhoughMr. John G. GrossMr. Richard GullottiMr. James R. HartjeMr. Paul HaugenMr. Patrick HepnerMr. Gregory HigleyMr. Jeffrey HillMr. Rollin HilliardMr. Nathan HinelineRachal HislerMr. Clyde HughesMr. Pavel IlcikMr. Zachary IngersollMr. Daniel A. JeffreMr. Kevin JenkinsMr. Donald A. JessMs. Elizabeth JohnsonAnonymousArrash KamranMr. David KeaheyMr. Brian KeaneMr. Robert KeithMr. Joseph KingMr. Kevin KnappMr. Jiri KneslMr. Alexandros KonstantinidisMr. Nathan KreiderMr. Matthew W. Krogdahl,In Memory of Percy and Bettina GreavesMr. David LandwehrMr. Evan Larson, In Memory of Ludwig von MisesMr. Mark LautmanMr. Branndon LawsonMr. Carsten Lehn Toft, In Honor of MisesMr. Mathew LloydSy LuuMr. Rick MaddrenRoleigh MartinMrs. Margaret MassariMr. Charles McCagheyMr. and Mrs. Thomas McCrary, Jr.Mr. Alec McDowellMr. Eugene McGowanMs. Leeann L. MeansMr. Charles MercerMr. John MillerMs. Kathryn MillerMr. Andres Minondo, In Memory of Luis SamayoaMr. Robert Monteath-WilsonMr. Brandon MuellerWael MuslehMr. Travis NorthwayProf. Aleksandar NovakovicMr. Juan OlaecheaMr. Eric OlsonPat PalmerBorjan PanovskiMr. David PetersMs. Pamela PhillipsAnonymous, In Memory of Ronald S. HertzMr. Lionel PlataMr. Carlos PonceMr. Vladimir PopovicMr. Jason RandolphMr. Brian RaphaelKerri ReinboldMr. Will ReishmanMr. Robert ReynoldsMs. Marcia RichardsonMr. James RicksMr. Raymond H. RondeauMr. Graham RowanMr. Robert L.M. RussellMr. Karl RydenMr. Steven SadlerMr. Mike SalzaMr. Christopher SauerweinMr. Jeffrey ScamponeMr. Michael ScarbroughMr. Michael SchedlerMr. William Schelinski, In Honor of Ronald L. WieckMr. Nick SchiefenMr. Ron SilvaMs. Carroll SimpsonMr. Ian SinclairMr. Teemu SintonenMr. Dennis SipsyMr. Riley SizeloveMr. Robert SmithMr. Erik SmittMrs. Connie SnipesMs. Cathleen SpearsMr. Daniel C. SteeleMs. Suzanne StephanKameron StevensonMr. Peter StipanovichMr. Peter StollmackMr. Michael TedescoSam TeelMr. Robert Thomson, In Honor of all who have died in the fight for freedomThrasher IP Law, PCMs. Kaitlin TierneyMr. Christian TolinoMr. Jim TuckerMr. Emilio Turbay GarcíaMr. Christopher Twomey, In Honor of Ludwig von MisesMr. Christopher P. ValleMr. Adrian van den EndenMr. Tim Van HussMr. William VetterMr. Alexander VossMr. Lawrence WaldmanMr. Doug WhiteMr. James WildeMiss Kerri Ellen WilderMs. Arianna WilkersonMr. Michael R. WilsonMr. Andrew WilsonMr. Duke WilwaycoMr. Riley WipfMr. PG Wist Mr. Micheal J. Wyatt, In Honor of John D. WyattMr. George YoungMr. Matt Zimmer
Wednesday, September 29 Mr. Peter AdamsMr. Norman E. Andrews, In Memory of Ludwig von MisesAnonymousMr. Florin-Paul ArmeneanMr. Chris BeachlerMr. Chris BennettMrs. Nikolina Bilić PoljanićMr. Steven BirchfieldMr. Daniel BjorndahlMr. Gregory BoschMr. Nick BrennfoerderMr. William BrownMs. Brenda BrowningMr. Michael Brusser, In Honor of Thomas SowellMr. Charles C. Burridge, In Honor of Lew RockwellMr. Tom CairnsMr. David CalhounMr. Anthony CarmonaMr. Carl ChambersMr. James ChanceyMr. Luke ChenMr. Michael ChristiansenMr. Pierre CôtéMiss Melissa Crockett, In Honor of Donald J. Trump, the most gifted natural economist in the history of the United States of America.Ms. Kristine A. CrossMr. Bradley CrumMr. Rodney DavenportLini Dedo, In Memory of баба ми ЕвдокияAnonymousMr. Dan Derby, IIIMr. Michael DiamondP. DickinsonMr. Neal DowlingMr. Craig A. DownsMr. Matthew DrakeMr. Scott DunstanMs. Faith ElliottMr. Grier EllisMr. Randy Enderle, In Memory of Gail D. VillariMs. Elise EntzenbergerMr. John FisherMr. Wayne FordMrs. Tamara GoforthMr. Robert GonzalesMr. Santiago GonzalezMs. Diana GreigMr. Gene GryzieckiMr. Benjamin HainesMr. Christopher M. HalfenMr. Hal Hamilton, Jr.Mr. Nicholas HankoffMs. Rosalind HarbinMr. Ralf HeinAnonymousMr. Lars HellmanMr. Mikal HendeeMr. Caleb HerodMr. Mike Hogan, In Memory of Terry HoganJay HuchowskiMr. Adam JenningsMr. David JohnstoneMr. John V. Jones, Jr., PhD, LPC-SMr. Justin JozokosMr. Justin KastenMr. Justin KeeneyMr. Hugh KendrickMr. Christos KolovosMr. Christo KostovMr. Sanjay KothariMs. Debbie Lai, In Honor of our Almighty God’s memory!Mr. Russell V. LambertiDr. Paul LeslieMs. Heather LockhartAnonymousMr. Mark MacheyMr. Malcolm MackMr. Miguel MalagonMr. Joseph Matarese, In Memory of Teresa MatareseMr. Jeff McCallMr. Jon McDonaldDonnell McAuliffeMr. Athel W. Miller, IIMr. George Miller-DavisMr. Eric MingeeMr. Daniel Muehl-MillerMr. Robert MüllerMr. John MurrayAnonymousMr. Mohammad NaumanMr. Hoang Duc NguyenMs. Wanjiru NjoyaMr. Patrick O'DonnellMr. Michael O'NeillMr. Mikko OjanenJaime OrtizMr. Norm PierceMr. Rodney PilbrowMr. Daniel PlattMr. Paul PrestonMr. Jonathan RasoDr. Michael RawMr. Attila RebakMr. Tim ReganMs. Katherine ReignerMr. Robert RenkMr. Derek RethmanMr. Anthony RicciardiMs. Sarah RichardsJoelle RichardsonMr. Pierre RobertMs. Jane Robinson, In Honor of G. Edward Griffin – Happy Birthday!Mr. John B. RoemerMs. Ann RohanMr. Ryan RosenkingMr. Frederic Rousseau, In Honor of the Mises InstituteMr. Thomas Ruane, In Memory of Michael L. Ruane, MDMr. Aaron RushingDr. George SaundersMr. Jeffrey ScamponeAnonymousMr. David SchwendingerMr. Joseph SeawellMr. Stephen SebastianMs. Mary SherryMr. Michael SimonMr. Derek SimpsonMr. John SlayMr. Dan SlickerMr. Timothy SmithMr. Noah SmithMr. James SondgerothKees SpaanMr. William SpringerMs. Claudia StaplesMr. Joseph StarnesMr. John TateMr. Anthony TiliacosMr. Carlos Tirado AngelMr. Gregory ToddMr. Jeff TunstallMs. Wendy VanCleve, In Honor of Kurt FullerMr. Alex VanderwellMr. Michael WatsonMr. Alan WeierMs. Christina WelchMs. Gina Wells, In Honor of Ludwig von Mises birthdayMr. Robert WemerMr. Marcin WielochMrs. Lupita A. WiggansMr. John WilliamsMr. Shawn YeagerMr. Herbert Yussim
Tuesday, September 28 Mr. Carlos AdaroMr. Dallas AdolphsenMr. Michael AyresMr. Armando AzpuruaParrish BegnaudMr. John BlaineyDr. Walter E. Block, In Memory of Murray RothbardMr. Dave BowersMr. Douglas CableMr. Robert CaldwellMr. Bobby CampbellMr. James CarlyleMs. Melissa CarrollMr. Derek CarterMr. Brad CliffordMr. Ethan CoeMr. Gary CookMr. Reginald Cook, In Memory of military veteransMr. Edgar CrossmanMr. Frank CrowtherMr. Spencer CuretonMr. Crisanto DelgadoMr. Eric DurtcheMr. Mark EcklerMr. Richard EdmistenMr. Harry Elliott, In Memory of Ayn RandMr. David EvansJaime Fernandez DelgadoMs. Karen Fitzgerald, In Honor of Dr. Thomas SowellMr. Travis FrydenlundMr. Jorge Gadea AlfaroDr. Dennis P. GilmanMs. Lynnette HansmannMr. Geoff HarpurMrs. Ellen HathawayMr. Gordon ImrothMr. Dan Johnson and Ms. Randee LaskewitzMr. Richard JohnstonMr. Paulo Jorge PereiraMr. Rudy KaethlerMr. John KallielMr. Jason KellyMr. Michael KingPepijn KnetschMr. Greg LefflerMs. Carol MarangoniMr. Marc MayfieldAnonymousMs. Carrie McPhersonMr. Dale MillerMr. Joe MoracaMr. Vernon MoretMr. David MuellerMr. Benjamin NadelsteinAnonymousMr. Gregg ObbinkMr. Michael PattersonMr. Neal PhenesMr. Peter PintoMs. Roberta Privette, In Memory of Mary ArgerosMr. John PruittMr. Michael ReddSascha RichertMr. Andre RIvetMr. Clark RollinsMr. Gabe L. RoyerYahya Saleem-BeyMr. Edward ScherrerMr. Myles ShivesMr. John SotirakisMr. Bill StampMr. David StefanMrs. Pamela StoutMr. Carlos Tapang, In Memory of Crisostomo TapangMr. Stephen TempleMr. Andrew TomashaskaMr. Alan TownsonMr. Scott P. TreaseMr. Edward TuttleMr. R. David Van TreurenMr. Gregory VisscherMr. Fabian von Schilcher, In Honor of Satoshi NakamotoMr. Howard WallaceMr. Vern WestgateMr. Newton WhiteMr. John Williams, In Honor of all the countless millions who have died under the boot of communismMs. Jennifer WisnoffMr. Elmer A. Wright, In Memory of Grand ChildrenMr. Viktor YoshimuraMr. Pedro Zapata Gil
Monday, September 27 Mr. Abdelhamid AbdouMr. Meldon AchesonMr. John AdlerDr. Richard Adler, In Memory of Nancy AdlerMr. Robert AdrianMr. and Mrs. J. Ryan AlfordMr. Leandro Alonzo BurguenoMr. Christian Alvarez, In Honor of all the libertarian people that are involved in the ideas battle in LatinoamericaAnonymousMr. Michael ArchieMr. Richard Armstrong, In Memory of Zechariah FarrEdgard BaqueiroMr. Durwood BarronDon BarzykDr. Jeremy BellMr. Davis Bennett, In Honor of Dr. Ron PaulMr. Thomas BertrandAnonymousMr. Stuart BeverleyMr. Dennis M. BlairMr. Michael BlevinsMr. Jeremy M. BolesMr. Michael BonenbergerGosse BoumaMr. Melvin BrandlMr. Ryan BreenMr. Keith BrilhartMr. Caleb BrownMr. Scott BurkhardtMr. Michael BurkhartMr. Brian BurleyMr. Matthew J. CannonMr. Scott CarlMr. Sammy CartagenaMark CasamentoBobby CatheyMr. Johnny ChinMr. Alex CombsMr. Robert CourserMr. Marc DAngeloRobin DeaMr. Ethan DemilioMr. Jose De SouzaNikola DimitrovMr. Aleksandar DjuricicMs. Maureen Dowst, CPA, PLLCMr. Kent DrinkwaterAnonymousMr. Caleb EarlMr. Bryce EickholtErol EraOr EzraMr. Tom FachanMr. Donald FannonMr. Thomas FelixMr. Justin FischerMr. Tony FulgenziMr. Frank GalushaMr. Aron GahaganMr. Allen GindlerAnonymousMr. David GleasonMr. Robert GordonDr. Marvin GrahamMs. Charlotte Kay GrahamMs. Elizabeth GravelyMr. John GriecoMr. Tyler GrossmanMr. Matthew GunterMr. Luis Gustavo FelippiMr. Randall HansenMr. R. Reid HansonMr. Sheldon HayerMr. Logan HazanMr. Jack HendersonMs. Amandah Hendricks, In Memory of FreedomMr. Joseph HenningerMr. Daniel HerltMr. Terrill HerringMr. James HickeyMr. Philip HillMr. Chris HindmarchMr. Nathan HinesRW HobertMr. Stephen HolohanMr. Daniel HolwayMr. Timothy HotchkissMr. Hal HowertonMr. Curtis M. HowlandMr. Bill HoyerMr. Mark HunterMr. Jeffrey JacobiMr. Bob JonesDorian JonesMr. Jeremy JonesMr. Peter J. KaliskyMr. Charles KapelaMr. Brandon KarpelesMrs. Marnie KerrisonDr. Ricardo Almeida KilsonMr. Thomas KirwanMr. Jacob KlaserAnton KovalenkoMr. Kenneth KuhnMr. John H. LandMr. Shawn LazarDr. Nicolau Leal Werneck, In Honor of the central-planners out thereMr. Andrew LeaverMr. Kevin LeCureuxMr. Jean LesperanceMr. Jared Lindquist, In Honor of Hoppean.orgThiago LoMr. Richard LodatoMr. Matthew LorenceMr. Jacob LovellZoran LowMr. Michael LukeDimitrios LypourlisMr. Aaron MaciasMrs. Caroline MacriBenedict MaliakkalMr. William MalisMr. Gabriel MarinMr. Kris P. MarinMr. Neal MarstonMr. John MasonMr. Samuel MatthewsMr. Roy McCollumMr. James E. McCullenZeke MckeeMr. Frank McLeanAnonymousMarco MessinaMs. Susan MeyersMr. Todd MillerMr. Zach MillsMs. Gail MitchellMr. Samuel A. MitchellMr. Michael MilovancevMr. Mark MorettiMr. Jack MosesMr. Richard MuldoonDr. James W. MulhollandDr. Lyle MullerMs. Helen NardiMr. Connor ObrienBoo O’ConnerMr. Marcus OmlinMr. Robert OnderMr. Michael PageMr. John W. PanchukMr. Nilo PascoalotoMr. Enrique Pascual ManzanoMr. Alvin PlummerMr. Joshua PolkMr. James PottsMs. Margareta RaducanMr. Bruno RaphenonMr. Richard ReevesMr. Kurt RescharMs. Susanna ReynoldsIvo RibeiroMr. James RobinsonMr. Richard RossMr. David RoyleQuentin SalleyMr. Rajiv SarafMr. James SawyerMr. Joshua SchubertMr. Pete SecorMs. Julie Seiffert JastoMs. Karen SelickMr. Mikhail Serfontein, In Honor of Jurie and Uta SerfonteinJesse ShattuckMr. Eduard SherstnevHelder Simoes,In Honor of Nuno NevesMr. Andrew SmithHochiu SoMs. Deborah SolomonMr. Donald SolowAJ TyvandMr. Byron L. StoeserMr. Allen Stokes, In Honor of Ludwig von MisesMr. David Stroh, JD, In Memory of Edwin J. StrohMr. Laron TamayeRoxane TeleshaMr. Michael ThomasMr. Thomas Timpone, In Honor of John AdamsMr. Joseph TorsielloMr. Michael TownsendRoman TraberMr. Aaron TuttleMr. Steve Tuttle, In Memory of Ed LampittMr. Hank Van GasseltMr. Lionel VasquezMr. Ian VigusMr. Nicholas WalkerMr. Jason Watson, In Honor of Michael Malice and Tom WoodsMr. David WengerMr. Ronald L. WestMr. Christopher WestleyMr. Todd WilliamsMr. Joe WithrowMs. Elaine WoodriffMr. Roger WoodwardDC WornockMr. Christopher C. WrenMr. Jeffrey A. YerkesMr. David ZientaraMr. Robert Zumwalt
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Saturday, October 3 Mr. Kelly BeanMr. Chris BecraftViera BibrDr. Chad BigonyMr. Heinz BitterliMr. John BlaineyDr. Walter E. Block,in honor of MurrayMr. Yann BongiovanniMr. Kristopher BorerMr. William C. Brennan,memory Kraig McKownMs. Rebecca BrewingtonMr. Gary BrogochMr. Petter BrolinMr. Michael BrusserMr. Steven BuerkleMr. Scott BullardMr. Scott BurkhardtMr. Michael BurksFrans Buzek and Liliana Mateus AldanaMr. Robert Calabro, in memory of deceased members of the Calabro and Iannuzzo familiesMr. Thomas CaldwellMr. David CarlsonMr. Wayne ChapeskieMr. Alec ChevalierMr. Johnny ChinBogdan CholakovMs. Linda ChynowethGordon P. Clark, MDMr. William Colburn, in honor Dr. Ron PaulMr. Fabrizio ComperMr. Lynn ConeMr. Richard F. ConwayMs. Cheryle CooperMr. Matthew CoppedgeMr. Shane CoulesMs. Kristine A. CrossMr. David CrouchAnonymousMr. Steven De Klerck, in memory of Ludwig von MisesMs. Jane DelgerDr. Kenneth DeLongMs. Jennifer DenBleykerMr. Paul J. DietrichDr. Thomas J. DiLorenzoMr. Lawrence DixonMr. Tom DouglasMr. Igor DrabMr. Andrej DrapalMr. Elias EconomouMr. Brenton ElisbergMr. Adam FavaroMr. Alan FanningMr. Joseph D. FeiferMr. Joe FertittaMs. Eileen Findlay, in memory of Peter Burke FindlayMs. Sandra FormanczykMr. André FortinMr. and Mrs. James E. FosterMr. C. Scott FreemanMr. Josef FrendreisMr. Lee FridayMr. William FullerMr. David GallerMs. Carol GarciaMr. Gary T. GeddensMr. Mark GilmoreMr. Stephen GinnettiMr. Artem Glushchuk, in memory of FreedomMrs. Tamara GoforthMs. Janice GottliebMr. Chester GranardMr. Peter GrigorMr. Richard GrimesMrs. Joan GrindelMr. Matt GrubbsMr. Tommy GustMr. Christopher Hammond, in memory of Gerald E. Hammond, MDMr. Ethan HammondsMr. Hill HamptonWou Sang HanMr. Geoff HarpurMr. Richard G. Hartman, in memory of LaVerne and Joyce HartmanOtto HavelMr. James Hayman, in honor of Tom WoodsMr. Kevin HedgesAnonymousMr. Dan HendershotMr. Shane M. HendrenMr. Luke HenkeniusMr. Sebastian Hernandez CarmonaMr. John HicksMs. Rosemary HolmMrs. Tara HopwoodMr. Timothy HotchkissAnonymousMr. James A. Howe, in honor of MurrayMr. Aaron HowellMr. Marvin HughesMr. Richard Humphrey, III, in honor of Dr. Randall HolcombeMr. Matthew ItzoMr. Bruce JalaMr. David JonesMr. John KaschMr. Marcel KepplerMs. Karen Killinger-HumesMr. Dylan KizyMr. Paul KlarenbergMr. Kevin KnappMr. John KnoxDr. Rudolph KohnMr. William KolpaskyMr. Greg KuruvillaMr. Rick LahrsonMr. Matt LanterMr. Nathan LantsMr. James LazearMr. Glenn LeeMr. Andrew LeeMr. Yevgen Lemberg, in memory of Natalia LinetskayaMyra LewinLivia LillMr. Jeff LindsayMr. Barry LinetskyMr. Tim LipusMr. Paul LockmanMr. Thomas LonerganMr. Phillip LuchettaMr. John LummusMr. Mark MarekMr. Alexander MarkesinisMr. James MartinMr. Jorge MateoMr. Warren MatthewsMr. John McCartyMr. Mark McGrath, in memory of MajGen Smedley D. Butler, USMCMr. James McKibbinMs. Suzanne McMaken,in honor of Pauline and Jesse GalindoMr. Caleb McmillenMr. Doug McNabbMs. Rebecca McNameeAli MecklaiMr. Charles A. MertesMs. Kathryn MillerMr. Reuben MillerMr. David MitchellMs. Vickie MoehlmanMr. Charles L. MorrealeArne and Jonalee MortensenMr. Arthur NationMr. Alexander NazarenkoMr. John NelsonMiss Ruxandra NistorescuMs. Wanjiru NjoyaMr. James Norman, Jr.Mr. and Mrs. Kevin A. NorthMr. Don NorthamMr. Brian OdonoghueMr. Jerry O'NeilMr. Michael OrtonMr. Rick O'SteenMr. Allen OvereemMs. Nicole PapakostasMr. Allen Pegues, in memory of James Cary Pegues, Jr.Mr. Justin PerryMr. John PhelanMr. Rodney PilbrowMr. David PlanchardWessel PorschenMr. Jacob PorterDr. and Mrs. Francis M. Powers, Jr.Mr. Robert PrellAnonymousMiss Kelly QuesenberryMr. Saul RackauskasMr. Richard Reese, IIIMr. Will ReishmanAnonymousMr. Richard RochelleMs. Rosemarie RotellaMs. Rita RussellMr. Christopher RymanMr. Al SadaghianiMr. Gerard SalamoneDr. Steven SandersMr. Paul SantucciDavid and Elaine SarosiMr. Bernard P. ScheurleMr. Jack SchlichtingMr. Robert SchwanbeckMr. Charles SebrellDiann Shook-CrenshawMr. Nikiforos SkoumasDr. H. Leland Smith, in memory of Dr. Hans SennholzMr. Isaac SmithMr. Frank SmithMr. Jay SmithDr. James SpeightsMr. David StanowskiMr. Timothy E. StevensMr. Robert J. StewartMr. Michael StewartMr. James SummersMr. Robert SzymaszczykMr. Trent N. TalbertMr. Ryan TaylorMr. James TaylorMr. John TeitenbergMr. Charles Tronolone, in honor of Lew Rockwell and Dr. Ron PaulMr. Richard UbertoGoran UgrinoskiMr. Don Van GorpMr. Mitchell A. VanyaMr. Paul C. VerdereseMr. William VetterMr. Robert A. VincentMr. Michael VliesMr. Robert VogelMr. Edward WalterMr. Jack WellsNatalie and Dustin WenzMr. Ronald WestMr. Andrew WestheadMr. Benjamin WiegoldAnonymousMrs. Lupita A. WiggansMr. Kenneth WilcoxMr. Edward WilkesMr. Jon WilliamsMr. James WittesMr. Michael G. Wood, in memory of Yami Frances WoodMr. Larry N. Woods, in memory of Robert LeFevreZongxiong Ye
Friday, October 2 Mr. Richard AlbarinoMr. Arthur E. AlbinJohn F. Ambrose, MDMr. Michael BaerresenMs. Alexandra Ballantine, in honor of Jacob HornbergerMr. Bruce BarberaMr. Brad BarsnessMr. Alex BassoMr. Meridan BennettMr. Andrew BerselliLeslie Blouin, in honor of Murray RothbardMr. Eddie BlueMr. Martin BlythMr. Walter Bradley, in memory of my father, Walter T. Bradley, Jr.Mr. Daniel BradyMr. Nicolaas BruijnMr. Andrei G. BucurMr. Charles C. BurridgeMr. John BusenitzMr. Mauricio CanedoMr. Juan Cano DiazMr. Yuk Ming CheungAnonymousMr. Brandon CillaMr. Edward ClarkMr. Richard ClarkeMr. Mark ColemanMr. Harry CollisMs. Susan CortesMr. Donald K. CowlesMr. Eric CrowleyMs. Melissa D'ArcheMs. Margaret A. DaggsMr. Andrew DiabMr. Bill DonabedianMr. Daniel DonovanMr. Constantin DragomirovMr. David DustinMr. Bill DyerMr. Jerry EdwardsMrs. Courtenay EllisonMr. Clint EtzelMr. Bob EvansMr. Katherine FarleyMr. Franklin Fiedler, in memory of Juanees RossMs. Sandra Filosof-SchipperMr. Armando FloresMr. Thomas FordMr. Steven ForresterMr. Martin C. FoxMr. Michael GaffneyMr. Pedro GaivaoMr. Robert Garretson, in honor of Christian GarretsonDr. Teresa GasallaDr. Marvin GrahamMr. Jonathan GuntherMr. Mark HannaMr. Samuel HarkinMs. Lucy HarrisonMadison HartMr. David HauensteinMr. Bret HayesMr. Jack HendersonMr. Paul HerrickRobert Heuermann, M.D.Janez HlebanjaMr. Axel HoebekeMs. Melanie HolzmanMr. Michael Houze,in memory of David JacksonMr. Richard HutchingsMr. Raymond IsbellMr. Daniel A. JeffreMr. Johnathan JenkinsMr. Peter L. Johnson, in honor of Robert Murphy, Israel Kirzner, and Gerald O’DriscollMr. Dan KellyMr. Don KilcoyneMr. Garett KleinschmidtMr. Eric KlierVasko KohlmayerMr. Francis KuhlmanMr. Steven La Bella, in loving memory of R. Nelson NashMr. Russell V. Lamberti, in honor of Ludwig von MisesMs. Candace LamoreeMs. Vicki LamppinMr. John H. LandKerri LandisHenri Le BihanMr. Dewey LevieMr. Carl LöwegrenDr. Joshua Malay, in memory of Odne StokkaMr. Gabriel Marin, in honor of Dr. Ron PaulMr. Frank MartinMr. Sladan MastilovicMr. Clinton McGrathMr. Michael J. McKayMr. Kent McKeeMr. James McKibbinMr. Edward MelanMr. Michael MillerAnonymousMr. Reuben MillerMr. Aleksandar MojovicMr. Vladimir MorgensternMr. Eric MorrisMr. Brian C. MulliganAnonymousMr. Matan NatansonTeri NewhallMs. Alison NicholsMr. Micha NiskinMr. John OglesbyMr. Aaron OlsonMr. Antonio Ortega AlbonicoTalat OzyagcilarMr. Donald PadalisDr. Pedro Alfredo PerezDr. and Mrs. Philip PiaseckiMr. Charles PickmanMr. James PillionMr. John R. PorterMr. Jordi PosthumusMr. Aaron PrinceMr. Alexander ProffittMr. Kevin PursleyMr. Andrew QuinnMr. Richard RandallMr. Daniel ReindersMr. Jose ReveloMr. Jon RobertMr. Ian RossiDr. Peter RoweMs. Susan RushMr. John E. RushingMr. David W. SandersMr. Larry SchmerbeckMr. Benjamin SchmittMr. Allan SelbyMr. Christopher SeyfertMr. Jesse ShattuckMr. Jeffrey Shaw, in memory of Karl HessMr. Eduard SherstnevMr. Bob SimeralMr. Michael SimonMr. and Mrs. Thomas W. SingletonMr. Walter SmithMr. George F. Smith, in honor of Preston Scott NicholsMr. Richard SobotaMr. David StallsmithMs. Claudia StaplesMr. Sebastian-Oliver SternAnonymousMr. Gregory StrebelMr. Adam SylvesterMr. Seth ThompsonMr. David Tubbs, in memory of Donald TubbsAnonymousAlex VerlindenMr. Michael Von HattenMr. Grover WallsMr. Michael Waters, in memory of Tom SparksMr. Jack WellsMr. Robert WemerMr. Richard WestrupMr. Marcin WielochMr. Stephen WindahlMr. Frank WiseMr. PG WistMr. Norris WoodMr. Michael WoodsJungho YooMr. Thomas Young, in memory of R. Nelson NashMr. Warren Y. Zeger, in honor of Prof. Sylvester Petro
Wednesday, September 30 Mr. Mariano BasMr. Julio BaylacMr. Arnes BegicMr. Ron BertiMs. Jacqueline BlackMr. Christopher BondMs. Judith BoveMr. Paul BowenMr. Paul BraccoMr. Richard BradtMr. Joseph BrittonMr. Edmund BrooksMr. Joseph Buczek, in honor of Dr. Ron PaulPer and Susanne BylundDr. Athanasios Chymis, in memory of Demetrius Kolias, PhDMr. John CiccotelliMr. Eugene ColliganMs. Teresa L. CosperMr. Trevor DaherSamir DeebMr. Javan DeGraffMr. Nikolaas de JongDr. Adolfo De UbietaDr. Ljubomir DimitrovskiMr. Thomas DoughertyAnonymousMr. Minh DuongMr. Geoff DurhamMr. Omar ElkhatibMr. Justin EndertonMs. Nina ErdmannMr. Norman FaccoMr. James FedakoMr. Bryant FisherMs. Sheila GallagherMr. Philip GarlandMr. John GermanyTy GiesemannMr. Gregory GordonAnonymousMr. Ryan HartMr. Daniel HerltDr. and Mrs. James M. HerringTerry HuffmanCurran HydeMr. John JordanMr. Kyle KeeganMr. Peter KeoughMr. Ricardo KilsonMr. William KittelsonMr. Alexandros KonstantinidisMr. Lawrence KuhlmanMr. Brent KupferMr. Jeremy LeenknechtMr. Thomas LevinsMr. Carl LocignoMr. Thomas LonerganHarmon Lowman, IIIMr. Christopher Manning, in honor of Dr. Ron PaulDr. Karl MaritatoMr. Steve MarriottMr. Elias MassartMr. William MielochMr. Kevin MileyMr. Steve MillerMr. David MisiscoMr. Edwin MorilloMr. Ryan NadeauMr. Jon NallMr. James O'BrienMr. James ObermeyerMr. Christopher OhnstadMr. Glenn ParishMr. Amit Reuveni, in honor of Ohad OsterreicherMr. Rodolfo RoballosMr. Mark SchmielMr. Ryan SearfoorceMr. Matthew SenfieldMr. James Michael Smith, in honor of Dr. Ron PaulMr. Bernhard W. StalzerDanielle StanleyMr. David SteuberAnonymousMr. Gregory StrzempekMr. Alan SwopeMr. James TaylorMr. Stephen TempleMr. Daniel TeskeMr. Robert TokarzMr. John B. TrolingerMr. Patrick Underwood, Jr.Mr. Ger van GilsMr. David Van SlyckMr. Thomas VarnadoMs. Anna VinogradovaMr. Brad WastlerMr. Austin WaungMr. Bruce WeddendorfMr. Christopher WeimannMr. Lee O. Welter, in memory of Douglas Arthur “Art” TumaMr. Dean WilsonMr. Robert WimsattMr. Michael WithrowMs. Elaine WoodriffMr. David Zientara
Tuesday, September 29 Mr. Abdelhamid AbdouMr. Adnan Al-Abbar, in honor of Dr. Haidar KhajahCiro AndradeMr. Donald ArmstrongMr. Igor AyalaDr. J. Duncan BerryMr. Philip BoggsMr. Daryl BortzMr. Yani BrankovMr. Donald Burger, In honor of Ludwig von MisesMs. Dorothea BurstynMr. Carroll BusherMr. Dennis M. CampbellMr. James CarlyleMr. Ricky CarneyMr. Russell CaseySheryl CastelloMr. Bobby CatheyMr. Luke Ciardi, in honor of Ludwig von MisesMs. Victoria ClickMr. Thomas Colella, in memory of Al ColellaMr. Kevin CourtneyMr. Harry CoxMr. Stephen DavidsonMr. Peter denDulkMr. Matthew DeNicolaMr. Frank Dieterich, in memory of Murray N. RothbardMr. Robert F. Dillman, Jr.Ms. Farrah DomekaMr. Mike Dumitriu, in honor of Hans Hermann HoppeMr. Ian DunlapMr. Mark EcklerMr. Harry ElliottMr. Eric EnglundMr. J. Guillermo Figueroa, in memory of Joseph KeckeissenMr. Jan M. Fijor, in memory of Ludwig von MisesMr. Tony FulgenziMr. J. Bruce Gabriel, in memory of Ludwig von MisesMr. Dennis GarrardMr. Patrick GasmenMr. Frank GrahamMr. Gene GryzieckiMr. William HanekampMr. Sheldon HayerMr. Sean Hernandez, in honor of Tank ManMs. Katherine HigginsMr. Jeffrey HillMr. Daniel HolwayMr. Justin HolzerMr. Troy HudsonMr. Douglas HunterMr. Gregg HunterMr. Jay JacksonMr. Nik JazbinsekMr. Hrvoje Jelić, in memory of Olga JelićMr. Franklin KellerMr. Ben KnowlesMr. Joe KosterichMr. Nathan KreiderMr. David KushMr. Barron LataquinMr. Junior Leslie, in honor of Ludwig von MisesMr. Mike Lev, in memory of YK ALMr. Charles LewisMr. Phillip L. LindseyMr. John LinskeyMr. Michael W. MaceMr. J. Stuart MacLeanMr. Attila MadarasCarole MannyMr. Efthimis Maramis, in memory of Murray Newton RothbardMr. Anthony MarescoDr. Stephen MarmerMr. Neal MarstonLee MbuguaMr. Boone McBrideMr. John McCartyMr. Brett McClain, in memory of Perry McClainMr. Kary McFaddenMs. Catherine E. MellorMaurizzio MenneaMr. Ralph Miller, in memory of Ralph LoydMr. George Miller-DavisMr. Mark MoersenMrs. Jane Moffitt, in memory of Edward L. MoffittMr. Jack MosesMs. Maria Gabriela MradMr. Edward MurrayDr. Patrick NewmanMr. Ohad OsterreicherMr. Steven OswaldMr. William J. OttMr. Ralph PascualyMr. Dennis Pavick, in memory of Melinda and Caroline CassidyMs. Signa PendegraftMr. Alvin PlummerMr. Rich PrestonMr. Tsvetalin RadevMr. James RadtkeChonzom RapgayDr. David J. RappMr. Jonathan RasoDr. John J. RayDr. Matthew ReverMr. Brendan RiceMiss Gyneth G. RichardsMr. Vincent RichardsonMr. Brett RiggsMs. Ann RohanMr. Scott RossMr. William RusherNemrod SaldanasLourdes SalvadorMr. Michael Schinstock, in memory of Jack SchinstockMr. Mike SchmidMr. David SchwendingerMr. Rajiv ShahRic StejbachMr. K.G. StephensMr. Peter StipanovichMs. Susan Stoppkotte, in memory of Craig WeeksMs. Molly StryjewskiMs. Nicole TateMr. Jonathan ThompsonMr. Stephen VickeryMr. R. Jeffrey White, in honor of Ronald R. WhiteMr. Chris WilsonMr. Michael R. WilsonMr. Joseph Withrow, in honor of Isaiah JosephMr. Bennett WoodwardMs. Emily WoofendenMr. Robert Zumwalt
Monday, September 28 Ms. Alyssa BaileyMr. Andrius BalandisDr. Francis Xavier Bardavío AraMr. Thomas BertrandMr. Randy BleyerMr. Mark BloomMr. Randy BoringMr. Boris BorissovAnonymousMr. Charles BorregoMr. Trevor BrownMr. Richard BrowningMr. Thomas J. BurlingameMr. Richard CausleyMr. Paul CerinoMr. Juan Carlos CervelleraHong ChenMr. Bruno Cormouls-HoulèsMr. Everett DavisMr. Dennis De FordMr. and Mrs. Allen DempsterDr. Atanu DeyMr. Paul DohertyMr. Eugene DoroshMr. Kent DrinkwaterMr. Romain DurandMr. Joshua EnderleMr. Dirk EnkMr. Mike EverettMr. Bart FrazierMr. Pedro GaivaoMr. Robert GaleMr. Surajit GoswamiMr. Robert HartnettMr. Stanley HeardMr. Adam HeinrichMr. Nathan HinesMr. François HodlerAnonymousMr. Andreas Huebner and Mrs. Maria Jose Silva RomanMr. Paul IsherwoodMr. Michael ItzoMr. Daniel A. JeffreDr. Porter JenkinsMr. Guojie JiaMr. Brian JohnsonDr. James JusticeMr. Peter J. KaliskyMs. Kaye KamonMr. Kevin KellMr. Cory KleinMr. Jim KnowlerBernard and Joan KoetherMr. Greg KrabbenhoftMr. Alex KulikowskiDr. Dennis KulondaMr. Matthew LaRocheMr. Jon LawrenceMr. Charles LebedaDr. Paul LeslieMr. Matthew LorenceMr. William LupienMs. Susan LussosMr. Aaron MaciasDr. Allen MartinMr. John McCartyMr. Curtis McGirtMs. Christina MehrenMr. Jip MeijerMr. Peter J. MichelMr. Don MurphyMr. Matthew MurphyMr. Christopher NawrotMs. Summer NorrisMr. Charles NovyAlbrecht Fürst Oettingen-SpielbergMrs. Carrie ORourkeMs. Terri OrtegoMs. Rachel PettitMr. Eugenio PozzoMr. Philip ProdanovicAnonymousMr. Jason ReichertMr. Danny Roberson, In memory of Voltairine de CleyreRev. Charles RobertsMr. Andrew RobertsMr. Holger RöderMr. Frank RooneyMr. Carlos RossiMr. Anthony RozmajzlMr. Glenn M. RuffusMr. Brae Sadler, In honor of Dave SmithMr. Michael ScarbroughMr. Edward ScottMr. Vincent ScrivensMrs. Margaret ScsasznyMr. Kurt SeidlerMr. John ShemiltDr. and Mrs. Paul L. ShelterMr. Michael SimonMr. Walter E. StepkoMr. Daniel ȘterbuleacMr. John SullivanMr. Dale SummersMrs. Nancy H. SwansonMr. Daniel S. TaylorGiovanni TestaMiss Eryn ThompsonMr. Henry TilestonMr. Joshua TurnerMr. and Mrs. Chase VentersMr. Garret WallimanMr. Steven G. WaltherMr. Gavin WaxMr. Paul F. WeberMr. Ronald R. WhiteMr. Daniel M. WinterrowdMr. Roger Woodward
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[Published in Chronicles, Nov. 1993, p. 23–25]
With the collapse of communism all across Eastern Europe, secessionist movements are mushrooming. There are now more than a dozen independent states on the territory of the former Soviet Union, and many of its more than 100 different ethnic, religious, and linguistic groups are striving to gain independence. Yugoslavia has dissolved into various national components. Slovenia, Croatia, Serbia, and Bosnia now exist as independent states. The Czechs and the Slovaks have split and formed independent countries. There are Germans in Poland, Hungarians in Slovakia, Hungarians, Macedonians, and Albanians in Serbia, Germans and Hungarians in Romania, and Turks and Macedonians in Bulgaria who all desire independence. The events of Eastern Europe have also given new strength to secessionist movements in Western Europe: to the Scots and Irish in Great Britain, the Basques and Catalonians in Spain, the Flemish in Belgium, and the South Tyrolians and the Lega Nord in Italy.
From a global perspective, however, mankind has moved closer than ever before to the establishment of a world government. Even before the dissolution of the Soviet Union, the United States had attained hegemonical status over Western Europe (most notably over West Germany) and the Pacific rim countries (most notably over Japan)—as indicated by the presence of American troops and military bases, by the NATO and SEATO pacts, by the role of the American dollar as the ultimate international reserve currency and of the U.S. Federal Reserve System as the “lender” or “liquidity provider” of last resort for the entire Western banking system, and by institutions such as the International Monetary Fund (IMF) and the World Bank. Moreover, under American hegemony the political integration of Western Europe has steadily advanced. With the establishment of a European Central Bank and a European Currency Unit (ECU), the European Community will be complete before the turn of the century. In the absence of the Soviet Empire and its military threat, the United States has emerged as the world’s sole and undisputed military superpower.
A look at history reveals yet another perspective. At the beginning of this millennium, Europe consisted of thousands of independent territorial units. Now, only a few dozen such units remain. To be sure, decentralizing forces also existed. There was the progressive disintegration of the Ottoman Empire from the 16th century until after World War I and the establishment of modern Turkey. The discontiguous Habsburg Empire was gradually dismembered from the time of its greatest expansion under Charles V until it disappeared and modern Austria was founded in 1918. However, the overriding tendency was in the opposite direction. For instance, during the second half of the 17th century, Germany consisted of some 234 countries, 51 free cities, and 1,500 independent knightly manors. By the early 19th century, the total number of all three had fallen below 50, and by 1871 unification had been achieved. The scenario in Italy was similar. Even the small states have a history of expansion and centralization. Switzerland began in 1291 as a confederation of three independent cantonal states. By 1848 it was a single (federal) state with some two dozen cantonal provinces.
How should one interpret these phenomena? According to the orthodox view, centralization is generally a “good” and progressive movement, whereas disintegration and secession, even if sometimes unavoidable, represent an anachronism. It is assumed that larger political units—and ultimately a single world government—imply wider markets and hence increased wealth. As evidence of this, it is pointed out that economic prosperity has increased dramatically with increased centralization. However, rather than reflecting any truth, this orthodox view is more illustrative of the fact that history is typically written by its victors. Correlation or temporal coincidence do not prove causation. In fact, the relationship between economic prosperity and centralization is very different from—indeed, almost the opposite of—what orthodoxy alleges.
Political integration (centralization) and economic (market) integration are two completely different phenomena. Political integration involves the territorial expansion of a government’s power of taxation and property regulation (expropriation). Economic integration is the extension of the interpersonal and interregional division of labor and market participation.
In principle, in taxing and regulating (expropriating) private property owners and market income earners, all governments are counterproductive. They reduce market participation and the formation of economic wealth. Once the existence of a government has been assumed, however, no direct relationship between territorial size and economic integration exists. Switzerland and Albania are both small countries, but Switzerland exhibits a high degree of economic integration, whereas Albania does not. Both the United States and the former Soviet Union are large. Yet while there is much division of labor and market participation in the United States, in the Soviet Union, where there was virtually no private capital ownership, there was hardly any economic integration. Centralization, then, can go hand in hand with either economic progress or retrogression. Progress results whenever a less taxing and regulating government expands its territory at the expense of a more expropriative one. If the reverse occurs, centralization implies economic disintegration and retrogression.
Yet a highly important indirect relationship exists between size and economic integration. A central government ruling over large-scale territories—much less a single world government—cannot come into existence ab ovo. Instead, all institutions with the power to tax and regulate the owners of private property must start out small. Smallness contributes to moderation, however. A small government has many close competitors, and if it taxes and regulates its own subjects visibly more than these competitors do, it is bound to suffer from emigration and a corresponding loss of future revenue. Consider a single household, or a village, as an independent territory, for instance. Could a father do to his son, or a mayor to his village, what the government of the Soviet Union did to its subjects (i.e., deny them any right to private capital ownership) or what governments all across Western Europe and the United States do to their citizens (i.e., expropriate up to 50 percent of their productive output)? Obviously not. Either there would be an immediate revolt and the government would be overthrown or emigration to another nearby household or village would ensue.
Contrary to orthodoxy, then, it is precisely because Europe possessed a highly decentralized power structure composed of countless independent political units that explains the origin of capitalism—the expansion of market participation and of economic growth—in the Western world. It is not by accident that capitalism first flourished under conditions of extreme political decentralization: in the northern Italian city states, in southern Germany, and in the secessionist Low Countries.
The competition among small governments for taxable subjects brings them into conflict with each other. As a result of interstate conflicts, historically drawn out over the course of centuries, a few states succeed in expanding their territories, while others are eliminated or incorporated. Which states win in this process of eliminative competition and which ones lose depends on many factors, of course. But in the long run, the decisive factor is the relative amount of economic resources at a government’s disposal. In taxing and regulating, governments do not positively contribute to the creation of economic wealth. Instead, they parasitically draw on existing wealth. However, they can influence the amount of the existing wealth negatively.
Other things being equal, the lower the tax and regulation burden imposed by a government on its domestic economy, the larger its population tends to grow (for internal reasons as well as immigration factors), and the larger the amount of domestically produced wealth on which it can draw in its conflicts with neighboring competitors. For this reason centralization is frequently progressive. States that tax and regulate their domestic economies little—liberal states—tend to defeat, and expand their territories at the expense of, nonliberal ones. This accounts for the outbreak of the “industrial revolution” in centralized England and France. It explains why in the course of the 19th century Western Europe came to dominate the rest of the world (rather than the other way around), and why this colonialism was generally progressive. Furthermore, it explains the rise of the United States to the rank of superpower in the course of the 20th century.
However, the further the process of more liberal governments defeating less liberal ones proceeds—i.e., the larger the territories, the fewer and more distant the remaining competitors, and thus the more costly international migration—the lower a government’s incentive to continue in its domestic liberalism will be. As one approaches the limit of a One World state, all possibilities of voting with one’s feet against a government disappear. Wherever one goes, the same tax and regulation structure applies. Thus relieved of the problem of emigration, a fundamental rein on the expansion of governmental power is gone. This explains the course of the 20th century: with World War I, and even more with World War II, the United States attained hegemony over Western Europe and became heir to its vast colonial empires. A decisive step in the direction of global unification, therefore, was taken with the establishment of a pax Americana. And indeed, throughout the entire period the United States, Western Europe, and most of the rest of the world have suffered from a steady and dramatic growth of government power, taxation, and regulatory expropriation.
What then is the role of secession? Initially, secession is nothing more than a shifting of control over the nationalized wealth from a larger, central government to a smaller, regional one. Whether this will lead to more or less economic integration and prosperity depends on the new regional government’s policies. However, the sole fact of secession has an immediate positive impact on production, for one of the most important reasons for secession is typically the belief on the part of the secessionists that they and their territory are being exploited by others. The Slovenes felt that they were being robbed systematically by the Serbs and the Serbian-dominated central Yugoslavian government, and the Baltics resented the fact that they had to pay tribute to the Russians and the Russian-dominated government of the Soviet Union. By virtue of secession, hegemonic domestic relations are replaced by contractual—mutually beneficial—foreign relations. Instead of forced integration there is voluntary separation.
Forced integration, illustrated by such measures as busing, rent controls, antidiscrimination laws, and “free immigration,” invariably creates tension, hatred, and conflict. In contrast, voluntary separation leads to social harmony and peace. Under forced integration any mistake can be blamed on a foreign group or culture and all success claimed as one’s own, and hence there is little or no reason for any culture to learn from another. Under a regime of “separate but equal,” one must face up to the reality not only of cultural diversity but in particular of visibly distinct ranks of cultural advancement. If a secessionist people wishes to improve or maintain its position vis-á-vis a competing one, nothing but discriminative learning will help. It must imitate, assimilate, and, if possible, improve upon the skills, traits, practices, and rules characteristic of more advanced cultures, and it must avoid those characteristic of less advanced societies. Rather than promote a downward leveling of cultures as under forced integration, secession stimulates a cooperative process of cultural selection and advancement.
Moreover, although everything else depends on the new regional government’s domestic policies and although no direct relationship between size and economic integration exists, there is an important indirect connection. Just as political centralization ultimately tends to promote economic disintegration, so secession tends to advance integration and economic development. First, secession always involves the breaking away of a smaller from a larger population and is thus a vote against the principle of democracy and majoritarian ownership in favor of private, decentralized property. More importantly, secession always involves increased opportunities for interregional migration, and a secessionist government is immediately confronted with the specter of emigration. To avoid the loss of its most productive subjects, it is under increased pressure to adopt comparatively liberal domestic policies by allowing more private property and imposing a lower tax and regulation burden than its neighbors. Ultimately, with as many territories as separate households, villages, or towns, the opportunities for economically motivated emigration would be maximized, and government power over a domestic economy minimized.
Specifically, the smaller the country, the greater will be the pressure to opt for free trade rather than protectionism. All government interference with foreign trade forcibly limits the range of mutually beneficial interterritorial exchanges and thus leads to relative impoverishment, at home as well as abroad. But the smaller a territory and its internal markets, the more dramatic this effect will be. A country the size of Russia, for instance, might attain comparatively high standards of living even if it renounced all foreign trade, provided it possessed an unrestricted internal capital and consumer goods market. In contrast, if predominantly Serbian cities or counties seceded from surrounding Croatia, and if they pursued the same protectionism, this would likely spell disaster. Consider a single household as the conceivably smallest secessionist unit. By engaging in unrestricted free trade, even the smallest territory can be fully integrated into the world market and partake of every advantage of the division of labor, and its owners may well become the wealthiest people on earth. The existence of a single wealthy individual anywhere is living proof of this. On the other hand, if the same household owners decided to forego all interterritorial trade, abject poverty or death would result Accordingly, the smaller a territory and its internal markets, the more likely it is that it will opt for free trade.
Secessionism, then, and the growth of separatist and regionalist movements in Eastern and Western Europe represent not an anachronism but potentially the most progressive historical forces. Secession increases ethnic, linguistic, religious, and cultural diversity, while in the course of centuries of centralization hundreds of distinct cultures were stamped out. It will end the forced integration brought about as a result of centralization, and rather than stimulating social strife and cultural leveling, it will promote the peaceful, cooperative competition of different, territorially separate cultures. In particular, it eliminates the immigration problem increasingly plaguing the countries of Western Europe as well as the United States. Now, whenever a central government permits immigration, it allows foreigners to proceed—literally on government-owned roads—to any of its residents’ doorsteps, regardless of whether these residents desire such proximity to foreigners. “Free immigration” is thus to a large extent forced integration. Secession solves this problem by letting smaller territories have their own admission standards and determine independently with whom they will associate on their own territory and with whom they prefer to cooperate from a distance.
Lastly, secession promotes economic integration and development. The process of centralization has resulted in the formation of an international, American-dominated government cartel of managed migration, trade, and fiat money; ever more invasive and burdensome governments; globalized welfare-warfare statism; and economic stagnation or even declining standards of living. Secession, if it is extensive enough, could change all of this. A Europe consisting of hundreds of distinct countries, regions, and cantons, of thousands of independent free cities (such as the present-day “oddities” of Monaco, San Marino, and Andorra), with the greatly increased opportunities for economically motivated migration that would result, would be one of small, liberal governments economically integrated through free trade and an international commodity money such as gold. It would be a Europe of unparalleled economic growth and unprecedented prosperity.
[Excerpt from "The Fall and Rise of Puritanical Policy in America," Journal of Libertarian Studies 12, no. 1 (1996): 143–60]
America was colonized by Europeans seeking economic and religious liberty, with many of the colonies founded explicitly along theocratic lines. The most notorious of these groups, the Puritans, founded the Massachusetts Bay Colony. They adopted wide-ranging sumptuary legislation including restrictions on alcohol and tobacco. Despite the natural advantages of a small homogeneous group based on voluntary association, many of the measures proved to be unworkable and ineffective and had to be modified or replaced by decrees to maintain moderation.Gary North, Puritan Economic Experiments (Fort Worth, TX: Institute for Christian Economics, 1988). It is the Puritan impulse for social reform that drives the cycle of reform, prohibition, and repeal. Over time this cycle has produced Puritanical social control that has been secularized, centralized, and has achieved a kind of permanence within government bureaucracy.
The American Revolution was an expression of political and economic independence, primarily precipitated by the British domination over trade and taxes. Americans did not want to pay British excises on the products they consumed. But equally important was the desire to eliminate British control over international trade that enriched the English at American expense. “Sinful” goods like alcohol, tea, and tobacco were targets of British colonial policy. Tobacco farmers, for example, were forced to export their tobacco to England at extremely unfavorable terms.John S. Bassett, A Short History of the United States: 1492-1929 (New York: The Macmillan Company, 1932), p. 143.
The success of the radical American Revolution ushered in a multitude of reforms honoring individualism at the expense of traditional hegemony. Slavery was abolished in several Northern states and freedom to manumit slaves was established in several Southern states. After writing the Declaration of Independence, Thomas Jefferson set about abolishing entail, eliminating primogeniture, and establishing religious freedom in Virginia, the first time this had ever been done in so complete a form. Freedom of religion was established in several other states and many established churches lost their state monopoly.
The late eighteenth century produced not only the American Revolution but also the Industrial Revolution. The new republic grew in size and population and prospered economically. Manufacturing, agriculture, and trade thrived in the northeast. The plantation economy of the South prospered and expanded, while the Northwest Territory was explored and settled.
The freedom from British dominion and the economic growth that followed the war resulted in fundamental changes in the production and consumption of alcohol. New England lost its advantage in the production of rum while western grain farmers developed an advantage in the production of whiskey. With the rise of whiskey, the long term trend of lower prices for spirits continued. Lower prices combined with the new prosperity and freedom to generate increased consumption of alcohol.
Consumption of spirits continued to increase after the Revolution, peaking during the 1820s. Despite the fact that consumption was greater than ever before or since, America was not a nation of drunkards, and public drunkenness was not common. Alcohol consumption in America was comparable to European patterns.W.J. Rorabaugh suggests that problem drinking was rare. The two types of drinking most prominent were dietary drinking, which involved numerous small servings throughout the day as a substitute for food and water, and communal binge drinking in which the entire town might get intoxicated in celebrations, such as Independence Day, harvest, weddings, and public events such as elections, generally less than once per month. See W.J. Rorabaugh, The Alcoholic Republic: An American Tradition (New York: Oxford University Press, 1979), pp. 521.
Not all Americans felt the same way about the progress and freedom generated by these revolutionary spirits. Many of these grumblers had benefited from English colonial rule as administrators, tax collectors, and bureaucrats. Others benefitted from playing key roles in the system of triangular trade which saw New Englanders sell their rum and other products, while African slaves were transported on the “middle passage” to the West Indian sugar islands where the slaves were sold in order to purchase molasses, the necessary ingredient for the burgeoning New England rum industry.Many of the smaller towns of New England, especially Boston and the Rhode Island ports benefitted materially from the production of rum and the slave trade, see Bassett, A Short History, pp. 140-145.
The Revolution thus posed a threat to some members of the ruling upper classes who controlled colonial society. A primary symbol of this threat to their hegemony was alcohol consumption. In colonial America, politicians controlled the issuance of licenses to sell spirits, the wealthy owned the taverns, and the clergy monitored consumption in the taverns. Spirits were expensive enough that only the wealthy could regularly afford these goods in large quantities. Public intoxication was viewed as a kind of status symbol.
The elite’s first line of defense against alcohol consumption by the lower classes had been the licensing of taverns. However, this measure had already lost much of its clout by 1764 when Benjamin Franklin’s Pennsylvania Gazette labeled the tavern a “Pest to Society.” John Adams had led a crusade in 1760 to restrict or reduce the number of licenses in Massachusetts but was ridiculed by the public and defeated in his effort. As the “seedbed of the Revolution,” the tavern was greatly strengthened (by victory over England) against the elites who sought to control alcohol consumption with policies of regulation and taxation.
The first anti-alcohol movement in the Republic turned to the British example of imposing excise taxes on spirits. After various anti-spirit measures failed at the state level, temperance advocates began calling for federal action, but no action was forthcoming until the overthrow of the Articles of Confederation. Alexander Hamilton had advocated the use of high excise taxes on spirits in the Federalist Papers and lobbied hard for such a tax as the Secretary of the Treasury.
The excise tax was eventually passed by Congress under the pressure of a budgetary shortfall, but was angrily opposed by citizens of the west and south. By 1794 hostilities erupted into open warfare known as the Whiskey Rebellion. This widespread revolt was concentrated in western Pennsylvania, but also effected parts of Maryland, Virginia, Kentucky, South Carolina and had support in parts of New York, the Northwest Territory, and in the Southwest.See Mary K. Tachau, “The Whiskey Rebellion in Kentucky: A Forgotten Episode of Civil Disobedience,” Journal of the Early Republic, Vol. 2 (Fall 1982), pp. 239-259. The rebels called for secession, sacked the federal tax commissioners, made advances on Fort Pitt, and threatened the federal arsenals at Pittsburgh and Frederick Maryland.
To surpress the revolt and collect the tax, George Washington and Alexander Hamilton nationalized the militia and sent a massive army into western Pennsylvania to crush the nucleus of the rebellion. Larger than most armies of the Revolutionary war, the “Watermelon Army” had more soldiers than western Pennsylvania had men of military age and was probably more than ten times the number needed to suppress the revolt. Despite this massive demonstration of federal commitment to tyranny and union, the suppression of open revolt was anything but a decisive triumph for the “friends of order” over the “friends of liberty.”
The excise tax remained difficult to collect, as western farmers continued to oppose the excise tax resulting in the costs of collection exceeding the revenue collected in the West. The Rebellion also solidified Jeffersonian opposition to the Hamiltonian nationalists. The majority of Americans now recognized that the Hamiltonians held a Tory ideology and were using the same methods and tactics as the British had used earlier. The friends of order had more in common with the enemies of the Revolution than with most Americans. Jefferson’s Republican government abolished the whiskey excise and all other internal taxes, establishing libertarianism as the dominant ideology in national government for the period 1800–1860.On this see Thomas P. Slaughter, The Whiskey Rebellion: Frontier Epilogue to the American Revolution (New York: Oxford University Press, 1986). It has been shown that the western farmers’ economic rationale for fighting was more as consumers of whiskey than as producers. See David O. Whitten, “An Economic Inquiry into the Whiskey Rebellion of 1794,” Agricultural History 49, No. 3 (July 1975), pp. 491-504.
The war was not, however, a total loss to George Washington and his supporters. The cost of the army was very large and much of the money was spent in the west. The visiting soldiers and newly cash-rich residents began a buying spree in western land. George Washington personally owned large holdings in the western lands, and decided to start selling his lands just prior to the Rebellion. Of course, the buying spree meant that Washington’s own holdings dramatically increased in price. As Thomas Slaughter observed, “the coincidence was certainly a propitious one for his finances.” Even Washington, who had gobbled up the largest and choicest parcels of land while in public service, noted that “this event having happened at the time it did was fortunate.”Slaughter, The Whiskey Rebellion, p. 224.
The puritanical counterrevolution that would eventually undermine the libertarian structure of the Early Republica had its beginnings in the early temperance movement. One of the great contributors to the early temperance movement was Benjamin Rush, physician and signer of the Declaration of Independence. Rush published pamphlets that condemned the use of alcohol as both unhealthy for the individual and destructive to society. His views, while of questionable scientific validity, were used by temperance leaders to confirm their faith that both science and God were on their side. Rush’s position as doctor and patriot rendered his message highly effective among the intellectual classes, culminating in the conversion of Jeremy Belknap, a minister from Boston who later became President of Harvard College. Rush also promoted the anti-alcohol crusade by requiring his doctrines be taught at his medical school.
Churches, however, were the principle players in the puritanical counterrevolution.This religious ideology is not necessarily inconsistent with the economic self-interest of the churches. Traditional Christian churches held that sin was a voluntary act even when temptation was involved. In early 19th century America, reformed or “heretical” Christians began a mass movement to make a preemptive strike at sin. These Christians believed that sinful objects were the source of temptation and consequently the cause of sin and thus had to be removed from society.This perspective on sin is analogous to an objective theory of value in economics. From the “objective” viewpoint, value and sin are innate aspects of the good, while from the subjectivist point of view, economic value and sin are matters of individual choice. They felt that alcohol hindered their ability to reorganize and purify society in their image. Quakers and Methodists were the first churches to declare their anti-alcohol beliefs and form the early temperance movement.
This new religious perspective can be characterized as post-millennial evangelical pietistic protestantism. They were militantly zealous and emphasized preaching from the Bible. They were also pietistic in stressing Bible study, devotion, personal religious experience, and like the 17th century German religious movement, pietism, they opposed formalism and intellectualism. Most important to this counterrevolution was the doctrine of millennialism, a prophecy or belief in an ideal society that would be created by revolutionary action. Post-millennialists hold the “reformed” or “heretical” view that man himself must purge the world of sin and imperfection and establish the Kingdom of God on Earth as a prerequisite of Jesus’s second coming.Orthodox Christians, such as Catholics, Calvinists, Lutherans, and mainstream Protestants, are typically a-millennialist in that they do not believe in a literal 1000-year Kingdom of God on Earth. Pre-millenialists hold that Jesus will come again, defeat the forces of evil, and establish a Kingdom of God on Earth. Pre-millennialists are notorious for their incorrect predictions about the end of the world. Obviously, post-millennialist belief provides a wide latitude in terms of policy prescriptions. Rothbard considered the spread of post-millennialism to be a crucial factor in ideological change in America because it was post-millenialism ideology that would become the driving force behind the drive for prohibition and other efforts to drive out sin and imperfection using the coercive arm of the state.Rothbard writes about the earlier post-millennialist, Joachim of Fiore, a twelfth-century Calabrian monk who attempted to establish a heretical communist society and almost converted three popes to his beliefs. Post-millennialism continued to spring up in medieval Europe, especially in Germany and among the Anabaptists. This history is described in Norman R.C. Cohn, The Pursuit of Millennium: Revolutionary Messianism in Medieval and Reformation Europe and its Bearing on Modern Totalitarian Movements (London: Harper & Row, 1961). According to Rothbard post-millennialism is also an important component of secular movements such as Karl Marx’s communism. Adolph Hitler's Nazism and Third (1000 year) Reich could also be interpreted as a secular derivation of Joachim’s millennialism and original thesis that history would be divided into three, rather than the traditional two periods of christian doctrine. See Murray N. Rothabrd, “Karl Marx: Communist as Religious Eschatologist,” Review of Austrian Economics 4 (1990), pp. 123-79.
Geographically, post-millennialist evangelical pietism emanated from New England where the Puritans first settled. The Puritans (who had already experimented with theocracy, witch hunts, and prohibitionism) and the Separatists evolved into the Congregational and Unitarian churches which were the state-established churches of New England. This Yankee influence spread into western New York, the Midwest, and Great Lakes region and eventually south and west as New Englanders, their clergy, and educators migrated with the nation’s expansion.Much of this migration was concentrated in areas claimed by Massachusetts and Connecticut in the Treaty of 1783. On the dispersion of the prohibitionists, see Whitney R. Cross, The Burned-over District: The Social and Intellectual History of Enthusiastic Religion in Western New York, 1800-1850 (Ithaca, NY: Cornell University Press, 1950); Peter H. Odegard, [1928] Pressure Politics: The Story of the Anti-Saloon League (New York: Octagon Books, 1966).
The first anti-alcohol organization was the Massachusetts Society for the Suppression of Intemperance, which was formed in response to the intemperance associated with the War of 1812. The American Temperance Society was organized in 1826. By 1833, the temperance movement had over one million members, largely comprised of New England evangelicals from the Baptist, Congregationalist, Methodist, and Presbyterian churches.Ironically, both the anti-alcohol movement and anti-slavery movement were centered in Boston which dominated the early colonial triangular trade in rum and slaves. This surge in prohibitionist sentiment is related to religious revivalism of the Second Great Awakening. Religious revivalism was very strong in the 1820s and 1830s throughout New England. Revivalism had always meant reform of the individual and society, but Americans saw themselves as a special case. Americans had defeated the savage Indian, nature, and the British. America was the proverbial city on the hill, an example to the world, and the most likely place for God to establish His Kingdom on Earth.
Increased alcohol consumption may have also stimulated the temperance movement. Rorabaugh estimated that the consumption of alcohol increased from 3.5 pure gallons per capita in 1770 to almost 4 gallons in 1830. This increased consumption was the result of lower production costs, lower taxes, and higher incomes. Drinking was part of virtually every aspect of life for many in the early Republic and was a symbol of the American spirit.Rorabaugh, The Alcoholic Republic, p. 9. While it is dubious that alcohol causes sin, “sinful” behavior is clearly associated with alcohol use. Given their superstitions, heretical religious views, and limited knowledge, it is not surprising that reformers would base their efforts on this association. Early success with private prohibitionism, such as the signing of pledges of moderation and abstinence also provided reinforcement for this association.
An added push for religious revivalism was provided by church privatization in New England. The Congregationalist Church was disestablished in 1818 in Connecticut and in 1824-1833 in Massachusetts. This period of church privatization and religious revivalism is described as follows:
During the first half of the nineteenth century, religion in New England was changing in dramatic fashion. On the one hand, the number of preachers demanded in Connecticut and Massachusetts with respect to the population increased by more than half even as real preaching salaries almost tripled. The increase in total pastors reflected a fivefold increase in dissenting preachers. From 1800 to 1840, the proportion of dissenting preachers in these two states increased from under 20 percent to over 50 percent.Kelly Olds, “Privatizing the Church: Disestablishment in Connecticut and Massachusetts,” Journal of Political Economy 102, No. 2 (April 1994) p. 291.
Despite the timing of privatization and religious revivalism, it is not possible to say definitively that privatization caused revivalism.In fact, many social and economic factors contributed to revivalism and the Second Great Awakening. For example, natural factors and natural disasters also contributed to revivalism. See Michael Barkun, Crucible of the Millennium: The Burned-Over District of New York in the 1840s (Syracuse, NY: Syracuse University Press, 1986), esp. chapters 6 and 7.
However, this separation of church and state involved not only the disestablishment of churches but also a movement from tax-funded churches to the voluntary funding of churches. In 1800, 90 percent of churches in Massachusetts and Connecticut used taxation but only 30 percent did so by 1840 in Connecticut and by 1850 in Massachusetts.Olds, “Privatizing the Church,” p. 291. Economic theory can therefore provide some support for a causal connection between privatization and religious revivalism. A monopoly church with taxing power would be expected to reduce output below competitive levels and charge monopoly prices for its “services.” We would therefore expect an increase in output after the privatization-demonopolization. Theory also predicts that new firms would enter the industry and supply competing products.Again see Olds, “Privatizing the Church,” for his evidence that the established churches did have state authority, practice price discrimination, and increase output after disestablishment (privatization), and that alternative churches expanded faster than the established churches after privatization.
As temperance groups formed and grew, several important changes took place. Initially temperance efforts were voluntary efforts to promote moderation in alcohol consumption. Members of the temperance groups were expected to lead by example and provide education and assistance to others. Over time, however, alternative groups were established that advocated abstinence from spirits and moderation in beer, wine, and cider. Eventually, even these groups were replaced with total abstinence societies in which members were required to sign an abstinence pledge. As the work of reform became more difficult over time, reform leaders became frustrated and dissatisfied with voluntary efforts and began to advocate the use of government to enforce temperance throughout society.Thornton, The Economics of Prohibition, pp. 43-45.
Temperance forces began to organize coalitions to pass restrictive legislation. Their first reform measure was typically to replace the license system with the more restrictive local option laws which gave communities the right to prohibit local liquor sales. Other restrictive policies included minimum-quantity purchase laws (which require the individual to buy at least 15 or 28 gallons of spirits at a time) and local prohibitions. These policies were difficult to enforce and had few if any beneficial effects. The failure of these policies to satisfy prohibitionists ultimately led to the call for state-wide prohibition.
State prohibitions were adopted in many northern states and territories between 1851 and 1855. These prohibitions were based on Maine’s law which was authored by the zealous prohibitionist, Neal Dow. The “Maine Laws” allowed for search and seizure, reduced the requirements for conviction, increased fines, created mandatory prison sentences, and called for the destruction of captured liquor.
The rapid success of the Maine Laws was shortlived as the rapidly growing immigrant populations opposed such laws. The Maine Laws also suffered several important setbacks in court. Enforcement was difficult because professional police forces existed in only a few large cities where the law was least popular. In the emerging Republican party, prohibition was considered a divisive issue and was not enthusiastically embraced at the national level.Interestingly, the decrease in alcohol consumption that resulted from temperance and prohibitionist efforts created a 500+ calorie deficit in the adult diet leading to declines in demographic-health measures during a period of high economic growth. See Mark Thornton, “Alcohol Consumption and the Standard of Living in Antebellum America,” Atlantic Economic Journal 23, No. 2 (June 1995).
One event seemed to have sealed the fate of the Maine Laws. Neal Dow, who was mayor of Portland, Maine in 1855, was accused of personally profiting from the government-controlled sale of alcohol.
An angry mob assembled at the liquor agency on the night of June 2, 1855, after the existence of the liquor had become common knowledge. The mob demanded destruction of the liquor and threatened to break into the agency if the demands were not met and Neal Dow arrested for violation of his own law. Dow, who was always quick to look to force in defense of morality, assembled the local Rifle Guards. In the confrontation which followed with the stone-throwing mob, Dow ordered his troops to fire when several rioters broke into the liquor agency.Ian R. Tyrrell, Sobering Up: From Temperance to Prohibition in Antebellum America, 1800-1860 (Westport, CT: Greenwood Press, 1979), pp. 295-299
Dow was labeled a murderer and a fanatic, and the prohibition movement which he was instrumental in crafting quickly diminished in political significance.Frank L. Byrne, Prophet of Prohibition: Neal Dow and His Crusade (Gloucester, MA: Peter Smith, 1969), pp. 60-69.
The rise of the Republican party was the result of a long series of attempts to form a coalition strong enough to challenge the dominance of the Democratic party. Forged from the Whig and No-Nothing Parties, the Republicans naturally captured the prohibitionist-abolitionist radicals and thereby dominated “Yankeedom.” This coalition of mercantilist parties did not directly satisfy the prohibitionist faction, but they were able to institute taxes on alcohol and tobacco that appeased the reformers and helped the Republican party to dominate American politics for decades. After the Civil War, prohibitionists became increasingly political and better organized at the national level. Their progress included the formation of the Prohibition Party, the Women’s Christian Temperance Union, and the Anti-Saloon League.
During the period between the Civil War and the Progressive Era the post-millennial crusade became increasingly secular. According to Barkun, the “slow nineteenth-century separation of a secular from a religious vision of the perfect society” accelerated after (and possibly because of) the Civil War and that by “the end of the nineteenth century, millennialism was dominated by secularizing tendencies” so that “by the very time that it succumbed in religious circles its secular version triumphed in the society at large.”Barkum, Crucible of the Millenium, pp. 2, 151, 29.
With respect to prohibitionism, this period is best classified as one of “modified” prohibition. State prohibition waned to such an extent that by 1875 only three states remained “dry.” Although there was a brief resurgence in state prohibitions in the 1880s, only three states remained dry by 1904. Modified prohibition consisted of local option, high license fees and restrictive regulations. These coalition-building and seemingly pragmatic policies ironically helped establish the conditions under which national prohibition would be promoted and enacted.
The scientific veneer of modified prohibition was provided, in part, by political economist Richard T. Ely.See Murray N. Rothbard, “World War I as Fulfillment: Power and the Intellectuals,” Journal of Libertarian Studies (Winter 1989), pp. 81-125, for more on Ely and other progressives academics. In a report to the Maryland legislature, Ely argued for a modified prohibition that consisted of local option and an annual auction of licenses for large exclusive territories (retail monopolies) for the sale of alcoholic beverages. He argued this would greatly reduce the number of establishments selling alcohol and maximize public revenue. He argued that such businesses would be easier to tax and regulate because of the greatly reduced number of establishments and the fear of losing expensive liquor licenses for violating regulations. He further argued that concentrating the liquor business via modified prohibition “drags it before the public where all its evils must be conspicuous.”Richard T. Ely, Taxation in American States and Cities (New York: Thomas Y. Crowell & Co., 1888),pp. 280-288.
Modified prohibition was promoted as the pragmatic alternative to prohibition because it resulted in fewer saloons, higher government revenues, and reduced public drunkenness. According to The Nation, “the same story that has been told of every State in which high-license or tax laws have gone into effect. That is, they provide ‘corroborative evidence of the practical wisdom of this method of fighting the liquor evil.’” The Nation also opposed the policy of prohibition because it was not “a proper or practical method of liquor regulation,” and that “no amount of amendment or addition can make the Prohibitory Law a success.” They concluded that when in the majority use local option, but when in the minority use high taxation to control drinking and make drinkers pay for their sins. “The lesson which has been taught over and over again (is) that prohibition laws cannot be enforced except where public sentiment in their favor predominates.”The Nation, January 12, 1888, Vol. XLVI No. 1176, pp. 24-26; February 16, 1888, No. 1181, p.127; January 31, 1889, Vol. XLVIII, No. 1231, p. 83; March 14, 1889, No. 1237, pp. 214-5; April 25, 1889, No. 1243, p. 336; June 27, 1889, No. 1252, p. 515.
Despite testimonials of its success, modified prohibition caused a plethora of problems such as black market production, smuggling, monopoly pricing, reduced quality, corrupt retail practices, graft, and political corruption. While not as evident as the problems caused by prohibition, modified prohibition did indeed drag the evils before the public. Indeed, the problems of modified prohibition were already obvious when Pennsylvania enacted its modified prohibition. The law attempted to limit corrupt practices stemming from modified prohibition by including a restriction on brewers that prevented them from financing the high license fees charged to saloon operators.The Nation, February 16, 1888, Vol. XLVI, No. 1181, p. 127. Also with respect to high taxes the National Municipal Review (January, 1935, p. 63) noted that “High taxation thus becomes the chief foundation of the illegitimate trade.” Tun Yuan Hu found this illegitimate trade to be “deeply disturbing” but he believed it could be “driven out” by reducing taxes. See The Liquor Tax in the United States, 1791-1947: A History of the Internal Revenue Taxes Imposed on Distilled Spirits by the Federal Government (New York: Columbia University Graduate School of Business, 1950), p. 86.
The political success of modified prohibition would suggest that true prohibitionist sentiment had all but died out in the late nineteenth century. The federal excise tax on distilled spirits had been increased by 120 percent between 1868 and 1894, most non-prohibition states had enacted local option laws by 1900, and most states and local jurisdictions had enacted high license fees.Hu, The Liquor Tax, Appendix II, p. 3, shows that the federal excise tax on distilled spirits was fifty cents per tax gallon in 1868 and one dollar and ten cents in 1894. Elsewhere, Hu notes that 37 states had local option laws by 1900 (p. 49). The Nation (January 12, 1888, Vol. 46, No. 1176, p. 25) describes the high license fees in several states. Ely, Taxation, notes that in Savannah, Georgia a liquor dealer would pay a Federal license of $25, a State license of $50, a County license of $100 dollars, and a City license of $200. The bar-keepers license in Charlotte, North Carolina was $1000 (pp. 203-205). However, instead of dying out, the prohibition movement was preparing to achieve the ultimate goal of national prohibition by organizing against the saloon, developing institutions and coalitions, and experimenting with new political techniques.
Women were an important source of support for prohibition. The leaders of the women’s suffrage movement were prohibitionists and encouraged their members to swell the ranks of prohibition organizations. The alliance was clear; women would support prohibition (and vote for it when and where they could) while prohibitionists would in turn support the women’s suffrage movement. Women would get the vote and sober husbands, while prohibitionists would reestablish social control and dry up society. In 1873, the Women’s Christian Temperance Union was formed to institutionalize this alliance.
In 1869, the Prohibition Party was formed. Often characterized as ineffective, it played a key although often neglected role in the ultimate success of national prohibition. Its electorial success was indeed limited, but the Prohibition party provided a valuable training ground for prohibitionists in politics. The Party also introduced ideas, such as child-labor laws, direct election of senators, the income tax, woman suffrage, and national alcohol prohibition, that were absorbed into major party platforms and enacted into law. The Prohibition Party also was a major factor in the major party realignment that occurred during the 1890s in which the Democratic party embraced prohibition.
The Anti-Saloon League was formed in 1895 as a political arm of the post-millennial evangelical protestant churches. By 1904, the League had organizations in forty-two states or territories. When Prohibition was enacted, the Anti-Saloon League could claim affiliation with over 30,000 churches and 60,000 agencies. It is important to note that the League, which was the prime mover toward national prohibition, explicitly emblemized the most prominent institution of “sin,” the government-licensed and heavily taxed saloon.Cf. Jack S. Blocker, Retreat from Reform: The Prohibition Movement in the United States, 1890-1913 (Westport, CT: Greenwood Press, 1976), p. 157; Odegard, Pressure Politics, pp. 20-21. The central forces of prohibitionism were the Congregationalist, Quaker, Methodist, Baptist, and Presbyterian churches. These churches, their ministers and their flocks had radiated out from New England into western New York, the mid-west, and by the turn of the century eventually throughout most of the western and southern states. It is this geographic and demographic dissemination that enhanced the potential for national alcohol prohibition.
The League completely split with the voluntary and educational efforts of past temperance movements. Coercion, propaganda, and intimidation of political candidates were the new tools. Professional reformers were paid to propagandize (often from the pulpit), in many instances making outrageous claims against blacks and Catholics. At its height, the League published over forty tons of propaganda literature each month. The League was able to shield its big contributors from public exposure by refusing to comply with the disclosure requirements of the Corrupt Practices Act.As a result, Warburton found little evidence for determining the extent of commercial rentseeking against alcohol. Clark Warburton, The Economics of Prohibition (New York: Columbia University Press, 1932), p. 263. See also Odegard, Pressure Politics, pp. 74, 181, 210; This absence of data should not be taken to infer a lack of commercial interest in promoting prohibition.
The League was able to refine, strengthen, and spread the prohibitionist ideology. The ideology that emerged during the Progressive Era was forged from the experience of “modified prohibition” and symbolized in the very name of its most powerful and effective political institution, the Anti-Saloon League. As Timberlake described, the saloon became the object of national opprobrium under modified prohibition:
The liquor industry became thoroughly involved in political corruption through its connection with the saloon. The root of the trouble here was that the ordinary saloonkeeper, confronted by overcompetition, was practically forced to disobey the liquor laws and to ally himself with vice and crime in order to survive. Unable to make a living honestly, he did so dishonestly.James H. Timberlake, Prohibition and the Progressive Movement: 1900-1920 (Cambridge, MA: Harvard University Press, 1963), p. 110.
Modified prohibition forced many saloons to offer breweries exclusive selling rights in exchange for payment of their annual license fees. Saloons would also disobey blue laws, serve poor quality and watered-down liquor, and employ prostitutes, professional gamblers, and pickpockets in order to generate sufficient revenues under modified prohibition. Of course all of these practices often necessitated the bribery of police and public officials.
The success of Prohibition depended vitally on defining its goal as ridding America of the crime and vice-ridden saloon that was corrupting both the political leadership and the poor immigrants who relied on the saloon as a center of entertainment, politics, and much more. Indeed, destroying the saloon would achieve an underlying goal of prohibitionists — providing the old-stock protestants with a method of social control over the “drinking class” who were largely recent Catholic immigrants from countries such as Ireland, Italy, and Germany.
The only major remaining hurdle in the establishment of national alcohol prohibition was government revenue. The tax on alcohol products was the second largest source of revenue for the federal government prior to Prohibition. However, as Boudreaux and Pritchard have demonstrated:
The income tax proved a viable alternative to liquor taxation for raising revenue, thus making prohibition possible. To be sure, the ideology of voters and politicians mattered, but Congress could not afford the cost in foregone tax revenue (hence, foregone wealth redistribution) that an ideological vote for prohibition entailed until the income tax demonstrated its revenue-raising potential.Donald J. Boudreaux and A.C. Pritchard, “The Price of Prohibition,” Arizona Law Review 36 No. 1 (Spring 1994), p 2.
They also argue that the shortfall of income tax revenue during the early years of the Great Depression led to the repeal of Prohibition and restoration of alcohol tax revenues.
In support of this tax substitution thesis, it should be recalled that it was the Prohibition party that first called for an income tax and that prohibitionists widely supported the income tax. It is also noteworthy that a tax revolt was gathering momentum in the early years of the Great Depression. The revolts began as a movement against property taxes in cities such as Chicago. Prior to Prohibition, local governments raised a great deal of revenue from high license fees, revenue which was lost with Prohibition. The repeal of Prohibition would not only lower alcohol prices, but would also reestablish revenue from license fees, thus relieving cities’ overreliance on property taxes. As Beito notes, “by the end of 1933, the effectiveness of the tax-resistance movement had started to wane.”Beito provides an excellent history of tax revolts during the Great Depression. He finds that the tax revolts ultimately failed because of a failure to develop a coherent anti-tax ideology and an overreliance on a strategy that stressed “good government.” David T. Beito, Taxpayers in Revolt: Tax Resistance During the Great Depression (Chapel Hill: University of North Carolina Press, 1989), p. 140.
The Progressive era also saw the prohibitionists launch their “war” against narcotics, tobacco, marijuana, gambling, prostitution and other “imperfections” in society. In each of these wars, prohibitionists and progressives sought to stamp out “vice,” establish means of social control (particularly over immigrants and inferior races), and to provide a path toward order and perfection of society.
During the Progressive Era the prohibitionist movement had become secularized, achieved the precedent of nationalized prohibition, and expanded its scope to cover marijuana and narcotics. The elitist, twentieth century Hamiltonians had established their control over American society.
[Excerpt from chapter 3 of the Bastiat Collection.]
I wish someone would offer a prize—not of a hundred francs, but of a million, with crowns, medals and ribbons—for a good, simple and intelligible definition of the word “Government.”This section was first published in 1848.
What an immense service it would confer on society!
The Government! What is it? Where is it? what does it do? what ought it to do? All we know is, that it is a mysterious personage; and assuredly, it is the most solicited, the most tormented, the most overwhelmed, the most admired, the most accused, the most invoked, and the most provoked, of any personage in the world. I have not the pleasure of knowing my reader, but I would stake ten to one that for six months he has been making Utopias, and if so, that he is looking to Government for the realization of them.
And should the reader happen to be a lady, I have no doubt that she is sincerely desirous of seeing all the evils of suffering humanity remedied, and that she thinks this might easily be done, if Government would only undertake it.
But, alas! that poor unfortunate personage, like Figaro, knows not to whom to listen, nor where to turn. The hundred thousand mouths of the press and of the speaker’s platform cry out all at once:
“Organize labor and workmen.”“Do away with greed.”“Repress insolence and the tyranny of capital.”“Experiment with manure and eggs.”“Cover the country with railways.”“Irrigate the plains.”“Plant the hills.”“Make model farms.”“Found social laboratories.”“Colonize Algeria.”“Nourish children.”“Educate the youth.”“Assist the aged.”“Send the inhabitants of towns into the country.”“Equalize the profits of all trades.”“Lend money without interest to all who wish to borrow.”“Emancipate Italy, Poland, and Hungary.”“Rear and perfect the saddle-horse.”“Encourage the arts, and provide us with musicians and dancers.”“Restrict commerce, and at the same time create a merchant navy.”“Discover truth, and put a grain of reason into our heads. The mission of Government is to enlighten, to develop, to extend, to fortify, to spiritualize, and to sanctify the soul of the people.”“Do have a little patience, gentlemen,” says Government in a beseeching tone. “I will do what I can to satisfy you, but for this I must have resources. I have been preparing plans for five or six taxes, which are quite new, and not at all oppressive. You will see how willingly people will pay them.”
Then comes a great exclamation: “No! indeed! Where is the merit of doing a thing with resources? Why, it does not deserve the name of a Government! So far from loading us with fresh taxes, we would have you withdraw the old ones. You ought to suppress:
“The salt tax,“The tax on liquors,“The tax on letters,“Custom-house duties,“Patents.”
In the midst of this tumult, and now that the country has two or three times changed its Government, for not having satisfied all its demands, I wanted to show that they were contradictory. But what could I have been thinking about? Could I not keep this unfortunate observation to myself?
I have lost my character for I am looked upon as a man without heart and without feeling—a dry philosopher, an individualist, a plebeian—in a word, an economist of the English or American school. But, pardon me, sublime writers, who stop at nothing, not even at contradictions. I am wrong, without a doubt, and I would willingly retract. I should be glad enough, you may be sure, if you had really discovered a beneficent and inexhaustible being, calling itself the Government, which has bread for all mouths, work for all hands, capital for all enterprises, credit for all projects, salve for all wounds, balm for all sufferings, advice for all perplexities, solutions for all doubts, truths for all intellects, diversions for all who want them, milk for infancy, and wine for old age—which can provide for all our wants, satisfy all our curiosity, correct all our errors, repair all our faults, and exempt us henceforth from the necessity for foresight, prudence, judgment, sagacity, experience, order, economy, temperance and activity.
What reason could I have for not desiring to see such a discovery made? Indeed, the more I reflect upon it, the more do I see that nothing could be more convenient than that we should all of us have within our reach an inexhaustible source of wealth an enlightenment—a universal physician, an unlimited pocketbook, and an infallible counselor, such as you describe Government to be. Therefore I want to have it pointed out and defined, and a prize should be offered to the first discoverer of the will-o-the-wisp. For no one would think of asserting that this precious discovery has yet been made, since up to this time everything presenting itself under the name of the Government is immediately overturned by the people, precisely because it does not fulfill the rather contradictory requirements of the program.
I will venture to say that I fear we are in this respect the dupes of one of the strangest illusions that have ever taken possession of the human mind.
Man recoils from trouble—from suffering; and yet he is condemned by nature to the suffering of privation, if he does not take the trouble to work. He has to choose then between these two evils. What means can he adopt to avoid both? There remains now, and there will remain, only one way, which is, to enjoy the labor of others. Such a course of conduct prevents the trouble and the enjoyment from assuming their natural proportion, and causes all the trouble to become the lot of one set of persons, and all the enjoyment that of another. This is the origin of slavery and of plunder, whatever its form may be—whether that of wars, taxes, violence, restrictions, frauds, etc.—monstrous abuses, but consistent with the thought that has given them birth. Oppression should be detested and resisted—it can hardly be called trivial.
Slavery is subsiding, thank heaven! and on the other hand, our disposition to defend our property prevents direct and open plunder from being easy.
One thing, however, remains—it is the original inclination that exists in all men to divide the lot of life into two parts, throwing the trouble upon others, and keeping the satisfaction for themselves. It remains to be shown under what new form this sad tendency is manifesting itself.
The oppressor no longer acts directly and with his own powers upon his victim. No, our discretion has become too refined for that. The tyrant and his victim are still present, but there is an intermediate person between them, which is the Government—that is, the Law itself. What can be better calculated to silence our scruples, and, which is perhaps better appreciated, to overcome all resistance? We all, therefore, put in our claim under some pretext or other, and apply to Government. We say to it,
I am dissatisfied at the proportion between my labor and my enjoyments. I should like, for the sake of restoring the desired equilibrium, to take a part of the possessions of others. But this would be dangerous. Could not you facilitate the thing for me? Could you not find me a good place? or check the industry of my competitors? or, perhaps, lend me gratuitously some capital, which you may take from its possessor? Could you not bring up my children at the public expense? or grant me some subsidies? or secure me a pension when I have attained my fiftieth year? By this means I shall gain my end with an easy conscience, for the law will have acted for me, and I shall have all the advantages of plunder, without its risk or its disgrace!
As it is certain, on the one hand, that we are all making some similar request to the Government; and as, on the other, it is proved that Government cannot satisfy one party without adding to the labor of the others, until I can obtain another definition of the word Government, I feel authorized to give my own. Who knows but it may obtain the prize?
Here it is:
Government is that great fiction, through which everybody endeavors to live at the expense of everybody else.
For now, as formerly, everyone is more or less for profiting by the labors of others. No one would dare to profess such a sentiment; he even hides it from himself; and then what is done? A medium is thought of; Government is applied to, and every class in its turn comes to it, and says, “You, who can take justifiably and honestly, take from the public, and we will partake.” Alas! Government is only too much disposed to follow this diabolical advice, for it is composed of ministers and officials—of men, in short, who, like all other men, desire in their hearts, and always seize every opportunity with eagerness, to increase their wealth and influence. Government is not slow to perceive the advantages it may derive from the part that is entrusted to it by the public. It is glad to be the judge and the master of the destinies of all; it will take much, for then a large share will remain for itself; it will multiply the number of its agents; it will enlarge the circle of its privileges; it will end by appropriating a ruinous proportion.
But the most remarkable part of it is the astonishing blindness of the public through it all. When successful soldiers used to reduce the vanquished to slavery, they were barbarous, but they were not irrational. Their object, like ours, was to live at other people’s expense, and they did not fail to do so. What are we to think of a people who never seem to suspect that reciprocal plunder is no less plunder because it is reciprocal; that it is no less criminal because it is executed legally and with order; that it adds nothing to the public good; that it diminishes it, just in proportion to the cost of the expensive medium which we call the Government?
And it is this great chimera that we have placed, for the edification of the people, as a frontispiece to the Constitution. The following is the beginning of the preamble:
France has constituted itself a republic for the purpose of raising all the citizens to an ever-increasing degree of morality, enlightenment, and well-being.
Thus it is France, or an abstraction, that is to raise the French, or flesh-and-blood realities, to morality, well-being, etc. Is it not by yielding to this strange delusion that we are led to expect everything from an energy not our own? Is it not announcing that there is, independently of the French, a virtuous, enlightened, and rich being, who can and will bestow upon them its benefits? Is not this supposing, and certainly very presumptuously, that there are between France and the French—between the simple, abridged, and abstract denomination of all the individualities, and these individualities themselves—relations as of father to son, tutor to his pupil, professor to his scholar? I know it is often said, metaphorically, “the country is a tender mother.” But to show the inanity of the constitutional proposition, it is only needed to show that it may be reversed, not only without inconvenience, but even with advantage. Would it be less exact to say,
The French have constituted themselves a Republic, to raise France to an ever-increasing degree of morality, enlightenment, and well-being.
Now, where is the value of an axiom where the subject and the attribute may change places without inconvenience? Everybody understands what is meant by this, “The mother will feed the child.” But it would be ridiculous to say, “The child will feed the mother.”
The Americans formed a different idea of the relations of the citizens with the Government when they placed these simple words at the head of their Constitution:
We, the people of the United States, for the purpose of forming a more perfect union, of establishing justice, of securing interior tranquility, of providing for our common defense, of increasing the general well-being, and of securing the benefits of liberty to ourselves and to our posterity, decree, etc.
Here there is no chimerical creation, no abstraction, from which the citizens may demand everything. They expect nothing except from themselves and their own energy.
If I may be permitted to criticize the first words of our Constitution, I would remark that what I complain of is something more than a mere metaphysical allusion, as might seem at first sight.
I contend that this deification of Government has been in past times, and will be hereafter, a fertile source of calamities and revolutions.
There is the public on one side, Government on the other, considered as two distinct beings; the latter bound to bestow upon the former, and the former having the right to claim from the latter, all imaginable human benefits. What will be the consequence?
In fact, Government is not impotent, and cannot be so. It has two hands—one to receive and the other to give; in other words, it has a rough hand and a smooth one. The activity of the second is necessarily subordinate to the activity of the first. Strictly, Government may take and not restore. This is evident, and may be explained by the porous and absorbing nature of its hands, which always retain a part, and sometimes the whole, of what they touch. But the thing that never was seen, and never will be seen or conceived, is, that Government can restore more to the public than it has taken from it. It is therefore ridiculous for us to appear before it in the humble attitude of beggars. It is radically impossible for it to confer a particular benefit upon any one of the individualities which constitute the community, without inflicting a greater injury upon the community as a whole.
Our requisitions, therefore, place it in a dilemma.
If it refuses to grant the requests made to it, it is accused of weakness, ill-will, and incapacity. If it endeavors to grant them, it is obliged to load the people with fresh taxes—to do more harm than good, and to bring upon itself from another quarter the general displeasure.
Thus, the public has two hopes, and Government makes two promises—many benefits and no taxes. Hopes and promises that, being contradictory, can never be realized.
Now, is not this the cause of all our revolutions? For between the Government, which lavishes promises which it is impossible to perform, and the public, which has conceived hopes which can never be realized, two classes of men interpose—the ambitious and the Utopians. It is circumstances which give these their cue. It is enough if these vassals of popularity cry out to the people—“The authorities are deceiving you; if we were in their place, we would load you with benefits and exempt you from taxes.”
And the people believe, and the people hope, and the people make a revolution!
No sooner are their friends at the head of affairs, than they are called upon to redeem their pledge. “Give us work, bread, assistance, credit, education, colonies,” say the people; “and at the same time protect us, as you promised, from the taxes.”
The new Government is no less embarrassed than the former one, for it soon finds that it is much easier to promise than to perform. It tries to gain time, for this is necessary for maturing its vast projects. At first, it makes a few timid attempts: on one hand it institutes a little elementary instruction; on the other, it makes a little reduction in the liquor tax (1850). But the contradiction is forever rearing its ugly head; if it would be philanthropic, it must raise taxes; if it neglects its taxing, it must abstain from being philanthropic.
These two promises are forever clashing with each other; it cannot be otherwise. To live upon credit, which is the same as exhausting the future, is certainly a present means of reconciling them: an attempt is made to do a little good now, at the expense of a great deal of harm in future. But such proceedings call forth the specter of bankruptcy, which puts an end to credit. What is to be done then? Why, then, the new Government takes a bold step; it unites all its forces in order to maintain itself; it smothers opinion, has recourse to arbitrary measures, repudiates its former maxims, declares that it is impossible to conduct the administration except at the risk of being unpopular; in short, it proclaims itself governmental. And it is here that other candidates for popularity are waiting for it. They exhibit the same illusion, pass by the same way, obtain the same success, and are soon swallowed up in the same gulf.
We had arrived at this point in February.This was written in 1849. At this time, the illusion that is the subject of this article had made more headway than at any former period in the ideas of the people, in connection with Socialist doctrines. They expected, more firmly than ever, that Government, under a republican form, would open in grand style the source of benefits and close that of taxation. “We have often been deceived,” said the people; “but we will see to it ourselves this time, and take care not to be deceived again!”
What could the Provisional Government do? Alas! Just that which always is done in similar circumstances—make promises, and gain time. It did so, of course; and to give its promises more weight, it announced them publicly thus:
Increase of prosperity, diminution of labor, assistance, credit, free education, agricultural colonies, cultivation of waste land, and, at the same time, reduction of the tax on salt, liquor, letters, meat; all this shall be granted when the National Assembly meets.
The National Assembly meets, and, as it is impossible to realize two contradictory things, its task, its sad task, is to withdraw, as gently as possible, one after the other, all the decrees of the Provisional Government. However, in order somewhat to mitigate the cruelty of the deception, it is found necessary to negotiate a little. Certain engagements are fulfilled, others are, in a measure, begun, and therefore the new administration is compelled to contrive some new taxes.
Now I transport myself in thought to a period a few months hence and ask myself with sorrowful forebodings, what will come to pass when the agents of the new Government go into the country to collect new taxes upon legacies, revenues, and the profits of agricultural traffic? It is to be hoped that my presentiments may not be verified, but I foresee a difficult part for the candidates for popularity to play.
Read the last manifesto of the Montagnards—that which they issued on the occasion of the election of the President. It is rather long, but at length it concludes with these words: “Government ought to give a great deal to the people, and take little from them.” It is always the same tactics, or, rather, the same mistake.
“Government is bound to give gratuitous instruction and education to all the citizens.”
It is bound to give “A general and appropriate professional education, as much as possible adapted to the wants, the callings, and the capacities of each citizen.”
It is bound “To teach every citizen his duty to God, to man, and to himself; to develop his sentiments, his tendencies, and his faculties; to teach him, in short, the scientific part of his labor; to make him understand his own interests, and to give him a knowledge of his rights.”
It is bound “To place within the reach of all, literature and the arts, the patrimony of thought, the treasures of the mind, and all those intellectual enjoyments which elevate and strengthen the soul.”
It is bound “To give compensation for every accident, from fire, inundation, etc., experienced by a citizen.” (The et cetera means more than it says.)
It is bound “To attend to the relations of capital with labor, and to become the regulator of credit.”
It is bound “To afford important encouragement and efficient protection to agriculture.”
It is bound “To purchase railroads, canals, and mines; and, doubtless, to transact affairs with that industrial capacity which patronizes it.”
It is bound “To encourage useful experiments, to promote and assist them by every means likely to make them successful. As a regulator of credit, it will exercise such extensive influence over industrial and agricultural associations as shall ensure them success.”
Government is bound to do all this, in addition to the services to which it is already pledged; and further, it is always to maintain a menacing attitude toward foreigners; for, according to those who sign the program, “Bound together by this holy union, and by the precedents of the French Republic, we carry our wishes and hopes beyond the boundaries that despotism has placed between nations. The rights that we desire for ourselves, we desire for all those who are oppressed by the yoke of tyranny; we desire that our glorious army should still, if necessary, be the army of liberty.”
You see that the gentle hand of Government—that good hand that gives and distributes, will be very busy under the government of the Montagnards. You think, perhaps, that it will be the same with the rough hand—that hand which dives into our pockets. Do not deceive yourselves. The aspirants after popularity would not know their trade if they had not the art, when they show the gentle hand, to conceal the rough one.
Their reign will assuredly be the jubilee of the tax-payers.
“It is superfluities, not necessities,” they say “that ought to be taxed.”
Truly, it will be a happy day when the treasury, for the sake of loading us with benefits, will content itself with curtailing our superfluities!
This is not all. The Montagnards intend that “taxation shall lose its oppressive character, and be only an act of fraternity.” Good heavens! I know it is the fashion to thrust fraternity in everywhere, but I did not imagine it would ever be put into the hands of the tax-gatherer.
To come to the details: Those who sign the program say, “We desire the immediate abolition of those taxes that affect the absolute necessities of life, such as salt, liquors, etc., etc.
“The reform of the tax on landed property, customs, and patents.
“Gratuitous justice—that is, the simplification of its forms, and reduction of its expenses,” (This, no doubt, has reference to stamps.)
Thus, the tax on landed property, customs, patents, stamps, salt, liquors, postage, all are included. These gentlemen have discovered the secret of giving an excessive activity to the gentle hand of Government, while they entirely paralyze its rough hand.
Well, I ask the impartial reader, is it not childishness, and worse, dangerous childishness? Is it not inevitable that we shall have revolution after revolution, if there is a determination never to stop till this contradiction is realized: “To give nothing to Government and to receive much from it?”
If the Montagnards were to come into power, would they not become the victims of the means that they employed to take possession of it?
Citizens! In all times, two political systems have been in existence, and each may be maintained by good reasons. According to one of them, Government ought to do much, but then it ought to take much. According to the other, this twofold activity ought to be little felt. We have to choose between these two systems. But as regards the third system, which partakes of both the others, and which consists in exacting everything from Government, without giving it anything, it is chimerical, absurd, childish, contradictory, and dangerous. Those who proclaim it, for the sake of the pleasure of accusing all Governments of weakness, and thus exposing them to your attacks, are only flattering and deceiving you, while they are deceiving themselves.
For ourselves, we consider that Government is and ought to be nothing whatever but common force organized, not to be an instrument of oppression and mutual plunder among citizens; but, on the contrary, to secure to everyone his own, and to cause justice and security to reign.
Murray Rothbard was a genius. One aspect of this was his writing as an American historian. He was every bit as significant a scholar here as he was as an economist and philosopher.
For example, there is his stunning four-volume history of early America from Jamestown to the end of the American Revolutionary War. His brilliance and originality are on display, as he deftly handles a huge amount of research including a vast array of hitherto unknown facts.
Murray is, as always, a power-elite analyst, and looks at family and financial interests of famous men, as well as their motivations and real ideologies. Standard historians shun this as politically incorrect, but in Murray’s hands, it explains so much.
Murray writes, of course, from a libertarian perspective, and also brings to light little-known libertarian writers and activists. History has seldom been this exciting.
But there is one tragic note. Conceived in Liberty was supposed to be a five-volume work, ending with the adoption of the Constitution. And, indeed, Murray wrote the fifth volume, the most revisionist of all. He did it in longhand on legal yellow pads, and used a dictating machine a friend had given him. His wife Joey would use the recording to type the manuscript.
I know that sort of machine, since my father had one. As you spoke into the microphone, it would inscribe clear plastic discs with your recorded words. Murray dictated the entire book, but when he finished it over many days, all the discs were gibberish.
Even experts couldn’t fix the disaster, so Murray — frustrated — put his huge handwritten manuscript aside, to take up other projects. He intended to get back to the fifth volume, but died before he could do so.
Murray left all his papers and books to the Mises Institute, honoring me as his literary executor. But I was never able to decipher his handwriting; not even Joey could do so, nor others I consulted. I hated the situation, but saw no way out of it. Then the young professor and Rothbardian Patrick Newman came upon the manuscript while he was doing other work in the Mises Institute archives, and astoundingly, he was able, with great difficulty, to read Murray’s handwriting.
So you can imagine the celebration that ensued. We were all thrilled with the book. It is compelling, radical, original, brilliant. It revivifies the first four volumes of Conceived in Liberty, and is a delight to read, with a great introduction by Patrick, who also edited Murray’s hitherto unpublished book, The Progressive Era. As you can imagine, we’re very proud of our former student. I can almost hear Murray exclaiming, “Attaboy, Patrick!”
The fifth volume, entitled The New Republic, 1784–1791, charts the course from the freeing of the 13 states from British mercantilism to their shackling with a new American form of it.
For Murray sees the Constitution, not as a document enshrining liberty, but as the charter of a new, powerful, centralized government designed by Madison, Hamilton, and their cohorts in a coup at Philadelphia.
The centralizers convinced the Continental Congress to wage a traditional, centrally planned, hugely expensive war, rather than a volunteer, libertarian guerrilla action. This ensured many evils, from paper money inflation to high taxes, from conscription to price controls and seizure of goods. Ironically, it was the guerrilla leaders who actually won the war, and not General Washington, as Murray demonstrates.
Even the post-war Articles of Confederation mixed centralizing provisions with libertarian ones. The centralizers dishonestly dubbed themselves “Federalists,” and their libertarian opponents “Antifederalists.”
They proved to be effective propagandists in lying to the people of the 13 states, and intimidating their leaders. Eventually the Constitution was ratified by 12 states, with only little Rhode Island refusing. So the central government threatened a trade war, and Rhode Island succumbed.
The Antifederalists, a minority, became strict constructionists to fight for freedom under the Constitution. But virtually all their predictions about future power grabs came true.
To get the Constitution passed, however, the opponents were able to demand a Bill of Rights. But the wily Madison made them as weak as possible, ignoring the stronger protections that the opponents wanted.
The fight for freedom continues to this day, of course, despite our giant warfare, welfare, and police state. As the fifth volume, like the rest of Conceived in Liberty, makes clear, we have an extraordinary American heritage. Heroes, known and unknown, are our inspiration. Villains, too, we must know about.
The fifth volume completes Murray’s great work, lost for decades, yet as relevant as the day he finished it. Regular American historians, ignorant of non-Keynesian economics and biased by statism, are a bane. Won’t you help us publish this corrective? It must be priced for students, sturdily bound, and widely distributed.
Your tax-deductible donation of any amount to the fifth volume will help. Donors of $100 or more will receive a free copy of the book. If you can make a $500 donation, you will be listed in the front of this handsome work as a Donor; $1,000 as a Patron; $5,000 as a Benefactor.
You’ll love the Foreword by Judge Napolitano and Preface by Tom Woods.
Help us with your generous donation to fill in this gap in American history. Help us honor Murray. Help us teach real history, instead of the usual pap.
[Editors note: Recently the Mises Institute received a box of documents belonging to Murray Rothbard from our friend Justin Raimondo. We will make new material available online as we work through the collection. The following is an autobiographical essay written while Murray was still a high school student. Fans of Rothbard will not only appreciate some of the personal details about his parents and upbringing, but also how his formative years clearly influenced his later work, including his critiques of public education. He also offers some of his political views he held during World War II, long before he became "Mr. Libertarian."]
My Parents and Their Influence In order to understand the magnitude of the influence exerted on me by my parents, it is necessary to learn something of their character and background.
My father has a very interesting and complex character, combined with a vivid background. Born near Warsaw, in Poland, he was brought up in an environment of orthodox and often fanatical Jews who isolated themselves from the Poles around them, and steeped themselves and their children in Hebrew lore. As is common with lower middle class families, there were some people who were eager to better their lot and acquire culture and western civilization. One example was my grandmother, whose ambition was confined primarily to her children, whom she imbued with her own unfulfilled cravings.
When my father immigrated to the United States, at the age of seventeen, he had only this spirit to urged him forward. He had a great handicap in that he did not know any established language, since he had spoken only Jewish in Poland. The isolation of the Jews precluded any possibility of their learning the Polish tongue. In addition, my father has little talent for languages, Despite these obstacles, he broke away from old nationalistic ties, and through sheer will and force of character, he has obtained an extensive knowledge of the English language, has no trace of an accent, and displays a vocabulary that would shame many native Americans. Furthermore, he has by dint of ability and perseverance, risen from an impoverished immigrant to a citizen of merit and responsibility. From the very moment he set foot in America he has been imbued with an intense love of this country, and feels a lasting gratitude for the opportunities and privileges accorded to him. This intense reverence for America and all it stands for sometimes tends toward an extreme nationalistic spirit.
My mother's background, though different, is just as colorful. Her family abounded in the traditions and characteristics of the old Russian aristocracy. My grandmother's family, especially, had reached the highest pinnacle that the Jews in Czarist Russia could have achieved, One ancestor founded the railroads in Russia, one was a brilliant lawyer, another was a prominent international banker; in short, my mother's family was raised in luxury and wealth, My grandfather, even though lower in the Russian social ladder, was still respected and beloved as a, member of the upper middle class. Unfortunately, the kindness of his heart was his undoing, and he lost nearly everything due to his lack of business sense, and to the fact that he persistently gave away large sums of money, sometimes neglecting his family's interest. Finally, my mother's family was forced to immigrate to America.
For my mother it was a climactic change. She had been brought up without any necessity of facing the realities of life, and consequently she shut herself up in a dream world of books and literature, much as Keats had escaped to a dream world of beauty. Both my parents have always had a profound admiration and great powers of analysis of literature, and my intense interest in books very likely is an inherited trait; although my parents encouraged it in my childhood.
Unfortunately, the literature which influenced my mother to the greatest extent was Russian literature. To this day she has an extensive knowledge of Russian writings. This literature is morbid and depressing, and preaches a type of negative idealism, which encouraged my mother's dream world.
As I said, the new situation was drastic for my mother. She suddenly came face to face with reality. Here was a test for the adaptability which is very necessary for an immigrant. My mother met this test well, but she did not conquer it completely, as in my father's case. She managed to find occupation and to become accustomed to American life, but she has never fully understood or known American customs and beliefs. She is still bound to Russia and its mode of life by strong ties.
The reason for this lack of complete adaptability was largely emotional and physical. She loved teaching and its ideals dearly. Her great thirst for knowledge, however, over-taxed her limited stamina, and she was forced to give up her lofty aims, and even to lose literature, in a sense, since her resulting poor memory caused her to lose the enjoyment of books.
Consequently, she came to the United States in a despairing mood, her ambition crushed, and adopted an attitude of bitter resignation. Thus, the spark of ambition which is primary for the adaptability of an immigrant was missing.
It is truly remarkable, and immensely fortunate from my standpoint, that my parents possess intelligence and profundity of character to a great extent. One of the traits and interests which I have learned directly from my parents is an ability and intellectual pleasure in analyzing people, including myself. Very often my parents and I have long talks, where I present my analyses of different people, after which both my parents add their own comments. They have taken great care, however, although encouraging me to analyze character, not to present their opinions before mine, and so to unduly influence my judgment, Many times I frankly analyze both myself and my parents, and these efforts are always met with interest and understanding.
The moments of my life that afford me the greatest enjoyment and instruction are the long discussions which I frequently have with my parents, The mutual understanding is so strong as to be ever silently present, a mute god seen appreciatively by us all. The relationship between my parents and myself has been a constant source of wonder and admiration for me, They are a brother and sister to whom I can always come for guidance and sympathy, which are backed by tender devotion, a keen insight, and intelligence. A statement made by a waiter in the hotel where I was staying this summer all-1ays comes forcibly back to me. "Gee!" he said. "You and your father are like brothers aren't you?" I could only nod my head in silent approval.
The discussions include every valuable topic, philosophy, literature, politics, and character analyses and self-analysis, which are a source of inspiration to all of us. Our tastes in books vary widely, and offer interesting topics for debates. I prefer American and English writers almost exclusively, but I am resolved to concentrate more on Continental literature in order to widen my scope. My mother is mainly interested in Russian writers; whereas my father has universal taste, with stress laid on English and Continental authors. To show an example of my parents' liberalism and openmindedness, in recent years I have influenced them more than they have influenced me, opening new vistas of modern American and English writings, Specifically, my father and I have become extremely interested in John Buchan, and we have both decided to read as many of his works as possible.
My father's mind is precise, analytical, and scientific; though he is emotional, he shuns an excess of emotionalism, Because of this paradox, he has been unwilling to read poetry, despite my persistent efforts.
When the family discussion turn to politics, my father and I take the lead, since my mother is not sufficiently interested in the subject to discuss it eagerly, and, I must confess, sometimes heatedly. My father went through all political stages in his life. According to Clemanceau’s definition, my father has both a head and a heart. Said the Old Tiger, “A man who is not a radical at twenty has no heart; he who is one at thirty has no head." My father was a radical at twenty, but he was quick to profit by his folly, strange as it appears, I always attempt to gauge my beliefs and actions by his experience, I think it is one of the cardinal faults of youth that it never profits by the experience of others. At any rate, my father taught me the intricacies of politics without prejudice, at least as without prejudice as politics could ever hope to be. However, when I became mature enough to form my own conclusions, I was not too much surprised to find that I agreed with my father on basic political principles.
Sometimes, in my opinion, my father becomes a little imperialistic. However, my father would scorn that statement since he dislikes political labels. “Labels," he has often said to me, "mean nothing. They are only an inept means of classification, used by unintelligent people.” Radicals use them almost exclusively, classifying people as "liberals; conservatives, reactionaries, Communists; or Fascists." They conveniently leave no room for plain Americans, or people who believe in democracy. My father, contrary to the bigoted opinion of many unintelligent people with whom we come in contact, believes in progress and change. Change must be slow, however, or else our delicate system of free enterprise will be hurt. "There are no people who do not believe in change," said my father once," the only difference between them is the rate of change in which they believe," Given a due amount of reflection, that statement appears clearly and surprisingly true.
Our attitude toward socialism is a common one. A belief in free enterprise is a basic one with my father, and has remained with me ever since I have formed ·a political philosophy. There can be no progress under a socialistic system. Under it, all incentive is lost, and initiative is: destroyed, as a result of the loss or competition. The "oh, I can always work for the government" theory will be all-pervading, and the United States which depends on growth will become stagnant. In addition, socialism inevitably leads to a great concentration of power in the government, which leads irretrievably to totalitarianism, Probably the man in America who has come nearest to representing my political beliefs is Wendell Willkie.
My parents' disbelief in religious customs and traditions stems partly from reaction to the religious fanaticism of Old World Jews, and partly from an intelligent outlook, which if it does not deny the existence of a Deity, repudiates out-worn traditions. Antique customs are acceptable only to fanatics or people who never stop to think and examine their beliefs. Thus, I was brought up with only rare entrances to temples or synagogues and with no adherence to orthodox customs. My: mother's parents, who are steeped in European traditions, are orthodox, but my frequent first-hand observations of their adherence to religious traditions does not cause me to change my non-religious views. Consequently, in my religious beliefs, I am a mixture of an agnostic and a reform Jew. I do not think that the human race can determine whether or not there is a Deity; certainly, if there is one, our prayers will not be more successful if we are governed by out-moded customs.
My father is the type of person who sets a goal for himself and never ceases until he reaches that goal. When he has reached, it he always sets his energies on another objective. Thus, he can never be emotionally satisfied or content, as long as there are more fields to traverse, or more possible goals. People such as my father make progress possible. However, my father is unhappy because he has never been able to climb to the top in his field, or to make any lasting contribution to science or scientific progress. His greatest hope, and my mother's too, is to see me reach the heights in any field which I choose. The hope that their child achieves more than themselves, is, I think, typical of parents. My parents, however, have confirmed their desires by action. They have spared no expense or sacrifice to give me all the advantages that I could require. I only hope that I will be capable of fulfilling their fondest dreams, and prove that all their sacrifices were not in vain.
Early Childhood My parents are firm believers in a liberal home education, and have always encouraged my persistent search for knowledge. I was a very inquisitive and inquiring child; if I saw anything which puzzled me, I didn't rest until I had received a satisfactory answer. I pestered my parents unmercifully, but they were always on hand to answer my questions. While still in my infancy, I made my first acquaintance with literature. Well, it could hardly be called literature, but it opened undreamed-of horizons for me. I was looking at an oatmeal box and saw the letters H-O. My parents explained to me what they meant, and at the age of seventeen months I mastered the alphabet. From then on, I amazed my parents by composing endless lists of poems. I was so filled with the splendor of words that verses flew from lips. When horizons of books were opened to me, I formed an intense love of reading. I read avidly and continually, gradually acquiring a grasp of literature which was advanced for my years. For example, when I was five years old, I was using the dictionary and Encyclopedia Britannica intelligently. My incessant reading finally resulted in impairing my eyesight.
At the age of five, I formed my first acquaintance with the beauties of nature. My father brought home one of his business associates, Mr. Larry LeJeune. Mr. Le Jeune had a wide knowledge of nature, but he was especially versed in the characteristics of every variety of tree. We took a walk through a park, and I listened in open-eyed awe and wonder to his enchanting description of the trees around us. These commonplace objects, which had appeared to be drab and uninteresting, took on a new aspect of greatness. It is true that I never developed as great an interest in nature, as in literature, but I always think of that walk, whenever I come upon a tree.
A series of accidents has bred in me a strong fear of high places. When yet an infant, I fell out of a second-story window, miraculously unhurt. A few years later I fell off a high chair, hitting my head against the wheel. In addition, I fell from a swing and a doctor's table. All these events has resulted in a fear of heights, which is still great today. A “keep my feet on the ground” policy is literal in my case.
In my childhood, I was not much of a social success. I was always cowed and bullied by my playmates, until I finally took recourse in books. Each succeeding year this situation became more acute. At first it was a result of my natural shyness and timidity. At the delicate age of five, we moved to Staten Island, abounding in race prejudice, which added to my troubles. I was indifferent to kindergarten since I learned nothing new there, except the noble art of rope jumping, which seemed silly and ridiculous, although the other children took great delight in it. My social maladjustment persisted through public school.
School A deep honesty and conscientiousness has always marked my school work. This trait is a manifestation of the inherent honesty of my character. My mother had a strong influence in its development. From my earliest days, my mother impressed me with the value of honesty. I remember how I was greatly shocked when I found that my mother had told a lie. Although I now realize that lies are sometimes necessary to spare someone's feelings, I still cannot reconcile myself to this fact. Honesty, in its broader sense, involves conscientiousness to a large extent, I cannot recall a time, except in the case of absence, that I have handed in an assignment late, or failed to do extra work if I thought it necessary. When I am absent, I try to make up my work as quickly as possible. My parents were like that in school, also. They always strived for accomplishment in the best way that they knew.
The unhappiest period in my life was the time when I labored under the evils of a public school system. Since I was superior to the rest of the class, I was "skipped" with disconcerting rapidity. Skipping is basically unsound because the pupil misses the valuable intellectual and social foundations acquired in the lower grades. In addition, the result of skipping is to place the pupil in a class of children much older than himself, with the consequences that the student can never adjust himself properly with the other members of the class. In my case the result was disastrous. Instead of overcoming my pre-school shyness, I was more bullied and beaten; this time by boys much older than I was. Consequently, the unhappiness which I felt in early childhood was nothing compared with the misery which I bore in public school.
Another great evil of the public school system is that it wreaks havoc on a child of superior ability. The entire method of teaching, the poor quality of the courses, the prevalent regimentation, and narrow-mindedness, all contrived to hamper me greatly. I felt myself imprisoned in a steel cage. My mind, which wanted to soar onwards, was chained to the earth, by an endless repetition of things that I knew, as well as by trifling but amazing public school restrictions. I have never been able to figure out why I had to sit with my hands folded, or why, if there was one malefactor in the group, the whole class was punished. The individual was completely forgotten in this system. No attention was given to individual needs and problems. He was swallowed up in a mass of fifty other souls. How well I remember how I chafed at the multiplication cards which the teacher held up before the class. Two times two equals four, three times two equals six; to me it all seemed a futile waste of time.
I was in the fourth grade when all the aforementioned evils developed at a great speed. Then, I was striving to break my bonds; but in a few years I might resign myself to the system, and become mentally lazy, actually no better than the others around me. The need for immediate action was apparent.
I remember with amusement my parents' first attempt to solve my social problem. They engaged a boxing instructor for me. My parents, with characteristic thoroughness, obtained the best one they could find. I believe he was a trainer of some lightweight champion. However, it was soon apparent to all concerned that my career was not along pugilistic lines. I'm afraid that my attempt to become a boxer was a dismal failure. However, my parents soon perceived that my difficulty was more emotional than physical. They made every possible attempt to adjust my problems through the help of the school authorities. By reading their replies, it is only now that can fully understand the incompetency of the Public school faculty. In their attitude concerning me they displayed a total ignorance of any fundamental psychology. The reason I was unhappy, they said, was that I persisted in thinking and playing differently from the rest of the group. If I would only conform to the rest of the class, my adjustment would naturally follow. They concluded that the fault was all mine, and that I exaggerated my troubles, anyway. The individual teachers, in addition, were highly eccentric and used their pupils as outlets for their emotions and idiosyncrasies. One teacher, who suffered from high blood pressure, delighted in pinching and cuffing the students on general principles. Another engaged in biting sarcastic ridicule of individual students before the class. In recent years, the public school authorities have endeavored to segregate the bright children from the average. However, a pre-requisite for the success of such a plan is a large amount of ability and sympathy on the part of the teachers.
After the failure of my parents' efforts, they determined to seek outside information. Even today, I marvel at the exhaustive research conducted by my parents, in order to decide upon the best course to follow. They have kept a file of correspondence and other data relating to that period, and it is a tribute to their tireless perseverance and thoroughness. Every conceivable source was tapped. Every means of advice was used. They sought the guidance of psychologists, friends, journalists acquainted with the subject, and student and parent associations. I distinctly remember visiting the office of Dr. John Levy, eminent psychologist in the field of child guidance, I clearly recall the actual contour of the room where I sat alone, and the unintelligible murmur of adult voices emanating from the next room. The most momentous decision that has yet affected my life was being reached. Dr. Levy recommended unequivocally that I be transferred to a private school. He advised that I go to as small a school as possible in order to satisfy my pressing needs for individual attention and emotional adjustment.
Acting on Dr. Levy's advice, my parents decided, in the second term of the fourth grade, to place me in Riverside School. My entrance into this school opened vast new horizons before my eyes. The importance of my transfer from public to private school cannot be overemphasized. My mind at last was free from all worthless intellectual and physical restrictions. I was free to think! I finally received a great amount of individual attention, since there were only seven students in the class. The teachers always endeavored to guide and advise me in any problems that I faced. I could express my ideas in class freely, without the psychological intimidation, which oppressed me in public school. The courses, moreover, were superior, and the teachers seemed omniscient before my inexperienced eyes. Above all, in the two years that I stayed in Riverside, I became completely adjusted to the group. In them I found equals in intelligence, and consequently, similar interests. Thus, it was easy for me to cooperate and become
an indissoluble unit of the class, without, however, losing my individual identity. I discovered, with gratified wonder, that the other children liked me. I had never before sensed a friendly feeling toward me by other children. The fact that many of them were my own age also made social adjustment easy.
Toward the end of the sixth grade my fervent enthusiasm for Riverside began to wane. It had served well as a reaction to public school, but its scope was becoming too narrow. I saw that the courses and the teachers were not as excellent as I had first thought. Furthermore, I suffered from a lack of competition. A certain amount of competition is necessary to any progress, material or spiritual. With only six others in the class, competition, or any exchange of intelligent ideas, was limited.
A specific reason for leaving Riverside was that the 7th and 8th grades were combined in one class. The full value of the junior high would be lost in such an unsound combination. For these reasons, my parents and I began looking for another private school, with a higher scholastic standing and a greater number of students. My parents thoroughly investigated many private schools. I remember my mother's account of her first visit to Birch-Wathen. She was deeply impressed and enchanted by the teachers and courses in that school. Her judgment is valuable because she has a teacher's ability to decide on the merits of teaching methods. The class that impressed her most was an English class conducted by a Miss Pendleton, which wrote compositions on the subject of fences. My mother greatly admired the challenge to the imagination in the problem, "what do you see in a fence?" It was a source of chagrin to my mother in the next two years that I did not have Miss Pendleton as an English teacher.
I entered Birch-Wathen in the 7th grade. I remember my first day there vividly. At the foot of the stairs in the hall, I was introduced to Russell Bliss, also a new student. Instinctively, we clung to each, with the natural impulse of two children facing a new world. We walked up the stairs solemnly, led by a sympathizing teacher. The "ice was broken" by the friendly, cheerful greeting of the 8th grade teacher, Mr. Hubbard. From that day on, I have esteemed and appreciated Birch-Wathen highly.
I was completely happy in this school. I made friends quickly and found myself an integral part of the class. The class was large enough to be a strong social unit, and its superior intelligence supplied friendly competition and opportunity for political and economic debates. Probably the greatest debate ever witnessed in the eighth grade was the famous argument over the undistributed profits tax. The discussion lasted two history periods with Mr. Hubbard as referee. Both sides compiled facts and figures, plus weighty arguments to support their claim. Dave Zabel, Alan Marks, and myself denounced the tax, while Jim Denzer, Jim Heilbrun, and David Cohen supported it. Our side won convincingly, and received an overwhelming majority vote of the class. Later, when the heat of battle had died away, Jim Denzer admitted that he didn't believe in the tax, anyway. However, I prefer to take that as an excuse for our victory.
I found Birch-Wathen in the quality of its courses and teachers far superior to Riverside. I was grateful to the method which allowed me to delve into research problems, exploring many streams of thought, all blending into the sea of the actual subject. I found that many assignments covered a large period, so that the student could compile and organize his material. I especially admired Mr. Hubbard. In my opinion, Mr. Hubbard is an example of a perfect junior high teacher. Every student graduating from the eighth grade glows with inspiration and enthusiasm due to his friendly, challenging teaching method. His favorite question was" Why?" He forced students to find out knowledge for themselves. This was manna to my inquiring mind. Another endearing part of his teaching was his irrepressible humor. With a genial twinkle of his eye, he would point to one student and suddenly shout out the name of another poor soul dozing in some other part of the room. He kept us constantly in an uproar, and we all looked forward to his classes as a source of entertainment as well as instruction. He instituted the delightful and unorthodox practice of urging a chocolate bar for everyone during lunch hour. Several times, during his history periods, we brought radios into school to listen to news reports. In addition, Mr. Hubbard has a remarkable collection of humorous incidents, throughout the country’s schools, and read some selections at the end of each year.
Suffice to say that we thought of Mr. Hubbard as the optimum in teaching. I have found that feeling true of every junior high student. However, his unique method is not as good for high school, since his failure to explain his subject is a burden to those who are not exceptional. His method, which was excellent for junior high, becomes extreme and impractical in high school.
An advantage of Birch-Wathen is that the transition from elementary school to high school is small. Naturally, more work is required in high school, and the courses are entirely changed. However, the basic system of teaching, namely, the encouragement of research and intellectual freedom and development, is still there. In addition, my graduation did not cause a departure from my happy social adjustment, but an increase in scope and interests with the same friends. I believe that the character of this class, with which I have worked for the past six years, is worthy of a brief analysis:
Our class has always been the victim of self-scorn. The tragedy of the situation is that we fail to realize our own potential value. It cannot be denied that the class, as a whole, is brilliant. The fact that we have not always shouldered enough responsibility is due in part to our innate sense of humor, which makes us laugh at everything, including ourselves. We scoff at ourselves, call ourselves stupid, and let it go at that. We close our eyes to our own value, because it is easy to do so. But the “stuff from which kings are made" is undoubtedly there. I have every reason to hope that our latent gifts will soon blossom, and become acknowledged by all.
I have not developed an outstanding preference for one subject in high school. In general, however, history and English have given me the greatest enjoyment. I remember the amazement and consternation which I caused the class when I stated my confirmed beliefs in the type of world that should emerge after the war. I was the only one in the class who believed that Germany should be kept in a perpetual state of subjection, and I was alone in my pronouncement that the Versailles treaty failed because it was too weak. I delighted in the ensuing debate with the other members of the class. I also liked to place myself in difficult historical situations, and see how I would have met those problems. In American history, for example, I decided I would have tried to settle slavery by popular sovereignty.
My interest in English is explained by my interest in literature and its analysis. In addition, I enjoy creative writing, and I believe I have improved, in recent years, in the ability to express my ideas.
Although I have been bred in a scientific tradition, and I am favorable to theoretical science, I have a dislike for laboratory work, which excludes me from that line of endeavor.
I am grateful to Birch-Wathen for the knowledge it has given me, and for the complete social adjustment which it has made possible. I didn't know true emotional or intellectual happiness before I came to Birch-Wathen. I echo the stirring words of its Alma Mater “You have shown us the portals to rich knowledge and truth. And have given us mortals, friendships so dear to youth!”
Summers Until the age of eleven, I spent my summers with my parents in mountain or seashore hotels, My recollection of these early summers is hazy, since we usually spent three weeks at best away from the city. In general, however, my social activities were broader and happier than they were in school. The reason probably was that any difference in intelligence was not conspicuous in summer recreation. Thus, the attitude between other children and myself was usually good. When I reached the age of eleven, my parents and I decided that, I should go to camp. My enthusiasm for this project was great, and my parents felt that I would learn to live and get along with, other people. My father, however, was rather skeptical, "I'll try anything once," he remarked drily.
The director of the camp asserted that he was an idealist, motivated solely by a humanitarian interest in children. He was a forceful-looking man, with a shining goatee and an imposing stature, and he managed to convince us of the, superior qualities of his camp. To be sure, this camp was not an ordinary one. It was one of the best in New York, and was recommended highly by Parents' Magazine. My parents, who made sure of its high rating, never rush blindly into any venture. Indeed, the food was excellent, and could not be excelled anywhere. However, after the first novelty wore off, I saw that the camp's qualities ended there. The heralded activities were almost, nil; the campers could only sit and mope all day. Mr. Robbins, the idealistic director, turned out to be an ineffectual materialist, with a blustering temper. I found that most campers lost weight solely because the bunks had the effect of a Turkish bath. However, I do owe my passion for chess to the camp. It was the only possible activity during many long hours of stagnation. The fact that no camper was sunburned offered conclusive proof that he hardly ever saw the light of day.
My father, in addition to his other qualities, is a brilliant wit. The main centers of camp life were the rec (recreation hall), the mess (dining room), and the bunks (sleeping quarters). Commenting on the camp as a whole, he said “It's a wreck, it’s a mess, it’s the bunk!" I am convinced that camps are mainly excuses for parents who wish to rid themselves of their children during the summer. If they had their children's interests at heart, they would not blind themselves to the glaring disadvantages of camp. “A racket,” my father termed it, and I heartily agree with him. If the best camp in New York was in such a deplorable condition, what are the conditions in camps of lower quality? I shudder to think of them. I believe that camps are only excusable when they assist poor families. In all other cases I condemn them whole-heartedly.
This disappointing summer in camp was my last, and ever since, I have had an uninterrupted succession of immensely happy summers. I gained invaluable friends during the summer, just as I developed what I hope to be lasting friendships in Birch-Wathen. My transformation from a lonely, maladjusted child to a happy, sociable one was complete. Some of my school friends decry my summer activities, which consist of an enjoyable vacation at a seaside hotel. They claim that I do nothing useful there. However, I consider it useful when I can further my own happiness, and at the same time increase the pleasure of others by social companionship. It is always useful to establish a firm relationship with society.
Relatives I have already dealt with my home, school, and summer environment. My relatives come under a special category. Many of them are definitely Communist sympathizers, or pinkish radicals. Consequently, my father frequently becomes involved in heated political debates. When they cannot help but see the logic of his arguments, they just call him a reactionary, a Republican (an abhorred word, for some reason) and hide behind the shield of those generously distribute labels. I usually take part in these discussions with vehemence and a certain amount of relish. Once, in the days of the Spanish Civil War, my parents and I visited the house of an uncle, a Communist party member. Naturally, his guests were all Communists, and were vigorous in their denunciation of Franco. I startled the assembly by asserting that the republican government of Spain was elected by a minority of the people, and quoted a letter in the Times to that effect. I was immediately bombarded on all sides, but I managed to hold my own against overwhelming odds. A favorite trick of the people, when someone quotes a respectable and reliable paper such as the Times, is to cry vehemently "Do you believe everything you read in the papers?" Then they proceed to counter with grandiose statements from tabloids such as In Fact, whose editor has been listed by Max Eastman as a front for Communist organizations.
My father's family in general are shrewd individualists, and as such, have little thought of family loyalty. They are endowed with common sense but are unintelligent. My mother's family, in contrast, has a strong sense of family devotion and loyalty. However, they do not have the common sense of my father's relations, with a few exceptions, there is little intelligence among them. Indeed my mother and father represent the pinnacle of intelligence in their respective families. I know my mother's family very well, and I usually look on with quiet amusement at their futile worries and panics. However, this feeling is mingled with a reverent admiration for their gentle nobility of character, which reminds me strongly of the weakness and courage of Louis XVI.
In my dealings with my relatives, I have learned not to get angry or indulge in heated personal arguments. From them I have learned the important value of tolerance. Tolerance also involves open-mindedness and a willingness to listen to other people's ideas whatever they may be.
Interests I have many varied interests and hobbies. Although I can trace the development of most of them, others evolved without my conscious knowledge, and with no definite or marked beginning. My interest in music has passed through several definite stages. At: first, at the age of ten, I enthusiastically adopted piano lessons. My reason was not any great love for music, since I was barely interested in it. I started piano lessons merely because of my intense curiosity and my desire to enter new fields of endeavor. Once I had learned the rudiments of music, and some of its characteristics, I lost interest in my musical career. My finger manipulation was poor, and I saw a new horizon of music listening open before me. Whatever I had learned in piano practice helped me to understand and evaluate music. I have been a fair judge of rhythm ever since it was drilled into me by my piano teacher. Therefore, since it was clear that I was not cut out to be a musician, I gave up piano lessons after two years, and devoted my musical activities to becoming an enthusiastic spectator.
At first I did not have much discrimination, and I accepted all types of music without attempting to formulate any special favorites. However, I was soon able to judge works of music and listen with a more critical outlook. I soon came to the conclusion that I liked swing music as well as, if not better than, classical music. The reason for my extensive interest in swing music is purely that. I obtain pleasure from hearing it. If I were able to derive inspiration from any form of music, I would be interested primarily in classical music. However, it is impossible for music to hold any inspiration for me. As a source of enjoyment, therefore, I think that swing is at least equal to classical music.
Likewise, painting has never interested me to any great extent because I can receive no inspiration from looking at a great work of art. If I tried, I could probably become expert in criticizing the technical qualities of a painting, but I could never become uplifted by it. In fact, of all the creative arts, literature is the only one that can inspire or elevate me forcibly.
In contrast to the development of my interest in music, I cannot account definitely for my devotion to sports. It did not result from any single event or start in any given period. I only know that I have become a voracious follower of sports, in all its phases and forms. Consequently, my knowledge of both major and minor sports is widespread. The public should realize the full importance of athletics in American life. Not only does it provide an interesting diversion for care-worn people, but it also serves to build up a nation's stamina.
However, my interest for violent athletics stops with the newspaper and the sidelines; when I seek personal athletic recreation, I prefer quieter games such as table tennis and chess. I have a definite reason for my attraction to chess. Chess, aside from its entertaining features, teaches farsightedness, circumspection, ability to think and act fast, and analysis of problems. I think that the main fascination that chess holds is that the player is a general directing his forces. There are all the difficulties, strategies, and tactics of modern warfare. Chess embodies all the challenging intellectual problems of war, without its horrible bloodshed and slaughter.
My character consists of many, strange, contrasts. Although, I am devoted to reading and quiet pursuits, I have a keen enjoyment of dramatics. I have always excelled in acting, and I revel in a dramatic portrayal of moods and, ideas. In addition, when I find, any article which I particularly like, I enjoy reading it for my parents, with all the drama that I can put into my voice, although I realize that my parents probably would much prefer to read it themselves. If I were in their position, I certainly could concentrate better by reading the article myself. However, my relish is so great that I continue in my unwelcome course. I also like to sing for my parents, who bear this great torture with good grace.
I have always had a keen interest in political and economic problems, and in current events, as a source of knowledge and of discussion. I think that it is the duty of every American citizen to acquaint himself with these problems, in order to contribute intelligently to any national effort, in time of war or peace.
A Look Into the Future As I turn my eyes from the past and present to the future, I am unappalled by the fact that my course is undecided at present. I have many fields of interest, and it is difficult to choose one for specialization. However, I know that I will do my best in any field I choose. Society can only benefit if each individual makes his greatest effort. This fact is apparent in wartime, but it applies also to peace conditions.
I do not believe that the advent of war has changed my outlook. War has only brought it into sharper focus and crystallization. I am even more determined mow to do my utmost to serve this nation.
I face college with keen interest and anticipation. I welcome the greater freedom and the necessity for self-discipline which are the characteristics of college. Some people believe that the only way to be free of parental restriction is to go to an out-of-town school. In my case, however, any misunderstandings can always be solved by, intelligent and reasonable discussion. Therefore, I am not hampered by unnecessary parental restriction, and I feel free to choose a college solely on its own merits. College becomes increasingly important in wartime, for the need for a comprehensive education of youth becomes greater. A college training enables anyone to cope, to a greater degree, with any national problems he or she is called on to face.
With all men and women striving for the common welfare, I see, in the future an America, perhaps a world, in war or in peace, sounding the call of progress, of civilization, of humanity, and taking care that "government of the people, by the people, and for the people, shall not perish from the earth!"
[This essay, written in October 1941, in one of Mises's lesser-known works and explores the use of a union of Eastern European states in addressing geopolitical threats in the region. Readers may be struck by how far Mises goes in supporting a strong central government in this case. We post it here for purposes of prompting discussion.]In his biography of Mises, Last Knight of Liberalism, Guido Hulsmann describes the essay:"Planning for after the war still occupied a prominent place in Mises’s work. On May 20, 1941, he reported ... that he had made good progress on his research project: a study of the social and economic problems of Central and Eastern Europe, which Mises hoped could serve as a basis for postwar reconstruction in this region. He said he would start writing it soon, and he must have finished it by mid-July, when he sent out copies to friends and colleagues. In this 43-page memorandum, Mises restated the political and economic case for the establishment of an East-European Union with a strong central government: growth through free trade and laissez-faire, response to the problems of linguistic minorities, and protection against the three mighty neighbors." -Ed.
I. Peace Within a World of Nationalism In a world of free trade and democracy no special institutions and provisions are needed in order to ensure undisturbed peaceful cooperation among all nations. In such a world, where there are neither trade barriers nor migration barriers; where the activities of governments are limited to the protection of the lives, the health and the property of individuals against violent or fraudulent aggression; and where neither the laws nor the administration nor the tribunals discriminate between different groups of citizens or between citizens and foreigners; it is without any importance for the individual, where the frontiers of his country are drawn. Every individual has the opportunity to live and to work where it suits him best. Nobody can derive any advantage from a change in the political distribution of the earth's surface. No citizen can be enriched by a victorious war, which makes his country larger at the expense of other countries. War does not pay. The nations become peaceful because they consider warfare as a useless waste both of blood and of wealth.
Our world is very different from this liberal free-trade utopia. We are living in an age when the governments are eager to further the short-run interests of some groups of their citizens at the expense of other groups of citizens and of foreigners. Ours is an age of economic nationalism. Economic nationalism is a policy which intends to improve the lot of greater or smaller groups of citizens by putting impediments in the way of foreigners. Foreign products are withheld from the domestic markets; foreign labor is banned from the competition on the domestic labor market. Whether these measures can really attain the ends which the governments want to attain or whether they do not in the long run hurt, in some way or other, the citizens whom they want to benefit is immaterial. The decisive point is that the great majority of our contemporaries firmly believe in the efficacy of these measures of economic nationalism. There is therefore no hope that the world will in the near future try to embark upon a policy of free trade.
Such is the stark reality we have to face. We should not deceive ourselves by false illusions. All the arguments brought forward in order to demonstrate the disadvantages of warfare and the benefits of undisturbed peace are vain in an age of economic nationalism. Under present conditions the pacifists are mistaken when they declare that a victorious war does not pay. It is true that the individual citizens of Germany did not gain anything in 1871 by the conquest of Alsace-Lorraine. This was in the days of a more or less free-trade Europe. But today it is different. For instance, a conquest of Australia by the Japanese would, under present circumstances, improve the lot of every individual Japanese wage earner. It would give a great number of Japanese the opportunity to work in Australia where the natural opportunities for production are much more favorable than in the overpopulated Japanese isles. It would therefore raise the level of wages and the standard of living for all Japanese wage earners, both for those who could emigrate to Australia and for those who remain in their old country.
Whereas in a world of universal absolute free trade every nation is eager to maintain peace, in a world of economic nationalism those nations which believe themselves strong enough are ready to profit from every opportunity to attack weaker nations. In such a world there is no solidarity of interests but a permanent latent conflict of interests which becomes manifest as soon as a good chance for prey appears. It is useless to fight this militarist bellicosity by mere moral condemnation. Both the Covenant of the League of Nations and the Briand-Kellog Pact failed, because the warlike nations considered them as nothing else than, an insincere protection of the unfair privileges of the weak. The principle of collective security could not work in a milieu where every nation waged a permanent economic war against all other nations.
We may hope that this unsatisfactory state of things will one day be replaced by a mentality of free-trade and good-will. But we have to realize that it would be foolish to believe that trade-barriers and migration-barriers will be abolished directly after this war. We therefore have to try to discover means which could make peace durable even in this age of radical nationalism.
Nations inspired by the spirit of nationalism recognize only one argument in favor of peace, namely, that there is but little hope of success for their armed forces in waging war. What is wanted, therefore, is some way to build up a political structure which would prevent the nations calling themselves "dynamic" from use of their powers for aggression.
It is very probable that the British Empire, the American Republics and some of the democracies of Western Europe will after the war arrange for permanent political and military cooperation in order to assure themselves security against German and Japanese aggressions. Whether constructed according to the pattern laid out by Mr. Clarence Streit or in another way, such a union could peacefully settle conflicts in all countries from the left bank of the Rhine westward to the western boundaries of the British sphere of influence in Asia. But just that part of the earth whence both world wars originated would remain outside. A special scheme for a durable peace in Eastern Europe is a necessary condition for the satisfactory working of all plans to make the world safe for peace.
II. The German Problem The following proposals for a new political constitution of Eastern Europe are based on two assumptions.
The first assumption is a total defeat of Nazism. We do not have to worry about what will happen if the Nazis could end their total war by a total victory. They will exterminate some of the vanquished nations, expel others from Europe and enslave the remaining ones. In the "New Order" the members of the Nazi party will rule over slaves.
The second assumption is that the victorious British Empire and its allies will not use their total success to exterminate the German nation. We assume that the victors will neither kill all Germans nor expel them to the Arctic Circle; of course, they do not even consider such a barbaric plan. But then the German problem remains unsolved.
This German problem consists in the firm conviction of the German nationalists that the German nation is the strongest military power on earth. The German philosophers, historians and would-be economists who have expounded these doctrines for more than eighty years base their statements on the following arguments:
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The Germans are the most numerous among the white nations. It is a mistake to believe that the Russians or the Americans are more numerous than the Germans are. From the total figures of the inhabitants of European Russia the non-Russians (Ukrainians, White Russians, Mongolians and others) have to be deducted; the remaining numbers of the Great-Russians are inferior to those of the Germans. The Americans are not a homogeneous nation, but a minority of Nordics amidst Negroes, Jews, Slavs, Italians and other "inferior" races.A 1941 typed and scanned version of the essay omits the quotation marks around "inferior." The version appearing in Richard Ebeling's collection of essays Selected Writings of Ludwig von Mises Vol. 3, includes the quotation marks. See Matthew McCaffrey on Mises's views on race: "Mises on the Battle between Liberalism and Racism" -Ed.
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The Germans own that country which dominates strategically the whole of Europe and some parts of the two adjacent continents. They enjoy in warring the advantages of standing on interior lines.
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The Germans are a warlike nation; they are heroes, whereas the other white nations are peddlars (Händler), who stick to pacifism and cowardice.
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The genuine Germans have always been socialists in their soul and have, under the guidance first of the Hohenzollerns, later of Adolf Hitler freed themselves from the domination of Western and Jewish ideas; their mind has only superficially or temporarily been infected by Christianism, Humanitarianism, Capitalism, Utilitarianism, Liberalism, Democracy and Bolshevism.
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Strong, as they are, the Germans have therefore the sacred duty to conquer and to rule the world. As supermen they will tame the underdogs, to whom the appellation "human" should be denied. Such is the will of the German God, who gave power to his chosen people, the Germans.
The main accent lies on the first of these five points. "We are a nation of 100 millions; therefore we are chosen to own the earth." It is necessary to realize that German nationalism differs from the nationalism of other nations only in the fact that the Germans believe themselves to be the strongest of all nations. They are not prepared to endure the disadvantages which the economic nationalism of other nations imposes on them, because they feel themselves strong enough to do away with these discriminatory measures. They say: "Smaller nations may acquiesce in the actual distribution of the resources of the earth; we, the big German nation, cannot tolerate this state of things." The Nazis are full of contempt for the Norwegians and the Danes, because they themselves are many and these "Nordic" nations are small.
As long as the world is on the line of economic nationalism and as long as there are 80 million Germans living in Europe and 20 million in non-European countries the spirit of aggression will dominate the political thought of Germany. Nazism is not a new doctrine. It has a long history. Fichte, List, Lassalle, Lasson, Lagarde, Langbehn, Richard Wagner, Treitschke, Schmoller and Houston Stuart Chamberlain, were its sponsors. The doctrine was completely laid out in the course of the 19th century. Spengler, Spann, Sombart, Hitler and Rosenberg did not add any new ideas; they only repeated and emphasized the old slogans.
Nothing can prevent a new German aggression but an organization of Europe which makes it hopeless for Germany to embark on a new war of conquest. The political and military union of the Western democracies will stop Germany at its western and northern frontiers. Special provisions are needed to stop it at its eastern and southern frontiers.
The German danger has to be seen not in the spirit of aggression which inspires most of the Germans of our time, but in the military strength of Germany, which makes such an aggression a dreadful menace. The other nations which share today a similar mentality of aggression are less dangerous. They all would be innocuous but for the constellation created by nazified Germany's "dynamism."
To carry out a scheme for a durable peace is not the outcome of hostility or hatred against Germany, Italy or Japan, the three aggressor nations of our times. The blessings of peace will benefit these nations in the same way they will favor the rest of mankind. The purpose of all plans for a lasting peace which involve the existence of these three nations is exactly this: to give to the vanquished nations after the war the opportunity to become again incorporated into the great human society of free nations. Germans and Italians were from time immemorial foremost among the shapers of our civilization. We may hope that they will one day remember that this civilization, which they despise today, was to a great extent an achievement of sons of their own peoples.
It is the aim of the following plan to make it unnecessary for the victorious Allies to consider any proposal which intends to treat the vanquished peoples in the same way in which the Nazis wish to treat the conquered in case of their total victory.
III. The Clash of Linguistic Groups The term "Eastern Europe" as used in this paper includes the whole territory between the eastern boundaries of Germany, Switzerland and Italy and the western borders of Russia. It reaches from the shores of the Baltic to those of the Black, of the Adriatic and of the Aegean Sea. We shall revert later to the problem of the precise delimitation of this territory.
This vast territory was in the Europe of the Congress of Vienna divided among Russia, the Hapsburg Empire, Prussia and Turkey. With the dissolution of the Ottoman power in Europe, with the disintegration of the Austro-Hungarian Empire and with the curtailment of the Russian power the peoples of this part of the world obtained autonomy and self-government. But this independence resulted in anarchy and finally in a new partition of the territory involved among the three mighty neighbors, Germany, Russia and Italy. The order established by the treaties of 1856, 1878 and 1919 collapsed catastrophically.
Eastern Europe is the central-seat of trouble and unrest. Both world wars arose in this territory. The units or groups which are bitterly fighting one another in Eastern Europe apply to themselves in their own languages terms which correspond to the English words nation, nationality or people. They consider a community of language as the characteristic feature of a nation. The issue in these fights is always the right to use the national idiom. The terms Germanization, Polanization, Magyarization, etc. always mean: to induce people, by violence or other methods of pressure, to replace their mother tongue by German, Polish, Hungarian, etc.
These are not struggles among races. No distinct bodily features which the anthropologist could establish with the aid of the scientific methods of his branch of knowledge separate the men belonging to different groups. If you present one of these men to an anthropologist he will not be able to decide whether the man is a German, a Czech, a Pole or a Hungarian.
Neither have the men belonging to one of these groups a common descent. The right banks of the Elbe river were 800 years ago inhabited by Slavs and Baltic tribes only. They became German in the course of the processes which the German historians call the colonization of the East. There was an immigration of Germans from the West and from the Southwest into this area; but the main stock of its present population are the descendants of the indigenous Slavs and Baltic peoples who under the influence of the church and the school turned to the use of the German language. Prussian chauvinists, of course, assert that the native Slavs were radically exterminated and that the whole present population are the descendants of German settlers. There is not the slightest proof for this doctrine, which some Prussian historians developed in order to justify the Prussian claim for hegemony in Germany. But even they never dared to deny that the purely Slav ancestry of the princely families and of most of the aristocratic families is beyond doubt. Queen Louisa of Prussia, whom all German nationalists consider as the paragon of German womanhood, was a scion of the ruling house of Mecklenburg, whose originally Slav character has never been contested. Many noble families of the German Northeast can be traced back to Slav ancestors. The genealogical trees of the families of the middle classes and of the peasantry cannot be established as far back as those of the nobility; this alone explains why the proof of Slav origin cannot be provided for them.
Shifting from one of these linguistic groups to another occurred not only in earlier days. It happened in the 19th century and today is so frequent that nobody ever remarks upon it. Many outstanding personalities in the Nazi movement in Germany and Austria and in the Czechoslovakian, Polish and Hungarian districts claimed by Nazism were the sons of parents whose language was not the German one." Similar conditions prevail in the nationalist parties of all East European linguistic groups. In many cases the change of loyalties was accompanied by a change of the family name. But many radical nationalists have retained their foreign sounding family names which clearly show their alien origin.
Whenever the question is raised whether a group has to be considered as a distinct nation and should therefore as such be entitled to claim political autonomy; the issue is whether the idiom involved has to be considered as a distinct language or as a dialect only. The Russians maintain that the Ukrainian idiom is a dialect only, like the Plattdeutsch in Northern Germany or the Provencal of the felibrists in Southern France. The Czechs propose the same argument against the political aspirations of the Slovaks and the Italians against the Rhaeto-Romanic idiom. (Only a few years ago the Swiss government gave to the Romansh the legal status of a national language.)
There is only one case in Eastern Europe where the characteristic feature which separates two nations is not language but religion and the alphabetical types used in writing and printing. The Serbs and the Croats speak the same language, but whereas the Serbs use the Cyrillic alphabet, the Croats use the Roman. The Serbs adhere to the orthodox creed of the Oriental Church, the Croats are Catholics.
Religious issues, moreover, play only a subordinate role in these struggles of linguistic groups. It is, on the contrary, the linguistic issue which dominates religion. As soon as a linguistic group of the Oriental Church succeeded in obtaining some degree of political or cultural autonomy it freed itself from the religious rule of the patriarch of Constantinople and founded an autonomous church. No dogmatical differences motivated these changes; they were purely political.
At the turn of the 16th and 17th centuries Ukrainian bishops acknowledged the Pope's supremacy. This Uniat Oriental Church was the main instrument in the poor Ukrainian serfs' fight against their oppressors. When Russia conquered the greater part of the Ukraine it violently persecuted this church in order to break the Ukrainian resistance against Russification. Finally the Czars succeeded in exterminating the Uniat Church on Russian soil. This church survived only in those parts of the country which were under the rule of the Hapsburgs.
All those parts of Eastern Europe, which in the middle ages acknowledged the supremacy of the Pope, were some hundreds of years ago terribily shaken by religious struggles. But times have changed. Today Catholics and Protestants of different denominations jointly cooperate within each linguistic group. Loyalty to the nation means for them more than the community or religion.
Only a few words have to be devoted to the Panslavist idea. The Russian governments — both that of the Czars and that of the Soviets — favored, at different times, a doctrine which assigned to the Russians, as the most numerous Slav nation, the task of freeing all Slav brethren from the yoke of the Germans, the Turks, the Italians and the Hungarians. As far as Panslavism means more — namely, the establishment of a unitary state including all Slav peoples under Russian hegemony — it was nothing else than a poor disguise for Russian imperialism. The Poles and the Ukrainians, who both knew what Russian rule meant, always opposed it bitterly. Neither are the other Slav peoples ready to surrender to Russia.
Nowadays some authors recommend a Union of all Slavs as the best solution of the problems of Eastern Europe. Such a union would mean an alliance of the Slavs for the sake of the oppression of the Germans, Lithuanians, Estonians, Letts, Hungarians, Rumanians, Italians and Greeks living in Eastern Europe. It would not abolish, but perpetuate the struggles.
IV. Present-day Conditions in Eastern Europe If you ask representatives of the nations of the European East what they consider would be a fair determination of the boundaries of their own countries and if you mark these boundaries on a map, then you will discover that the greater part of this territory is claimed by two nations and that a not negligible part is claimed by three nations. Every nation knows how to justify its claims with linguistic, racial, historical, geographical, economic, social or religious arguments. No nation is prepared to renounce the least of its claims for reasons of expediency. Every nation is ready to resort to arms in order to satisfy its pretensions. Every nation, therefore, considers its immediate neighbors as mortal enemies and relies on its neighbors' neighbors for armed support of its own territorial claims against the common foe. Every nation tries to profit from every opportunity to satisfy its claims at the expense of its neighbors. The history of the last twenty years proves the correctness of this description.
These claims are not claims of the governments or of "ruling" and "exploiting" classes, as current opinion would have us believe; these are claims of the whole nations and of every member of the respective linguistic groups. The governments are sometimes prepared to renounce some of these claims temporarily, in order to adjust the conduct of foreign policy to immediate political necessity.
The wealthy classes are peace loving, because they do not want to suffer material losses. The radical nationalists, supported by the general consent of the large majorities, rebuke the governments for their cowardice and moderation and the capitalists and entrepreneurs for their selfish materialism. Extreme nationalism is not the work of bribed propagandists; it is a mentality created by the teachings and writings of sincere poets, writers and scholars. The teachers and the youth are the most enthusiastic supporters of chauvinism and nationalism. The nationalism of public opinion is intractable and intransigent and eliminates from the public scene every politician and every party suspected of being lenient in "national" concerns. The most radical nationalists terrorize the moderate men, because everybody knows that the voters favor the most radical program.
Years ago it could be asserted that only the intellectuals were nationalists, whereas the uneducated masses were more or less indifferent. This is no longer true since the spread of education has caused the disappearance of illiteracy. Besides in our age of economic interventionism and its consequence — economic nationalism — every citizen has a personal interest in the result of these struggles between linguistic groups. Every peasant and every worker wishes that the area in which no discrimination is applied against him should be broadened. Every Czech shoe worker derived an immediate advantage from the fact that shoes manufactured in Czech plants could easily be sold in the sheltered markets of Slovakia and Carpatho-Russia. Every Croat peasant was injured by the fact that the Yugoslavian government's export agency discriminated against the Croats in purchasing cereals for sale to Germany. Austrian immigration barriers worked harm on all Czechs, Hungarians and Yugoslavs, who were barred from the Austrian labor market, where wages were higher than in their countries.
It is impossible to draw boundaries in Eastern Europe which would clearly separate linguistic groups. A great part of this territory is linguistically mixed, i.e., inhabited, by men of different languages. Every territorial division would therefore necessarily leave minorities under foreign rule. These minorities are the bearers of permanent unrest, of Irredentism and hatred.
To dispose of the problem of minorities in a peaceful way two methods had been suggested.
One method was the protection of minority rights by international law and its enforcement by international tribunals. The method failed. The economist has to recognize that such a system could be successfully applied only in a world of free trade and unhampered market economy. It must needs fail and it did fail in our age of economic interventionism. A law cannot protect anybody against measures dictated by alleged considerations of economic expediency. All measures of government interference in business can be and are used in countries inhabited by different linguistic groups for the sake of injuring the minorities. Customs tariffs, foreign exchange regulations, taxation, subsidies, labor legislation, and so on, may be utilized for discrimination although this cannot be proved in court procedure. The government can always explain such measures as being dictated by purely economic considerations. If licenses are denied to members of the minority but on the other hand are granted to the members of the privileged group the interference of an international tribunal is in vain. A system of foreign exchange regulation can be used to struggle all business activities of the minority. By means of subsidies the minority has to contribute to the bounties paid to its competitors who belong to the ruling linguistic group. Where the export trade of agricultural produce is nationalized and a government agency is the only buyer on the export market, discrimination in making purchases and in prices paid is practiced against the minority. With the aid of government interference in business, life for the minorities without formal violation of legal equality can be made unbearable. In our age of interventionism there is no legal protection available against an ill-intentioned government.
The impracticability of protecting minorities by international tribunals led to the proposal of another solution — the transplantation of minorities. This method could work only in a world in which all parts offered the same natural opportunities for production. In our actual world where the natural conditions for production are unequally distributed, the execution of such a plan would only aggravate existing inequalities and therefore intensify the desire for territorial expansion. When Hitler withdrew some German minorities from the East, he did so because he believes that he has much more fertile land to offer them.
The reform most commonly suggested recommends to these nations the formation of an economic union. An economic union would, under present conditions of government interference in business, have to include a complete unification of all branches of economic policy. It would shift the political center of gravity to the executive office of the union and reduce the national governments to the level of provincial and local auxiliaries. We may witness today how in all federations the power of the member states is gradually shrinking and that of the federal authorities increasing. This is not an accident. It is rather the unavoidable consequence of economic interventionism.
The western nations are unjust when they ridicule the anarchic conditions in Eastern Europe and the inability of their rulers to find a way for peaceful neighborliness. These eastern nations do nothing else than imitate the economic policies of the western democracies. They apply the measures of economic nationalism. This means they discriminate against foreigners because they believe that in this way they can further the welfare of their own citizens. They have invented nothing; they have only taken over. It is not their fault that the contradictions and deficiencies of economic nationalism are more glaring under the conditions in which they have to live.
There is general agreement today that the principle of unlimited sovereignty cannot be maintained in a world where the international division of labor results in a mutual dependence of every nation on all other nations. Notwithstanding this consensus nothing was done to limit the power of each nation, even the smallest one, to behave as if it were alone in the world. This contradiction is to be explained by the confusion which the term "limited sovereignty" involves. The concept of sovereignty, i.e., supreme power, does not allow for any limitation. A power may be supreme only if unlimited. If the power of a nation is limited so as to exclude some measures only, the remaining power can be used for the annihilation of this restriction. If, for instance, customs tariffs are excluded or limited it is possible to use other powers to render this limitation meaningless. It is possible, for example, to use the measures of veterinarian policy or measures for fighting plant diseases in a protectionist way, not to mention foreign exchange control and other methods. A pure limitation of sovereignty is not enough when the spirit of economic nationalism is allowed to survive. A total suppression of local sovereignty is necessary in order to insure good will and cooperation. To make Eastern Europe peaceful it is indispensable to vest the whole sovereignty in one democratic body ruling the entire area, which for more than 25 years has been a theatre of continual warfare and destruction.
The world as a whole is not yet prepared to renounce national sovereignty in favor of a world government. The commonwealth of free nations and free men is today an utopian concept only. Great ideological changes have to take place until a mentality of universal peace and world-wide cooperation will have replaced the present-day spirit of conquest and mutual hatred.
But Eastern Europe cannot wait any longer. Here something has to be done immediately. A return to the conditions of 1933 is out of the question. Conditions in which every sovereign state is looking for an opportunity to annex some territories belonging to its neighbors and every government considers a large number of its citizens as pariahs cannot be maintained.
We may assume that every linguistic group is honest in believing that its own claims are better founded than those of the competing groups. But we cannot agree with the repeated assertions of some linguistic groups, that the yoke which they impose on other groups is more fair and reasonable and less hard than the yoke imposed on them by other linguistic groups. The judgment of the oppressed has not less weight than that of the oppressors. No linguistic group should be permitted to inflict harm on members of other groups. No "protectorate" can be considered as justified, if the "protected" do not want the alleged protection.
We have to realize that the principle of nationality, as developed in Western Europe, is simply inapplicable in Eastern Europe where the linguistic groups are inextricably mingled. The political system of Eastern Europe cannot therefore be built up as a replica of that in the West. New standards have to be applied.
The foremost aim of a new order in Eastern Europe is to eliminate the problem of linguistic minorities. To be a member of such a linguistic minority means to be an outlaw. Every Slovak will say that this was the status of Slovaks in Hungary (before 1918) and in Czechoslovakia. (from 1918 to 1939); every Hungarian will say that this was the status of Hungarians in Czechoslovakia and is today in Slovakia; every Czech will say that this is today the status of Czechs both in those territories which the Reich has annexed since 1939 and in the Protectorate. It is the same with all similar cases all over Eastern Europe. There were and are autonomy and democracy only for the members of the ruling linguistic majorities; the members of the minorities have the disadvantages but not the privileges of citizenship.
It is immaterial to enter into a discussion of the claims of all these linguistic groups concerning their respective cultural values. It is of no concern whether or not the Hungarian civilization is higher than that of the Rumanians or of the Croats. The fact that Goethe, Kant and Beethoven were Germans does not justify the methods applied by the Nazis against the Czechs and the Poles; Mussolini may be right or wrong that Dante means more for humanity than Walter von der Vogelweide; but what relationship has this comparison of two poets to the problem of the oppression of the German-speaking inhabitants of Bozen and Brixen? It is grotesque that both Germans and Poles claim Copernicus for their own nation. It is beyond doubt that Copernicus wrote in Latin. There were in his time neither German nor Polish books on mathematics and astronomy; all the lectures which were delivered at the Italian, German and Polish universities were delivered in Latin.
We do not have to discuss the question whether it is of any value for mankind that the Czech, the Polish, the Ukrainian or the Serb civilizations should survive. The only fact which we have to face is this: there are people who wish to use freely the language which their parents have taught them. This legitimate desire has to be satisfied.
It is not true that in order to develop its own civilization a linguistic group needs a government whose sovereignty can be used to inflict harm on other linguistic groups. No Hungarian can derive any advantage from the fact that to a Slovak or a Rumanian the right to use his native tongue is denied.
The treaties of 1919 brought large minorities of Germans, Russians and Ukrainians under the rule of Czech and Polish majorities. This state of things could not be maintained except by a power strong enough to prevent both the Reich and the Soviet Union from interfering. It was based on the readiness of the French and the British to fight for the Czechs and the Poles.
Of course, neither Germany nor Russia has a right to oppress the Poles or the Czechs. But their title is no worse than the title of the Czechs against the Germans in the districts of Eger and Reichenberg or of the Poles against the Ukrainians in Eastern Galicia.
We do not mention these deplorable events of the past in order to blame anybody or in order to discover some nation's guilt. It is immaterial to establish who the first aggressors were. It is without any consequence whether Bohemia in the early Middle Ages was inhabited by Germans or Slavs or whether the Germans came to Bohemia only in the late Middle Ages as colonists. An argument like that between Hungarian and Rumanian scholars concerning the question of whether the Rumanian settlement in Transylvania took place earlier or later is futile. It is useless to inquire whether the century-old hatred between Poles and Russians was inaugurated by Polish or by Russian aggression. Let bygones be bygones. We do not have to revenge crimes of the past, but to build up a future, where people can enjoy the blessings both of peace and freedom.
V. The Requisites for a Permanent Settlement of the East European Problem In order to make Eastern Europe safe for peace it is necessary to establish a state of things where war does not pay. The average citizen should not expect any profit from a war in which his own linguistic group would be victorious over one of the other linguistic groups. Within this area borderlines must lose their present meaning. They must not have more importance, in the future, than the frontiers between the 48 states of the United States of America or between the counties of England.
The whole territory of Eastern Europe has to be organized as a political unit under a strictly unitary government. Within this whole area every individual has to have the right to choose the place where he wishes to live and to work. The laws and the authorities have to treat all natives — i.e., all citizens of Eastern Europe — in the same way on an equal footing without privileges or discrimination against individuals or groups.
Within the frame of this new political structure — let us call it the Eastern Democratic Union (EDU) — the old political units may continue to function. A dislocation of the historically developed entities is not required. Once the problem of borders has been deprived of its disastrous political implications most of the existing national bodies can remain intact. Having lost their power to inflict evils on their neighbors and on their minorities, they may prove very useful for the progress of civilization and welfare.
There will be, for instance, a Kingdom of Rumania and a Polish Republic. But these former sovereign states will now have to comply strictly with the laws and with the administrative provisions of the EDU. There will be no constitutional limit to the power of the EDU which could be used by an ill-intentioned local government to frustrate the laws and regulations issued by the EDU.
This shows us why the aims of the EDU cannot be realized in the constitutional form of a federation (Bundes-staat). Under a federative system the constitution assigns some branches of government activity to the federal government and other branches to the local governments of the member states. As long as the constitution remains unchanged the federal government does not have the power to interfere with questions which are in the jurisdiction of the member states. Such a system can succeed and has succeeded only with homogeneous peoples, where there exists a strong feeling of national unity and where no linguistic, religious, or racial discrepancies divide the population.
Let us assume that the constitution of a supposed East European Federation grants to every linguistic group the right to establish schools, where its own language is taught. Then it would be illegal for a member state to hinder directly and openly the establishment of such schools. But if the building code and the administration of public health and firefighting are in the exclusive jurisdiction of the member states, a local government could use its powers to close the school on the ground that the building does not comply with the requirements fixed by these regulations. The federal authorities would be helpless because they would not have the right to interfere, even if the grounds given prove to be only a subterfuge. Every kind of constitutional prerogative granted to the member states could be abused by a local government. If the fight against crime should be assigned to the member states, they could be slow in protecting the members of a minority group. If they should have the right to establish foreign exchange control they could discriminate against the members of the minority groups in complying with the demands for foreign exchange.
If we want to abolish all discrimination against minority groups, if we want to give to all citizens actual and not only formal equality, we have to vest all powers in the central government only. This would not cripple the right of a loyal local government eager to use its powers in a fair way. But it would hinder the return to methods whereby the whole administrative apparatus of the government is used to inflict harm on minorities.
A federation in Eastern Europe could never succeed in abolishing the political implications of the frontiers. In every member state there would remain the problem of minorities. There would be oppression of minorities, hatred and irrenditism. The government of every member state would continue to consider its neighbors as adversaries. The diplomatic and consular agents of the three big adjacent powers would try to profit from these quarrels and rivalries and might succeed in disrupting the whole system.
The main objectives of the new political order which has to be established in Eastern Europe are:
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This new system of government has to grant to every citizen full opportunity to live and to work freely without being molested by the hostility of any linguistic group inside or outside the boundaries of Eastern Europe. Nobody should be prosecuted or disqualified on account of his mother tongue or his creed. Every linguistic group should have the right to use its own language. No discrimination should be tolerated against minority groups and its members. Every citizen should be treated in such a way that he will call the country without any reservation "my country" and the government "our government."
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No linguistic group should expect any improvement of its political status by a change in the territorial organization. The difference between a ruling linguistic group and oppressed linguistic minorities has to disappear. There must not be any "Irrendenta."
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The system has to be strong enough to defend its independence against aggression on the part of its neighbors. Its armed forces have to be able to repel without foreign assistance an isolated aggression of either Germany or Italy or Russia. It should rely on the help of the Western democracies only against a common aggression by at least two of these neighbors.
VI. The Abandonment of Economic Nationalism The EDU will have to renounce all hostility against any linguistic group. This includes the elimination of all measures of economic nationalism. Economic nationalism is, as already mentioned, a policy which intends to improve the conditions of some groups of citizens by inflicting evils on foreigners; it is a policy of discrimination against foreigners. Foreign goods are excluded from the domestic market or only permitted after having paid an import duty. Foreign labor is disbarred from competition on the domestic labor market. Foreign capital is liable to confiscation. But all these measures hurt at the same time the economic interests of some groups of citizens. An import duty for shoes, for instance, may benefit the people interested in this particular branch of industry, but it injures all consumers of shoes.
It was feasible in linguistically homogeneous nations to justify import duties in the eyes of the consumers. The German protectionists, for instance, succeeded in convincing the majority of the German voters that it is expedient for them to pay a much higher price than the world market price for wheat in order to increase the revenue of the German wheat producers. But in a country inhabited by different linguistic groups such a justification would not be considered as satisfactory. Those linguistic groups whose industrial production is backward will never acquiesce to an import duty for shoes which would benefit the shoe production of those linguistic groups whose industrial production has reached a higher stage of development. They will call such foreign trade policy an exploitation of their own group. The history of the Austro-Hungarian customs union provides us with ample evidence for the correctness of this statement. Sometimes even within linguistically homogeneous nations the discussion concerning the foreign trade policy favors the spirit of disintegration. Both in the Dominion of Canada and in the Commonwealth of Australia the purely agricultural western parts oppose the protectionist policy of the more industrialized sections and even ventured to propose a dissolution of the customs union.
If the EDU would embark on a policy of protectionism its existence would be doomed.
The EDU will therefore be a country of free trade. There will be no protective tariffs nor other measures for the protection of home industries against foreign competition. There will be neither foreign exchange control nor inflationary measures. There will be neither subsidies nor bounties and no migration barriers. There will be a stable currency system with stable rates of foreign exchange.
All objections raised against such a policy of free trade on the part of a single country within a world of economic nationalism and protectionism are futile. It would be a waste of time to refute again the popular fallacy that such a country would not be able to continue any domestic production and only import from abroad.
The far greater part of Eastern Europe is mostly interested in the export of food and raw material. These agricultural, forest, and mining interests cannot suffer any disadvantage from a policy of free trade. On the other hand, it is obvious that none of the industrial interests of this territory can assume that the excessive protectionism of the past could be continued even if the EDU should not be formed.
Let us consider the two types of foreign trade policy applied in this territory before 1938 in referring to Austria as an instance of agricultural protectionism and to Hungary as an instance of industrial protectionism.
In Austria the non-agricultural section of the population was exploited for the benefit of agriculture. Food prices in Austria were maintained at a level of much more than 200 percent of world market prices. The peasants got from the treasury much more as bounties than they had to pay as taxes. In the mountain districts the peasants got a premium for tilling the land regardless of whether climatic conditions will allow the corn to ripen. For butter the government, paradoxically enough, paid export subsidies, which were much higher than the world market price of butter. It will be impossible to continue these methods after the war to the disadvantage of the impoverished non-agricultural population.
Hungary on the other hand exploited the agricultural population for the benefit of industrial production. The prices of manufactured goods were much higher than in the world market and in the countries of Western Europe and America. A system of more or less concealed export premiums and tax exemptions furthered the export of manufactured goods which were unavailable to the masses of peasants and poor agricultural workers. It is obvious that such a policy will have to be abandoned sooner or later.
The main economic problem which the peoples of Eastern Europe have to face is relative overpopulation. In respect to the natural conditions which this territory offers for production and in respect to the density of population in areas much better endowed by nature all these countries are overpopulated. The abolition of migration barriers in other parts of the world would result in an emigration of scores of millions from Eastern Europe and would create a tendency towards an equalization of the marginal productivity of labor; wages and farmers' income in Eastern Europe would rise. (Of course, the tilling of the poorer soil would be discontinued.) Migration barriers force these peoples to stay at home and put a check on the improvement of their standard of living. But this problem cannot be solved by any scheme limited to the domestic organization of Eastern Europe. It is a world problem.
The second economic problem of these countries is scarcity of capital. It is unlikely that foreign capital will be available for them. Private investors will have more promising offers for the employment of their funds; foreign governments will consider domestic investment as more useful than the export of capital to Eastern Europe.
Even with a smoothly functioning political organization Eastern Europe will remain a poor country with a standard of life which Americans and Britons will judge as a very low one.
But all these sad facts cannot be considered as valid objections against the scheme proposed. There is no other method left for Eastern Europe to improve its economic conditions than the establishment of a durable peace and the abandonment of the policies which wasted the economic resources and the capital accumulated in previous years.
VII. Outlines of the New Order 1. The Area of the EDU
The EDU has to include the territories which in 1933 formed the sovereign states of Albania, Austria, Bulgaria, Czechoslovakia, Danzig, Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Rumania and Jugoslavia.
It has to include the whole territory which in 1913 belonged to the Prussian provinces — Eastern Prussia, Western Prussia, Posen and Silesia. The three first-named provinces were once parts of Poland. They were appropriated by the princes of the House of Hohenzollern, but this conquest did not make them a part of the Holy Roman Empire. The fact that the rulers of these countries were at the same time Electors of Brandenburg had legally and constitutionally no other significance than the fact that the kings of England were Electors (and later kings) of Hanover. Neither did these provinces belong to the German Confederation from 1815–1866. They remained "private property" of the Hohenzollern family. Only after the battle of Koniggrätz in 1866 the king of Prussia incorporated them by his own sovereign decision into the Norddeutscher Bund and later in 1871 into the Deutsches Reich.
Silesia was a part of the Holy Roman Empire only as an adjunct of the Kingdom of Bohemia. In the Sixteenth and Seventeenth Centuries it was ruled by dukes who belonged to a branch of the Piasts, the old royal family of Poland. When Frederick the Great in 1740 embarked on the conquest of Silesia he tried to justify his claims by pointing out that he was the legitimate heir of the Piast family.
All these four provinces are inhabited by a linguistically mixed population. They returned many Polish members to the old German Reichstag. In Eastern Prussia there is a not negligible Lithuanian minority.
Italy has to cede to the EDU all the European countries which it has occupied since 1913, the Dodecanese Islands and the eastern part of the province of Venice, Friuli, a district inhabited by people speaking a Rhaeto-Romanic idiom.
Thus the EDU will include about 700,000 square miles with about 120,000,000 people using 17 different languages. Such a country when united will be strong enough to defend its independence against the three mighty neighbors, Russia, Germany and Italy.
- The Constitution
Every adult will have the right to vote. The parliament — one chamber only, with about 600 members — has to be a fair representation of all citizens. The cabinet has to be responsible to the parliament.
The parliament's first task will be to make a constitution. It will decide whether the head of the EDU should be a President or a hereditary ruler.
The parliament will be the only legislative body. All local and provincial councils will be advisory boards only. Every attempt to give more power to provincial institutions and to local boards would necessarily revive the problems of borders and of minorities.
- Local Government
The former independent states will in the framework of the EDU be nothing else than provinces. Retaining all their honorary forms they will have to comply strictly with the laws and with the administrative provisions of the EDU. But so long as they do not try to violate these laws and regulations they will be free. The loyal and law-abiding government of each state will not be hindered, but strongly supported by the central government.
Special commissaries of the EDU will have to oversee the functioning of every local government. Against all administrative acts of the local authorities the parties will have the right to appeal to this commissary, and to the central government, provided that such acts are not liable to be appealed to a tribunal. All disagreements between the commissary and the local government or between different local governments will be ultimately adjudicated by the central government, which is responsible to the central parliament only. The supremacy of the central government will not be limited by any constitutional prerogatives of local authorities. Disagreements will be settled by the central government and by the central parliament, which will judge and decide every problem in the light of its implications for the smooth working of the total system. If, for instance, there arises a dispute concerning questions of the City of Wilno — one of the innumerable neuralgic points of the East — the solution will be sought not only between the Polish and the Lithuanian local governments or between the Polish and Lithuanian members of the central parliament; the central government and the central parliament will try to find a solution which will do justice to similar cases arising in Budweis, in Temesvar or in Salonica.
In this way it may be possible to have a unitary government with a high degree of administrative decentralization.
- The Budget and the Power to Tax
All financial powers will be vested in the central government and in the central parliament.
The parliament will allocate to every local government for its expenditures a lump sun according to the population of its area. It will, in addition, supervise the spending of this money.
It is further advisable to give to every local government the revenue derived from taxes on real estate situated in its jurisdiction. But in any case the laws regulating these taxes have to be enacted by the central parliament.
With regard to provisions for government bonds issued prior to the establishment of the new order an international agreement between the EDU and the representatives of the foreign bondholders will be necessary. New loans will be floated only by the central government or, with its permission, by the bigger cities.
- The Linguistic Problem
The most delicate problem of the EDU will be the linguistic problem.
All the 17 languages will be treated in an equal way. In every district, county, or community the tribunals, the government agencies and the municipalities will have to use all languages which in their district, county or community are the languages of more than 20 percent of the population.
English has to be used as an international subsidiary language for the dealings between the members of different linguistic groups. All laws have to be published in English and in all 17 national idioms. This system may seem strange and very complicated. But we have to realize that it worked rather satisfactorily in old Austria with 8 languages. Contrary to a widespread error the German language had no constitutional preeminence in imperial Austria.
- Religion
The peaceful coexistence of different denominations can easily be secured by the adoption of the system which has succeeded in the United States of America.
- Education
The governments of Eastern Europe abused the system of compulsory education in order to force the minorities to give up their own languages and to adopt the language of the majority. The EDU will have to be strictly neutral in this respect.
There will be private schools only. Every citizen and every group of citizens will have the right to run educational institutions. If these schools comply with the standards fixed by the central government they are subsidized by a lump sum for every pupil.
The curriculum of the secondary education will include the teaching of English.
The local governments will have the right to take over the administration of some schools. But even in this case the budget of these schools has to be kept independent of the general budget of the local government and no public funds but those allocated by the central government as subsidies for these schools may be used.
- Economic Policy
It is necessary to deny to the government the power to benefit one linguistic group at the expense of others. There will be neither subsidies nor licenses which can be granted or denied ad libitum.
To the general principle that no measures of protectionism should be applied one exception only should be permitted. The importation of commodities from countries which do not treat the imports from the EDU according to the most favored nation standard or do not allow any imports at all may be prohibited or taxed.
- Measure for the Period of Transition
The first president and the members of the first cabinet have to be appointed by the League of Nations. They will have to hand over their functions to the parliament as soon as it is constituted.
For a period of transition foreign citizens — with the exception of Germans, Italians, Russians and the subjects of totalitarian states will be eligible for all public and judiciary offices and functions.
- Working of the System
A foreign visitor, more interested in sightseeing than in the study of constitutional and economic problems, will notice the disappearance of the customs barriers and of the variety of national currency systems, but in all other respects it will be impossible for him to observe any change. He will say, "Now I have visited Hungary and I want to go to Rumania." He will not see the EDU; he will not have the opportunity to meet the agents of the EDU.
There will be the old national flags and anthems. Every member state will have its own postage stamps issued by the unitary postal system of the EDU. There will be coins of every member state, coined with the national emblems and — in monarchies — with the portrait of the king (as in the German Reich from 1873 until 1914). Of course all these coins will be minted by order of the EDU's government and will be legal tender in the whole territory of the EDU. Every member state and every linguistic group will be free to cultivate intellectual relations with foreign countries and to represent its own civilization abroad.
The individual citizen will have to renounce all claims for privileges which could harm other individuals or groups. But he will be free to use his own mother tongue and to bring up his children with the aid of schools where this language is taught. He will not have to consider himself as a citizen of minor status, because all authorities and tribunals will treat him in a fair way.
VIII. The Political Chances of the Proposed Plan
We have to realize that the politicians and the statesmen of these eastern nations are united today on only one point: the rejection of such a proposal. They do not see that the only other alternative is the partition of their territories among Germany, Russia and Italy. They do not see it because they firmly rely on the invincibility of the British and the American forces. They do not imagine that the Americans and the British have any other task in this world than to fight for them an endless sequence of world wars.
It would be merely an evasion of reality if the refugee representatives of these nations would try to convince us that they have the intention of peacefully disposing of their mutual claims in the future. It is true that the Polish and the Czech refugees have made an agreement concerning the delimitation of the boundaries and a future political cooperation. But this scheme will not work when actually put into practice. We have ample experience that all agreements of this type fail because the radical nationalists never accept them. All endeavors at an understanding between Germans and Czechs in old Austria met with disaster because the fanatical youth rejected what the more realistic older leaders had proposed. Refugees are, of course, more ready to compromise than men in power. During the First World War the Czechs and the Slovaks and likewise the Serbs, the Croats and the Slovenes came to an understanding in exile. History has proved the futility of these alleged agreements.
Besides that, we have to realize that the area which is claimed both by the Czechs and by the Poles is comparatively small and of minor importance for each group. There is no hope that a similar agreement ever could be effected between the Poles on the one hand and the Germans, the Lithuanians, the Russians or the Ukrainians on the other hand — or between the Czechs on the one hand and the Germans or the Hungarians or the Slovaks on the other hand.
What is needed is not delimitation of specific borderlines between two groups but a system where the drawing of borderlines no longer creates disaffection among minorities, unrest and irredentism.
Democracy can be maintained in the East only by an impartial government. Within the EDU no single linguistic group will be sufficiently numerous to dominate the rest. The most numerous linguistic group will be the Poles; they will comprise about 20 percent of its whole population.
It is not unlikely that some critics will call the EDU a reconstruction of the old Austrian empire on a broader scale. This is true as far as old Austria (but not Hungary!) was the only power among those ruling in this area which tried to treat all citizens on an equal footing. In the Turkish empire all Christians were pariahs. In Russia, Prussia, and Hungary the governments were eager to force all subjects to give up their mother-tongues and to become Russians, German-speaking Prussians, or Magyars. In Austria the constitution of 1867 granted to every citizen the right to use his own language and provided equality in the use of all languages in court procedure, in the administration, and in educational institutions. The system failed, because the striving for full national independence of every linguistic group hindered its success. Some details of the suggested constitution for the EDU are based on precisely the lessons which this Austrian failure teaches us and at the same time on the shortcomings of the League of Nations minority protection.
There is no other precedent which we could use in framing a new political system for Eastern Europe. The Swiss Confederation cannot be considered as a useful pattern. In Switzerland the cooperation of the three (or four) linguistic groups was undisturbed as long as its economic policy was based on free trade. With the trend towards economic interventionism conditions changed. Today there is a not negligible Nazi party in the German-speaking cantons and a powerful pro-Fascist group in the Ticino. The French-speaking cantons strongly oppose what they call the policy of Berne. Switzerland will have to face serious problems in a not too distant future.
There was still another linguistically mixed democratic country in Europe, Belgium. Here too the linguistic diversion disrupted the political unity. The military defeat of Belgium was to a great extent due to the irrendentism of the Vlames. Belgium will have to solve its linguistic problem in the future.
We do not have to discuss in this context the general problem of government interference with business. It suffices to realize the fact that the system of interventionism can never work satisfactorily where different linguistic groups are determined to use it as a weapon in their wars aiming at mutual extermination.
More serious would be the objection that the territory assigned to the EDU is too large and that the different linguistic groups involved have nothing in common. It seems indeed strange that the Lithuanians should have to cooperate with the Greeks although they never before had had any other mutual relations than those diplomatic ones existing among all nations of the world.
But we have to realize that the EDU has to create peace in a part of the world ridden by age-old struggles among linguistic groups. Within the whole area assigned to the EDU there cannot be discovered any undisputed borderline. If the EDU has to include both the Lithuanians and the Poles, because there is a large area where Poles and Lithuanians live inextricably mixed and which both nations vigorously claim for themselves, it has to include the Czechs and the Ukrainians too because the same conditions as between the Poles and the Lithuanians prevail between the Poles and the Czechs and between the Poles and the Ukrainians. Then the Hungarians have to be included for the same reasons, next the Serbs and consequently all other nations which claim parts of the territory known as Macedonia, i.e., the Bulgarians, the Albanians and the Greeks.
For the smooth functioning of the EDU it is not required that the Greeks should consider the Lithuanians as friends and brothers. (Although it seems probable that they would have more friendly feelings for them than for their immediate neighbors.) What is needed is nothing else than the conviction of the politicians of all these peoples that it is no longer possible to oppress men who happen to speak a foreign language. They do not have to love one another but to stop inflicting harm on one another.
The EDU will include many millions of German-speaking citizens and some hundreds of thousands of Italian-speaking citizens. It cannot be denied that the hatred engendered by the methods used by the Nazis and the Fascists during the present war will not disappear at once. It will be difficult for Poles and Czechs to meet for collaboration with Germans.
But none of these objections can be considered as valid. There is no other solution for the East European problem which could give to these nations a life of peace and political independence.
Conclusion The third point of the Atlantic Declaration establishes as a common principle in the national policies both of the United States and of the British Empire that "they respect the right of all peoples to choose the form of government under which they will live; and they wish to see sovereign rights and self-government restored to those who have been forcibly deprived of them." The sixth point expresses the "hope to see established a peace which will afford to all nations the means of dwelling safely within their own boundaries, and which will afford assurance that all the men in all the lands may live out their lives in freedom from fear and want."
These principles are incompatible with the conditions which have prevailed for ages in Eastern Europe. There were many millions of people who were forced to live under governments which they had not chosen. There were countries where 20 percent, 30 percent or even 40 percent of the population were irredentists and expected to be redeemed by the armed interference of foreign powers. These millions considered themselves as having been forcibly deprived of their sovereign rights and self-government. They believed that they were prevented from living out their lives in freedom from fear and want.
The proposed scheme for an Eastern Democratic Union is the only plan which could adjust political and economic conditions in Eastern Europe to the requirements of the Atlantic Declaration. Its execution would impose on no nation any other sacrifice than the renunciation of the power to inflict harm on other linguistic groups. But it would on the other hand secure them against the risk of falling victim to oppression by other nations. It would make Eastern Europe safe both for peace and democracy.
The devaluationary spiral of the peso began with the fall in oil prices in mid-2014. At the time, the depreciation was easy to explain in terms of the deterioration of the balance of trade. With Mexico being a net oil-exporting country, the fall of oil prices meant a fall in the country’s foreign currency revenue. This situation explains the depreciation of the peso of mid-2014 and all of 2015.
In 2016 the situation gets complicatedThe victory of the Brexit referendum in June 2016 deteriorated expectations of the Mexican economy’s performance, lowering the price of the peso against the dollar.
Things got worse for the Mexican peso in November 2016, when Donald trump was elected as President of the United States. At the time, the pessimism that took hold of investors and speculation lead to a depreciated Mexican peso. As we explained in another article, the peso depreciated 14% in only three days after Trump’s victory.
Banxico reacted without success…With this scenario, the Bank of Mexico (Banxico) begun a series of efforts to try to defend the peso by raising the benchmark interest rate in 2016. The following graph shows the price of the peso against the dollar on the left axis; on the right it shows the reference interest rate of Banxico. Banxico practically doubled its reference rate between July 2016 and July 2017.
Graph 1:
Source: BanxicoTwo factors helping the peso in 2017In 2017, things seem to be different for the Mexican peso. Between January and July of 2017, the peso appreciated on average 17% against the dollar. What are the reasons for this behavior? There are at least two.
1.The pessimism caused by Trumps victory has considerably decreasedIf in November 2016, investors were nervous after Trumps victory: they anticipated an attack on NAFTA that would harm the Mexican market. On Wednesday, August 16 Canada, the US, and Mexico started renegotiating NAFTA.
Although there is much expectation for the results, most recognize that Mexico could gain from a NAFTA renegotiation. When the agreement was signed more than 20 years ago, the energy sector was controlled by the government. Since the energy reform by Peña Nieto, there have been proposals to integrate the energy market between the three countries.
This has reassured investors, and it is reflected in the peso’s price. Perhaps the speculative alarms launched the peso away from its “fundamental value” and today the markets reflect it with the peso’s appreciation
2.A weaker dollarIn 2017, the US dollar has weakened against other currencies. There was talk that the dollar traded at its lowest level against the euro in two years. However, the Bloomberg dollar spot index is a better indicator, since it compares the dollar against a basket of the world’s top ten most important currencies. Each currency in the basket and its weight are determined annually based on its share in international trade and its liquidity.
Graph 2:
In the graph we see how the dollar strengthened at the end of 2016, just after Trump’s victory and in subsequent months. When Trump announced major tax cuts, the optimist environment was reflected in a strong dollar. But the Republican’s failed attempt to dismantle the Affordable Care Act make a tax cut less likely.
What about Banxico’s efforts?We could debate whether or not the Mexican central bank has been a decisive factor in the recovery of the exchange rate. In general, as seen in graph 1, we see that Banxico’s efforts were considerable in terms of the increase in reference rates. However, even though interest rates increased, the peso continued its trend to depreciate.
It is also not a Banxico mandate to have a determined exchange rate. Banxico had in mind its inflation target, which for now should be its concern as we mentioned in our last quarterly report. At least we can say that Banxico protected itself and resisted an attack that seems to have ended for the moment.
Originally published by UFM Market Trends the Universidad Francisco Marroquin.
The biggest winner of the Trump presidency is also the most surprising: Federal Reserve Chairman Janet Yellen.
After all, Yellen was a constant target for criticism by Candidate Trump, going so far as to accuse her of being “more political than Hillary Clinton.” Beyond Mr. Trump’s barbed rhetoric, pundits such as Paul Krugman predicted that Trump’s ascendency would be disastrous for the US economy and the stock market in general, which would have wiped out the modest recovery that Yellen’s legacy depends on.
Almost a year after Trump’s election, the world looks quite different. Not only has Wall Street toasted the Donald’s victory, but the president continues to keep open the possibility of re-nominating Janet Yellen for a second term. Of course, given Trump’s surprisingly strong understanding of how current Fed-policy was a positive for the administration, perhaps this reversal should have been as predictable as Paul Krugman being wrong.
For Yellen, more important than Trump’s willingness to compliment her performance is what his presidency has done for the reputation of the Fed. Prior to this year, the Fed had been constantly forced to backtrack on planned interest rate hikes and downplay talk of balance sheet normalization due to economic stagnation.
For example, in 2016 the Fed was only able to hit one of its projected four interest rate hikes during the year, and that one came after the market surged following Trump’s election. Still, many traders were skeptical of the Fed’s forecast of three interest rate hikes. Earlier in the year, Yellen was even forced to admit that forward guidance, a communication tool that was favored by Ben Bernanke, no longer worked because people simply stopped taking the Fed’s projections seriously.
2017 has been a better one for those in the Eccles Building. The Fed is on schedule with its rate hikes and feels comfortable enough following through on its plans to slowly — very, very slowly — unravel its balance sheets that ballooned from various rounds of quantitative easing. While we are still years away from anything resembling normal pre-crisis monetary policy, at least the Fed has been able to make the appearance of trying to get there for the first time since 2008.
Why the change?
Well in spite of the Trump administration’s public frustrations in achieving legislative victories, it has seen success at one of the stated goals of former strategist Steve Bannon: the (partial) deconstruction of the administrative state.
As the Completive Enterprise Institute reported earlier this month, the Federal Register is at 45,678 pages — less than half of the 97,110 pages that existed during the Obama administration. While that is still an extraordinary amount of government red tape (the equivalent of over 50 copies of Human Action), it is a significant step in unraveling one of the most underreported disasters of Barack Obama’s tenure in DC. Further, executive orders made during Trump’s first weeks in office required agencies to eliminate rules prior to writing new ones, which has helped stymie the rate in which new rules are being written.
Not only has this led to saving tens of billions in regulatory compliance cost, but — coupled with continued hope for tax reform — it has been a major boon to business confidence. IECONOMICS finds business confidence at the highest it's been in 10 years.
Data: United States Business Confidence provided by IECONOMICS Meanwhile, NFIB has finally found recovery from post-crisis lows.
Data: NFIB Small Business Trends Survey, September In short, Trump hasn’t needed Congress to do some real good for economic activity — he just needed to not govern like Barack Obama.
The results from this renewed optimism in America’s economic landscape has been increased investment and employment — which have been routinely referenced by the Fed this year while announcing their policy decisions, over the objections of Minneapolis Fed Chair Neel Kashkari and other more dovish critics.
To their credit, in spite of their toxic advocacy for even easier-monetary policy, there is substance in Kashkari’s criticism. In spite of increased business confidence — itself partially grounded on inadequate tax reform that quite possibly may not come to fruition — wages outside of the financial sector and technology still lag — in no small part due to consequences of the very monetary policy hyper-doves are advocating. Meanwhile, while reduction of the regulatory code is a very important step, nothing has been done to address other systemic issues, such as Washington’s complete inability to curb its hedonistic addiction to debt — that too being subsidized by the Federal Reserve’s own policies. Not to mention the ever looming threat of a trade war being just a tweet away. And, of course, these gains have all been assisted directly by the Fed's accommodative monetary policy — a bubble is still a bubble, even if the resulting boom is a historically modest one.
In spite of these very real dangers to the US economy, it’s understandable why the economy is second only to his IQ in topics he enjoys bragging about. As such, with reports swirling that he will soon be making an announcement about next year’s Fed chair, it wouldn’t be surprising to see Trump maintain the status quo and re-nominate Janet Yellen. After all, it's one thing to attack the swamp from the outside, but quite another when you're in charge. Trump's campaign rhetoric made it clear that he understands what will happen when the Fed truly changes course, he's not going to want to be there when that "big fat bubble" pops.
Today the Federal Reserve announced that it will finally begin the process of reversing quantitative easing. Following the process it outlined earlier this year, the Fed will start allowing assets (Treasurys and mortgage-backed securities) to mature off its balance sheet, rather than re-investing them as had been its prior policy. The current plan is to start with a $10 billion roll off in October, and increasing quarterly until it reaches $50 billion by October of next year. Considering the Fed’s balance sheet currently stands at $4.5 trillion, the Fed is envisioning a slow, multi-year process. As Philadelphia Fed president Patrick Harker described it earlier this year, the goal is for it to be “the policy equivalent of watching paint dry.”
Of course the old saying about the “best laid plans of mice and men” also applies to central planners, and as Janet Yellen once again noted today, “policy is not on a pre-set course.” Should markets react negatively, as they did when Bernanke hinted at reducing their purchases in 2013, the markets have reason to expect the Fed to act. In fact, when asked, Yellen kept the door open to both lowering interest rates and stalling its roll off should market conditions worsen. In fact, it appears that markets are already betting on the Fed to not follow through on its projected December rate hike.
As the Fed has been signaling for months now that a taper was in the works, the mainstream narrative suggests that tapering has been priced in (though stocks dropped on the news.) There are still major questions left unanswered.
One of the biggest questions going forward is who will step up to replace the Fed’s purchasing power in the US Securities market? In the past, the US has been able to count on China to purchase US debt. Even before the Trump administration threatened the country with sanctions, China was selling off Treasurys in order to help prop up its struggling economy. With other nations also backing off from US debt, the hope is that investors will fill the gap. While the continued actions of the ECB, BOJ, and other central banks may make US debt more attractive in comparison, increased investments in bonds is likely to come at the expense of other assets.
Of course the noise of the Fed’s actions only serves to distract from the real issue, which is the continuing economic stagnation of the US economy. While Yellen continues to boast about modest employment gains, full-time employment remains lower than it was prior to the recession. Meanwhile, American’s personal debt has reached record highs — following the example of their government. How much of these gains are being fueled by credit and the false prosperity of inflated stocks and other assets? We’ll see.
For what it’s worth, the Fed itself — which is regularly overly-optimistic — doesn’t seem to have much faith in the future. It is now projecting long-term growth below 2%.
Growth in the supply of US dollars fell again in August, this time to a 108-month low of 4.2 percent. The last time the money supply grew at a smaller rate was during August 2008 — at a rate of 4.1 percent.
The money-supply metric used here — an "Austrian money supply" measure — is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.
The "Austrian" measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler's checks, and retail money funds).
M2 growth also slowed in August, falling to 5.3 percent, a 75-month low.
Money supply growth can often be a helpful measure of economic activity. During periods of economic boom, money supply tends to grow quickly as banks make more loans. Recessions, on the other hand, tend to be preceded by periods of falling money-supply growth.
Thanks to the intervention of central banks, of course, money supply growth in recent decades has never gone into negative territory.
Nevertheless, as we can see in the graph, significant dips in growth rates show up in years prior to a economic bust or financial crisis.
For insights into what's affecting money supply growth, we can look at loan activity, such as the Federal Reserve's measure of industrial and commercial loans.
In July of this year, growth rate in loans fell to a 75-month low, dropping to 1.5 percent. In August, loan growth rebounded slightly, climbing back to 2.1 percent. Loan growth has not been this weak since April of 2011, in the wake of the last financial crisis.
We find similar trends in real estate loans and in consumer loans, although not to the same extent.
The current subdued rates of growth in the money supply suggests an economy in which lenders are holding back somewhat on making new loans, which itself suggests a lack of reliable borrowers due to a lackluster overall economy. This assessment, of course, is reinforced by the Federal Reserve's clear reluctance to wind down it's huge portfolio, and to end its ongoing policy of low-interest rates — concerned that any additional tightening might lead to a recession. Growth in consumer loans hit a 27-month low in August, and real estate loans hit a 28-month low during the same period.
Fed vice-chair Stanley Fischer’s surprise announcement of early retirement triggers the obvious question as to whether this could be the fore-runner to a serious market and economic deterioration ahead. Monetary bureaucrats, even if signally bad at counter-cyclical fine tuning, sometimes have a reputation for intuition about how to time their own career moves ahead of crisis. In this case, such suspicion may be wide of the mark given the personal circumstances. Even so, the exit of a Fed Vice-Chair, who in many respects has been the pioneer and the dean of the prevailing doctrine in the global central bankers club, is pause for thought.
The Early Years When Professor Fischer published his famous paper “On Activist Monetary Policy with Rational Expectations” (NBER working paper no. 341, April 1979), the fiat money world was well into the third stage of disorder following the collapse of the international gold standard in 1914. But things were at a temporary resting point where the skies seemed to be getting clearer. After the violent terminal storms of the gold exchange standard (early 20s to early 30s), and then of the Bretton Woods System, it seemed to many that the “monetarist revolutionaries” had found a better practical monetary navigation route. The Bundesbank, the Federal Reserve, the Swiss National Bank, and even the Bank of Japan were pursuing an ersatz gold rule of low percentage increases in the monetary base or a related aggregate.
Fischer vs. the Monetarists Despite the optimism at large, Fischer issued a challenge. The monetarist rules (x per cent growth of the chosen monetary aggregate) were doomed to fail when the underlying demand for money and monetary base in particular was so unstable.
Fischer rejected the new popular view (in the late 1970s) of the fashionable “classical economists” (for example Robert Barro) who argued that under market rationality monetary policy was powerless to influence the real economy. All the various trade-offs hypothesized by the Keynesian economists of the previous decade and pursued in part had been based on a view that central bankers could take the public by surprise (who would not realize what they were “up to” until later on). But once the public knew all Keynesian manipulations could not be effective.
In contrast, Fischer purported to demonstrate that if wages were rigid (most likely due to the existence of long-term contracts), then even given rational expectations, monetary policy could stimulate the real economy.
And so Professor Fischer, on the basis of his pioneering neo-Keynesian creed, preached that, yes, central bankers could and should pursue activist contra-cyclical strategies, especially when shocks were large and obvious. But yes, he also recognized that fine-tuning had its dangers and could morph into a long-run rising inflation rate, and so he recommended that policy be bound by the setting of a low inflation target. These ideas were in turn taken up and worked on by leading disciples (students) of Stanley Fischer, including Ben Bernanke and Mario Draghi.
The Birth of the 2% Inflation Standard And so the fourth stage of fiat money disorder was born — what we may describe as the “global 2% inflation standard”. The prior monetarist experiments faded away in the decade following publication of Fischer’s paper (Paul Volcker abandoned monetarism by 1982, and the Bundesbank was the last hold-out in the year before the launch of the euro). At a stretch we could call this fourth stage the “Fischerian age of monetary policy”. Even though its author is now retiring, the outlook is for this stage to move eventually into a much more vicious sub-stage in which inflation rises far above the levels which the central bankers are purporting to target and the forces of rationality greeted by the classical revivalists have been completely trumped by powerful irrational forces which typify asset price inflation..
And all of this does not depend on who exactly President Trump decides to nominate in Fischer’s and Yellen’s place in coming months, even though there are reasons to speculate that the choice is likely to be pro-3% growth with the near-term target of avoiding defeat in next year’s mid-term elections. The bigger issue is that the so-called 2% inflation target belongs to a collection of fables under the title of the Emperor’s New Clothes. In today’s monetary environment where monetary base has been totally dislocated from the pivot of the monetary system (e.g., there's no stable demand, distinctive qualities of base money are virtually eradicated, and both supply and demand are boated by QE) there is no basis – other than expectation inertia – to view prices of goods and services as anchored.
At the best of times no one knew the precise relationship between monetary aggregates and prices — and indeed under the gold standard or monetarism no one pretended to have the price path under control; at best money was under control and that should foster some long-run tendency for prices to return to the mean, but there was no assurance of this. Strikingly the “Fischerians” have lost all sight of the natural rhythm of prices as responding to fluctuations in the pace of globalization, productivity growth, and of course the business cycle.
There is every reason to believe that expectation inertia will snap at some point in the future. And the root combination of monetary disorder — a Federal budget deficit of 4-5-6% of GDP at a cyclical peak, a Federal Reserve determined to hold down rates and manage the government bond markets, an administration favoring a weak dollar — there are grounds for fearing a lurch of the monetary train towards high inflation, albeit possibly beyond the next business cycle trough. And all of that despite the pride of Stanley Fischer in his resignation letter to President Trump:
During my time on the Board, the economy has continued to strengthen, providing millions of additional jobs for working Americans. Informed by the lessons of the recent financial ciris, we have buildt upon earlier steps to make the financial system stronger and more resilient and better able to provide the credit so vital to the prosperity of our country’s households and businesses.
Power corrupts, and Washington corrupts absolutely. How can anyone pretend to have learnt the lessons and achieved the results until at least one long business cycle under the given monetary regime has been completed? Only then can all the mal-investment be counted and the financial quake or hurricane damage assessed.
The primary purposes of the incorrectly named “unconventional monetary policies” are to debase the currency, stoke inflation, and make exports more competitive. Printing money aims to solve structural imbalances by making currencies weaker.
In this race to zero in global currency wars, central banks today are “printing” more than $200 billion per month despite that the financial crisis passed a long time ago.
Currency wars are those that no one admits to waging, but everyone wants to fight in secret. The goal is to promote exports at the expense of trading partners.
Reality shows currency wars do not work, as imports become more expensive and other open economies become more competitive through technology. But central banks still like weak currencies — they help to avoid hard reform choices and create a transfer of wealth from savers to debtors.
The Euro Rallies So how must the bureaucrats at the European Central Bank (ECB) feel when they see the euro rise against the U.S. dollar and all its main trading currencies by more than 12 percent in a year, despite all the talk about more easing? The ECB will keep buying 60 billion euro a month in bonds, maintain its zero interest-rate policy, and keep this “stimulus” as long as it takes, until inflation growth and GDP growth are stable.
Contrary to the wishes of the ECB, however, a strong euro is justified for several reasons. First, the European Union’s trade surplus is at record highs, and 75 percent of Eurozone trade happens between eurozone countries. Higher exports and the continued recovery of internal demand in European member countries strengthen the euro.
The third is the perception of weakness of the U.S. government and its inability to push through key reforms. This has weakened the dollar and by definition strengthened the other two large trading currencies, the euro and the Japanese yen.The second important factor is the relief rally after the French and Dutch elections. The fears of a euro breakup have been eliminated, or at least delayed, as pro-EU political parties won.
The Problems With a Strong Euro However, a strong euro has very significant implications for the EU economy and the ECB’s policy.
The strong euro puts exports to its main outside trading partners — the United States (20.8 percent of exports in 2016) and China (9.7 percent) — at risk. Despite the ECB’s extreme monetary policy and a euro trading almost at parity with the dollar, exports to non-EU countries have stalled since 2013. GDP growth estimates for 2018 are falling due to a lower contribution of net exports.
The currency also has a high impact on tax revenues in Europe. The correlation between the euro–dollar exchange rate and the earnings estimates of the largest multinationals represented in the Stoxx Europe 600 Index is very high.
According to our estimates, a 10 percent rise of the euro against the dollar is equivalent to an 8 percent drop in earnings and leads to lower corporate tax revenues. From an investment perspective, as earnings drop, the European stock market goes from being relatively cheaper to becoming more expensive.
Investors and economists need to pay attention to these factors. If the euro continues to strengthen, the EU economic recovery is at risk. So the eurozone is stuck between a rock and a hard place. It cannot stop the stimulus because deficit spending governments cannot live with higher financing costs, and increasing the stimulus to weaken the currency simply doesn’t work anymore.
The only way out is structural reforms, but most governments are afraid of them even in good times, let alone when the going gets tough.
Originally published by Epoch Times. Reprinted with permission.
Fed Vice Chair and Yellen ally Stanely Fischer announced his unexpected resignation today, citing “personal reasons.” His term as a Fed governor wasn’t to be over until 2020 and his vice chairmanship was to end June of next year.
Fischer was one of the three most important Fed members, the other two being Yellen herself and the New York Fed’s William Dudley. The WSJ reports:
Mr. Fischer came to the Fed in 2014 a luminary in central banking, having taught many leading policy makers during a more-than two decade career as a professor at the Massachusetts Institute of Technology specializing in international economics. His students included European Central Bank President Mario Draghi and former Fed Chairman Ben Bernanke.
Mr. Fischer also ran a central bank—the Bank of Israel—from 2005 to 2013, held a senior post at the International Monetary Fund and served as a Citigroup vice chairman.
In terms of the insider status of these central bankers, Mr. Fischer was “Mr. Establishment.” Well educated in the machinations of how to control an economy from the top, Fischer was an expert bureaucrat. On paper, Fischer was among the most qualified in the world to be tasked with impossible role of making us more prosperous by diktat.
In reality, Fischer, to the extent he had a marked influence on central bankers like Draghi, Bernanke, Yellen, and so many others, was a key player in the boom-and-bust system of modern monetary economics. Under his watch, we had two major and devastating recessions— the cause of which was not Fischer’s failure individually, but the inflationary framework that pervades them all.
Fischer was considered to have leaned “hawkish” by the financial press. In the old days of Paul Volcker, a hawk was one wary of dangers of rising inflation. This was juxtaposed to a dove, who would downplay the dangers of inflation and advise greater monetary expansion. But in the post-crisis era of the so-called “new normal,” where interest rates are to remain absurdly low and inflation must be targeted at 2%, the hawks have long gone extinct. Fischer was no hawk, he was a cheerleader of the quadrupling of the Fed’s balance sheet, an advocate of unprecedented credit creation, and a hater of sound money.
It remains to be seen where Fischer will go next. But his undying advocacy of the use of central banking to tinker with and manage the economy will live on.
See also:
"The Fed Wants to Test Drive Negative Interest Rates" by Joseph Salerno "Stanley Fischer's Eureka Moment" by C.Jay Engel
For the second time in less than two months, the Bank of Canada has raised interest rates.
On Wednesday, the central bank raised its overnight lending rate by a quarter per cent to 1 per cent.
The move surprised many who weren’t expecting a rate increase until later this Autumn.
Just like last time, the rationale behind higher rates was centred around the Bank of Canada’s belief that the economy is growing faster than expected.
Bank of Canada Governor Stephen Poloz said, “The level of GDP growth is now higher than the bank expected.”
Of course, this assumes that GDP measures anything.
The Canadian loonie surged after the announcement, climbing to 82 cents U.S.
The decision reinforces the message that easy money and low-interest rates are coming to an end. Of course, the bursting of Canada’s real estate bubble could reverse direction for the bank, using these recent rate gains as leverage to cut rates in order to “stimulate” the deflating economy.
But until then, analysts are expecting more rate hikes since many have confused consumer indebtedness and rising prices as economic strength.
The Bank of Canada won’t confirm these predictions since, according to the central bank’s statement, price controls on interest rates are, “predetermined and will be guided by incoming economic data and financial market developments.”
Of course, the Bank of Canada isn’t clueless when it comes to higher rates and indebted Canadian households. In the rate hike statement, the bank promised that “close attention will be paid to the sensitivity of the economy to higher interest rates,” given “elevated household indebtedness.”
The bank’s next scheduled rate-setting is Oct. 25.
All in all, today’s announcement puts interest rates back to where they were in January 2015, before Poloz made two surprising “emergency rate cuts” to deal with falling oil prices.
Reprinted from Mises.ca.
And then there were three.
Today Stanley Fischer submitted his letter of resignation from the Federal Reserve’s Board of Governors, effective next month, the second such resignation of Donald Trump’s presidency. While Fischer’s term as Vice Chairman of the Fed was set to end next year, he had the ability to serve as a governor through 2020. Along with Trump’s decision next year on whether to replace Janet Yellen as the Fed’s chair, this means Trumps will have the opportunity to appoint five of seven governors to America’s central bank.
Given that the position holds a 14-year term, it is unusual for a president to have the opportunity to make so many appointments. As Diane Swonk of DS Economics noted, “It’s the largest potential regime change in the leadership of the Fed since 1936.”
Of course the question is now whether a change in personnel will lead to a change in policy.
Trump has already taken steps to fill one of the vacancies, nominating Randal Quarles earlier this year. Quarles, a former Bush-era Treasury official turned investment banker, will be taking the specific role of Fed vice chair of supervision. As a vocal critic of Dodd-Frank, and the Volker Rule in particular, Quarles may help relieve some of the regulatory burden on financial institutions, but his views on monetary policy are less clear. He has also voiced his support for rules-based monetary policy, though he has distanced himself to the specific proposal of the “Taylor Rule.” Given the growing consensus building for NGDP-targeting, and Republicans in Congress advocating for rules-based Fed reform, Quarles could become a supporter from within the central bank. All in all though, Quarles is seen by many observes as a bland Fed-appointment.
More concerning are the views of Marvin Goodfriend, who has been reported to be a front runner for one of the Fed vacancies. An economics professor at Carnegie Mellon University and former director of research at the Richmond Fed, Goodfriend has a traditional central banker background and the dangers that comes with it. In 2016, Goodfriend made an impassioned plea for the Fed to consider negative-interest rates:
The zero interest bound is an encumbrance on monetary policy to be removed, much as the gold standard and the fixed foreign exchange rate encumbrances were removed, to free the price level from the destabilizing influence of a relative price over which monetary policy has little control—in this case, so movements in the intertemporal terms of trade can be reflected fully in interest rate policy to stabilize employment and inflation over the business cycle.
Since negative interest rates usually coincide with greater use of cash (and personal vaults), Goodfriend went so far as to suggest the Fed should consider devaluing the value of printed bank notes. A $10 bill would buy less than a $10 debit card transaction, opening up a new front in the ongoing war on cash.
Given his radical views on monetary policy, it’s not hyperbole to suggest that Goodfriend’s nomination would represent a genuine danger to the economic wellbeing of every American citizen – or at least those outside of the financial services industry.
Unfortunately, even if Goodfriend doesn’t get the nod, it’s unlikely Trump will nominate anyone who understands the negative consequences of our artificially low interest rate environment. Though Candidate Trump demonstrated remarkable savvy when it came to how the actions of Bernanke and Yellen hurt Americans, as President Trump he has consistently indicated a desire to keep the “big fat bubble” going. Such a desire obviously fits the self-interest of the White House, but with long-term consequences for the base that elected him.
The only hope for a change in direction from the Administration is for Trump to stop listening to his Goldman Guys and instead lean on the team that helped get him to the White House. As Tommy Behkne noted last November, Trump had managed to surround himself with a number of Fed skeptics during his campaign, and even considered Austrian-friendly John Allison for Treasury Secretary.
Given the historic opportunity he has with the Fed, if Trump chooses to return to those roots, he could do severe damage to the swamp — all without passing a single piece of legislation through Congress.
In April 2017, the Bank of Mexico transferred an unprecedented figure to the federal government: 321,653 billion Mexican pesos from its operating surplus. How much is this figure? It is equivalent to 1.7% of Mexico’s GDP — 25% of Guatemala’s GDP — and to 22% of the total revenue budget of the Mexican government.
What is Banxico’s Operating Surplus? Essentially all of Banxico’s profits are a result of the appreciation in the value of the bank’s foreign exchange reserves in pesos. At the beginning of 2016, the Bank of Mexico’s dollar reserve was of 176,736 billion dollars. By the end of 2016, the bank had almost the same amount in reserves. However, in January the peso was trading at 17.35 to the dollar, and in December at 20.62 a dollar.
The Mexican peso depreciated by 19% in 2016. As a consequence, the value of Banxico’s foreign exchange reserves reported a gain of 582.8 billion pesos. It is from this profit that Banxico transferred the 321,653 billion to the Mexican federal government — a transfer the bank was obligated to carry out as established in article 55 of the Banxico law by no later than April of each year.
A Blessing for Public Finances This “gift” that the central government received came as a blessing to a government that had announced a modest fiscal consolidation plan. It is important to take into account that from early 2013 until the end of 2016, the Mexican public debt went from 5202.77 billion pesos to 8657.62 billion.
By legal provision, 70% of the operative surplus that Banxico transferred to the Mexican government must be directed to repayment of debt. Undoubtedly, the aid fell from thin air: the operative surplus came from the peso’s depreciation caused by Donald Trump’s victory last November.
Will Banxico Continue to Profit? What will happen now that the peso is appreciating against the dollar? If we review the Banxico’s results from the valuation of its foreign currency reserves as a consequence of the variation in the exchange rate, we find that in the first quarter of 2017 Banxico lost 310,911 billion pesos. This means that only in the first quarter of the year Banxico lost 53% of what it earned in 2016. This is not a reason to believe that Banxico is going bankrupt, but the bank is definitely decapitalizing.
What Should We Expect for the End of the Year? Everything depends on the trend of the Mexican peso against the dollar. Experts do not expect a strong appreciation in the rest of the year. The high inflation rate does not suggest that the peso can appreciate too much. There are only two things that are certain: Banxico will report operational losses this year, and the Mexican government will not receive another “gift” in 2018 to pay for the public debt. The government will have to tighten its belt if it wants to reduce the high level of public debt it has.
Originally published by UFM's Market Trends.
On 23 August 2017, the president of the European Central Bank (ECB) gave a speech titled “Connecting research and policy making” at the annual assembly of the winners of the Nobel Price for Economics in Lindau, Germany.See Draghi, M., The interdependence of research and policymaking, speech at the Lindau Nobel Laureate Meeting, Lindau, Germany, 23 August 2017. What Mr Draghi talked about on this occasion — and especially what he didn’t talk about — was quite revealing.
Any analysis of the causes of the latest financial and economic crisis is conspicuously absent from Mr Draghi’s remarks. One gets the impression that the crisis came basically unexpected, out of the blue. There is no mention of the role of central banks, the monopoly producers of unbacked paper (or: fiat) money, played for the crisis.
No word that central banks had for many years manipulated downwards interest rates — accompanied by an excessive increase in credit and money supply — causing an unsustainable “boom.” When the bust set in — triggered by the spreading of the US subprime crisis across the globe — the ugly consequences of this central bank monetary policy came to the surface.
In the bust, many governments, banks and consumers in the euro area found themselves financially overstretched. The economies of Southern Europe especially do not only suffer from malinvestment on a grand scale, they also found themselves in a situation in which they have lost their competitiveness.
Mr Draghi, however, doesn’t deal with such unpleasant details. Instead, he lets his audience know how well the ECB pursued a policy of "crisis solution." His narrative is straightforward: Without the ECB’s bold actions, the euro area would have fallen into recession-depression, perhaps the euro area would have broken apart.
The analogy to such a line of argumentation would be praising a drug dealer, who provides the drug addict (who became a drug addict because of him) with just another shot. Repeated consumption of drugs does not heal but damages drug addict. Who would applaud what the drug dealer does? Likewise: would it be appropriate to praise the ECB’s action?
Mr Draghi presents himself as a fairly modest, intellectually ‘undogmatic’ central bank president stressing the importance of the insights produced by economic research for real life monetary policy making (thereby dutifully applauding the output of the economics profession). But the policy maker’s approach is far from being scientifically impartial.
Draghi's Flawed Methods Today’s economics research — as it is pursued, and taught, by leading mainstream economists — rests on a scientific method that is borrowed from natural science and builds on positivism-empiricism-falsificationism. For a critical analysis see Hoppe, H.-H. (2006), Austrian Rationalism in the Age of the Decline of Positivism, in: The Economics and Ethics of Private Property. Studies in Political Economy and Philosophy, 2nd edition, Ludwig von Mises Institute, Auburn, US Alabama, pp. 347 – 379. This approach, used in economics, does not only suffer from logical inconsistencies, its embedded skepticism and relativism has, in fact, has let economics astray.
Under the influence of positivism-empiricism-falsificationism economic theory – in particular monetary theory and financial market theory – has become the intellectual stirrup-holder of central banking, legitimizing the issuance of fiat money, the policy of manipulating the interest rate, the idea of making the financial system ‘safer’ through regulation.
In this vein, Mr Draghi praises especially the independence of central banks — for it would shield central bankers from destabilizing political outside influence. One really wonders how this argument — one-sided as it is — could find acceptance, especially in view of the fact that independent central banks have caused the great crisis in the first place.
The Central Bank's Many Friends Why is there hardly any public opposition to Mr Draghi’s narrative? Well, a great deal of experts on monetary policy — coming mostly from government sponsored universities and research institutes — tends to be die-hard supporters of central banking. The majority of them would not find any fundamental, that is economic or ethic, flaw with it.
These so-called “monetary policy experts,” devoting so much time and energy for becoming and remaining an expert on monetary policy, unhesitatingly favor and accept without reservation the very principles on which central banking rests: the state’s coercive money production monopoly and all the measures to assert and defend it.
The upshot of such a mindset is this: “Once the apparatus is established, its future development will be shaped by what those who have chosen to serve it regard as its needs,”Hayek, F. A. v. (1960), The Constitution of Liberty, The University of Chicago Press, Chicago, p. 291. as F.A. Hayek explained the irrepressible expansionary nature of a monopolistic government agency – like a central bank.
Experts, keenly catering to the needs of the state and the banks, will make monetary policy increasingly complex and incomprehensible to the general public. Just think about the confusing abbreviations the ECB uses such as, say, APP, QE, CBPP, OMT, LTRO, TLTRO, ELA etc.APP = Asset Purchase Programme, QE = quantitative easing (issuing new money by purchasing bonds), CBPP = Covered Bond Purchase Programme, OMT = Outright Monetary Transactions, LTRO = Long-term Refinancing Operations, TLTRO = Targeted Long-term Refinancing Operations, ELA = Emergency Liquidity Assistance. In this way central bankers effectively sneak themselves out from public and parliamentary control.
Has the ECB Violated its Mandate? It comes therefore as no surprise Mr Draghi hails “non-standard policy measures” such as quantitative easing through which the central bank subsidizes financially ailing governments and banks in particular. Mr Draghi, however, does not leave it at that. He also suggests that monetary policy should shake off remaining restrictions that hamper policy maker’s discretion:
[W]hen the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defence of previously held paradigms that have lost any explanatory power.
These remarks come presumably because the German Constitutional Court has found indications that the ECB’s government bond purchases may violate EU law and has asked the European Court of Justice to make a ruling. The German judges say that ECB bond buys may go beyond the central bank's mandate and inhibit euro zone members' activities.
The issue is no doubt delicate: If the ECB is prohibited from buying government bonds (let alone reverse its purchases), all hell may break loose in the euro area: Many government and banks would find it increasingly difficult to roll-over their maturing debt and take on new loans at affordable interest rates. The euro project would immediately find itself in hot water.
Without a monetary policy of ultra-low interest rates and bailing out struggling borrowers by printing up new money (or promising to do so, if needed) the euro project would already have gone belly up. So far the ECB has indeed successfully concealed that the pipe dream of successfully creating and running a single fiat currency has failed.
The crucial question in this context is, however: What has changed in economics in the last ten years? Unfortunately, economists that follows the doctrine of positivism-empiricism-falsificationism feel encouraged to question, even reject, the idea that there are immutable economic laws, preferring the notion that ‘things change’ that ‘everything is possible’.
However, sound economics tells us that there are iron laws of human action. For instance, a rise in the quantity of money does not make an economy richer, it merely reduces the marginal utility of the money unit, thus reducing its purchasing power; or: suppressing the interest rate through the central bank must result in malinvestments and boom and bust.
In other words: Sound economics tells us that central bankers do not pursue the greater good. They debase the currency; slyly redistribute income and wealth; benefit some groups at the expense of others; help the state to expand, to become a deep state at the expense of individual freedom; make people run into ever greater indebtedness.
What central bankers really do is cause a "planned chaos." Unfortunately, the damages they create — such as, say, inflation, speculation, recession, mass unemployment etc. — are regularly and falsely attributed to the workings of the free market, thereby discouraging and eroding peoples’ confidence in private initiative and free enterprise.
The failure of such interventionism — of which central bank monetary policy is an example par excellence — does not deter its supporters. On the contrary: They feel emboldened to pursue their interventionist course ever more boldly and aggressively to achieve their desired objectives. Mr Draghi made a case in point when he said in July 2012:
“[W]e think the euro is irreversible” and “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”Draghi, M., Verbatim of the remarks made by Mario Draghi, speech held at the Global Investment Conference in London, 26 July 2012. Hayek’s warning in his book Fatal Conceit (1988) goes unheard: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."Hayek, F. A. v. (1988), Fatal Conceit. The Errors of Socialism, edited by W. W. Bartley, III, Routledge, London, p. 76.
Mr Draghi’s speech should not convince us that monetary policy rests on sound economics, or that the ECB works for the greater good. If anything, it shows that economics has been twisted and deformed to service the needs of the state and its central bank – which increasingly erodes what little is left of the free market to keep the fiat money system going.
Holding up the fiat euro will result in a coercive redistribution of income and wealth among people, within and across national borders, to an extent historically unprecedented in times of piece. As a tool of an effectively anti-democratic policy, the single European currency will remain a source of interminable conflict, injustice, and it will be a drag on peoples’ prosperity.
The Federal Reserve tries and tries and just can’t muster up some price-tag ripping price inflation. Blowing up its balance sheet from $900 billion to $4.5 trillion would have seemed to send us to Zimbabwe, but no, prices just won’t cooperate with the monetary masterminds toiling away in the Eccles Building.
MarketWatch’s Caroline Baum says Fed Chairs used to call these things conundrums. However, “Conundrums are a thing of the past. Nowadays, Fed Chairwoman Janet Yellen has an explanation — an excuse, really — for almost anything, from the atypical behavior of asset prices to inconsistencies in economic relationships,” writes Baum.
We’re told by President Trump that we’re at full employment, yet prices (the way the Fed measures them anyway) can’t get to the 2 percent increase level Yellen et. al. considers nirvana.
Baum writes that the Fed called price changes “transitory” then they were “definitional challenges” followed by “idiosyncratic factors,” such as “a precipitous drop in the price of wireless telecommunications services this year.”
It’s in all the economic textbooks: Nothing stops inflation like a drop in cell phone fees.
This summer, private economists are pointing to drops in hotel rates as depressing CPI and whatnot. However, Ms. Baum knows, “Inflation is a monetary phenomenon. When the Fed expands its balance sheet through asset purchases, it has no control over where that newly created money will go: toward the purchase of goods and services; or into financial assets, such as stocks, junk bonds or housing.”
She continues, “The Fed’s asset purchases lower risk-free Treasury rates, encouraging investors to reach for yield and buy riskier assets.
“Because asset prices aren’t part of official inflation measures, and because identifying an asset bubble is beyond their scope, central bankers eschew using monetary policy to respond to them.”
The Fed is not alone in its bubble enabling. A Bloomberg Businessweek headline screams, “Even the Junkiest Sovereign Debt Now Pays Less Than 6%.” with the subtitle naming the culprit, “Central bank buying has distorted the market and reduced yields on the lowest-rated debt.”
It’s not just those cranky Austrians calling central bankers on the carpet for their monetary mischief these days. Everyone knows, is holding their breath, and hoping for the best.
Natasha Doff explains,
The junkiest emerging-market bonds yield less now than U.S. Treasury bills did as recently as 1999. Yields on state debt of Mongolia, Ukraine and Belarus -- at seven levels below investment grade, among the world's lowest ranked -- have dropped under 6 percent in the past two months.
It is as Ms. Baum writes, “Asset prices are a symptom; excessive credit growth is the cause.”
William White wrote in a 2009 paper that bubble episodes have the following in common: leverage, speculation and declining credit standards.
For instance money losing Tesla looked to sell $1.5 billion of junk bond debt and ended up selling $1.8 billion because the demand was so high for it's B- rated paper.
"I won't call it a bubble," said Andrew Feltus, co-head of high yield and bank loans at Amundi Pioneer Asset Management in Boston told Reuters. "The (market) fundamentals are pretty good."
Some would disagree. According to ValueWalk, “Tesla, Inc. is an over-hyped, lousy company, from a financial perspective, that is destined to go bankrupt.”
Famed Short-seller Jim Chanos said last year the announced $2.6 billion merger with SolarCity Corp. will make Tesla Motors Inc. a "walking insolvency."
A “walking insolvency” can borrow more than it wants at 5.3%; now that’s a conundrum.
Douglas French is former president of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth.
Ever since entering the Senate, Rand Paul has continued his father’s work in advocating for an audit of the Federal Reserve. This week, writing for the Daily Caller, Senator Paul renewed his efforts, illustrating how the recent era of unconventional monetary policy has made an audit all the more important:
In 2009, then-Fed Chairman Ben Bernanke was able to refuse to tell Congress who received over two trillion in Fed loans, and it took congressional action and a Bloomberg lawsuit to force the Fed to reveal the details of what it did in more than 21,000 transactions involving trillions of dollars during the 2008 financial crisis. A one-time audit of the Fed’s emergency lending mandated by Congress revealed even more about the extent to which the Fed put taxpayers on the hook.
When pushed to defend the lack of transparency for the Federal Reserve, officials like Janet Yellen and Treasury Secretary Steve Mnuchin point to the myth of the Fed independence — a position that requires outright ignorance of the history of America’s central bank and the executive branch. Of course it’s quite usual for the Senate to base the merits of legislation entirely off of fallacious arguments, so they have continued to be the legislative body holding up a Fed audit with little indication they are prepared to move.
Given that reality, it is time for Senator Rand Paul to change his approach and introduce another piece of legislation from his father’s archives: the Free Competition in Currency Act.
While not as catchy as “End the Fed”, this piece of legislation – inspired by the work of F.A. Hayek – was perhaps Ron Paul’s most radical pieces of legislation. The idea was quite simple: eliminate legal tender laws mandating the use of US Dollars and remove the taxes Federal and State governments place on alternative currencies — such as gold and silver. While the original legislation did apply to “tokens,” an updated version should explicitly include the growing market of cryptocurrencies as a good with monetary value that should not be taxed.
What this would do is create a more even playing field between the dollar and alternative currencies, allowing an easy way for Americans to safeguard their wealth if they ever have reason to doubt the wisdom of the Federal Reserve’s policies. Just as Senator Paul advocated for the ability of Americans to be able to opt-out of the failing Obamacare system, this bill would grant Americans a lifeboat should the weaknesses inherent with the Fed’s fiat money regime expose themselves.
Unlike most examples of monetary policy reforms, which tend to be the products of ivory tower echo chambers, competition in currency would reflect active political trends. In recent years, states like Texas, Utah, and – in 2017 – Arizona have passed laws allowing the use of silver and gold for use in transactions. Meanwhile, other countries have looked to embrace the potential of cryptocurrencies for their monetary regimes. This makes this not only an idea that is good on paper, but one whose time has come.
As alluded to before, simply because a policy makes sense does not mean the Senate will act on it. That doesn’t mean the conversation and debate isn’t worth having. While it may still be on the horizon, there has been a steady drumbeat in Washington for the Federal Reserve to face some sort of reform. For two Congressional sessions in a row, the House has passed legislation explicitly calling for the Fed to embrace a “rules-based monetary system.” While this approach may sound better than today’s PhD standard, it doesn’t solve the problems inherent with central banking and fiat money.
Monetary rules such as “NGD Targeting” – which has the support of a rare coalition including the Cato Institute, Mercatus Center, Christina Romer, and Paul Krugman — should never be seen as a “reasonable compromise” for those skeptical about the Fed. Instead it’s simply another way of disguising central planning in a way to make it more palpable to the public, and therefore more difficult to stop. By putting this bill out there, Rand Paul can help frame the debate and bring a real solution to the table. Something that wouldn't force the Fed to change a single thing, only making them compete on the market like the producer of other good or service.
After all, as is the case with healthcare, or shoes, the best sort of “monetary policy” is competition on the market. Not one dictated by government.
The FT recently ran an article that states that “leading central banks now own a fifth of their governments’ total debt.”
The figures are staggering.
Without any recession or crisis, major central banks are purchasing more than $200 billion a month in government and private debt, led by the ECB and the Bank of Japan.The Federal Reserve owns more than 14% of the US total public debt.The ECB and BOJ balance sheets exceed 35% and 70% of their GDP.The Bank of Japan is now a top 10 shareholder in 90% of the Nikkei.The ECB owns 9.2% of the European corporate bond market and more than 10% of the main European countries’ total sovereign debt.The Bank of England owns between 25% and 30% of the UK’s sovereign debt. A recent report by Nick Smith, an analyst at CLSA, warns of what he calls ”the nationalization of the secondary market.”
The Bank of Japan, with its ultra-expansionary policy, which only expands its balance sheet, is on course to become the largest shareholder of the Nikkei 225’s largest companies. In fact, the Japanese central bank already accounts for 60% of the ETFs market (Exchange traded funds) in Japan.
What can go wrong? Overall, the central bank not only generates greater imbalances and a poor result in a “zombified” economy as the extremely loose policies perpetuate imbalances, weaken money velocity, and incentivize debt and malinvestment.
Believing that this policy is harmless because “there is no inflation” and unemployment is low is dangerous. The government issues massive amounts of debt and cheap money promotes overcapacity and poor capital allocation. As such, productivity growth collapses, real wages fall and purchasing power of currencies fall, driving the real cost of living up and debt to grow more than real GDP. That is why, as we have shown in previous articles, total debt has soared to 325% of GDP while zombie companies reach crisis-high levels, according to the Bank of International Settlements.
Government-issued liabilities monetized by the central bank are not high-quality assets, they are an IOU that is transferred to the next generations, and it will be repaid in three ways: with massive inflation, with a series of financial crises, or with large unemployment. Currency purchasing power destruction is not a growth policy, it is stealing from future generations. The “placebo” effect of spending today the Net Present Value of those IOUs means that, as GDP, productivity and real disposable income do not improve, at least as much as the debt issued, we are creating a time bomb of economic imbalances that only grows and will explode sometime in the future. The fact that the evident ball of risk is delayed another year does not mean that it does not exist.
The government is not issuing “productive money” just a promise of higher revenues from higher taxes, higher prices or confiscation of wealth in the future. Money supply growth is a loan that government borrows but we, citizens, pay. The payment comes with the destruction of purchasing power and confiscation of wealth via devaluation and inflation. The “wealth effect” of stocks and bonds rising is inexistent for the vast majority of citizens, as more than 90% of average household wealth is in deposits.
In fact, massive monetization of debt is just a way of perpetuating and strengthening the crowding-out effect of the public sector over the private sector. It is a de facto nationalization. Because the central bank does not go “bankrupt,” it just transfers its financial imbalances to private banks, businesses, and families.
The central bank can “print” all the money it wants and the government benefits from it, but the ones that suffer financial repression are the rest. By generating subsequent financial crises through loose monetary policies and always being the main beneficiary of the boom, and the bust, the public sector comes out from these crises more powerful and more indebted, while the private sector suffers the crowding-out effect in crisis times, and the taxation and wealth confiscation effect in expansion times.
No wonder that government spending to GDP is now almost 40% in the OECD and rising, the tax burden is at all-time highs and public debt soars.
Monetization is a perfect system to nationalize the economy passing all the risks of excess spending and imbalances to taxpayers. And it always ends badly. Because two plus two does not equal twenty-two. As we tax the productive to perpetuate and subsidize the unproductive, the impact on purchasing power and wealth destruction is exponential.
To believe that this time will be different and governments will spend all that massive “very expensive free money” wisely is simply delusional. The government has all the incentives to overspend as its goal is to maximize budget and increase bureaucracy as means of power. It also has all the incentives to blame its mistakes on an external enemy. Governments always blame someone else for their mistakes. Who lowers rates from 10% to 1%? Governments and central banks. Who is blamed for taking “excessive risk” when it explodes? You and me. Who increases money supply, demands “credit flow,” and imposes financial repression because “savings are too high”? Governments and central banks. Who is blamed when it explodes? Banks for “reckless lending” and “de-regulation”.
Of course, governments can print all the money they want, what they cannot do is convince you and me that it has a value, that the price and amount of money they impose is real just because the government says so. Hence lower real investment, and lower productivity. Citizens and companies are not crazy for not falling into the trap of low rates and high asset inflation. They are not amnesiac.
It is called financial repression for a reason, and citizens will always try to escape from theft.
What is the “hook” to let us buy into it? Stock markets rise, bonds fall, and we are led to believe that asset inflation is a reflection of economic strength.
Then, when the central bank policy stops working — either from lack of confidence or because it is simply part of the liquidity — and markets fall to their deserved valuations, many will say that it is the fault of “speculators,” not the central speculator.
When it erupts, you can bet your bottom dollar that the consensus will blame markets, hedge funds, lack of regulation and not enough intervention. Perennial intervention mistakes are “solved” with more intervention. Government won on the way up, and wins on the way down. Like a casino, the house always wins.
Meanwhile, the famous structural reforms that had been promised disappear like bad memories.
It is a clever Machiavellian system to end free markets and disproportionately benefit governments through the most unfair of competitions: having unlimited access to money and credit and none of the risks. And passing the bill to everyone else.
If you think it does not work because the government does not do a lot more, you are simply dreaming.
Originally published at DLacalle.com
Although today high levels of inequality in the United States remain a pressing concern for a large swath of the population, monetary policy and credit expansion are rarely mentioned as a likely source of rising wealth and income inequality. Focusing almost exclusively on consumer price inflation, many economists have overlooked the redistributive effects of money creation through other channels. One of these channels is asset price inflation and the growth of the financial sector.
The rise in income inequality over the past 30 years has to a significant extent been the product of monetary policies fueling a series of asset price bubbles. Whenever the market booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble.
The Cantillon Effect The redistributive effects of money creation were called Cantillon effects by Mark Blaug after the Franco-Irish economist Richard Cantillon who experienced the effect of inflation under the paper money system of John Law at the beginning of the 18th century.Blaug, M. (1985) Economic Theory in Retrospect, 4th edition, Cambridge: Cambridge University Press. Cantillon explained that the first ones to receive the newly created money see their incomes rise whereas the last ones to receive the newly created money see their purchasing power decline as consumer price inflation comes about.
Following Cantillon and contrary to Fisher and other monetary theorists of his time, Ludwig von Mises was the first to emphasize these Cantillon effects in terms of marginal utility analysis. With an increase in the stock of money, the cash balances of the early receivers of the newly created money increase. Correspondingly, the marginal utility they give to money decreases and the individuals in question buy either investment or consumption goods, thus bidding up the prices of those goods and increasing the cash balances of their sellers. With this step by step process, the price of goods will increase only progressively and affect both the distribution of income and wealth as well as the different price ratios.
Financialization, Asset Price Inflation and Inequality In accordance with the Cantillon effect, inflation can increase inequality depending on the channel it takes, but increasing inequality is not a necessary consequence of inflation. If it happened that the poorest in society were the first receivers of the newly created money, then inflation could very well be the cause of decreasing inequality.
Under modern central banking however, money is created and injected into the economy through the credit channel and first affects financial markets. Under this system, commercial banks and other financial institutions are not only the first receivers of the newly created money but are also the main producers of credit money. This is so because banks can grant loans unbacked by base money. In a free-banking system, this credit creation power of banks is strictly limited by competition and the clearing process. Under central banking however, the need for reserves is relaxed as banks can either sell financial assets to the central bank in open market operations, or the central bank can grant loans to banks at relatively low interest rates. In both cases, central banks remove the limits of credit expansion by determining the total reserves in the banking system. In other words, commercial banks and other financial institutions are credited with so-called base money that has not existed before. Thus, the economics of Cantillon effects tells us that financial institutions benefit disproportionately from money creation, since they can purchase more goods, services, and assets for still relatively low prices. This conclusion is backed by numerous empirical illustrations. For instance, the financial sector contributed massively to the growth of billionaire’s wealth (see table below).
We can list four main reasons why the growth of financial markets is triggered by an expansion of the money supply:I owe the three first reasons to Mises Fellow Karl Friedrich Israel. See: Israel, K. F. (2016a). In the long run we are all unemployed? The Quarterly Review of Economics and Finance. (64). 67-81. (1) because financial titles are often used as collateral in debt contracts; (2) because the anticipation of price-inflation, which is a common trait among all fiat money regimes, discourages the hoarding of money thus encouraging both the demand for and the supply of financial titles; (3) because the production of money through central banks is a matter of sheer human will and is therefore prone to developing moral-hazard in the financial world. This leads to an artificially high demand for financial titles and increases the supply of such titles by the same token. And (4) because the manipulation of credit by central banks and banks, by lowering the interest rate in the short run, particularly affects the demand for capital and the capital structure during the course of the business cycle.
One of the most visible consequence of this growth of financial markets triggered by monetary expansion is asset price inflation. In a completely sound money system where credit only depends on the amount of saving rather than on fiduciary credit, there is very little room for generalized and persistent asset-price inflation as the amount of funds which can be used to purchase assets is strictly limited. In other words, the phenomenon of asset-price inflation is a child of credit inflation.
Asset price inflation in turn benefit mostly the richest in society for several reasons. First, the wealthy tend to own more financial assets than the poor in proportion to his income. Second, it is easier for the richest individuals to contract debt in order to buy shares that can be sold later at a profit. Since credit easing lowers the interest rate and therefore funding costs, the profits made by selling inflated assets bought at credit will be even greater. Finally, asset price inflation coming with the growth of financial markets will benefit the workers, managers, traders, etc. working in the financial sector. It will also benefit the CEO's of the publicly traded companies who will be paid more as the capitalization value of their company increases. Hence, the correlation between asset prices and income inequality has been, as expected, very strong.
However, most monetary economists ignored — and continue to ignore — asset-price inflation and do not see it as a consequence of an inflated money supply. A reader of A Monetary History of the US (1963) by Friedman and Schwartz or of Allan Meltzer's A History of the Federal Reserve (2004) will not find one mention of asset price inflation. This oversight leads to the effects of inflation on inequality to be underestimated or ignored. Periods of growing inequality and monetary inflation such as the 1920's or the 2000's were associated with a high rate of asset-price inflation but relatively stable consumer prices. Therefore, to focus on consumer price inflation as the only variable accounting for monetary policy leaves out most of the effects of money creation on inequality.
Since the 2008 financial crisis, the so-called unconventional monetary policies have often been justified on the ground that something must be done in the short run since, as would have said J.M. Keynes, "In the long run, we are all dead." But as our monetary system tends to increase inequality, and if the goal is to improve the standards of living of the least well-off in society, then central banking and artificial monetary creation may be more costly than usually assumed by policy-makers.
If you invest your money, you will have to deal with numerous risks. For instance, if you buy a bond, you run the risk of the borrower defaulting or being repaid with debased money. As a stock investor, you face the risk that the company's business model will not live up to expectations, or that it, at the extreme, will go bankrupt. In an unhampered financial market, prices are formed for these and other risk factors.
For instance, a bond with a high default risk will typically carry a high yield. The same goes for debt denominated in an unsound currency. Stocks of companies that are deemed risky tend to trade at a lower valuation level than those considered low risk. All these risk premiums, if determined in the unhampered market, constitute a portion of an asset’s price, be it a bond or a share. They play a vital role in the way capital is allocated in an economy.
Risk premiums are meant to compensate investors for the risk of losses resulting from adverse developments. If you buy a stock at a depressed price relative to the firm’s earnings power, it tends to reduce your downside (while offering the chance of great gains). At the same time, risk premiums increase investors’ cost of capital. This, in turn, discourages them from engaging in overly risky investments.
Decline in risk premiums:
In other words, risk premiums determined in an unhampered market align the interests of savers and investors. Of course, one cannot be sure that ex ante risk premiums are always correct. Sometimes it turns out that risks were overestimated, sometimes they were underestimated. However, the unhampered market is still the best and most efficient means to determine the price of risk.
Central Banks Suppress Risk Premiums Central banks, however, interfere and corrupt the best practice of the formation of the price of risk. In the last financial and economic crisis, central banks had lowered interest rates to unprecedented low levels and ramped up the quantity of (base) money to keep financially ailing governments and banks afloat and the economy going. In fact, they effectively put out a ‘safety net’, providing insurance to financial markets against potential systemic losses.
Decline in risk premiums:
By doing so, central banks have put investor risk aversion to sleep: Under their guidance, financial markets are now betting on, and have high confidence in, monetary policy makers successfully fending off any new problems in the economic and financial system. This seems to be the message the price action in financial markets is conveying to us. For instance, stock price fluctuations have returned to very low levels, accompanied by strong stock market gains and high valuations.
The yield spread of risky corporate bonds over US Treasuries has returned to levels last seen in early 2008. Or look at the prices for credit default insurance for bank bonds. They also have returned to pre-crisis levels, suggesting investor credit concerns have markedly declined. In other words, investors are back again, eagerly taking on additional credit risk and willingly financing corporates’ investments at suppressed costs of capital.
Central banks have thus not only artificially reduced interest rates by lowering credit costs, they have also artificially reduced risk premiums by (explicitly or implicitly) signaling to the financial markets that they are prepared to basically ‘do whatever it takes’ to prevent another meltdown as witnessed in 2008/2009. The consequence is that financial markets and economies depend on central bank action more than ever before.
There is no easy way out of this situation. If interest rates go up — be it through rate hikes or the elimination of the ‘safety net’ — the current recovery will most likely come to a halt, if it does not turn into a bust straight away: With higher interest rates, the economic structure, built on artificially low interest rates, would run into serious trouble. The idea of central banks ‘normalizing’ interest rates without output losses or even a recession appears illusionary at best.
Against this backdrop, it is interesting to see that, for instance, the US Federal Reserve and the European Central Bank (ECB) may want to bring short-term interest rates back up (further). At the same time, however, there is no evidence that monetary policymakers have any plans to remove the ‘safety net’ that has so successfully brought down risk premiums in asset markets and thus the cost of capital.
That said, even an increase of central banks’ short-term funding will not bring about a normalization of the cost of capital — as risk premiums will most likely remain artificially suppressed. Capital misallocation will continue and the artificial boom is kept alive and well. Investors, therefore, face quite a challenge: Malinvestments continue, and downside risks increase, while it might be too early to jump ship.
Sin City’s projected 5,000 new apartment units for this year makes no noise nationally in the latest real estate craze. “In 2017, the ongoing apartment building-boom in the US will set a new record: 346,000 new rental apartments in buildings with 50+ units are expected to hit the market,” writes Wolf Richter on Wolf Street. That is three times the number of units that came on line in 2011.
Richter continues, “Deliveries in 2017 will be 21% above the prior record set in 2016, based on data going back to 1997, by Yardi Matrix, via Rent Café. And even 2015 had set a record. Between 1997 and 2006, so pre-Financial-Crisis, annual completions averaged 212,740 units; 2017 will be 63% higher!”
I’ve written before about the high-rise crane craze in Seattle, but that’s nothing compared to New York and Dallas, that are adding 27,000 and 25,000 units, respectively. Chicago is adding 7,800 units despite a shrinking population and rents decreasing 19 percent.
Not surprisingly, Fannie Mae and Freddie Mac are financing this rental housing boom. I wrote recently, the GSEs made 53% of all apartment loans in 2016, down from their combined 68% market share in 2012. “So, their conservator, The Federal Housing Finance Agency (FHFA), recently eased the GSE’s lending caps so they can crank out even more loans.”
Mary Salmonsen writes for multifamilyexecutive.com, “Currently, Fannie and Freddie are particularly dominant in garden apartments [and] in student housing, with 62% and 61% shares, respectively. The two remain the largest mid-/high-rise lenders but hold only 35% of the market.”
Mr. Richter warns us, “Government Sponsored Enterprises such as Fannie Mae guarantee commercial mortgages on apartment buildings and package them in Commercial Mortgage-Backed Securities. So taxpayers are on the hook. Banks are on the hook too.”
But, for the moment, it’s build them and they will come; first renters, then complex buyers. Wall Street giant “The Blackstone Group acquired three Las Vegas Valley apartment complexes for $170 million, property records show,” writes Eli Segall for the Las Vegas Review Journal. “Overall, it bought 972 units for an average of $174,900 each.”
Sales like this has developers going as fast as they can. I heard an apartment developer say Vegas has at least four more good years left in this cycle and is scrambling for new sites. In the land of Starbucks, Microsoft and Amazon, it’s thought the boom will never end. Richter writes, “the new supply of apartment units hitting the market in 2018 and 2019 will even be larger. In Seattle, for example, there are 67,507 new apartment units in the pipeline.”
However, while no one was paying attention, “the prices of apartment buildings nationally, after seven dizzying boom years, peaked last summer and have declined 3% since,” Richter writes. “Transaction volume of apartment buildings has plunged. And asking rents, the crux because they pay for the whole construct, have now flattened.”
As usual, cheap money entices developers to over do it, and the fall will be just as painful.
Douglas French is former president of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth.
The Bank of International Settlements (BIS) has warned again of the collateral damages of extremely loose monetary policy. One of the biggest threats is the rise of “zombie companies.” Since the “recovery” started, zombie firms have increased from 7.5% to 10.5%. In Europe, Bof A estimates that about 9% of the largest companies could be categorized as “walking dead.”
What is a zombie company? It is — in the BIS definition — a listed firm, with ten years or more of existence, where the ratio of EBIT (earnings before interest and taxes) relative to interest expense is lower than one. In essence, a company that merely survives due to the constant refinancing of its debt and, despite re-structuring and low rates, is still unable to cover its interest expense with operating profits, let alone repay the principal.
This share of zombie firms can be perceived by some as “small.” At the end of the day, 10.5% means that 89.5% are not zombies. But that analysis would be too complacent. According to Moody’s and Standard and Poor’s, debt repayment capacity has broadly weakened globally despite ultra-low rates and ample liquidity. Furthermore, the BIS only analyses listed zombie companies, but in the OECD 90% of the companies are SMEs (Small and Medium Enterprises), and a large proportion of these smaller non-listed companies, are still loss-making. In the Eurozone, the ECB estimates that around 30% of SMEs are still in the red and the figures are smaller, but not massively dissimilar in the US, estimated at 20%, and the UK, close to 25%.
The rise of zombie companies is not a good thing. Some might say that at least these companies are still functioning, and jobs are kept alive, but the reality is that a growingly “zombified” economy is showing to reward the unproductive and tax the productive, creating a perverse incentive and protecting nothing in the long run. Companies that underperform get their debt refinanced over and over again, while growing and high productivity firms struggle to get access to credit. When cheap money ends, the first ones collapse and the second ones have not been allowed to thrive to offset the impact.
Low interest rates and high liquidity have not helped deleverage. Global debt has soared to 325% of GDP. Loose monetary policies have not helped clean overcapacity, and as such zombie companies perpetuate the glut in many sectors, driving down the growth in productivity and, despite historic low unemployment rates, we continue to see real wages stagnate.
The citizen does not benefit from the zombification of the economy. The citizen pays for it. How? With the destruction of savings through financial repression and the collapse of real wage growth. Savers pay for zombification, under the mirage that it “keeps” jobs.
Zombification does not boost job creation or buy time, it is a perverse incentive that delays the recovery. It is a transfer of wealth from savers and healthy companies to inefficient and obsolete businesses.
The longer it takes to clean the overcapacity — which stands above 20% in the OECD — and zombification of the economy, the worse the outcome will be. Because, when the placebo effect of monetary policy disappears, the domino of bankruptcies in companies that have been artificially kept alive will not be offset by the improvement in high added-value sectors. Policymakers have decided to penalize the high productivity sectors through taxation and subsidize the low productivity ones through monetary and fiscal policies. This is likely to create a vacuum effect when the bubble bursts.
The jobs and companies that they try to protect will disappear, and the impact on banks’ solvency and the real economy will be much worse.
Avoiding making hard decisions from a crisis created by excess and overcapacity ends up generating a much more negative effect afterward.
Reprinted with permission of the author. Daniel Lacalle has a PhD in Economics and is author of Escape from the Central Bank Trap, Life In The Financial Markets, and The Energy World Is Flat (Wiley).
When Janet Yellen testified before the House Financial Services Committee last month, she faced grilling on a topic that hasn’t received enough mainstream attention: the interest being paid on excess reserves at the Fed. While the topic has come up occasionally since the program began in 2008, it is worth noting that Yellen was pushed by both Jeb Hensarling, the committee chairman, and Andy Barr, the chairman of the Monetary Policy Subcommittee. While ending this taxpayer subsidy to Wall Street is important, it’s also important to understand the dangers posed by allowing these excess reserves to be lent out of major financial institutions.
RELATED: "Who Benefits from the Fed?" by David Howden
To understand what is at stake, recall back to 2008 when many Fed observers were concerned about the inflation dangers posed by the policies of the Bernanke Fed. In a six year period, the base money supply increased over four-fold. Understandably, this sparked grave fears about the devaluation of the dollar — fears that, to date, have yet to really present themselves in the CPI. While stock prices, real estate prices, and other types of asset-price inflation are likely being fueled by this monetary policy, the Fed isn’t facing political pressure from inflation concerns — but rather being grilled by misinformed legislators for not reaching their (unfortunate) 2% inflation target.
This is, in part, due to the fact that a lot of this new money has been kept sterile by being parked within the Fed itself as excess reserves. Today, more than $2 trillion worth of these reserves are parked at the Fed, which means that only two thirds of the newly created money has actually been pumped into the “real economy.”
RELATED: "Central Banks Should Stop Paying Interest on Reserves" by Brendan Brown
Now this policy should rightfully puncture the narrative that the Fed was at all concerned with providing liquidity to businesses on Main Street (i.e., not big banks). After all, if the aim of the various rounds of QE was to get banks to loan, then paying them not to is irrational. Instead, the Fed was using taxpayer dollars to subsidize the very same banks that they just bailed out. We are continuing, to this day, to pay banks to not make loans.
While Bernanke repeatedly dismissed the problem of incentives posed by paying 25 basis points on these reserves, the reality is that this was a risk-free investment at a time of great market volatility. Considering that several important banks had issues passing the Fed’s stress tests — tests are designed to exaggerate the stability of the financial sector — it doesn’t require a great logical leap to suggest that the Fed misrepresented this program to public in the name of “stabilizing” the financial sector. In 2016, this policy paid $16 billion to big banks, a number that will likely rise as the interest rate payments go up with every increase in the federal funds rate (we are now paying 1.25% interest, higher than the public can receive from their own banks.)
While both the public and Fed critics on Capitol Hill should be outraged at this clear example of cronyism, simply ending it is not enough. After all, the danger of refusing to pay ransom money is that the ransomer will follow through on their threat. If the Fed was to simply stop payment on these funds, and banks decided to lend it out — then $2 trillion would be injected into credit markets. Given the amplifying effects of a fractional reserve banking system, it’s easy to see how quickly this could unleash severe inflationary pressures.
So this is the true policy issue going forward, how do you stop the taxpayer subsidy to Wall Street while avoiding lighting the fuse to Bernanke’s inflation bomb? One way would be to increase reserve requirements. Currently banks with over $115.1 million in liabilities have to keep 10% at the Fed, by raising that number up you will not only serve to keep this expansion of the monetary base “sterile,” but will make the banking sector as a whole more stable.
The Federal Reserve (Fed) is widely expected to continue to tighten its monetary policy this year. According to a latest Reuters Poll, the Fed is likely to start shrinking its US$4 trillion balance sheet in September and, moreover, raise further its key interest rate, which is currently standing in a range of 1.0 to 1.25 percent, in the fourth quarter this year.
According to mainstream economic wisdom, the time has come for the US economy to return to a more normal level of interest rates. Industrial output is expanding at a decent clip, official unemployment has declined markedly, and prices in the stock and housing market show a sustained upward drift. Considering these circumstances, the US economy can now shoulder a tighter monetary policy, it is said.
It should be understood, however, that there will be side-effects, even unintended consequences, if and when the Fed hikes interest rates further. Most importantly, the Fed doesn’t know where the “neutral interest rate” is. If it does too much, the economy will collapse. If it does not do enough, it will only prolong the artificial boom, causing ongoing malinvestment and, ultimately, another crisis.
Admittedly, this is nothing new: The Fed has always been a cause of boom and bust. It sets into motion an artificial boom by issuing new fiat money through bank credit expansion. Such a boom, however, must sooner rather than later collapse and turn into a bust. It is, therefore, strongly advised to expect nothing good coming out of Fed interventions.
Going Through the Numbers This of course holds true for the Fed’s plan to start selling securities it has bought during the financial and economic crisis to prop up the economic and financial system. Back in 2008 and 2009, the Fed provided the US banking system with an enormous cash infusion by granting loans to and purchasing securities from banks.
The Fed ramped up banks' cash holdings from US$ 24,9bn to US$ 2,398.1bn from September 2008 to July 2017. It did so by buying Treasuries and mortgage-backed securities (MBS) amounting to US$ 1,908.9bn and US$1,770.3bn, respectively. In the meantime, however, banks have repaid most of the loans provided by the Fed.
This, in turn, has reduced banks' cash holdings to US$ 2,398.2bn. As a result, it has become impossible for the Fed to sell all the bonds it has purchased. Simply put: The US banking system does currently not have enough base money to pay for the Fed’s crisis-related bond purchases of US$3.755.8bn.
If the Fed were to shed just 64 percent of its current bond holdings, the base money supply in the US banking system would be completely wiped out, making the banking sector effectively illiquid. In this process, US interbank interest rates would presumably spike, sending shock waves through the economic and financial system, not only in the US but worldwide.
Three Options It is safe to assume that the Fed and the banks would want to avoid such a scenario. This leaves the Fed with three options. Option 1: The Fed sells only a (small) part of its current Treasury and MBS to avoid a liquidity shortage in the interbank money market. In other words: The Fed would have to keep sitting on a significant part of its bond holdings and buy new bonds once they mature.
Option 2: The Fed sells off its bond holdings and, at the same time, runs liquidity providing operations to keep banks sufficiently equipped with cash. It purchases, for instance, consumer and/or corporate loans from banks issuing new base money. As a result, the Fed’s assets in its balance sheet would see Treasuries and MBS go down, and consumer and corporate loans go up.
Option 3: The Fed swaps its Treasury and MBS holdings into short-term maturities and sells these papers over time, thereby reducing the base money supply in the banking system as far as possible. This way, the Fed would reduce its active involvement in the credit markets somewhat, confining it mainly to the short-term end of the market.
Interest Rates will Remain Distorted That said, it will be enlightening to see which option the Fed will ultimately choose. Option 1 and 2 would be indicative of the Fed wanting to retain its powerful grip on the price action and consequently the yields in fixed income markets. Option 3, in turn, would suggest that the Fed allows interest rates in the long-term end of the market to normalize at least to some extent.
Whatever option it chooses, however, the Fed will, one way or another, keep distorting interest rates. By issuing new quantities of fiat money through credit expansion, the Fed inevitably wreaks havoc on the economy's price system. It manipulates the perception of risk and flatters the value of future cash flows.
This, in turn, causes many economic and social problems. Most importantly, the Fed’s actions debase the purchasing power of the US dollar, thereby destroying much of peoples' life savings. What is more, the Fed’s policy coercively redistributes income and wealth, and it also brings about costly boom and busts.
Just to be on the safe side: The Fed is not the solution to all these problems. It is the actual cause. Whatever the US central bank will do: Be assured it will remain on course to trouble. And trouble there will be – and unfortunately so, whatever the Fed will be doing in terms of setting interest rates and dealing with the bonds it has purchased against issuing new fiat dollars.
While this is certainly a gloomy message, it might help investors to make wise decisions. Because if the Fed causes another round of trouble, it will most likely resort to even lower interest rates and issuing even more fiat money. So whatever happens short-term, there is good reason to expect that the fiat dollar — and this holds true for all fiat currencies — will lose value.
Growth in the supply of US dollars fell again in May, this time to a 105-month low of 5.4 percent. The last time the money supply grew at a smaller rate was during September 2008 — at a rate of 5.2 percent.
The money-supply metric used here — an "Austrian money supply" measure — is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.
The "Austrian" measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler's checks, and retail money funds).
M2 growth also slowed in May, falling to 5.6 percent, a 20-month low.
Money supply growth can often be a helpful measure of economic activity. During periods of economic boom, money supply tends to grow quickly as banks make more loans. Recessions, on the other hand, tend to be preceded by periods of falling money-supply growth.
Thanks to the intervention of central banks, of course, money supply growth in recent decades has never gone into negative territory.
Nevertheless, as we can see in the graph, significant dips in growth rates show up in years prior to a economic bust or financial crisis.
For insights into what's affecting money supply growth, we can look at loan activity, such as the Federal Reserve's measure of industrial and commercial loans.
In this case, we find that the growth rate in loans has fallen to a 74-month low, dropping to 1.9 percent. Loan growth has not been this weak since April of 2011, in the wake of the last financial crisis.
We find similar trends in real estate loans and in consumer loans, although not to the same extent.
The current subdued rates of growth in the money supply suggests an economy in which lenders are holding back somewhat on making new loans, which itself suggests a lack of reliable borrowers due to a lackluster overall economy. This assessment, of course, is reinforced by the Federal Reserve's clear reluctance to wind down it's huge portfolio, and to end its ongoing policy of low-interest rates — concerned that any additional tightening might lead to a recession.
There seems to be no shortage today of investors and pundits criticizing the market interventions of the world’s central banks. Monetary stimulus in the form of artificially low interest rates and bloated central bank balance sheets ($18.5 trillion, to be exact), the argument goes, have created another dangerous financial bubble (evidenced by ubiquitously bubbly stock market valuation ratios) that ultimately threatens the financial system yet again. The author shares wholeheartedly in this criticism.
The ethical problem is, where were these voices when this all started, with Greenspan in the 1990s and, more specifically, with Bernanke in 2008? The central bank critics today who were not critics of — and in most cases were even sympathetic to — the great bailouts and stimulus that started almost a decade ago have reserved their criticisms only for those interventions that appear to hurt their interests, as opposed to those that have helped them. After all, no one would disagree that bailouts and monetary stimulus got us out of the last financial crisis, but they also certainly got us to where we are today, vulnerable to another even bigger one.
We are so concerned about our friend the strung-out junkie, though we paid little mind when they were but a casual user. It is so easy to care when problems become obvious and critical, so hard when they are subtler and nascent. Artificial stimulus in an economy is the same: it is easily ignored as a problem in its infancy, but it always develops into a huge problem. Economies and markets are structurally altered and distorted by such stimulus, such that it cannot be removed without breaking those new structures. It must rather be ever increased, though even this will only delay an inevitable collapse.
It is just too easy in today’s investing environment, and even necessary for most participants, to sympathize with and even exploit central bank interventions. Doing otherwise creates an opportunity cost in one’s career and investments. But doing so puts one in the position of enabler to the economic system’s self-destructive dependence on artificial stimulus. One cannot be a part-time classical liberal, criticizing central planning only when it runs contrary to one’s interests. Indeed, this is the very problem of Socialism: there are winners and losers; the winners are in the here and now — the seen; the losers are in the future — the unseen. The winners don't complain, and the losers can‘t until it is too late.
But as the future becomes the here and now, the unseen becomes the seen, those who now think they are anticipating a problem and its cause, yet supported that same cause when they stood to benefit, must be seen for what they are: fellow travelers in the central planning ideology that grips today’s financial markets. They are too late.
The shock landslide defeat of PM Shinzo Abe’s Liberal Democratic Party (LDP) in the recent Tokyo metropolitan elections — and the triumph there of Tokyo Governor Koike’s new party (Tomin First) — has lit a faint hope that the radical Japanese monetary expansion policy could be on its way out. The flickering light though is not strong enough to soothe the mania in Japan’s carry trades and so the yen continued to slide in the aftermath of the elections. Between mid-June and early July the Japanese currency depreciated by some 5% against the US dollar and 10% against the euro.
The perception in currency markets is that Japan will not be embarking on monetary normalization this year or next, in contrast to Europe where ECB Chief Draghi has hinted that the train (to monetary normalization) will start next year, even though the journey promises to be very slow. The US train to normalization continues at a glacially slow pace including some periods of reverse movement. Moreover the monetary climate prior to the journey commencing is even more extreme in the case of Japan than in Europe or the US.
It was possible to imagine that the shock election setback for the LDP could have caused Shinzo Abe to withdraw support from his money-printer in chief, Bank of Japan governor Haruhiko Kuroda (whose term ends in April 2018), thereby signaling an early end to negative interest rates and quantitative easing. But markets in their wisdom have concluded this is not to be. Many elderly Japanese are pleased with their stock market and real estate gains even though they complain about negative interest rates and the threat of inflation. In any case it was young voters, responding to the stink of alleged corruption scandals, who turned out en masse for Governor Koike’s new party.
In fact, the widespread prediction is that PM Abe will nominate an even more radical monetary experimenter to the head of the Bank of Japan along with two deputy governors of similar persuasion. Some political pundits in Tokyo suggest that Shinzo Abe could yet face a challenge in an LDP leadership election in September 2018 and that ex-Defence Minister Shigeru Ishiba (also on the nationalist right of the party) could prevail. Ishiba-san would favor, some speculate, a return to monetary orthodoxy. But in market terms this is a long time ahead and much further monetary damage will have been done first.
Three Risks to the Current Easy-Money Orthodoxy Currency markets are not a one-way bet and there are three main risks confronting speculators on further yen depreciation.
First, Washington could yet get its trade and currency acts together (President Trump’s nominee for the role of Treasury Under-Secretary responsible for international affairs, David Malpass, has not yet been approved by Congress). The US would take aim at currency manipulation by Europe and Japan, now occurring under the camouflage of the global 2% inflation standard and deployment of non-conventional monetary policy tools. In particular the Bank of Japan’s policy of pegging long-term interest rates at barely zero is surely a means of keeping the yen cheap.
Second, the US economy could enter a growth cycle slowdown and even recession which in turn would narrow the yield gaps which draw capital out of Japan.
Third, the giant carry trades could suddenly go into reverse as global asset price inflation progresses toward its final deadly phase.
Booming carry trades are indeed a top symptom of asset price inflation. As income famine investors hunt for yield, or investors impressed by a series of capital gains become irrationally exuberant, they are unusually susceptible to speculative narratives, discarding normal healthy cynicism. These narratives justify risk-arbitrage positions implicit in all the various forms of carry trade (whether in search of premiums for exchange risk, or term risk, or credit risk, or illiquidity, or equity risk). Japan, due to the extent of monetary distortion there, has become the land of frenzied carry trading.
The Japanese War Against Deflation The natural rhythm of prices has been unusually strong in a downward direction in Japan, meaning that the central bank’s targeting of positive inflation creates powerful monetary disequilibrium. The entry of China into the global economy in the case of Japan has meant an integration process which brings persistent strong downward pressure on prices (and on wages via offshoring). Adding to this pressure has been the growth of the “irregular” labor market (temporary contracts as against lifetime employment). And if we consider the core zone of the Japanese economy around Tokyo, productivity growth and technological change have been bearing down on prices (these trends are not apparent in the national data due to the falling behind of regions distant from the capital).
In the age of Abenomics (starting in 2013) the Bank of Japan ramped up the inflation target to the global 2% level. Accordingly, the carry trades in their various forms have boomed. The speculative hypotheses to justify these have waxed and waned through time. Some market critics think the latest to be waning is the FANMGs (equities in Facebook, Apple, Netflix, Microsoft, and Google) into which Japanese investors have poured funds in many cases via so-called structured products (notes which are a hybrid between fixed-interest paper and a kicker in the form of pay-outs related to the performance of a given index or stock price, in effect an option-type product).
The popularity of certain investment tools adds to the momentum of carry trades in Japan. Market practitioners (including hosts of retail investors) study charts and the trend lines there; the trend is the friend, make no mistake, until the trend brakes. Under monetary stability the flaws of such tools would most likely remain contained. But in the vast domestic and global monetary disorder such as now exists and which fans irrationality Japanese carry-trades become even more prominent.
Shinzo Abe if he thinks about this, and he has praised repeatedly the booming Tokyo stock market, must doubtless hope that global asset price inflation including its Japanese component will remain in its present sweet phase through the elections next year, first for LDp President and then for the Lower House of the Diet (December).
On Wednesday, Janet Yellen testified before the House Financial Services Committee. Though the hearings lost much of their appeal when Dr. Ron Paul retired from Congress, the House Republicans have maintained a reputation for being far more hostile to the Federal Reserve than their colleagues in the Senate — managing to generate some worthwhile moments. While little news was made, with Yellen maintaining her support for generally low interest rates, there were some points made today worth noting.
1) Republicans Continue to Push on the Fed’s Subsidy to Wall Street Starting in 2008, the Federal Reserve has paid interest on excess reserves parked at the Fed. While this had never been done prior to the financial crisis, this policy has now become a vital tool for the Fed in setting short-term interest rates. As the Fed has increased the Federal funds rate, so too has it increased its “Interest On Excess Reserves” (IOER), now paying 1.25% on the over 2 trillion banks hold at the Fed.
This policy has drawn increasing criticism from House Republicans, and Yellen faced criticism from both Committee Chairman Jeb Hensarling and Rep. Andy Barr, who hold Dr. Paul’s old position as chairman of the monetary subcommittee. Accurately, both men highlight that this policy means the Federal Reserve – and by extension the US Treasury that would otherwise receive these interest payments – are directly subsidizing large Wall Street and foreign banks. Considering these IOER payments are projected to be $27 billion this year, it’s good to more attention be brought to this obvious example of Wall Street cronyism.
2) Higher Interest Rates for Wall Street, not for Main Street Continuing on the subject of IOER payments, Rep. Barr also highlighted that average consumers are not seeing any payoff from higher interest rates. Interest payments on CD’s remain historically low, with many consumers unable to get the 1.25% the Fed is giving their financial institutions.
As the Wall Street Journal documented, a reason for this is the way a decade of low interest rates have changed the consumer-bank relationship. All of this is simply another demonstration of how policies by the Federal Reserve are benefitting Wall Street at the direct expense of the rest of the country.
3) Maxine Waters Wants to Make Poor People Poorer Maxine Waters may be best known these days for being one of Donald Trump’s most vocal critics, but she is also the leading Democrat on the Financial Services Committee. On Wednesday, Waters questioned Yellen on why mainstream inflation measures have been constantly undershooting the Fed’s 2% inflation target, and voiced her disagreement with the Fed’s minor increases in the Federal funds rate.
The way politicians like Ms. Waters discuss inflation makes it clear that they don’t truly comprehend how it presents itself in real life. After all, as someone who constantly fundraises off the dangers of income inequality and the plight of low income Americans, surely the last thing Ms. Waters would want to see is for the purchasing power of the dollar decline for the very people she claims to want to help.
4) Hensarling References Marvin Goodfriend Earlier this week it was reported that President Trump will nominate former Treasury official Randal Quarles Fed Vice Chairman. During the hearing, Chairman Hensarling quoted another economist who has been connected to another Fed vacancy: Marvin Goodfriend. As a Treasury Secretary finalist who has worked with the Administration on banking regulation, Hensarling evoking Goodfriend is being taken by some a sign that his nomination is now simply a matter of when.
Unfortunately Goodfriend’s surname is misleading, as he has been a vocal advocate of negative interest rates. His nomination would be a devastating betrayal by Trump of his blue-collar base, for the reasons he himself articulated as a candidate.
5) Yellen still hates Audit the Fed Thanks to Dr. Paul, the head of the Fed now knows to expect one question about Auditing the Federal Reserve. This time it was Rep. Bill Posey, who tried to push Yellen away from her default defense of mythical Fed independence. Mr. Posey repeatedly asked Ms. Yellen to name a single instance where the Fed would have been negatively impacted by a full audit.
The Fed Chairwoman was unable to provide an answer.
On Tuesday, Fed Governor Lael Brainard downplayed past talk of numerous rate hikes from the federal reserve and suggested that he Fed may "not have much more" to do in terms of rate hikes. "In light of recent policy moves, I consider normalization of the federal funds rate to be well under way," Brainard said.
Today, speaking before Congress, Janet Yellen built upon Brainard's earlier comments, but simultaneously suggested that there will be "gradual rate hikes" over "the next few years," and hinting that many more rate hikes won't be necessary because "the neutral rate is low by historical standards."
Markets took this to mean — probably correctly — that the Fed is moving in a more dovish direction.
The "Neutral Rate" Canard Note that both announcements are based on the idea that the "neutral rate" is unusually low, so while a target rate of 1.5 percent may seem quite low by historical standards, it's not really low. It is near the neutral rate — also known as the "natural rate."
In other words, the "natural rate" has fallen below where it was in the past, so now, the interest rates we saw in the days of yore — those around 3 per cent or 5 percent — would today be much too high.
Bloomberg explained a bit more of the Fed's logic here last year:
When Fed Chair Janet Yellen wants to explain why the Fed is keeping rates so low, she cites the natural rate. At the press conference following the FOMC’s June meeting, she said the neutral interest rate—which is essentially synonymous with the natural rate—“is quite depressed by historical standards.” She added: “I think all of us are involved in a process of constantly reevaluating where is that neutral rate going.”
Politically speaking, identifying this "natural rate" as being very low allows the Fed to create the perception that its very-low target rates aren't really all that stimulative at all. They're practically neutral! Just look at the natural rate, they'll tell us.
The problem however, is that all good economic theory tells us that the Fed has no idea what the natural rate actually is. Earlier this year, Mark Spitznagel explained:
How do we even know what that neutral rate is? The neutral rate is, by its current definition, inherently unobservable, as there is no discovery process in short-term interest rates (and there hasn’t been for as long as any of us have been around). Central banks calculate the neutral rate based on their formulas and identifying assumptions about output gaps and what interest rates, according to those models, will close those gaps. Here we have an immense circularity problem: Policymakers think they know the neutral rate because the assumptions of their interventionist model that they impose on the data say so, not because they have any insight that the market would actually clear at that rate, sans intervention. There is an underlying assumption that “markets, left on their own, are wrong, while our model is right.” Moreover, they are using observable data as model inputs that are the result of interventions that are already in effect. There are no controlled experiments in economics. Only market participants, acting freely in borrowing and lending at whatever interest rates make sense for that borrowing and lending, can ever discover what the neutral rate should be.
Joseph Salerno explains this in even further detail in his article "The Fed and Bernanke Are Wrong About the Natural Interest Rate."
All this talk about the natural/neutral interest rate thus provides political cover for the Fed, and allows the FOMC to claim that they're using economic science in determining the "correct" target rate. In truth, the Fed has no idea what the natural rate is but is really just proceeding with great caution because the Fed's leadership knows that allowing interest rates to increase beyond the current low levels would upset the fragile economy.
The Fed's Balance Sheet Thus, the question of the target rate remains constantly in flux, just as the Fed would like to have it.
Equally amorphous is the question of reducing the Fed's balance sheet. This reduction, according to both Brainard and Yellen, will come "soon" (whatever that means). One thing we know for sure: it will take a while to implement:
Ms. Yellen told the House Financial Services Committee that unwinding a $4.5 trillion-plus balance sheet that includes $2.5 trillion in Treasuries and the rest in mortgage-backed securities will probably take until 2022 before it shrinks to pre-crisis levels. Fed officials have not decided yet on longer-term policy framework that will affect the size of reserves, she said.
This assumes, of course, there is no worsening in the economy between now and 2022, which is a tall order, to say the least.
Moreover, what are the details of how this balance-sheet wind-down will occur? It's a great mystery. Also mysterious is why, in an age of massive home price inflation, the Fed still isn't unloading those mortgage-backed securities.
All in all, there's extremely little to see here in Yellen's testimony. It's the usual routine: the economy is experiencing "moderate" growth. We'll raise rates — but not too much! We'll wind down the balance sheet "soon."
Meanwhile, the Fed continues to invent new explanations of why it needs to remain accommodative. The totally arbitrary 2-percent inflation target continues to serve as a justification for continued low rates. And, more recently, the "natural rate" explanation is starting to serve as a convenient excuse as well.
With the economy expected to “grow by 2.8% in 2017” up from their April forecast of 2.6%, the Bank of Canada has decided to raise interest rates for the first time in 7 years to 0.75%
It may be minor, but it should be just enough for the Bank of Canada's Stephen Poloz to cut them again when things start to get tough, and the 2.8% growth vanishes just as quickly as it was envisioned.
Of course, higher borrowing costs are just what the doctor ordered. Often disparaged as the flawed “hangover theory” by Keynesians who believe consumption equals wealth creation, the idea that we’ve been on an unsustainable economic path, fuelled by low-interest rates, is about as outside the mainstream as you can get.
Source: Bank of Canada. Graph by Ryan McMaken.
But as the popularity of Mises grows faster than the 2.8% economy, the “hangover theory,” or, rather, the Austrian business cycle theory, will be harder and harder to suppress and ignore. Especially as the truth of its statements outperform the lies of the Keynesian doctrine.
That said, moving up a one-quarter of a percentage point from 0.50% to 0.75% isn’t as earth-shattering as, say, moving the rate up to 2.75%. While the latter may bankrupt a good number of Canadians, the decision would cease punishing savers and allow the painful but necessary correction and restructuring of the economy to commence.
But as Stephen Poloz himself has said, “When you’re looking at making an investment that you think will make you 20 percent or more over the next 12 months, and you have to borrow the money to make that investment, is a quarter point or a half a point (in extra interest) going to make a difference?”
So the rate “hike” was not an attempt to get household debt under control but actually a consequence of a robust economy that has been fuelled by household spending.
Leave it to the central bank to confuse and ignore the causal-realist tradition in economics. Nowadays the bankers in charge just run data through a computer and make decisions based on that. But as Murray Rothbard points out, if economists can predict future trends then why are they wasting their time “putting out newsletters or doing consulting when he himself could be making trillions of dollars in the stock and commodity markets?”
Household spending isn’t growing the economy. A rate hike is just giving the Bank some room to cut rates again when the financial house of cards starts to sway in the wind.
This is the first overnight rate increase since August 2010 when Mark Carney was leading the central bank. Poloz took over in 2013 and cut rates twice in 2015 due to the slow-down caused by crude oil prices.
Caleb McMillan writes from Vancouver, British Columbia.
Originally posted at Mises.ca.
Federal Reserve Chair Janet Yellen recently predicted that, thanks to the regulations implemented after the 2008 market meltdown, America would not experience another economic crisis “in our lifetimes.” Yellen’s statement should send shivers down our spines, as there are few more reliable signals of an impending recession, or worse, than when so-called "experts" proclaim that we are in an era of unending prosperity.
For instance, in the years leading up to the 2008 market meltdown, then-Fed Chair Ben Bernanke repeatedly denied the existence of a housing bubble. In February 2007, Bernanke not only denied that “sluggishness” in the housing market would affect the general economy, but predicted that the economy would expand in 2007 and 2008. Of course, instead of years of economic growth, 2007 and 2008 were marked by a market meltdown whose effects are still being felt.
Yellen’s happy talk ignores a number of signs that the economy is on the verge of another crisis. In recent months, the US has experienced a decline in economic growth and the value of the dollar. The only economic statistic showing a positive trend is the unemployment rate — and that is only because the official unemployment rate does not count those who have given up looking for work. The real unemployment rate is at least 50 percent higher than the manipulated “official” rate.
A recent Treasury Department report’s called for rolling back of bank regulations could further destabilize the economy. This seems counterintuitive, as rolling back regulations usually contributes to economic growth. However, rolling back bank regulations without ending subsidies like deposit insurance that create a moral hazard that incentivizes banks to engage in risky business practices could cause banks to resume the unsound lending practices that were a major contributor to the growth, and collapse, of the housing bubble.
The US economy is already faced with several bubbles that could implode at any time. These include bubbles in student loans and automobiles sales, and even another housing bubble. The most dangerous of these bubbles is the government bubble caused by excessive spending. According to a 2016 study by the Mercatus Center, at least four states could soon join Puerto Rico and Illinois in facing bankruptcy.
Of course, the mother of all government bubbles is the federal spending bubble. Despite claims of both defenders and critics of the president’s budget, neither President Trump nor the Republican Congress have any plans for, or interest in, reducing spending in any area. Even the so-called cuts in Medicare and other entitlement programs that have generated such hysterics are not real cuts, but “reductions in the rate of growth.”
Some fiscal conservatives are praising the administration’s proposal to finance transportation spending via government bonds. However, the people will eventually have to pay for these bonds either directly through income taxes or indirectly through the inflation tax. Government-issued bonds harm the economy by diverting investment capital away from the private sector to the “mixed economy” controlled by politicians, bureaucrats, and crony capitalists.
If Congress continues to increase spending and the Federal Reserve continues to facilitate that spending by monetizing the debt, Americans will face an economic crisis more severe than the Great Depression. The crisis will likely result from a rejection of the dollar as the world’s reserve currency. Those of us who know the truth must redouble our efforts to ensure a peaceful transition away from the Keynesian system of welfare, warfare, and fiat currency to a society of peace, prosperity, and liberty.
Reprinted with permission.
There are a number of things you don’t want to hear a central banker say. One of those things just popped out of Janet Yellen’s mouth – “I don’t believe we will see another financial crisis in our lifetime.” That has to be up there with Irving Fisher’s deathless observation from 17 October 1929 that "Stock prices have reached what looks like a permanently high plateau" or John Maynard Keynes’ comparably adept forecast from 1927 that "We will not have any more crashes in our time."
So far, so anecdotal. How about some data to back up the thesis that, as Thorstein Polleit puts it, the super bubble is in trouble ?
First, define your Super Bubble. We can do this in two ways. One relates to longevity (how long has the bull run lasted ?), the other to valuation (how expensive is the market now ?). The global bond bull began back in 1981, when 30 year US Treasury yields peaked at 15.2%. Now, over 35 years later, long bond yields are below 3%.
Polleit expresses it a little differently, citing the p/e ratio of bonds so that they might more fairly be compared to stocks. To calculate the p/e ratio of a government bond, he divides 1 by the 10 year government bond yield. His results are shown below.
Source: Thomson Financial / Thorstein Polleit
¹For bonds, calculated as 1 divided by the 10 year government bond yield
In his words,
You do not need to be a financial market wizard to see that especially bond markets have reached bubble territory: bond prices have become artificially inflated by central banks’ unprecedented monetary policies. For instance, the price-earnings-ratio for the US 10-year Treasury yield stands around 44, while the equivalent for the euro zone trades at 85. In other words, the investor has to wait 44 years (and 85 years, respectively) to recover the bonds’ purchasing price through coupon payments.
Meanwhile, however, the US Federal Reserve (Fed) keeps bringing up its borrowing rate; and even the European Central Bank (ECB) is now toying with the idea of putting an end to its expansionary policy sooner rather or later.
Those of us who are hostile to central planning are doubly hostile to governmental interference in the price mechanism, which is what the misguided policies of QE and ZIRP effectively are. The definitive text on this topic is Forty Centuries of Wage and Price Controls. Spoiler alert: government attempts to rig prices always fail, sometimes catastrophically.
The problem facing the likes of Janet Yellen, Mark Carney [makes sign of the cross and looks urgently for garlic] and Mario Draghi is that, having now weaponized short term lending rates, the nukes can’t be put back in their silos. How can interest rates be raised meaningfully above zero without crashing the financial system ? Perhaps they can’t. Perhaps unelected monetary bureaucrats should never have been allowed to take them there in the first place. But we are where we are. Any commentary surrounding monetary policy can now only echo that tired old joke about the lost traveller who, when seeking advice, is told that he shouldn’t start from here.
In December 2016, the National Bank of Ukraine (NBU) nationalized Ukraine’s largest private bank for what we now know was an incorrect understanding of the facts. It remains unclear who benefitted from this expropriation.
But it wasn’t just a misunderstanding. The nationalization of PrivatBank very likely was the result of a still-unexplained refusal by the NBU to accept the financial reality of the situation.
This extraordinary government takeover has made the banking and economic situation in Ukraine much worse rather than better, and is an almost classic case of government overreach.
The NBU’s inappropriate and unnecessary nationalization has hurt the Ukrainian economy, stolen millions from PrivatBank’s owners and is forcing Ukraine’s taxpayers to bear a substantial additional burden.
The NBU took its action in large part because of what it said was an unacceptable level of related-party loans: 90 percent or more was the number it frequently used.
But Ernst & Young, the global “Big Four” accounting firm the NBU hired to undertake an audit of PrivatBank at the end of 2016, said the actual level of related-party loans at PrivatBank was merely 4.7 percent.
And that very low level (an astounding almost 95 percent less than what the NBU used to justify its nationalization) is itself lower than the level of related-party loans reported a year earlier in a separate audit conducted by yet another Big Four firm: PWC.
Perhaps to protect itself from what will undoubtedly be withering criticism, the NBU is now considering suspending PWC from auditing Ukrainian banks, has accused one of the most renowned and highly esteemed auditors in the world of being “unprofessional,” and is at least hinting that its audits contributed to the situation.
The NBU has claimed that PrivatBank siphoned a majority of its equity to related party loans to enrich the bank’s shareholders. Operating activities show that the cash flow for 2016 was 21 billion Ukrainian hryvnia to client funds, but not to the issuance of loans to related parties.
Similarly, the NBU made an arbitrary, erroneous and harmful decision to regard PrivatBank’s collateral as unacceptable even though a significant amount of the loans that were classified as “impaired” should have been acceptable under IFRS standards.
But it’s not just the NBU’s decision to nationalize PrivatBank that’s questionable; serious issues have now been raised about the way the NBU carried out the nationalization once it decided to move forward.
The NBU’s capitalization of PrivatBank after the nationalization was a transfer of government bonds, rather than cash, that effectively was worthless.
Up to then, the NBU always required the valuation of collateral from independent appraisers so that its value would be recorded appropriately on the balance sheet. But, as E&Y stated in its 2016 audit report, ten days after the nationalization, there was a sudden increase of investments in government bonds that were never valued. Who will buy those bonds now?
But the biggest issue is why the NBU ever thought that government control through nationalization of Ukraine’s largest privately owned bank was appropriate in the first place. PrivatBank had a strong vote of confidence from its customers with 40 percent of the country’s private deposits and serving 44% of corporate clients. It had a strong positive track record of supporting Ukraine’s economy and creating jobs. And, as a report by E&Y (the auditors chosen by the NBU) subsequently confirmed, according to IFRS standards its financials were far stronger than the NBU was charging.
All of this makes the NBU’s nationalization of PrivatBank more of an unnecessary expropriation – a taking by the government – than a good banking practice. That is the textbook definition of a scandal.
[First published by Rare, July 1, 2017]
Speaking in London, Federal Reserve chair Janet Yellen Tuesday predicted that the “the system is much safer and much sounder” and explained that the Federal Reserve is prepared to deal with numerous enormous shocks to the economy.
In her conversation with Lord Nicholas Stern, Yellen also went on to list the reasons that, thanks to central bank intervention, there is unlikely to be another financial crisis “in our lifetimes.”
For those who have lived through more than one business cycle, however, alarm bells tend to go off every time an economist, central banker or high-ranking government official declares that there’s little to no danger of economic turmoil in the near future.
There is a long history of spectacularly bad predictions being made shortly before economic crises. Famously, shortly before the Crash of 1929 — one of the earlier crises that occurred on the Federal Reserve’s watch — Herbert Hoover proclaimed that “We in America today are nearer to the final triumph over poverty than ever before in the history of any land.” But, we certainly don’t have to go back that far.
Indeed, in the late 1990s, it became nearly routine to hear economists announce that “the internet changes everything” and “the business cycle is dead.”
Economist Rudi Dornbusch — a close associate of current Fed vice chair Stanley Fischer — even wrote a July 1998 column in the Wall Street Journal titled “Growth Forever.” Dornbusch concluded that the possibility of an imminent recession “is remote” and the country “will not see a recession for years to come.” So sure of the benefits of the “new economy” was Dornbusch, in fact, that he declared, “This expansion will run forever.”
Then came the dot-com bust of 2001. After that came a short expansion from 2002 to 2007. After that came the Great Recession.
Meanwhile, from 2000 to 2015, according to the federal government’s data, real median household income was flat. Only over the past two years have we seen any of that expansion that many were venturing to say was permanent back in the late 1990s.
Economists and policymakers were no more insightful when examining the possibility of a new crisis post-2007.
In 2005, for example, Milton Friedman could have been paraphrasing Yellen’s Tuesday comments when he concluded that “the stability of the economy is greater than it has ever been in our history. We really are in remarkable shape.” Friedman went on to give Alan Greenspan credit for the expansion.
In early 2007, Ben Bernanke predicted, “We’ll see some strengthening in the economy sometime during the middle of the new year.”
As late of mid-2007, Bernanke was downplaying any problems associated with the sub-prime housing market, allaying any fears of a bubble or bust and claiming, “I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened [i.e, enormous home price growth during the housing bubble] is supported by the strength of the economy.”
If housing bubbles do prove to be a problem, Bernanke concluded, it’s “mostly a localized problem and not something that’s going to affect the national economy.”
The US would officially begin to contract in December 2007, followed by a financial crisis the following autumn.
Even on the eve of the crisis — in September 2008 — John McCain announced that “the fundamentals of our economy are strong.”
A year later, the unemployment rate would reach 10 percent, foreclosure rates were surging and total employment would collapse from 116 million to 107 million. Employment would not return to pre-crisis levels until late 2013.
Millions of workers would need to change careers, be retrained, scratch for other forms of income to avoid foreclosure or eviction and put off retirement indefinitely. The economy was so weak for so long, in fact, that the Fed felt it necessary to keep the key target interest rate near zero for seven years to add “stimulus.”
Of course, just because Janet Yellen says the economy won’t experience a crisis anytime soon doesn’t mean a crisis is imminent. A truly strong economy isn’t going to be “jinxed” by a declaration that things are fine. On the other hand, given the record of eminent economists and Fed board members in the past, Yellen’s predictions are hardly anything that should inspire confidence.
Janet Yellen finally did it, mark the date June 27, 2017. Something all modern Federal Reserve chairs do: open mouth, insert foot. Tuesday in London Ms. Yellen announced the end of financial panics...well...at least while she’s alive.
"Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be," Yellen said.
She follows in the footsteps of two great Fed Chair prognosticators
In 2002 Alan Greenspan said,
The ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices. However, the analogy often made to the building and bursting of a stock price bubble is imperfect. First, unlike in the stock market, sales in the real estate market incur substantial transactions costs and, when most homes are sold, the seller must physically move out. Doing so often entails significant financial and emotional costs and is an obvious impediment to stimulating a bubble through speculative trading in homes. us, while stock market turnover is more than percent annually, the turnover of home ownership is less than percent annually— scarcely tinder for speculative conflagration. Second, arbitrage opportunities are much more limited in housing markets than in securities markets. A home in Portland, Oregon is not a close substitute for a home in Portland, Maine, and the “national” housing market is better understood as a collection of small, local housing markets. Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole.
When Federal Reserve Chairman Ben Bernanke was questioned in 2005 about whether house prices might be getting ahead of the fundamentals, he replied:
Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.
Also in 2005.
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.
Later that same year
With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.
Then in 2006
Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.
February 2007
Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.
March 2007
At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.
May 2007
All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.
October 2007
It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.
June 2008
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.
July 2008
The GSEs are adequately capitalized. They are in no danger of failing.
December 2010
I wish I'd been omniscient and seen the crisis coming.
Here are this week's events relating to the Fed. All times Eastern.
Monday, June 26
Chicago Fed National Activity Index. 8:30amDallas Fed Manufacturing Survey. 10:30am Tuesday, June 27
San Francisco Fed President John Willaims will speak at The Economic Association of Australia on "The Global Growth Slump: Causes and Consequences" in Sydney, New South Wales. 4:00amRichmond Fed Manufacturing Index. 10:00amPhiladelphia Fed Reserve President Patrick Harker will speak on the economic outlook and international trade at the European Economics & Financial Centre. 11:15amFed Reserve Chair Janet Yellen will discuss global economic issues at the Conversation between Chair Yellen and Lord (Nicholas) Stern, President of the British Academy in London. 1:00pmMinneapolis Fed Reserve President Neel Kashkari to participate in a townhall in Houghton, Michigan. 5:30pm Wednesday, June 28
San Francisco Fed President John Williams will speak on The Global Growth Slump: Causes and Consequences at the The Economic Association of Australia, Eminent Speaker Series 2017 in Canberra, ACT. 3:30am Thursday, June 29
The third estimate for first-quarter GDP. 8:30amSt. Louis Federal Reserve Bank president James Bullard to deliver a presentation on the U.S. economy and monetary policy at the Official Monetary and Financial Institutions Forum (OMFIF) City Lecture in London. 1:00pm
For the past several weeks, a dark and uneasy atmosphere has been hanging heavily over the British political landscape. In addition to the four major terrorist attacks on British soil since March, the 2017 general election highlighted growing public anger with the complacent, non-ideological, and seemingly uncontested reign of Prime Minister Theresa May. Not only has May all but purged libertarian and free market ideas from the Conservative Party, but she also conducted one of the most staggeringly inept election campaigns in recent memory, with a series of policy announcements directly before the election which were wildly unpopular, strategically insane, and practically worthless in the face of the country’s major problems. All this led to an election where, had the various progressive parties gained just 6,379 additional votes overall, the most extreme far-left Labour Party in a generation would have been able to form a new coalition government. This would have left Britain with a prime minister who has publicly defended the failing socialist policies of Venezuela and referred to the terrorist group Hezbollah as his “friends.”
A Labour Party victory would have brought the British economy under the control of a Marxist, and policing, immigration, and national security in the hands of a woman who once argued on national TV that Chairman Mao “did more good than harm.” The tense national mood was crystallised when, on June 14th, a 220-foot tall public housing apartment block in West London was engulfed in an inferno that lasted over 24 hours. This apparently random tragedy is estimated to have led to the deaths of 79 of London’s lowest-income residents, with many more having been left homeless during a record-breaking heat wave, in the heart of one of the city’s wealthiest boroughs. The perceived lack of government concern for the disaster and its victims led to widespread speculation that the capital was on the verge of descending into riot.
It was to this backdrop of anger and uncertainty that Bank of England governor Mark Carney delivered his annual speech to financial leaders at London’s Mansion House this month, initially scheduled for the day after the Grenfell Tower fire. With the exception of the rescheduling of the speech however, Carney wasted no time in harnessing the national mood toward his own ends; a tactic which he has become quite accustomed to in recent months. The BoE governor made no secret of his opposition to Brexit in the run-up to last year’s referendum, supposedly on the grounds that it would cause a recession, and was equally outspoken when it came time to take the credit for the fact that that recession never arrived. However, with public opinion now seeming to be turning against Theresa May’s Brexit government, Carney’s Mansion House speech twisted the knife by emphasising at its outset that (to paraphrase the BBC’s account) Brexit is making people poorer, because Brexit is causing inflation.
Unfortunately for Britain’s ‘impartial’ state-funded news service, this is flatly incorrect. Real incomes have not in fact fallen, but rather have merely slowed somewhat in the rate at which they are continuing to increase, a fact which even Carney conceded in his speech. This obvious mistake would tend to suggest one of two things: either that the BBC’s economics editor Kamal Ahmed simply does not understand the difference between a weakening in the rate of growth and a decrease in absolute terms, or that he is using license fee payers’ own money to misrepresent the facts to them in the pursuit of his political agenda. Sadly, for a man of Ahmed’s education it is difficult to extend to him the courtesy of assuming the former.
In any case, it is true that British real incomes have slowed in their rate of increase since Brexit, largely due to the weakening of sterling since the referendum, and consequent inflation of consumer prices. Offloading of sterling on the foreign exchange markets has often been vaguely attributed to a decrease in business confidence since the Brexit result, and consequent decrease in demand to hold sterling reserves for the purposes of investing in the UK and purchasing pound-denominated assets. The decline in the value of the currency has tended to make imported goods more expensive for British consumers, leading to such harsh — indeed, almost unbearable — deprivations as the recent decrease in the weight of the beloved Toblerone chocolate bars.
It has rarely even been suggested, however, that the Bank of England’s own post-Brexit emergency policies — committing to £70 billion of new quantitative easing and suddenly pushing interest rates down to historic lows — could be the true source of the devaluation of the pound. Yet every piece of evidence has continued to support this basic economic insight, shown no more starkly than by the plummeting value of sterling in the immediate aftermath of Carney’s speech, in which he confirmed that the Bank’s printing presses would continue to run at full speed.
One might hope that Carney is merely oblivious to the impacts of his own actions; after all, what person would not prefer to have a harmless simpleton in charge of British monetary policy, rather than an ‘expert’ in the jumble of scientistic obscurantism that is modern mainstream economics? Sadly, however, it is far more likely that Carney is all too aware of the instability that exists in the fundamentals of the British (and world) economy, even as the shaky recovery from the Great Recession appears to continue. Given the Bank of England governor’s power to lower interest rates and expand the money supply at will, Carney finds himself in the comfortable position of being able to kill two birds with one stone: papering over the cracks in the economy and impelling the elected government into ‘softening’ Brexit, both by recourse to the printing press. The idea that a central bank could unilaterally cause price inflation, then publicly blame that inflation on a political outcome it opposed in order to pressure the government and undermine the will of the voters, bespeaks the dangerous extent of the power wielded by such seemingly arcane and insipid institutions. Yet for as long as that power is allowed to continue existing, concentrated in the hands of central bankers, who amongst them could resist such temptation?
George Pickering is a Fellow in Residence at the Mises Institute this summer, and is a student of economic history at the London School of Economics.
The results of the UK elections are unquestionably negative for the economy, bad for investment, bad for the pound, and for a swift Brexit resolution.
The UK economy has performed exceptionally well in the past years, even after the Brexit referendum. So well, that international agencies such as the IMF or the OECD had to completely reverse their negative expectations for the economy of a “Yes” vote.
The problem is that we have focused on the positive — the fact that doomsayers were wrong — without analysing the negatives — the impact on potential growth and increase in investments. The Bank of England had to increase its growth estimates for 2017 to 1.7% and 1.3% for 2018. However, the uncertainty of a hung parliament, a weak government unable to negotiate Brexit from a position of strength, and the ongoing weakness of the pound may continue to erode growth potential, gross capital formation, and economic agents’ investment and hiring decisions.
It is extremely unlikely that Brexit will be reversed. It is, however, very likely, that negotiations will be more difficult and longer.
The UK is a very dynamic economy, and its companies have enormous strengths, with a thriving export sector and global multinationals. These will continue to benefit from a weak currency, but internal demand and the large surplus of service exports may suffer from the uncertain process of an even more complex Brexit.
As such, it is likely that we will not see a major impact in the growth prospects of the economy due to the benefits of a global and strong external sector, which benefits more from solid high-margin products and competitive technology than from weak currencies, but internal demand challenges will likely have an impact on consumption, hiring and wages.
It is no surprise, then, that the FTSE will continue to rise. It is fundamentally composed of diversified international companies. The impact of uncertainty may weigh on banks, consumer stocks and those with a large proportion of sales in the UK. However, the FTSE is more impacted by estimates of the global economy and energy-commodity prices. It is an index with almost 30% of sales in foreign currency.
The pound weakness may continue, also because the BoE is unlikely to take any measures to defend the currency.
As for bonds, extended QE means that sovereign bond yields will remain depressed, while solid corporate earnings and good balance sheets will support a more than adequate demand for corporate bonds. A clear indicator in the wake of the UK election this month has been that yields are still contained in all the different indices.
Clearly, investors will have to pay attention to guidance and cash flow generation of companies, but I would imagine that the forthcoming uncertainty will likely have an impact on a potential growth that should be well above EU or US figures, but will not.
Being complacent about average growth and acceptable macro figures cannot disguise the fact that the UK could and should grow well above its comparable economies and that the Bank of England is keeping an uncomfortably aggressive quantitative easing program that will leave it without tools in case of a change of economic cycle that is now more likely than before.
Reprinted with permission of the author. Daniel Lacalle has a PhD in Economics and is author of Escape from the Central Bank Trap, Life In The Financial Markets, and The Energy World Is Flat (Wiley).
The attacks on physical cash from a phalanx of economists, central bankers, commercial banks, and politicians have not diminished in recent years. On the contrary, in the face of the worldwide increase in terror attacks, particularly in Europe, and ongoing pressure on public budgets, the cash ban issue is increasingly dragged into the spotlight.
In a highly-recommended study entitled “Cash, Freedom and Crime. Use and Impact of Cash in a World Going Digital,” Deutsche Bank Research demolishes numerous popular myths surrounding cash, inter alia in the context of crime and terrorism. Without cash there are no longer bank robberies at gun point, instead there are now electronic bank robberies. Fraud involving credit cards and ATM cards is massively increasing in Sweden, the country considered the pioneer of the cashless society. The argument that adopting a cashless payment system would facilitate the fight against terrorism doesn't hold water either:
As regards terrorism in Europe, an analysis of 40 jihadist attacks in the past 20 years shows that most funding came from delinquents’ own funds and 75% of the attacks cost in total less than USD 10,000 to carry out — sums that will hardly raise suspicions even if paid by card.
Moreover, many terrorists, particularly if they are prepared to risk their own death, won't be deterred by prohibitions, just as stricter gun laws have no impact on people who must use unregistered weapons for their crimes. Often, they are unable to get hold of a weapon by legal means anyway if they have a criminal record. Planned terror attacks are as a rule characterized by a meticulous and careful approach. At best a cash ban might make financing of terrorism more difficult (even that is doubtful), but at the price of subjecting the law-abiding peaceful population at large to even more intrusive surveillance.
Legislators have passed additional regulations in the past 12 months which at least restrict the use of cash; bans of high-denomination banknotes (e.g., the 500 euro note) and (lower) thresholds for legal cash payments. There are however also technological developments that are significantly reducing the transaction costs of cashless payments and are therefore making cash comparatively unattractive.
In Sweden, an app called “Swish” introduced by the country's leading banks has revolutionized cashless payments. To this point, the app has been downloaded 5.5 million times. In the Scandinavian country only 2% of all payments are settled in cash these days.
Sweden's central bank expects that this percentage will decline by another three-quarters to 0.5% by the end of the decade. 900 of the 1,600 bank branch offices in the country no longer have any cash in store.
The academic debate continues unabated. A paper that has recently triggered intense debate is the IMF working paper “The Macroeconomics of De-Cashing,” which was published in March 2017. Its author Alexei Kireyev examines the possible macroeconomic consequences of abolishing cash. His central conclusions are:
A cashless payment system would make the monetary policy transmission mechanism more efficient, as there would be very little or no cash available anymore. In particular, it would become possible to implement negative interest rates on a broad front, in order to boost consumption.Since a decline in cash holdings would go hand in hand with an increase in demand deposits at banks, the banking sector would be able to extend more loans. That would lower the level of interest rates and boost economic growth.A sudden increase in the demand for cash is a sign of an imminently impending financial crisis. Shortly before the collapse of Lehman Brothers in September 2008, demand for cash currency increased significantly. That was a sign that bank customers increasingly lost confidence in the solvency and liquidity of commercial banks. This warning signal would no longer be available if cash were abolished.A cashless economy makes tax collection easier, as the example of Sweden illustrates. Regardless of a superficially balanced approach in large parts of the text, the article clearly evinces an underlying bias toward supporting the abolition of cash. Several arguments in the paper are fallacious and represent little more than intellectual kowtowing to the prevailing zeitgeist. Thus a cashless economy is supposedly going to improve “financial inclusiveness” — as every citizen and economic actor would be forced to open a bank account; it would reduce illegal immigration — as employment of illegal immigrants would become more difficult; and it would help protect the environment — because the production of paper or polymers for banknotes has a greater impact on the environment than electronic money.
Whether the given objective of fighting crime and black markets can be realized by banning cash remains a highly controversial issue. Thus, Professor Friedrich Schneider, one of the most renowned experts in the areas shadow economy and tax evasion, shows that a cash ban would reduce illicit employment be a mere 10% and organized crime by less than 5%.
The paper's conclusions ultimately read like a political manual for the abolition of cash by means of salami tactics. In other words, to prevent the population from getting alarmed, it is to be weaned off cash in tolerable doses through a piecemeal approach. Economic incentives for cashless payments are to be put in place, i.e., specifically, fees for cash payments are supposed to be introduced or raised. In our assessment, the most important point though concerns the notion that “de-cashing” would be “critical for the efficiency” of a negative interest rate policy.
The economic arguments against central banks are numerous to say the least. Through the writings of Ludwig von Mises and Murray Rothbard we have a wide variety of critiques that explain the many ways the central banks distort economies, cause booms and busts, punish savers, and chose winners and losers through monetary policy.
But, even if confronted with these arguments, and one remains supportive of central banks, other non-economic arguments must still be addressed.
For example, it is becoming increasing important — in our current age of "non-traditional" monetary policy — to take note of the fact that central banks, and especially the Federal Reserve, are essentially unrestrained by law.
Economists themselves often defend this total unmooring from legal or political accountability, saying it is necessary for the Fed to have "independence" from elected officials.
In reality, however, this "independence" is best described as "total lack of accountability."
Writing in today's Dallas Morning News, Texas Tech economist Alexander William Salter writes:
A phenomenal amount of time and money is spent trying to anticipate what the Fed will do and, afterwards, what the ramifications will be. The reason it takes so many experts to weigh in on Fed behavior is because the Fed's actions are fundamentally unpredictable. This is a huge defect in an organization of such public importance in a nation whose founding principles include the sanctity of the rule of law.
"Rule of law" does not merely mean "according to some official procedure." In order to be truly lawful, the behaviors of government entities must adhere to a more general framework of rules, so that these behaviors are not arbitrary. The more general rules must be more or less fixed, known in advance, and — most importantly — not subject to reinterpretation by those whose hands the rule is supposed to bind. This concept of the rule of law is central to classically liberal constitutionalism and jurisprudence, which underlies the American experiment in ordered liberty.
The behavior of the Fed fails to meet any of these criteria.
Fed activities are more or less unpredictable on any given day, as indicated by the need for various financial houses to devote significant resources to Fed-watching. Congress has almost entirely abdicated its responsibility in holding the Fed accountable, so Fed's actions are not in conformity with any general rule other than what the Fed Board of Governors thinks is expedient. This means the Fed is a judge in its own cause and a law unto itself.
In recent years, some observers — Robert Higgs, for instance — have focused on "regime uncertainty" which is a problem arising from "a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights."
Much of the focus in this research has been on the presidency and the Congress and the courts while ignoring the central role of the Fed itself in promoting this uncertainty.
As Salter notes, the Fed is now unpredictable, and it's anyone's guess what policy change might be coming down the road at any given time. Needless to say, this isn't great for economic growth for all the reasons laid out in the regime-uncertainty research.
Of course, the Fed has always essentially been unaccountable to any outside institutions. Nevertheless, both political ideology and prevailing views among many economists helped to restrain Fed action over the past century. Since World War II, another important factor has been the fact that the US economy has often been relatively strong, and there rarely appeared to be ample justification for the sorts of radical monetary policy now routinely being discussed among Fed policymakers.
As a perfect example of how radical monetary thought has become might be the discussion surrounding Marvin Goodfriend, who was recently revealed to be a leading candidate for appointment by Donald Trump to the Fed's board of governors. According to the Financial Times, Goodfriend possesses "a radical willingness to embrace deeply negative rates."
As a member of the Fed's board, would Goodfriend push for negative rates under the "right" conditions? Who knows?
But if he was successful in winning over a majority of voting members to such a position what could anyone do about it? More importantly, what documents, guidelines, or statutes would indicate for us ahead of time what the "right" conditions would be for implementing negative rates?
There are none. Whether or not the "time is right" for negative rates is completely up to the whims of Board members.
This situation is, as Salter points out, the complete opposite of "the Rule of Law" and has no place in a legal or political regime that claims to respect such a concept.
Moreover, the situation that now prevails at the Fed is exactly the sort of thing F.A. Hayek warned about in The Road to Serfdom when Hayek outlines the incompatibility between the rule of law and an economy controlled by government planners.
Hayek writes:
...stripped of all its technicalities, [the rule of law] means that government in all its actions is bound by rules fixed and announced beforehand — rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one's individual affairs on the basis of this knowledge.
Serious problems begin to arise, Hayek continues, when "ad hoc actions" on the part of government planners prevent market actors from planning for their own economic futures.
Unfortunately, "ad hoc" would appear to be one of the most apt phrases for describing how the Fed functions in today's world.
The Fed's defenders will tell us that this unrestrained capriciousness must be tolerated or else the Fed will no longer have its precious "independence."
Of course, applying this logic to any other political institution — and the Fed most certainly is a political institution — would be immediately denounced as absurdly authoritarian.
And rightly so.
But the Fed's lack of accountability continues to be sacrosanct among many in power — and it continues in spite of a decade of lackluster economic performance under the Fed's "leadership. Salter is forced to conclude:
But when money is governed by the arbitrary rule of central bankers, things become much more uncertain. Trade slows. The economy stagnates, jobs are hard to come by, and the gains from trade mostly accrue to politically connected financial elites. The Fed bears no small responsibility for the past 10 years of anemic economic performance.
You do not need to be a financial market wizard to see that especially bond markets have reached bubble territory: bond prices have become artificially inflated by central banks' unprecedented monetary policies. For instance, the price-earnings-ratio for the US 10-year Treasury yield stands around 44, while the equivalent for the euro zone trades at 85. In other words, the investor has to wait 44 years (and 85 years, respectively) to recover the bonds' purchasing price through coupon payments.
Meanwhile, however, the US Federal Reserve (Fed) keeps bringing up its borrowing rate; and even the European Central Bank (ECB) is now toying with the idea of putting an end to its expansionary policy sooner rather or later. Most notably, however, US long-term rates have come down since the end of 2016, despite the Fed raising its short-term interest rate. How come?
Presumably, investors seem to expect that the Fed might not hike interest rates much further, and/or that higher short-term interest rates will prove to be short-lived, to be reversed quite quickly. In any case, bond markets do not seem to expect interest rates to go back to normal levels — that is toward pre-crisis levels — anytime soon. Several reasons could be responsible for such an expectation.
First and foremost, the US economy appears to be addicted to cheap money. The latest economic recovery has been orchestrated, in particular, through a hefty dose of easy monetary policy. It is therefore fair to assume that market agents will have a hard time coping with higher interest rates. For instance, corporations, consumers, and mortgage borrowers, in general, will face higher credit costs and a less favorable access to funding if and when interest rates edge higher.
In particular, higher interest rates could send the inflated prices of stocks, bonds, and housing southward. For instance, expected future cash flows would be discounted at a higher interest rate, deflating their present values and thus market prices. The deflation of asset markets would hit borrowers hard: Their asset values would nosedive, while nominal debt would remain unchanged so that equity capital is wiped out — a scenario most investors might assume to be undesirable from the viewpoint of central banks.
Moreover, the yield curve has become flatter and flatter in recent years. This, in turn, suggests that banks' profit opportunities from lending have been shrinking, potentially dampening the inflow of new credit into the economic system. A further decline of the yield spread could bring real trouble: In the past, a flat or even inverted yield curve has been accompanied by a significant economic downturn or even a stock market crash.
That said, investors might expect that central banks find it hard to bring interest rates back up, especially back to a level where real interest rates are positive. This holds true for the Fed as well as for all other central banks, including the ECB. This is because the monetary policy of increasing borrowing rates by a significant margin would most likely prick the “Super-Bubble” which has been inflated and nurtured by central banks’ monetary policies over the last decades.
However, it wouldn’t be surprising if, again, central banks, the monopolist producers of fiat money, turn out to be the major course of trouble. After many years of exceptionally low interest rates, central banks may well underestimate the disruptive consequences an increase in borrowing rates has on growth, employment, and the entire fiat money system. In any case, the artificial boom created by central banks must at some point turn into bust, as the Austrian business cycle theory informs us.
The boom turns into bust either by central banks taking away the punchbowl of low interest rates and generous liquidity generation; or the commercial banks, in view of financially overstretched borrowers, stop extending credit; or ever greater quantities of fiat money need be issued by central banks to keep the boom going, inflating prices so that ultimately people start fleeing out of cash. In such an extreme case, the demand for money collapses, and then a Super-Super-Bubble pops.
In this context, it is interesting to see that the price of Bitcoin has been skyrocketing in recent years. There are certainly several reasons for this. One reason is undoubtedly the fact that the cyber unit offers a potential “escape route” from fiat money. Bitcoin (and other cyber units as well) might well be seen, and increasingly so, as a “safe haven” in future times of trouble. And there will be for sure new waves of trouble going forward — whether central banks will tighten interest rates or not.
As alternatives to fiat money become increasingly accepted, positive spill-over effects can be expected for gold. Gold has always been the monetary prototype of a “safe haven.” It may be increasingly in demand for its store of value function going forward and, by making use of the blockchain, even as a digitalized means of payment representing a claim on physical gold. Once the Super-Bubble pops, we will see for sure what people demand as the ultimate means of payment: gold or cyber units, or both.
Is the Bank of Canada going to raise its overnight benchmark rate?
Since rising interest rates are decreed by the central bank, the real scarcity of capital in which major financial institutions can borrow and lend out overnight amongst themselves is unknown. Disconnected from any real savings, we expect the Bank of Canada to manually raise rates when the going gets good.
This is flawed thinking. Clearly, the rag-tag team at the BoC has confused cause and effect once again.
Through experience and logic, the idea that central banks can provide a free lunch is rebuffed by a hefty dose of reality. You need capital to have capitalism. Savings and production come before consumption. This is a priori true.
That’s why the Fed-induced casino reacted to BoC’s Number 2 Carolyn Wilkins’s recent speech. Her words were interpreted in such a way that had a discernible effect on the Canadian loonie, and it surged.
It’s easy to imagine a financial system where this is not the case. Where “monetary policy” is returned to its rightful owner — the individual buying public.
When the No. 2 at the BoC says, “We are seeing the economy pick up,” and hints at raising rates, this means that the central bankers believe they can make everyone’s debt more expensive without bankrupting everyone in the process.
Since the economy seems to be doing well, how would a quarter-point or two fare?
Former BoC governor and now Bank of England head star Mark Carney succeeded with this back in September 2010.
America’s housing bubble had already burst, the effects were international, but the whole house of cards didn’t come crashing down. The Fed had some wiggle room, the end was near but it wasn’t set, and Canada happened to weather the storm quite nicely.
After all, we had been running federal budget surpluses since the 1990s, and we had yet to import all the finer details of the Southern real-estate easy-money craze.
With propaganda about our large “stable” banks (who have since been downgraded), there was enough global and domestic confidence for Clown Carney to nudge interest rates to 1%.
Ho, hum.
Gains were lost when his successor cut rates in 2015 due to the crash of Alberta oil.
Current BoC governor Stephen Poloz, or Simple Steve, couldn’t let that wild card spill over into other sectors of the economy. Steve told us to go back to buying land since they ain’t making any more of it. Use the low rates to pay back debts while also taking on more, he said. Grow the economy by borrowing to invest and remodel your house. Don’t look at me for the details, I just work here.
Meanwhile, Wilkins’s speech is “preparing markets” for the eventual crawl back to rate hikes.
The Bank of Canada has created a monstrosity of a monetary system. Insomuch that central banks will be around for the foreseeable future, may I suggest rediscovering some of former BoC governor James E. Coyne’s economic speeches?
Originally posted at mises.ca.
With last week's FOMC meeting over, which means Fed members are speaking once again, reflecting on the June meeting and looking forward to future decisions. Here is a breakdown of the content given by the five Fed members who appeared publicly this week so far.
William Dudley
New York Fed President Dudley stated that inflation, which is closer to 1.5% than 2% as measured by the PCE, is on the low side but he is happy with the progress made on the headline employment numbers. Given the low inflation, future rate hikes are not as certain as they were a few months ago.
Charles Evans
Chicago Fed President Evans was focused on the "low inflation" as while, wanting to emphasize the alleged importance of making sure the public knows that the Fed is going to be doing something about the low inflation problem. Apparently, the "public" is worried that their costs of living aren't going up fast enough and needs confidence that the Fed will sweep in to the rescue in such a dire situation. “We have to assure the public that we recognize the new low-inflation environment and that we are not overly conservative central bankers who see our inflation target as a ceiling,” Evans said, according to Bloomberg. Of course, the opposite is the truth. The Fed has been overly extreme in its monetary expansion and reckless interest rate suppression.
Stanley Fischer
Fed Vice Chair Fischer focused on the steps that must be done to prevent another financial crisis. His focus, naturally, was on government regulation including oversight of lending practices and bank stress tests. As always, there was no mention of the danger to financial stability caused by artificial expansion of the money supply and the suppression of interest rates, which encourages speculation and diverts resources into "investments" which otherwise would not have been funded if it wasn't for the Fed's easy money regime in the first place.
Eric Rosengren
The Boston Fed President almost stumbled onto the right track when he said that persistently low interest rates may raise concerns about financial stability. Unfortunately, all he meant was that the Fed needed to be prepared to "act" (which of course means print more money) in response to possible negative shocks. It seems there was no realization about the reality sitting right under his nose: the Fed's previous course of action is what led interest rates so low in the first place!
Robert Kaplan
Dallas Fed President pointed to the low yields on the 10 year Treasury as a sign that investors were anticipating slow growth in the years ahead. Because of this, Kaplan warned about being too hawkish on monetary policy and moving to remove "accommodation" too early. That is, the Fed's quadrupling of the balance sheet over the last decade hasn't actually provided for a robust economy and now the Fed is stuck having to prop it up with easy money.
Unsurprisingly, central banks are reluctant to claim credit for inflation. In their latest bulletin, the European Central Bank (ECB) published the graph below explaining what causes inflation.
See the problem? Neither the money supply nor the ECB are mentioned. While there are many factors that influence the purchasing power of money, inflation is still inherently a monetary phenomenon and the role central banks play simply can’t be ignored.
Instead, the ECB prefers to do what all central banks did just before the 2009 great recession: blame inflation on rising food and energy prices. But large central banks like the ECB have a strong and disproportionate effect on energy prices, as predicted by Austrian business cycle theory. The rise in oil prices in 2007, for example, was triggered by the end of the euphoric monetary boom initiated by the Fed and the ECB in the years prior. As investment in energy production was fueled, in part, by credit expansion instead of real savings. The quantity of producer’s goods — or at least of some of them — revealed themselves to be insufficient to complete the plans of entrepreneurs, thus generating a sharp increase in their prices.
Therefore the ECB has some responsibility in the so-called external drivers of inflation.
Another problem worth noting is that the ECB seems eager to revive the old myth of cost push inflation. The author of the ECB bulletin writes that: "Domestic price pressures result mainly from wage and price-setting behaviour, which is closely linked to the domestic business cycle."
But it is the values of the first order goods which are imputed back to productive factors, rather than the other way around. As Henry Hazlitt puts it:
The other rival theory is that inflation and the rise of prices are caused by higher wage demands — by a “cost push.” But this theory reverses cause and effect. “Costs” are prices. An increase in wages above marginal productivity, if it were not preceded, accompanied, or quickly followed by an increase in the supply of money, would not cause inflation; it would merely cause unemployment. It is not true, as so often assumed, that a wage increase in a given firm or industry can be simply “added on to the price.” Without an increased money supply, prices cannot be raised without reducing demand and sales, and hence production and employment. We can stop the “cost push” if we halt the increase in the money supply and repeal the labor laws that confer irresponsible private powers on union leaders.
With a constant demand for money, it is possible for some prices to go up but it is impossible for all prices to go up. For all prices to go up, a central bank must exist and pump more money into the economy. If, in a free market, the cost for oil increases because of an increase in demand, whether foreign or domestic, other prices, ceteris paribus, must fall.
Of course, the ECB is right to argue that global commodity prices affect the domestic price level. Nonetheless, the bulletin deliberately understates the impact the ECB has on the movement of prices. To simply chalk it up to international pressure will, for sure, become a handy justification for the ECB if they fail to maintain inflation under 2%.
But don’t be fooled, central banks, not oil, are responsible for the debasement of the currency.
Beyond the behavior of speculators or OPEC—which some consider a cartel, if there is anything we can learn is that the fall in oil prices responds to the forces of supply and demand. On the demand side, lower economic activity throughout the world, specially in China, has lowered the price of oil. Projections by the International Energy Agency show how demand weakened in 2014, although it rebounded in 2016.
However, there is no doubt that the supply side saw the most significant change. There has been much talk about fracking and how this technology—implemented primarily in the United States—has affected the oil supply. Between 2008 and 2014, the US oil supply increased by 76%.
This shock in the supply of oil and the weak demand has accustomed people to low oil prices. In 2016, the average price of a WTI barrel was valued at $43.15. In June 2016, the price was over $90. In just one year, from June 2014 to June 2015, the price of a barrel fell 43%.
The shock in the supply will not last forever: producers have different marginal costs. In the past, high oil prices made new forms of production with greater marginal costs profitable. If prices remain low, some producers could exit the market and there would be a price adjustment. Yet, there are good reasons to think that oil won’t reach the exorbitant prices of early 2014.
The question many are asking is: why hasn’t OPEC acted to keep prices from remaining low? To answer this question, we need to examine whether OPEC is able to manipulate prices.
Is OPEC a Cartel?Economists define a cartel as a group of producers that come together to plot in the market. In other words, a group of producers agree to restrict supply and maintain prices at a certain level, making their incomes greater. However, for this to happen the members of the cartel need to have a dominant position in the market.
Although many economists consider OPEC a cartel, the question becomes difficult to answer when we look at historical data. In their book The Price of Oil, Roberto Aguilera and Marian Radetzki lay out empirical evidence showing that, historically, OPEC has not been able to act as a cartel. OPEC’s policy has always consisted in setting maximum production quotas to keep the supply below a certain level; yet these quotas are rarely followed and OPEC countries generally produce at 94% of their capacity.
On the other hand, OPEC’s market share does not clearly show a dominant position in the market that would allow them to directly influence prices. According to Aguilera and Radetzki, OPEC’s market share has varied between 31% and 56%. Although it might seems like a large share it is not, especially if we compare it to other minerals such as bauxite where there is a supply concentration of 73% to 81%.
OPEC has announced that it hoped to reach an agreement to extend the output cuts of major oil-producing countries. Certainly, the quotas fixed by OPEC have an influence on the price of oil, but this does not make OPEC a cartel. Only the future will tell if OPEC’s measures have any effect on oil prices or if our interpretation that they aren’t able to move prices is true.
Reprinted from Market Trends at Universidad Francisco Marroquin.
They’re back. Subprime mortgages. And loan brokers are needed to start making them. Kirsten Grind, who, by the way, wrote a wonderful book about Washington Mutual (WaMu) entitled The Lost Bank, writes for the Wall Street Journal, “Brokers willing to learn the lost art of making risky mortgages are in demand again.”
Home values are up, flipping is back in vogue, and more than a little subprime sauce is needed to keep the party cooking. Putting a face on the subprime broker demand Ms. Grind features a former Calvin Klein salesman who admits he didn’t know much about housing finance. “‘I knew a mortgage was a loan for a house,’ said Mr. Boyd, who was recruited by his boss, Jon Maddux, after selling him a Calvin Klein suit at a local outdoor mall. ‘I came in just a blank slate.’”
Mr. Maddux now owns Drop Mortgage. But at the depths of the crash his business was “YouWalkAway.com between 2008 and 2012. The site charged homeowners on the brink of foreclosure $995 to learn how to leave their debt behind.”
Of course there’s a good market for loans to folks who don’t fit in the Dodd-Frank box and lenders can earn 6% to 10% from borrowers sporting credit scores of 660 and below. But fresh-faced originators can’t figure out how to make the loans.
“A lot of (the brokers) are timid and scared and don’t know where to start with the nonprime type loans,” Steve Arnold, who is based in West Palm Beach, Fla. told Ms. Grind. Mortgage lenders have succumbed to Stockholm Syndrome and can’t figure out how to make anything but a drop-dead lead pipe cinch conforming mortgage.
Krista Donecker, an account executive at Irving, Texas-based Caliber Home Loans Inc. tells Grind, “It’s been a hard battle” against the stigma of subprime lending. She gives presentations on originating subprime loans and remembers a broker asking her, “Are you sure this isn’t illegal?”
Ironically, subprime is making a comeback while European banks fight “the same kind of heavy-handed rules for banks’ mortgage holdings that have been adopted by their American counterparts,” reports Bloomberg.
“‘By and large, Germans pay their debts’ and are nowhere near as risky as American lenders and home-buyers have been in the past,” says Deutsche Bank AG chief John Cryan. Ouch.
This is all about measures that are “part of the completion of Basel III, effectively [to] increase the capital backing mortgages held on banks’ balance sheets to ensure that lenders can weather another economic downturn,” writes Matt Scully for Bloomberg.
In the conventional loan market, “Interest rates fell last week to the lowest level since November, and the seasonally adjusted mortgage volume jumped accordingly, up 7.1 percent, according to the Mortgage Bankers Association,” reports Diana Olick for CNBC.
"Purchase application volume increased to its highest level since May 2010. Refinance activity bumped up as well in response to moderating rates, but remained generally subdued," said Joel Kan, an MBA economist.
Rreprinted from DouglasinVegas. Douglas French is former president of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply , and author of Walk Away: The Rise and Fall of the Home-Ownership Myth.
Just two days ago the FOMC decided once again to raise the target range for the Fed Funds rate, with Yellen expressing optimism about 2% inflation and therefore (in the Keynesian framework), the economy itself. While Dallas Fed President Robert Kaplan voted with everyone else (except Neel Kashkari) to hike rates, he today made it clear that the inflation trend is worrying him. If the inflation rate continues to move away from 2%, his opinion is that rate hikes should be suspended.
The June decision was therefore tougher for him to make. Reuters reports:
"In this job you make trade-off decisions; I think the fact that inflation of late has been more muted, for me, made me weigh those trade-offs much more carefully," Kaplan told reporters after a meeting of the Park Cities Rotary Club in Dallas. While he is comfortable with where rates are now, he said, "before I’d be comfortable taking the next step in raising the fed funds rate, I’m going to want to see more evidence that we are making more progress" toward the Fed's 2-percent inflation goal.
His concern about inflation is also the very reason that Neel Kashkari dissented on the rate decision. On his own blog, Kashkari referred to the alleged tradeoff between inflation and unemployment (known as the Phillips Curve) and noted that he believes the slowing inflation is sending a warning to the labor market. That is, since inflation was slowing, the employment numbers may soon reveal a scenario that is less rosy than their current trend. He writes:
On the other hand, unfortunately, the data aren’t supporting this story [that falling unemployment numbers are congruent with rising inflation--CJE], with the FOMC coming up short on its inflation target for many years in a row, and now with core inflation actually falling even as the labor market is tightening. If we base our outlook for inflation on these actual data, we shouldn’t have raised rates this week. Instead, we should have waited to see if the recent drop in inflation is transitory to ensure that we are fulfilling our inflation mandate.
Both Kashkari and Kaplan are worried that inflation trends are slowing and therefore don't want any rate hikes to impede the glorious path toward 2%. Of course, Kashkari is already talking about inflation beyond 2%, stating that an "overshoot of 2 percent... shouldn’t be concerning since we say we have a symmetric target and not a ceiling." When it comes down to it, don't think that a 2% devaluation of our purchasing power will stop the Fed's reckless ways.
Mario Draghi has again missed an exceptional opportunity to adjust monetary policy. By ignoring the huge risks that are being created from the brutal inflation of financial assets, saying that “there are no signs of a bubble,” the European Central Bank (ECB) remains adamantly focused on creating inflation by decree, denying the effects of technology, demography, and overcapacity.
“No signs of bubble”? I’ll show you some of them myself.
The percentage of debt of major countries “bought” by the ECB: Germany, 17%, France 14%, Italy 12%, and Spain 16%. In all cases, in 2016 and 2015 the ECB was the largest buyer of said countries’ net emissions. Ask yourself a question: On the day the ECB stops buying, which of you would buy peripheral or European bonds at these prices? Clearly, the first sign of a bubble is the absence of demand in the secondary that offsets the impact of the ECB. It indicates that the current price is simply unacceptable in an open market, even if the recovery is confirmed, especially because rates do not even reflect a minimum real return, being below inflation.
European Union high-yield bonds are trading at record-low yields despite the fact that cash generation and debt repayment capacity, according to Moody’s and Fitch, have not improved significantly.European largest stocks (Eurostoxx 50) trade at 20x PE and 8.3x EV/EBITDA despite eight years of flat earnings and downgrades, which have only just recently reversed.Infrastructure deals’ multiples have increased five-fold in three years to an astonishing average of 16-19x EBITDA.Excess liquidity in the euro zone already reaches 1.2 trillion euros. It has multiplied by almost seven since the “stimulus” program was launched. Anything for Inflation There is a problem in the huge amount of assets bought by the ECB, whose balance sheet already exceeds 25% of the European Union’s GDP. At the beginning of the repurchase program, it could be argued that risky assets, especially sovereign bonds, could have been cheap or under-valued because of the risk of break-up of the euro and overall negative sentiment. However, that statement cannot be made today, with bond yields at historic lows and debt levels at historic highs. Monetary policy is a perverse incentive to spend more and add more debt.
Of course, what the ECB expects is the arrival of the inflation mantra, that mirage that deficit states yearn for and no consumer has ever wanted.
But the search for inflation by decree meets the pitfall of reality. The positive disinflation that technological advances generate adds to the logical change of consumption patterns due to aging of the population and the elephant in the room: The European Union has never had a problem of lack of investment, but of excess spending on dozens of industrial and infrastructure plans that have left behind some positive effects, but — due to excess — greater debt and overcapacity .
Now that prices are moderating again with the dilution of the base effect, the opportunity to moderate this unnecessary monetary stimulus is lost. As I explained at CNBC on May 29, the supposed positive effects of the buyback program cannot make us ignore the accumulation of risk in sovereign and corporate bonds and the dangerous impact on the financial sector.
Draghi, at Least, Warns The president of the ECB does not stop alerting governments about the importance of reforms to drive growth, lower taxes and reduced imbalances, but no one hears. When Draghi warns banks of their weaknesses, they don’t listen either. When he reminds deficit spending governments that monetary policy has an expiration date, they look the other way. It’s party time .
Monetary policy is “like Coca-Cola,” said Jens Weidmann , president of the Bundesbank. A drink that stimulates, but has too much sugar and no real healing qualities.
The problem of losing this opportunity to moderate monetary policy is that it is highly unlikely that the necessary measures will be taken to correct excesses when they are no longer a debate of economic analyst, but evident to all citizens. Because then, the central bank will be afraid of a financial market correction, after a bubble inflated by its policies.
European governments make a huge mistake thinking that prosperity is going to be generated from debt and not from savings. But they make an even bigger mistake if they think that by perpetuating the imbalances, they will prevent a crisis.
At the press conference, Draghi said that “nobody knows when or where the next crisis will come: the only sure thing is that it will come.”
What Draghi did not explain is that the artificial creation of money without support, well above real economic growth, is always behind those crises. But that is another problem, that will be dealt with by the next president of the Central Bank, who will offer the “new” solution … Yes, you have guessed it: Cut rates and increase liquidity.
Reprinted with permission of the author. Daniel Lacalle has a PhD in Economics and is author of Escape from the Central Bank Trap, Life In The Financial Markets, and The Energy World Is Flat (Wiley).
Last week, the Federal Reserve announced an increase in the Federal Funds rate to 1.25 percent. The last time the target rate reached so high was in September of 2008, when the rate was 2.0 percent. In October of that year, the target rate fell to 1.0 percent, and was moved down to 0.25 percent in December. It remained at 0.25 percent for the next 83 months.
This week's rate increase was the third increase since December 2016, when the Fed increased the rate from 0.5 percent to 0.75 percent.
Compared to the last seven years, this policy looks hawkish by comparison. On the other hand, compared to the 1990s — which were at the time seen as an era of low rates — current policy remains remarkably accommodative.
Other central banks, however, continue to take no action.
For example, the Bank of England recent voted to keep rates at a record low 0.25 percent. Meanwhile, the Bank of Japan is making no change and keeping rates near zero. Last week, the European Central Bank kept is target rate at negative 0.4 percent. In the wake of this week's Fed decision, the People's Bank of China elected to take no action either.
If we look at all these central banks together, the Fed does appear to be the odd man out:
Perhaps the most notably development is the Fed's announcement of plans to "normalize" its balance sheet and reduce in size the huge $4.4 trillion balance sheet it has accumulated since 2009. According to CNBC:
On top of the rate hike, the committee said it will begin the process this year of reducing its balance sheet, which it expanded by buying bonds and other securities in order to fight the housing crisis. Minutes from the May meeting indicated officials already had begun discussion about putting a set limit each month on the amount it would let run off as it conducts its policy of reinvesting proceeds...
"The committee currently expects to begin implementing a balance sheet normalization process this year, provided the economy evolves broadly as anticipated," the post-meeting statement said.
According to information released Wednesday, the roll-off cap level will start at $6 billion a month for the level of principal payment proceeds from Treasurys it will let run off without reinvesting. The remainder will be reinvested.
The Fed will increase that cap level at a pace of $6 billion each quarter over 12 months until the cap reaches $30 billion a month.
For agency and mortgage debt, the cap will be $4 billion a month initially, with quarterly increases of $4 billion until the level reaches $20 billion a month.
Once both targets are met, the total runoff per month will be $50 billion. Several Fed officials have said publicly they expect the runoff program to continue until the balance sheet declines to about $2 trillion to $2.5 trillion.
If the Fed manages to implement this plan, we're still only looking at a reduction to 2010 levels, and 2010 was not exactly an age of tight money at the Fed.
Moreover, it's rather unlikely we'll ever see this actually happen. Bill Gross, for example, remains doubtful:
I think that the Fed can't follow through with their ... plan and I think that the Fed can't follow through with what they're suggesting in terms of the sell-backs in the Treasury market."
And why won't the Fed follow through?
Well, as Jason Schenker points out at Bloomberg, reducing the balance sheets requires a robust economy, and it's not clear the US has that right now. Moreover, recent history has not provided much hope in this respect:
The ECB’s attempt to reduce its balance sheet was a complete failure, and it almost resulted in a recession. Policy makers were forced to reverse course, and it necessitated the massive quantitative easing program the ECB has since been implementing since, putting the current size of the ECB balance sheet at 4.1 trillion euros ($4.57 trillion) -- more than double the level at the end of its reduction program. In other words, a one-third reduction in the ECB balance sheet subsequently necessitated its doubling from the newly reduced level. This shows how difficult balance sheet “normalization” could be for the Fed.
For all its talk of balance sheet normalization, the Fed may similarly struggle. After all, once hooked on the sauce of cheap money, financial markets don’t want to see the punch bowl taken away. If the ECB offers a lesson, it’s that shrinking the balance sheet can necessitate a rather quick, and even more drastic, expansion.
The Fed's state itself notes its plans depend on "the economy evolv[ing] broadly as anticipated.
At this point, the Fed is clearly in a mine field. It has been seeking to raise rates for some time, to give the Fed some room to move if the economy does fall back into recession. At 1.25 percent, matters have improved, but rates are no where near where they were in 2007 (above 5 percent) at the beginning of the last crisis. However, given the weakness of the economy, it's not at all clear that current markets could ever survive an attempt to raise rates even halfway to the five percent rates we saw a decade ago. In any case, even some minor tightening of policy is can be dangerous, as Thorsten Polleit recently explained:
To keep the boom going, the central bank must keep interest rates below their natural levels. It cannot raise them back to “normal.” First and foremost, higher interest rates would make the boom collapse. The credit market would collapse, stock and housing prices would tumble, and the financial system and the economy as a whole would go into a tailspin.
One may ask: Why is the Fed then raising rates then? Perhaps the Fed’s decision-makers think that the US economy has overcome the latest crisis and higher interest rates are economically justified. Others might wish to tighten policy for getting the short-term inflation adjusted interest rate out of negative territory.
Be it as it may, the disconcerting truth is this: Fed rate hikes will close the gap between the natural interest rate and the actual interest rate level. This, in turn, amounts to putting a brake on the boom, bringing it closer to bust. It is impossible to know with exactitude at what interest rate level the US economy would fall over the cliff.
One thing is fairly certain, though: The US economy, and with it the world economy, is caught between a rock and a hard place. Maybe the Fed’s current rate hiking spree will bring about the bust. Or the Fed refrains from raising rates further and keeps the boom going a little bit longer.
June's FOMC meeting concluded today and the meeting announcement revealed an interest rate hike of .25% to bring the Federal Funds target to between 1 and 1.25%. Additionally, we also learned that the FOMC anticipates one more rate in 2017, 3 more in 2018, and the beginning of a balance sheet reduction effort starting this year. Of course, the balance sheet reduction is actually just a taper in the amount of reinvestment. Since they are simply slowing down how much in assets they are buying every month, the balance sheet will still be increasing.
There are still concerns at the FOMC (and in monetary officialdom in general) that the devaluation of our purchasing power (colloquially known as "inflation") is not occurring rapidly enough. From their own statistics, which exclude things most important to consumers such as food and energy, price inflation dipped a bit to 1.7%. This, of course, is an utter outrage to the experts.
We also got more specific detail about the balance sheet plan, which as we have said all year is going to be the primary narrative of the second half of 2017 in place of interest rate hike talks. Bloomberg reports:
In a separate statement on Wednesday, the Fed spelled out the details of its plan to allow the balance sheet to shrink by gradually rolling off a fixed amount of assets on a monthly basis. The initial cap will be set at $10 billion a month: $6 billion from Treasuries and $4 billion from mortgage-backed securities.
The caps will increase every three months by $6 billion for Treasuries and $4 billion for MBS until they reach $30 billion and $20 billion, respectively.
Officials didn’t reveal the exact timing of when the process will begin this year, as well as specifically how large the portfolio might be when finished.
On the interest rate decision it was Minneapolis Fed President Neel Kashkari who once again dissented, preferring no change. He is one of the more dovish members of the Fed, preferring to see the core inflation rate (according to Fed-preferred statistics) solidly above 2% before additional rate hikes.
The next FOMC meeting is at the end of July, but no rate hikes are expected again until September.
While the Federal Reserve has an explicit dual mandate to keep prices stable and maintain full employment, they have unofficially taken on new goals like maintaining financial stability. Bernanke, Yellen, and other officials have noted how traditional monetary policy is a limited and blunt tool to accomplish this goal, which is why the Fed has, in recent years, exercised and flexed its regulatory muscle.
The Minnesota District Bank president, Neel Kashkari, recently wrote an article about the dilemma the Fed faces regarding asset bubbles and whether or not they should be met with raising interest rates. He summarizes in five points:
It is really hard to spot bubbles with any confidence before they burst. The Fed has limited policy tools to stop a bubble from growing, even if we thought we spotted one. The costs of making policy mistakes can be very high, so we must proceed with caution. What we can and must do is ensure that the financial system is strong enough to withstand the inevitable bursting of a bubble. And finally, monetary policy should be used only as a last resort to address asset prices, because the costs to the economy of such a policy response are potentially so large. In an addendum to his article, he admits that it is possible artificially low interest rates increase the probability of asset bubbles forming: “low rates ... could make bubbles more likely to form in the first place.” He laments that there is no economic theory to back this up, to the unending frustration of Austrian economists everywhere. Indeed, F. A. Hayek won a Nobel Prize in economics in part for his work on a business cycle theory that blames central banks for causing, among other things, bubbles.
ABCT Isn’t So Controversial Despite the lack of representation in Federal Reserve and government offices, the theory is not as controversial as it is made out to be. Just a week before Kashkari’s post, Bloomberg.com published an article on a bubble in the automobile industry that singled out the cause of increased subprime auto loans: “While caution may be good for banks’ balance sheets, it doesn’t offer much relief for automakers, who relied on cheap credit to fuel a seven-year stretch of booming sales.”
In fact, artificially low interest rates and expansionary monetary policy have the explicit goal of stimulating borrowing and spending. This is no secret, as Kashkari explains: “we lower interest rates to try to stimulate economic activity by reducing borrowing costs.”
Now take Kashkari’s first and second points in view of this. If central bank policy is responsible for creating bubbles, then how could a central bank official say that spotting and preventing bubbles is “really hard”? It’s like a detective admitting he’s stumped about who is starting all of these fires around town, while he’s holding a container of fuel, a matchbook, and a book titled Arson for Dummies.
Broken Clocks and Broken Records While Hayek certainly deserved his Nobel Prize, it is well-known that he was following Ludwig von Mises and his work on business cycles. Together, they constructed the framework for what we know today as Austrian business cycle theory, expounded and expanded more recently by Murray Rothbard, Joseph Salerno, Roger Garrison, Jesús Huerta de Soto, David Howden, Philipp Bagus, and many others.
Kashkari referred to those who try to identify bubbles as broken clocks. This characterization is unfortunate. Broken clocks do not explain why. If Austrian economists were only accidentally right some of the time, then they would not be able to point to the specific causes of the business cycle.
A broken clock, for example, would not explain, pre-1929 crash, the causes of the “inevitable crisis”:
Government agencies responsible for financial policy, directors of the central banks of issue and also of the large private banks and banking houses ... failed to recognize the fundamental problem. They did not understand that every increase in the amount of circulation credit (whether brought about by the issue of banknotes or expanding bank deposits) causes a surge in business and thus starts the cycle which leads once more, over and beyond the crisis, to the decline in business activity. In short, they embraced the very ideology responsible for generating business fluctuations. (Ludwig von Mises, Monetary Stabilization and Cyclical Policy, 1928)
Perhaps a broken record is a more apt analogy for modern central bankers (even a broken clock is right occasionally). After every financial crisis, in the midst of every recession, we hear the same line: “Let us stimulate the economy with expansionary monetary policy.” There is no adequate explanation of where the crises keep coming from, except for vague accusations against unregulated financial markets. And there is always another crisis on the way. The booms and busts are taken as a given, it seems. The Fed doesn’t try to solve the problem of the business cycle. They have given up on that task — they just try to make them smaller and smoother when they do come. Kashkari admits this in his article (point four): “What we can and must do is ensure that the financial system is strong enough to withstand the inevitable bursting of a bubble.”
The High Costs of Artificial Credit Finally, Kashkari’s remaining words of warning in points three and five, that bad monetary policy is very costly, are the same as Mises and Hayek’s words of warning. The only difference is what counts as a “policy mistake” and where to look for the costs of wrong-headed policy.
For Mises and Hayek, the policy mistake involves any creation of credit out of thin air. If the Federal Reserve decreases interest rates below what would prevail on an unhampered credit market, then an artificial, unsustainable boom is set in motion. If any central bank increases the money supply through the financial system, it means that borrowers have the privilege of being the first to bid up prices as the new money ripples through the economy.
It means that nominal incomes, employment, consumption, the prices of capital goods, and other asset prices will increase. It means that capital will be directed into new, longer, and riskier lines of production, beyond what would have happened at the prevailing levels of real saving. These lines of production will turn out to be unprofitable as the increasing scarcity of capital becomes apparent and the costs of production become prohibitively high. Incomes, employment, consumption, and stock prices plummet as laborers and capital owners seek productive and profitable employment. The bust is made up of all of the necessary corrections for the errors made during the boom. Additional artificial credit will only delay this process and make it more painful when the day comes.
Contrast this view with that of Kashkari or this supportive Business Insider article: “the main, unspoken reason for pushing interest rates higher was to tame runaway stock and credit markets, which have broken all sorts of records under the Fed’s zero-rate policy ... [Kashkari] makes a solid case in an essay this week as to why this is a terrible idea.” They seem to understand that fiddling with interest rates and flooding the economy with artificial credit has numerous unintended consequences and potentially high costs.
Why is it such a stretch to posit that the bubbles, recessions, and depressions created by these policies are too high a cost? Why is it so controversial to suggest that we should leave interest rates and credit markets alone? Perhaps monetary policy is not a blunt tool, but a dangerous weapon — one that should be confiscated from those who have wielded it for too long.
The ECB's regular policy statement was announced today by President Mario Draghi and it was the typical central banking balance beam act of self-congratulation for the strong economy coupled with the conditional warning that was inflation was too low. This way, everyone should be thrilled that the economy is strong and yet the central planners don't have to cut back on the monetary addiction.
It is assumed, of course, that unless the economy is experiencing 2% inflation rates (as calculated by their own statistical reference points), there's still lots of printing work to be done. Deflation is to them the Great Enemy to be slaughtered.
But since it's been nearly a decade of loose monetary policy in one way or another, and progress needs to be shown to justify their careers, they emphasize that the economy doesn't per se need more stimulus. To satisfy both the need for more money creation and the bank's trustworthiness, the ECB's statement dropped reference to future interest rate cuts while at the same time refusing to slow the current pace of stimulus.
These miniscule changes in their posturing is supposed to be of great importance, a sign that the Planners really know what they are doing; they are fine tuning and perfecting the European economy.
But it's all hogwash. They don't know how to run an economy. They only know how to put on a great performance and create money with which to prop up assets and governments around the Eurozone. The game, as it always seems to do, goes on.
It's a slow week for the Fed as they gear up for next week's FOMC meeting and subsequent announcement. In the days ahead, there will be much commentary about whether or not the Fed is going to raise rates.
For example Tim Duy, who is always happy to support the Fed's inflationary excesses, is worried about the strength of the economy in the case of "excessive monetary action." What he means by this phrase is not the quadrupling of the Fed's balance sheet since 2008, but rather a small tick upwards in the Federal Funds target rate. He doesn't want the Fed to continue "tightening" and refers to this as excessive action.
This framework of the Fed's letting interest rates rise (by not expanding the money supply by as much as previous) as being excessive action implies that it is somehow less excessive (more "normal") for the Fed to keep interest rates low. This is the exact opposite of the reality of monetary policy in light of monetary theory. In a world without monetary interventionism in which a central bank can simply buy assets (with money created out of thin air) and suppress interest rates, the money supply would tend to remain relatively stable. Interest rates would rise and fall in accordance with the time preferences of lenders and borrowers on the market.
It is the central bank's intervention ("monetary action") that causes interest rates to be forced artificially low. If the Fed let go and stopped "acting," if they let the money supply correct to its natural levels, if they let the malinvestments liquidate, interest rates would likely spike. It is not "excessive monetary action" that characterizes rising interest rates in a recessionary scenario but rather it is the suppression of those interest rates that is the example monetary action.
The Fed letting go of the economy's reigns, the opposite of monetary action, is recessionary because it was the Fed's monetary interventionism which created an artificial economic boom in the first place. Of course, this is not a case against the Fed letting go, for the recession is badly needed so that prices and the capital structure can properly adjust.
The Fed keeps interest rates low by continuing to intervene in the market. That is where the true excessive monetary action lies, and this is the source of our true economic woes.
There are currently three open Federal Reserve Board of Governors positions and the New York Times reports that Trump is ready to nominate the following two:
The expected nominees include Randal K. Quarles, a Treasury Department official in the George W. Bush administration, and Marvin Goodfriend, a former Fed official who is now a professor of economics at Carnegie Mellon University.
In picking Mr. Quarles and Mr. Goodfriend, President Trump is seeking to install conservative counterweights to the Fed’s chairwoman, Janet L. Yellen. Both men have expressed reservations about the Fed’s aggressive efforts to revive economic growth since the 2008 crisis.
Importantly for the discretionary vs. rule-based policy debate, it seems that Trump and those advising him are specifically picking two people who have been outspoken in defense of rule-based (such as the famed Taylor Rule) decision making. This is in contrast to Stanley Fischer and others at the current the Fed who have been firm in defense of discretionary policies.
We still await a formal announcement from Trump.
The Fed's economists are always coming up with deranged new ideas and when they fail to reach their goals the first time, they double down. In the recent decade they picked the completely arbitrary inflation growth rate of 2% (as calculated by the misleading PCE) and stated that for the economy to be on a strong trajectory, 2% inflation was a necessity. And of course, they directed all their stimulus toward Wall Street and capital markets (including housing) which has seen substantial gains since the crisis, but neither are calculated in the PCE.
At any rate, the Fed can point to the failure to hit 2% as an excuse why the economy isn't exactly strong 9 years after the crisis. The silly goal of trying to cause a rise in consumer prices will now be addressed with new "solutions." According to their models they haven't consistently hit 2%, though main street grocery shoppers dissent from the academic models.
At any rate, the Fed is determined to succeed. And so, San Francisco Fed President John Williams presented the idea of "flexible price-level targeting." This new excuse for monetary expansion will allegedly allow the Fed to adjust interest rates and monetary base growth in accordance with what is needed to hit a certain price level. In other words, the Fed wants the ability to overshoot the 2% goal as necessary to make up for lost time or to more effectively deal with years of "too low inflation."
The whole idea of trying hard and failing to hit their inflation goals is a massive underlying theme that continues to justify more monetary intervention. The Fed could hit 2% or more anytime it wanted to. For one thing, they could stop paying interest on excess reserves and therefore remove the incentive to keep money stocked at the Fed. This whole dramatic presentation is just an excuse to keep feeding cheap debt into the capital markets and the US Treasury.
What the United States economy needs is not a Fed that is more successful at hitting its currency devaluation schemes. We need the opposite: we need the Fed to walk away from the business of managing the economy so that prices can adjust, bad debts can be liquidated, and the economy can accumulate a healthy level of savings.
San Francisco President John Williams spoke last Sunday, reiterating his position that the Fed would hike 3 times this year. Looking only at the inflation rate (as measured by the PCE) and the unemployment levels, the Fed considers its dual mandate as having been met. On the surface this justifies a rate hike, according to mainstream economic orthodoxy.
However, Williams also expressed concern about the long-term prospects of slowing economic growth. CNBC quotes Williams:
"I personally view that the biggest challenges the U.S. faces are really longer run challenges, not about next month, next year. They're about the fact that productivity growth is very slow, we have a shortfall of infrastructure in the U.S.," he said.
"We have a lot of longer term challenges that really revolve around needing more investments in education, job training, infrastructure, research and development, all the things that propel an economy over the longer term."
The fact of the matter is the last 3 decades have seen a central bank-induced false prosperity in which the true capital stock of the United States (and the global economy) has been depleted. By artificially lowering interest rates and expanding the money supply worldwide, the central planners have brought consumption spending forward, neglecting the necessary savings required for long term economic growth.
Williams mentions several areas requiring increased investment, which allegedly propel an economy over the long term. The problem is that the world has far less capital to actually invest in the long term-- and the central bankers falsely believe that the creation of more money and the suppression of interest rates will suffice. But money is not the same as savings, as capital. Frank Shostak:
Money can be seen as a receipt, as it were, given to producers of final goods and services that are ready for human consumption. Thus when a baker exchanges his money for apples, the baker has already paid for them with the bread produced and saved prior to this exchange. Money therefore is the baker’s claim on real savings. It is not, however, savings.
The only way that the economy can be prepared for investment in various areas for the long term is by first accumulating a large capital stock. But the Fed's entire academic framework rests on the opposite of this; namely, to keep interest rates basically at all time lows and to encourage spending and consumption. With this the goal in mind, growth rates simply can't recover.
It seems that this theme of "rate hikes immediately but concern about the long term" could be a sign that the Fed is hiking now so that it has room to slash them in a future recession. Watch for this theme to become more prominent toward the end of the year.
I hate to be the bearer of bad news before a three day weekend, but St. Louis Fed President James Bullard informs us that "U.S. prices are now 4.6 percent below the price level path established from 1995 to 2012, when inflation was growing near the Fed's target of 2 percent each year."
This lower than expected price level is deeply "worrisome," for Bullard.
The delight that the average main-streeter feels upon observation of a store sale, or the general falling of the price of all kinds of electronic devices, is not an emotion shared by our well-educated bureaucrat monetary overlords. Instead, evidence of prices falling below their price level path expectations, is of serious concern.
Now, given the above tragedy, it appears to Bullard that the Fed's rate hike expectations are "overly aggressive." That is, in order to save the United States from the haunting specter of falling costs of living, the Fed may need to remain "accommodative," ever ready to flood more debt into the system. How original.
For the past year or so, the Fed has come across as more or less "hawkish;" preferring to position themselves as ready to tighten monetary policy via continued interest rate hikes. Following the recent several hikes, the Q1 GDP numbers came in terribly low and the Fed's anticipated source of "economic growth," consumer spending, hasn't been up to par either. The economy, quite frankly, looks sick despite the Fed's best efforts to increase the cost of living (what they refer to as inflation).
Thus, it makes sense that two recent Fed speeches have included a tone of caution about further interest rate hikes. Last Friday, St. Louis Fed's James Bullard noted that the economy is showing signs of weakness and argued that earlier months' rate hike expectations were too aggressive [per CNBC]:
On balance, the U.S. macroeconomic data have been relatively weak since the March...meeting.
As such, Bullard argued that the rate hikes estimates were "overly aggressive relative to actual incoming data on US.. macroeconomic performance."
On Tuesday, Minneapolis Fed president Neel Kaskari echoed this same sentiment, arguing that the lack of a clear inflationary trend was troubling. In his mind, the rate of inflation needs to be higher in order to justify higher interest rates. Kashkari emphasized that there was no real inherent need for interest rates to be rushed back to normal levels (as if a .25% hike is a Draconian move).
As we approach the June Fed meeting, we will pay close attention to whether the FOMC follows through with their rate hike estimates. Dr. Thorsten Polleit may have been on to something when he wrote that "the Fed will likely chicken out on planned rate hikes."
May's FOMC minutes were released at 2:00 eastern today and included the same self-confidence about the strength of the economy, the progress on inflation, and the good employment numbers. Any sign of weakness, especially in the GDP numbers were waved away as being "transitory."
Besides these things being used as justification for further rate hikes, we also received more detail about their balance sheet plans. In short, so as not to scare the markets, they are aiming merely to taper back on the dollar amount of reinvestment of the maturing debt. That is, rather than selling their debt holdings to shrink the balance sheet back to normal levels (which are not actually going to be at "normal" levels), they are going to start by halting their reinvestment program. However, before quitting cold turkey on the reinvestments, it appears that they are aiming to agree on a certain dollar amount of holdings that will be allowed to run off.
The WSJ summarizes:
They want to avoid a rerun of the 2013 “taper tantrum,” when investor concerns over the Fed’s decision to slow the pace of those asset purchases roiled markets, leading to a large spike in Treasury yields and capital outflows from emerging-market economies.
Under the emerging scenario Fed officials have outlined in public speeches and interviews, the central bank would raise short-term interest rates two more times this year and then pause rate increases later in the year when they announce plans to set their balance-sheet wind-down into motion. A pause would allow the Fed to watch for any ill effects before resuming rate increases in 2018.
Following the 2008 financial crisis, many observers were surprised by how much many Americans began saving. From 2009 to 2012, total household debt fell considerably, dropping by more than 12 percent from 2008 to 2013.
According to the Wall Street Journal, that drop was described by Fed researchers as “an aberration from what had been a 63-year upward trend reflecting the depth, duration and aftermath of the Great Recession.”
Since 2013, though, household debt has again marched upward. And now, according to the New York Fed, household debt in the US has now topped its previous pre-crisis level. According to the Fed:
The CMD’s latest Quarterly Report on Household Debt and Credit reveals that total household debt achieved a new peak in the first quarter of 2017, rising by $149 billion to $12.73 trillion — $50 billion above the previous peak reached in the third quarter of 2008. Balances climbed in several areas: mortgages, 1.7 percent; auto loans, 0.9 percent; and student loans, 2.6 percent. Credit card balances fell 1.9 percent this quarter.
If we look at all the components of debt since 2009, we can see that most components remains near or below the former peak levels. What's pushing total debt up is student debt and auto loan debt.
In this next graph, in which I index all debt levels to the 2008 3rd Q peak, we find that most debt components are near or below the old peak levels. Total debt (the black line) has just now risen above the old peak, with mortgage debt (the light blue line) still below the old peak (represented here by the value of 1). But, if we look at student debt and auto loan debt, we see that debt is well above its old peak. Student debt is now more than double what is was in 2008, and auto loan debt is almost 50 percent higher than the old peak.
Things are only slightly different if we account for growth in the working age population (ages 15–64). When we divide total debt by the working age population over time, we find that the per capita debt (which is $61,800 as of the first quarter this year) is still down 3.9 percent from the peak in 2008.This per capita figure is calculated by dividing the total debt level by the number of working-age persons in the US.
Nevertheless, either way you look at it, the old debt-cutting ways of the population that prevailed in the wake of 2008 appear to now be over, and debt is mounting back to old peaks.
Not surprisingly, the largest components of total debt tend to benefit greatly from government interventions and subsidies. Mortgages are subsidized by a plethora of programs including loose monetary policy and a secondary market for loans dominated by government-owned Fannie Mae and Freddie Mac — not to mention the benefits of the too-big-to-fail FHA. Many student loans, of course, are directly subsidized by the federal government, and auto loans continue to be helped along by rock-bottom interest rates made possible by quantitative easing.
Thus, as auto loans and student loans become larger and larger parts of total household debt, we see it's more than just mortgage housing, this time around. Jonathan Newman addressed some of these implications in March:
[T]his is more of an intended feature than a flaw of the Fed’s monetary policy since the housing bubble popped. Expansionary monetary policy can only replace bubbles with new bubbles. Malinvestments are not totally liquidated, but shift from one sector to another. Consumer debt is not directly paid off, but transferred from one type to another.
The redirection is mostly guided by new government interference in markets. Pre-2008, federal government programs to encourage new housing and mortgages, along with the low interest rates and new money from the Fed, created the housing bubble. Since 2008, programs like Cash for Clunkers, auto manufacturer bailouts, and income-based student loan repayment have funneled spending, borrowing, and increasing prices into education and autos.
Moreover, as with home loans in the late stages of the housing bubble, auto loans are seeing a rise in the total number of loans being made to customers with lower credit scores. Thus, it perhaps should not surprise us that serious delinquencies in auto loans are now near a six-year high:
With the exception of student loans, however, delinquency rates are not exceptionally high, and the current boom — while weak by historical standards — appears to be continuing.
The trouble will come when consumers can no longer keep up with debt payments and money begins to disappear from the fractional-reserve banking system, setting in motion deflation and recession.
It's a correction that's badly needed, but as of the first quarter of this year, at least, the money continues to flow, and debt is enabling many Americans to keep expanding their spending for now.
Politicians, bureaucrats, and media talking heads specialize in saying one thing but meaning something else. In Fed world, something referred to as "balance sheet normalization" would be thought to be a return of balance sheet levels to pre-crisis numbers (roughly $850 billion). But common sense does not prevail. Instead, as it turns, normalization doesn't mean a return to normal. CNBC:
Interviews with Fed officials, and public statements they've made suggest the Fed's new normalized balance sheet could end up being three times as large as it was before the financial crisis. And it could be bigger than that.
Of course, this was the almost inevitable, given the Fed's irrational fear of monetary deflation and their unwillingness to do anything that might make Wall Street think the punch bowl of easy money was being whisked away. Not to mention the political motivations of remitting profits back to the Treasury and artificially suppressing the US Government's cost of borrowing.
The CNBC article states:
A bigger Fed balance sheet on a more permanent basis is potentially good news for long-term interest rates. It means the Fed will have fewer bonds to unload, and so exert less upward pressure on interest rates. But if the Fed's calculations are wrong, it could mean higher inflation and higher rates.
"Good news for interest rates" does not, of course, mean good news for the economy as a whole. The economic role that interest rates play is to coordinate the use of scarce resources across time in accordance with the time preferences of human beings. So an interest rate that is kept lower due to central bank policies interferes with the market process. Resources are consumed in a way that varies with the desires of people acting in the free economy.
The article sums up opponents of a large balance sheet as follows:
Opponents of a large balance sheet say the Fed should reduce it as much as possible so it doesn't become a victim of politics, where Congress or the executive branch could mandate that the balance sheet be used to buy certain types of securities to solve fiscal problems. They also worry that such a large balance sheet is potentially inflationary.
Contrary to the mainstream press and what has become of "orthodox" economics, "inflation" (by which they mean rising consumer prices) is not the primary threat of suppressed interest rates. Economic depressions themselves are caused by the malinvestment that takes place during the era of too low interest rates. The healing process of liquidating these malinvestments is the pain of higher interest rates and the falling of asset prices. This healing process is what the Fed actively works to prevent by refusing to actually normalize the balance sheet.
2016 was supposed to be the year that the Federal Reserve "normalized" its policies. As much as two years ago — after years of a near-zero target rate — the Fed was swearing that it would begin to raise rates back to "normal" levels and cut its balance sheet.
That never happened.
Yes, the Fed has increased its target rate from 0.25 percent to 1 percent over the past 19 months. But if we look at this in context, it would be absurd to declare a target rate of 1 percent as anything other than an easy-money stance. Remember that throughout the 1990s, the Federal Funds rate was usually between 5 percent and 6 percent.
After December 2008, though, the target rate remained at 0.25 percent for seven years. Now that we're nine years into this "recovery" the Fed is talking about hiking rates, but we're in a strange world indeed when a 1 percent target rate looks like a central bank "tightening."
Moreover, we're still hearing precious little about the Fed normalizing its balance sheet, which remains heavy with assets purchased in the wake of the financial crisis to prop up asset prices.
We keep hearing about how the the economy is showing signs of strength, but nearly a decade after the last financial crisis, central banks — the Fed included — are still treating the economy as if it is extremely fragile and may fracture if upset in the slightest.
This becomes all the more evident when we look at other central banks around the world.
After all, the Fed is the odd man out when it comes to central banks, and is the only major central bank that's raising rates.
Looking at the central banks of Australia, the EU, Canada, Japan, China, and the UK, we find no tightening at all. Since 2012, with the exception of the Fed, it's been nothing but cuts in the target rate. Excluding the Fed, the last time we saw central banks move was when the Australian central bank and the Bank of England lowered their target rates in August 2016.
Meanwhile, the European Central Bank and the Bank of Japan continue to sit in negative territory.
The Bank of Japan has been saying it's going to get serious about shedding its massive balance sheet, though — in the future. Last week, the Bank of Japan's governor Kuroda said he might even release a report on the impact of unwinding the BOJ's balance sheet. But talking about scaling back monetary stimulus and actually doing it are two different things.
The balance sheets at the big central banks of the US, EU, and Japan are so big that Bloomberg last month called the balance sheet issue, "the $13 trillion gorilla in the room." It's a combined total that's so huge it's "greater than either China’s or the euro region’s economy."
Like Japan, the ECB is doing nothing at all right now, and "any discussion on when to start shrinking [the balance sheet] appears to be some distance away."
Moreover, the Bank of England left its rock-bottom 0.25 percent rate unchanged and lowered its 2017 forecast. Earlier, the B of E had used Brexit as an excuse to ramp up the stimulus, and in spite of a stabilizing economy, has done nothing since.
And lest anyone think the smaller economies may be doing fine, we find that Moody's is downgrading Canada's six largest banks over fears the housing market there is too frothy. The Bank of Canada's last move was to cut its target rate to 0.5 in 2015.
The cumulative effect of all of this is to drive home, yet again, that the central banks are simply too frozen with fear about the true state of the economy to take any hawkish action on interest rates.
If things are progressing so well, where are the rate hikes of a mere 0.25 percent?
We're not seeing any, because the banks know that without a constant infusion of easy money, demand would likely collapse, and recession would follow soon after.
But, with the Fed the only major bank tightening rates, the world's central banks are driving home yet again that we're in a race to the bottom. Yes, the US is in the midst of an inflationary regime, but the ECB, BOJ, and others appear to have no qualms about keeping their own money spigots wide open. And thus, the dollar, for now, looks not so terrible by comparison.
Chicago Fed President Charles Evans spoke on Friday, expressing his fear that there was risk to the downside on the inflation outlook. These people! Unlike the Austrians, who define inflation and deflation in terms of the supply of money and fiduciary media, the mainstream defines them in terms prices. Thus, when Evans and others like him consider there being risk of too low inflation, what they are saying us that they fear the cost of living either falling or not rising fast enough (2% annually). No wonder the average person can't stand the pompous "let them eat cake" attitude of the global bureaucrats. Who except an overpaid government academician would praise rising price levels?
For this reason, Evans is on the "dove" side of the FOMC's spectrum, stating that one rate hike instead of two seems more prudent. If inflation isn't up where it should be, then we ought to avoid raising interest rates and instead keep the monetary juices flowing. Of course, there's no real difference between one or two .25% rate hikes, especially on the meaningless Fed Funds rate.
Evans also indicated that he thinks the Fed's balance sheet could return to normal levels ($800 billion) if it was trimmed once per month over the next 3-4 years. This is ludicrous if he thinks this can happen without pension pain, market toil, and even massive problems at the Treasury. It took 8 years to quadruple the size of the balance sheet up to $4.5 trillion. And Evans thinks it'll just be wound down in half that time? Yeah right.
The supply of US dollars has slowed during early 2017 with March's year-over-year percentage increase hitting a 103-month low of 5.9 percent. The last time the year-over-year growth rate was lower was during September of 2008, when the growth rate was 5.2 percent. Monthly year-over-year growth rates in the money supply have been falling each month since October. (All the numbers used here were posted in mid-April 2017.)
Over the past eight months or so, money supply growth rates have become somewhat volatile with the growth rate surging from 6.7 percent in late 2015 up to 11.3 percent by late 2016, and down again to March's multi-year low.
The M2 measure also showed a downward turn in recent months, although not to the same extent as the "Austrian" measure. The year-over-year change in M2 during March was 6.3 percent which put M2 growth near a 12-month low. M2 movements were otherwise unremarkable, however.
In fact, the measure has now dropped below that of M2, which has not happened since the period of 2005 to 2008. A similar phenomenon occurred from 2000 to 2001. In both cases, sizable declines in the Austrian measure below M2 signaled brewing economic troubles.
Two factors that may be contributing to a decline in money supply are the drop in Treasury Deposits at the Fed, and a relative lack of new loans being made in the banking sector.
In March, growth in commercial and industrial loans began to fall to multi-year lows, with April's totals showing the smallest amount of growth in loan activity since 2009. As Frank Shostak explains here, the money stock tends to shrink when banks cut back on loans:
Another factor at work may be the ongoing decline in treasury deposits at the Fed, which in March dropped to a nearly 18-month low.
March's large decline in money supply growth partially reflects a collapse in treasury deposits at the Fed. Indeed, March's year-over-year decline in treasury deposits was the largest decline recorded in 29 years, with treasury-deposit totals dropping by 72 percent.
The "Austrian" money supply measure (also known as the "true money supply") used here is a measure of the money supply pioneered by Murray Rothbard and Joseph Salerno and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.
The "Austrian" measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler's checks, and retail money funds).
Nota Bene: Given a large number of confused comments by readers to these money-supply articles in the past, it may be necessary to clearly state that a measure of the money supply is not a measure of price inflation, and movement in money supply growth should not be interpreted as an index of index of price changes in the general economy. As Frank Shostak explained in a recent article:
[I]ncreases in the money supply need not always to be followed by general increases in prices. Prices are determined by both real and monetary factors. Consequently, it can occur that if the real factors are pulling things in an opposite direction to monetary factors, no visible change in prices might take place. In other words, while money growth is buoyant, prices might display low increases.
... If the growth rate of money is 5% and the growth rate of goods is also 5% then there will not be any increase in the prices of goods. If one were to follow that inflation is the increase in the CPI then one will conclude that despite the increase in money supply by 5% inflation is 0%.
Last Friday featured a handful of Fed speeches, and this week began the same.
Cleveland Fed President Loretta Mester warned against "moving too slow" on interest rake hikes, implicating that she would prefer that the Fed hike faster than the Fed's current "gradual" approach. Mester is not a voting member, and one of her statements was particularly interesting. She said that if the delay in rate hikes was too long, recession could loom. This is not Keynesian orthodoxy, which teaches inflation and recession are mutually exclusive. This is why, for the Keynesians, inflation is always and everywhere the remedy for recession. It is odd to hear a Fed President argue for rate hikes on the basis that not raising them will lead to recession.
Minneapolis Fed President Neel Kashkari spoke optimistically on the prospects for the blockchain. As we mentioned in a previous post, there is much incentive for central banks to adopt and monopolize blockchain technology for the sake of increased control. As the New York Times observed:
For the central banks, the promise of the technology is that it would allow them to track every pound or renminbi on every step of its travels through the financial system in real time — something that is impossible now. The goal would be to make the financial system more transparent, fast, efficient and secure.
So naturally, Kaskari sees great promise in adoption of the technology.
Finally, Boston Fed President Eric Rosengren expressed worry that the economy would overheat unless the Fed moved faster on rate hikes. If the unemployment continued to move too low, this would be a sign of overheating (per the economically fallacious Phillips Curve). That is, Rosengren seemed to argue in the opposite way of Mester, though both support hiking rates at a faster pace than current. Yet, he also expressed his belief that the Fed would someday hit a zero rate of interest and a further expanded balance sheet once again to deal with a future recession.
This gives credence to the idea that the Fed is really pushing to shrink the balance sheet and hike rates so that it can have lots of room to move when the next official recession comes. Such is the state of our "healed" economy.
Fed Vice Chairman Stanley Fischer spoke first on Friday morning and made it clear that the Fed's discretionary approach to monetary policy was to be preferred over a "rules-based" approach. That is, the flexible judgment calls of the economists at the helm of the economy are going to be more accurate than a mathematical model. Such arrogance, thinking that one can run an economy from the top, is typical of those in power positions. Of course, we should be as equally quick to point out that a mathematical model, which naturally originates in the mind of some other academician, is not any better. Central planning is central planning, whether we are told we ought to put faith in the model or in the discretion of the Central Planner.
Fed Chair Janet Yellen chose a politically popular topic: gender issues and discrimination in the workplace. She expressed frustration that discriminatory tendencies were holding back women's pay, apparently unaware that she could help by not being so adamant about increasing their cost of living. If one wonders what this has to do with monetary policy, it must be remembered that the Fed has to play the PR game, just like everyone else in bureaucratic positions.
John Williams of the San Francisco Fed came next. He was enthusiastic about the falling unemployment levels, not once mentioning either that people are taking on more part time jobs to stay afloat or that the employment participation rate itself is terribly low (the denominator in the employment calculation).
However, he expressed concern that job growth was actually growing too fast, as in Keynesian land too many people employed could be a sign of an overheating economy that should be slowed. Here is a piece by Christopher Casey challenging this alleged "Phillips Curve" conundrum.
Finally, St. Louis Fed's James Bullard touched on the balance sheet issue, opining that the Fed should start to roll back its holdings later this year. Whereas other Fed members want one more rate hike before touching the balance sheet, Bullard indicates that the interest rate levels are fine. The balance sheet is ready for "normalization!"
Bullard, however, is not a voting member of the FOMC so it remains to be seen whether any of the others will share his strategy.
At 2:00 pm Eastern, the FOMC made their policy announcement as their meeting came to an end. As expected the Fed did not raise the Federal Funds rate target at this May meeting.
Two items are in focus now, however. The first is the possibility of a June hike. As always, the Fed wants be clear that such a move is “on the table.” Prior to the meeting, the June hike probability was around 70% and have now jumped to 90%. These odds will adjust over the rest of the week in response to the FOMC statement and the plethora of Fed member speeches this Friday. While the Fed doesn’t want to stick hard and fast to a timetable of their hikes, they do seem to be dedicated recently to appearing reliable. They said they’d aim for 3-4 hikes this year. Though of course as Thorten Polleit points out this morning, they will likely chicken out. FOMC on rate hikes:
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
The second is the balance sheet issue. This has been the theme recently as the Fed is giving the impression that policy normalization is on the horizon. That is, the Fed alleges that it has the wherewithal to actually trim its $4.5t balance sheet. Normalization would take it back below $1t, at least. Yeah right. Nevertheless, the minutes of this May meeting will be released on May 24th and we will have a better idea at that time as to how in depth they covered this issue. Here is the FOMC on the balance sheet:
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
These policy decisions come on the back of the lowest GDP growth rate in 3 years. And yet, the FOMC announcement did reveal they are positioning the GDP situation and other "soft data" weakness as "transitory." This means that it is not the mark of new economic problems, just sort of an outlier. But knowing the Fed, when push comes to shove, the only thing they know how to do is suppress interest rates and increase the money supply.
In sum: nothing new here!
The Atlanta Fed's final projected Q1 GDP growth rate was 0.2%. That was down from over 3% earlier in the year. Q1 GDP's actual ("advanced") number ended up being 0.7%, so the 0.2% was pretty close.
But now, the second quarter has begun and the hilarity begins immediately. The forecast has jumped from the 0.2% to a 4.3% forecast for Q2, in a matter of days. Call it a forecast of hope.
The BEA's "advance estimate" release of Q1 GDP came in today at a very low 0.7%, indicating severe slowdown of growth. The growth rate was attributed to slowed consumer spending, downturn in inventory investment, and a slowdown among state and local spending.
Of course, this exposes one of the problems with GDP in the first place: it relies on government spending and consumption qua consumption. That is, it pays little attention to the health of the capital structure and artificial credit expansion. Further, it does not take into account the fact that government expenditures are not necessarily connected to true market demand. As Rothbard noted:
Spending only measures value of output in the private economy because that spending is voluntary for services rendered. In government, the situation is entirely different ... its spending has no necessary relation to the services that it might be providing to the private sector. There is no way, in fact, to gauge these services.
Thus, a high GDP number doesn't imply a healthy of the economy in the first place. Nevertheless, the fact of the matter is that the econometric establishment claims GDP is a good reading on the progress of the economy. And therefore their own models are challenging their claim that their central planning is doing the trick! Will the Fed hike rates into the lowest GDP reading in 3 years?
Finally, this low number points to the superior accuracy of the Atlanta Fed's GDPNow forecasting model (final estimate was 0.2%) than the New York Fed's Nowcast model (2.7%).
Atlanta Fed:
New York Fed:
The Atlanta Fed's GDPNow model has steadily dropped from above 3% growth forecasted for Q1 2017 down to just barely positive as of today: 0.2%. Here is the reasoning from the Atlanta Fed:
The forecast of first-quarter real consumer spending growth fell from 0.3 percent to 0.1 percent after yesterday's annual retail trade revision by the U.S. Census Bureau. The forecast of the contribution of inventory investment to first-quarter growth declined from -0.76 percentage points to -1.11 percentage points after this morning's advance reports on durable manufacturing and wholesale and retail inventories from the Census Bureau.
The Fed has been saying that since the economy was so grand (supported of course by consumer spending — oops), it was time to up the monetary "tightening" efforts. In addition to fed funds rate increases, they are anticipating adjustments to the balance sheet. But this was all dependent on a cooperative economy, which now looks like it's not doing so hot. Which may, to the the dismay of politicians, Wall Street gamblers, and central bankers everywhere, "require" them to keep the monetary juices flowing. Aw shucks.
Paul-Martin Foss has put together a great overview of possible Fed appointees should Trump replace Yellen upon expiration of her term as Fed Chair. One individual who has come to the surface since Foss' article is former Goldman Sachs CEO and quintessential Wall Street establishmentarian Gary Cohn.
CNBC:
Speculation is building on Wall Street that a likely replacement to run the central bank would be Gary Cohn, director of the National Economic Council and Trump's closest economic advisor.
"The buzz among those who claim Cohn confides in them is that he would like to eventually replace" Yellen, assuming Trump decides to move in a different direction when the chair's term ends in early February, Beacon Policy Advisors said in its daily report for clients Tuesday.
Taken in the context of Yellen's recent determination to raise interest rates and Trump's sudden though unsurprising comments on the "need" for a weaker dollar and low interest rates, this could be Trump's move to avoid a tightening monetary environment. No one wants to be in a position of power when the bubble pops.
At any rate, choosing someone like Cohn to lead the Fed would be a long step along Trump's post-election path of base betrayal. Cohn is the epitome of what is wrong with Wall Street's relationship with Washington — and represents exactly what Main Street and rural America were trying to avoid with a Clinton presidency.
Minneapolis Fed President Neil Kashkari spoke on Monday and came out against the idea that infrastructure spending was going to lead to economic growth. No, this doesn't mean he has been keeping up to date with David Stockman, or cracked open Mises's Theory of Money and Credit. Rather, the Central Planner from Minnesota figures that it is "investment" in the education system rather than infrastructure spending, that is going to grow the economy. As if he could possibly know.
Of course, this is just a surface level skirmish between central planners about what centrally planned projects should be focused on. There is nary a hint of conviction that only market actors, guided by the market's wondrous price mechanism, can properly allocate resources in the most productive manner. If the economy (which is in fact just a metaphor that doesn't have an existence of its own) is to be grown at all, such growth must be driven by the market, not the academics at the Eccles Building.
Below is the outline for this week's events and speeches of importance relating to the Fed and its members. All times Eastern.
Monday, April 24
Minneapolis Fed President Neel Kashkari will be speaking at UCLA in CA on opportunity and growth. –11:30amKashkari also has a second speech Monday, this one at Claremont College in CA. –3:15pm Tuesday, April 25
Richmond Fed's Manufacturing Index: released at 10:00am Thursday, April 27
Kansas City Fed's Manufacturing Index: released at 11:00amThe Fed's Balance Sheet update will be released at 4:30pm. Friday, April 28
Fed Governor Lael Brainard will be speaking on "fintech" (financial technology) at the Kellogg School of Management at Northwestern University conference in Evanston, Illinois. –1:15pmPhiladelphia Fed President Patrick Harker will speak at the X-STEM Symposium in Washington DC. –2:30pm
Greece is on the hook for a €7 billion debt repayment in July, but may not be prepared to meet the obligation. If Europe doesn't agree to come to an alternative agreement, the IMF may step in and bail them out again. This, according to the New York Times, which writes:
As the International Monetary Fund approaches the seventh anniversary of the contentious Greek bailout, it is torn over whether to commit new loans to a nearly bankrupt Greece.
The fund has been criticized for overcommitting financial resources to the European debt crisis.
Yet the I.M.F. has an obligation to lend to countries that are in financial need as well as to safeguard global financial stability.
Ostensibly, the role of the IMF is to safeguard global financial stability and it therefore would rather continue to throw money into the black hole of Greece than let it default. What this amounts to economically is a grand case of wealthier governments propping up overly indebted poorer countries against any standard of financial prudence. And since no government acquires its wealth in the first place, the IMF acts as a mechanism of wealth transfer. As the New York Times observes:
For example, the €30 billion the fund lent to Greece in 2010 was 30 times more than the sum of Greece’s financial contribution to the fund as a member, which is called a quota. The loan is one of the largest in the history of the fund, which was formed in 1944.
Of course, this money above and beyond Greece's own "quota" came from the taxpayers of other countries, who don't get any benefit at all out of the IMF's wealth transfer scam. As we near Greece's repayment date, we are going to get nothing from the press about the Western taxpayers on the hook for the Greece bailout — and neither are we going to hear anything about the creation of debt by central banks which makes these debt crises a reality in the first place. Instead, we are going to get a surface debate about whether Europe or the IMF should compromise over Greece's dire and never ending problem.
Dallas Fed President Robert Kaplan weighed in on the rate hike storyline Thursday, endorsing the "three rate rises" view. He also qualified it, saying that if the economy outperforms, more than three is possible; and if it is weaker, less than three is possible. Thanks Bob.
He also stated that he was paying particular attention to price inflation trends. It's going the right direction, in his view (prices are rising), but unfortunately there are factors such as "technology-enabled disruption of business [that is] exerting downward pressure" (Reuters). This is unfortunate, of course, because rising prices are desirable and economic advancement challenges their efforts. Sarcasm aside, it is in statements like these that we get a peak into the anti-consumer mindset brought forth by the world's most eminent economists.
Beyond the tired rate hike issue, there is of course the new balance sheet theme. Kaplan informs: "As soon as later this year or maybe early next year, we should begin the process of letting the balance sheet roll off." The balance sheet has grown over 400% since the financial crisis, and now stands at $4.5 trillion compared to the $800 billion level where it stood in 2007. Yes, from the Fed's inception in 1913 to 2007 –almost a hundred years– it racked up an $800b balance sheet. And yet, in the 9 years since the crisis, it launched up to $4.5t.
So how much of this can actually be scaled back? Kaplan's answer: the balance sheet "[is] going to be bigger than the $800 billion we used to run." Clearly.
Regarding the Fed's balance sheet shrinkage narrative, one of the concerns is an unfavorable market response. The bond market (to the extent an actual market even exists) in 2013 panicked when the Fed began to taper it's asset purchases. While many are concerned the markets could panic, Fed Vice Chair Stanley Fischer on Monday denied this as a true concern. After all, they've been talking about this for some time — even in the FOMC minutes — and the bond market has hardly shrugged.
Said Fischer:
My tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum.
However, he also stated it was something that needed to be monitored closely:
But, of course, as we continue to discuss and eventually implement policies to reduce our balance sheet, we will have to continue to monitor market developments and expectations carefully.
So, does this mean that the Fed actually submits to the will of traders on Wall Street after all? To this, Fischer is quick to save face:
During a question-and-answer session, Fischer dismissed concerns that the Fed was providing too much information and therefore fueling too much trading.
“I don’t think we’re engaged in a game where they are leading by us the nose,” he said.
Of course he has to say that. No one is supposed to admit that the Fed doesn't do things on the mere science of dispassionate monetary policy. They cater to those whom they subsidize: both the Federal Government and Wall Street. And in the end, despite Fischer's dismissal of a market tantrum, can we really expect Wall Street's traders to smile and carry on as if they truly realize the Fed is no longer buying what they want to sell?
Below is the outline for this week's events and speeches of importance relating to the Fed and its members.
Monday, April 17
Fed Vice Chair Stanley Fischer speech in New York at Columbia. The topic is "Monetary Policy Communication." –5:00pm Tuesday, April 18
Kansas City Fed President Esther George to speak at 26th Annual Hyman P. Minsky Conference at the Levy Economics Institute of Bard College in Annandale-on-Hudson, N.Y. –9:00am Wednesday, April 19
Boston Fed President Eric Rosengren is also speaking at the Minsky Conference at Bard College, N.Y. – 12:30pmThe Fed's Beige book will be released at 2:00pm here. Thursday, April 20
Fed Governor Jerome Powell is having a Q&A with European Commission VP Valdis Dombrovskis in Washington DC at the Global Finance Forum. The topic is "Capital Markets, Growth & the Economy of Tomorrow." –8:00amThe Philadelphia Fed's Business Outlook Survey, which looks at trends in the manufacturing industry, will be released at 8:30pmThe Fed's Balance Sheet update will be released at 4:30pm. Friday, April 21
Minneapolis Fed President Neel Kashkari will be talking about the health of the economy and "community development" at the Hamline University Community Economic Development Symposium in St. Paul, Minn. –9:30am
Audit the Fed recently took a step closer to becoming law, when it was favorably reported by the House Committee on Oversight and Government Reform. This means the House could vote on the bill at any time. The bill passed by voice vote without any objections, although Fed defenders did launch hysterical attacks on the bill during the debate as well as at a hearing on the bill the previous week.
One representative claimed that auditing the Fed would result in rising interest rates, a stock market crash, a decline in the dollar’s value, and a complete loss of confidence in the US economy. Those who understand economics know that all of this is actually what awaits America unless we change our monetary policy. Passing the audit bill is the vital first step in that process, since an audit can provide Congress a road map to changing the fiat currency system.
Another charge leveled by the Fed’s defenders is that subjecting the Fed to an audit would make the Fed subject to political pressure. There are two problems with this argument. First, nothing in the audit bill gives Congress or the president any new authority to interfere in the Federal Reserve’s operations. Second, and most importantly, the Federal Reserve has a long history of giving in to presidential pressure for an "accommodative" monetary policy.
The most notorious example of Fed chairmen tailoring monetary policy to fit the demands of a president is Nixon-era Federal Reserve Chair Arthur Burns. Burns and Nixon may be an extreme example — after all no other president was caught on tape joking with the Fed chair about Fed independence, but every president has tried to influence the Fed with varying degrees of success. For instance, Lyndon Johnson summoned the Fed chair to the White House to berate him for not tailoring monetary policy to support Johnson’s guns and butter policies.
Federal Reserve chairmen have also used their power to shape presidential economic policy. According to Maestro, Bob Woodward's biography of Alan Greenspan, Bill Clinton once told Al Gore that Greenspan was a “man we can deal with,” while Treasury Secretary Lloyd Bentsen claimed the Clinton administration and Greenspan’s Fed had a “gentleman’s agreement” regarding the Fed’s support for the administration’s economic policies.
The Federal Reserve has also worked to influence the legislative branch. In the 1970s, the Fed organized a campaign by major banks and financial institutions to defeat a prior audit bill. The banks and other institutions who worked to keep the Fed’s operations a secret are not only under the Fed’s regulatory jurisdiction, but are some of the major beneficiaries of the current monetary system.
There can be no doubt that, as the audit bill advances through the legislative process, the Fed and its allies will ramp up both public and behind-the-scenes efforts to kill the bill. Can anyone dismiss the possibility that Janet Yellen will attempt to "persuade" Donald Trump to drop his support for Audit the Fed in exchange for an “accommodative” monetary policy that supports the administration’s proposed spending on overseas militarism and domestic infrastructure?
While auditing the Fed is supported by the vast majority of Americans, it is opposed by powerful members of the financial elite and the deep state. Therefore, those of us seeking to change our national monetary policy must redouble our efforts to force Congress to put America on a path to liberty, peace, and prosperity by auditing, then ending, the Fed.
Originally published by the Ron Paul Institute.
JP Morgan CEO Jamie Dimon and Minneapolis Fed's Neel Kashkari recently had a bit of a clash over the health of US banks, with Kashkari rebutting Dimon's claim that there's no longer a risk of taxpayers having to bailout banks in a financial crisis. Bloomberg summarizes:
In an essay published on Medium and republished on the Minneapolis Fed website, [Kashkari] challenged Dimon’s assertion in his annual letter to shareholders that 1) there’s no longer a risk that taxpayers will be stuck with the bill if a big bank fails, and 2) banks have too much capital (meaning an unnecessarily thick safety cushion).
Kashkari responded to this with: “Both of these assertions are demonstrably false.”
As Bloomberg explains, the conflict is over the acronym TLAC, which stands for total loss-absorbing capacity. That is, in the case of a sudden swarm of losses, how much capital does a bank have to have to absorb all these losses? The more capital, the safer the bank. Kashkari believes that banks are not as safe as Dimon says they are. Their disagreement is over who would absorb the losses (that is, where the capital to absorb the losses would come from). Here is the difference:
Dimon operates on the assumption that the unsecured bondholders of the bank will simply be forced to take a loss and they no will longer receive their interest payments. Thus, unsecured bondholders will aid in the loss absorption rather than, say, taxpayers.Kashkari does not include these bondholders because if one bank announced a default on its debts, bondholders across the financial system who own the debt of other banks would panic. Financial contagion would ensue. Thus, the regulators (i.e., Kashkari) need to protect the bondholders. Kashkari, then, is emphatic that the TLAC should not be thought of as including bonds. Because according to him, the financial regulators, at the end of the day, are going to do everything they can to prevent financial contagion. Bloomberg:
[W]hen push comes to shove, bondholders will absorb few if any losses. Taxpayers will be forced to step up and make sure they keep getting paid.
In a free market, taxpayers wouldn't even be part of the equation. Bondholders take risks and earn the profits or suffer the losses accordingly. But the much bigger point is that if our system wasn't predicated on the crony assumption that the taxpayers and the Fed (lender of last resort) would be there to save investors, these banks wouldn't be nearly as concerned about their health in the first place. The Federal Reserve system and its explicit rejection of sound money has spawned the very challenges it seeks to overcome.
As Yellen and the rest of the Fed cohorts talk rising interest rates and balance sheet shrinkage, Trump makes it clear: the dollar is too strong. As such, he opposes the Fed's recent efforts on interest rate policy. He likes low interest rates. This makes sense — politicians love cheap debt — though it is a sad deviation from his more critical stance on financial bubbles during his candidacy years.
What is interesting though, as he very clearly takes on the Fed's normalization narrative, he states that he has yet to decide whether Yellen should stay as Fed chair. WSJ:
He left open the possibility of renominating Federal Reserve Chairwoman Janet Yellen once her tenure is up next year, a shift from his position during the campaign that he would “most likely” not appoint her to another term.
This seems more like polite posturing than anything, given that Yellen's Fed is obviously on an opposite track than a weak dollar policy, at least in the short term. With the two board vacancies at the Fed, the power is clearly in Trump's hands. If Yellen too forcefully challenges the Trump "weak dollar" stance, she could find herself without the chairmanship when her term expires.
He even goes so far as to say: "I like her, I respect her."
Whatever the case, Trump obviously is gunning for a weaker dollar and lower interest rates. This is a stark aberration from the Fed's budding 2017 narrative. The Trump-Yellen showdown continues, even if it remains behind the vocal niceties.
Echoing the thoughts of Yellen and other Fed members, the Dallas Fed's Robert Kaplan indicated that the $4.5 trillion balance sheet should begin the scale-back process this year. "Gradually and patiently" was the phrase used, as they are ever wary of a tantrum on Wall Street. Reuters reports:
"My view is we could start that process as soon as later this year," Kaplan said in Fort Worth at the Cornerstone Credit Union League Annual Meeting, adding that he would prefer the Fed phase in the reductions to its portfolio so as to manage the impact on markets.
The last time the Fed signaled a change of course on the balance sheet, in 2013 under Fed Chair Ben Bernanke, yields shot up quickly, delaying the central bank's plans for returning monetary policy to a more normal setting.
Consider this a reminder that Wall Street's overreaction to slowing of easy money heavily weighs on the Fed's "objective and scientific" monetary management style. If Wall Street doesn't like it, then the Fed will give in. At any rate, right now the balance sheet normalization narrative is going full steam ahead.
One of the great Federal Reserve scandals in recent history seemed to resolve itself last week as Jeffrey Lacker of the Richmond Fed resigned for his role in the Medley Leak. But as Pedro Nicolaci da Costa, (perhaps the best reporter on this story) points out, the finely scripted statement from Lacker shows that he was not Medley’s original source for the market-moving information.
Lacker’s statement reads:
During that October 2, 2012 discussion, the Analyst introduced into the conversation an important non-public detail about one of the policy options considered by participants prior to the meeting. Due to the highly confidential and sensitive nature of this information, I should have declined to comment and perhaps have ended the phone call. Instead, I did not refuse or express my inability to comment and the interview continued.
When Medley published a report by the Analyst the following day, October 3, 2012, it contained this important detail about one of the policy options and I realized that my failure to decline comment on the information could have been taken by the Analyst, in the context of the conversation, as an acknowledgment or confirmation of the information.
As da Costa points out:
What Lacker admitted to was unwittingly confirming key information about deliberations on whether and when the Fed should purchase large quantities of government and mortgage bonds to keep long-term interest rates down.
That means "the Analyst" at Medley actually obtained the market-moving details about the Fed's decision-making from someone else.
The identity of the initial source remains a mystery.
While laws against insider trading should be abolished, there is an obvious difference between dealing with non-public information about private companies and central bank officials tipping off a select group with valuable information. In spite of such behavior undermining institutional credibility, the Fed has seemed disinterested in properly investigating it. They did conduct an internal investigation which largely cleared itself of any wrongdoing, but the the FBI and Congressional oversight disagreed with those findings. In fact, this decision to handle the matter internally, rather than working with outside organizations, has raised more questions than answers.
Whether the original source of the Medley leak is found, the entire episode should plainly illustrate the need for greater oversight and transparency at the Federal Reserve.
On Monday, Yellen took the opportunity during a public event at the Ford School of Business to reiterate her position to Congressional attempts to increase Fed transparency, her own actions during the Medley scandal validate the need for changes to be made. The Fed’s utter inability to conduct a credible investigation into blatant mishandling of public information demonstrates that mythical “Fed independence” shouldn’t be enough to prevent public transparency over the Fed’s monetary policy. Especially, as Jonathan Newman noted last week, considering the truly radical nature of the Fed's post-crisis policy.
It’s also worth pointing out that Lacker’s resignation, correct or not, is a significant loss for those skeptical of the Fed’s post-crisis action. Lacker was perhaps the strongest inflation hawk among the members of the FOMC, and has claimed that if he had full control of the Fed he would have never attempted Quantitative Easing in the first place. He has also publicly questioned whether QE has made unemployment worse.
Lacker’s replacement will not be decided by President Trump, but does represent yet another open seat in the FOMC. Who ends up filling these seats will be very important as the Fed seeks to normalize interest rates and unwind its balance sheet. Hopefully Lacker’s successor will share his sensibilities while Trump’s own Fed appointees resemble his campaign rhetoric more than his emerging tax plan does.
After eight years of extremely loose monetary policy, the economy is great again and we are to enter into a post-stimulative era of monetary policy. So said Yellen at a recent discussion at the University of Michigan. In her words, the Fed had given the economy all the "oomph [they] possibly could" and it was time to "allow" the economy to coast along.
Paying no attention to their own econometric constructs such as the GDP, the Fed has declared that the economy is fantastic. After all, the unemployment rate has leapt downward over the last several years (just don't look at the denominator — the labor participation rate) and the Fed's inflation measures are right around their arbitrary 2% level. Allegedly, these two pieces (and the unrelenting stock market) means everything is great!
According to the WSJ's summary: "Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate." So the financial system, after eight years of balance sheet expansion at the Fed, is stable, unless it's not. Then what? Well, then the rate-rising narrative will quickly reverse and we'll be back where we were — more stimulative monetary policy!
Yellen couldn't resist a hearty slap on her own back as she praised the Fed as doing well at — get this — keeping inflation low. Seriously. They run around with their hair on fire in panic that deflation is a great threat and that the Fed's balance sheet needs to be quadrupled in order to Save the World. Then they express pride at their ability to keep inflation low. Of course, last year they were frustrated because they just could not hit the 2% inflation target! Amazing. Every data point is either an excuse for more Fed intervention, or otherwise a reason to bow to the cheering media.
Naturally, even despite claiming that the economy is doing well and that we can return to normal, there is still the qualification that there has been some "long-term changes to the US economy" that are going to require a "lower for longer" interest rate mentality. That is, we aren't really returning to normal. The proper interest rate in the Fed's mind is much lower than it was historically.
As if they could know what the proper rate of interest should be. As if their models, which ignore the capital structure and human action, can replace the insight offered by humans acting in the market according to their own consumption and saving preferences.
We end with this, from Yellen: “Evidence suggests that the population roughly expects inflation in the vicinity of 2%." Well, perhaps that's because the Fed and it's financial media lapdogs have been screaming for 2% inflation for years. To the extent that the population pays attention to how much they are being scammed by the central bankers, it seems reasonable that they "expect" an inflation rate comparable to what is blared on television.
Is this the end of stimulative monetary policy? Only until the Fed and the academicians realize their Goldilocks economy is sham and they have to double down to prevent another recession. Because stimulus is all they know how to do. And they reject completely the benefits of a healthy, healing, old-fashioned depression.
The minutes from the March FOMC meeting were released yesterday and we discover that the balance sheet theme is really coming together. The massive portfolio held by the Fed is allegedly going to be reversed over the coming years. The way to initiate this shrinkage in the balance sheet is to first stop reinvesting the return that it is making on all the bonds it holds. In the minutes, we learn that they are considering two options for how to do this:
An approach that phased out reinvestments was seen as reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the Committee's policy intentions while only modestly slowing reductions in the Committee's securities holdings. An approach that ended reinvestments all at once, however, was generally viewed as easier to communicate while allowing for somewhat swifter normalization of the size of the balance sheet.
Option 1: "gradual" phasing out of the level of reinvestment. Option 2: immediate halting of any reinvestment whatsoever.
These are going to be the debated options moving forward in the coming FOMC meetings and Fed members speeches. The Fed tends to prefer "gradual" approaches to things, keeping at the forefront of their mind the possible reactions (temper tantrums) by stock and bond market participants. If they decide to begin phasing out reinvestment, it will be much later this year. This gives them two quarters in the meantime to conduct two more rate hikes.
The FOMC minutes give the suggestion that, as they try to get back to "normal" interest rates and balance sheet levels, they will be going back and forth between their two methods: Fed Funds rate hikes and slowing reinvestment. While watching paint dry has been more exciting than their rate hike progress, it seems that the Fed is going to be another two years before they get the Fed Funds rate into the 2% range (if they can make it that far) if they alternate between a reinvestment policy change and a Fed Funds hike.
Of course, all this could come unraveled by a single poor employment report. The wizards determining the direction of our economy, are actually as blind as anyone else. They are walking on eggshells, unsure what to do and where to go next. How does one reverse an 8-year 400% increase in the central bank's balance sheet without causing a commotion? That would be impossible.
Looks like Trump may have another opening to get more influence at the Fed. The fallout from this remains to be seen:
In 2012 there was a leak of sensitive information that caused an investigation into the Fed. There was some heavy scrutiny of Yellen herself:
Ms. Yellen met in 2011 and 2012 with a representative of Medley Global Advisors, the financial consultancy involved in several investigations into its publication of sensitive details of internal Fed policy deliberations.
Just today, Richmond Fed President Lacker came forward and admitted himself as the source of the leak. He announced his immediate resignation. MarketWatch reports:
The Medley report made several accurate predictions about some missing details of the asset purchase plan agreed to by Fed officials at a meeting in the September 2012 that were not released to the public. At the time, the Fed said it could not tell how the reporter got the information.
"I deeply regret the role that I may have played in confirming…confidential information," Lacker said in a statement.
Now that the Fed has tinkered the Fed Funds target range to the upside on a handful of occasions over the last year, they are slowly turning more focus to the Fed's balance sheet. Before the financial crises, the balance sheet stood below $1 trillion. Now, just 8 years later, it sits above $4.5 trillion. That's a lot of purchased assets and interest rate manipulations. Since they are claiming to have saved the global economy, it is time to prove it by unwinding all these positions.
Their emerging plan is to complete two more rate hikes this year and then address the balance sheet, likely starting by slowing or halting the reinvestment of their proceeds from their current assets. Of course, they don't want to go too fast, lest the markets panic. The Wall Street Journal observes:
How it proceeds is of great importance to market participants. In 2013, when the Fed signaled it would stop adding to the portfolio, stocks fell, interest rates rose and emerging stock and bond markets sank—an event known as a “taper tantrum” on Wall Street, driven by investor worries about the implications of a less accommodative Fed.
The implications are obvious: Wall Street is a mighty influence on the Fed and Wall Street's anticipated reaction to the Fed actually influences monetary policy, whether they admit it or not. Of course, this is nothing new. As David Stockman explains in The Great Deformation, as the Fed becomes more involved in interest rate targets and asset-purchases, market speculators begin to play the game and bet on the Fed's moves. He writes:
For instance, if traders believed there was an 80 percent chance that the federal funds rate would be increased by 50 basis points in four months, the futures contract for that month would exceed the spot rate by a corresponding amount.
Last week, the House Committee on Oversight and Government Reform approved a bill submitted by Thomas Massie (R-KY) to allow Congress to audit the Federal Reserve. The bill was originally introduced by Ron Paul in 2009 and was passed in the House twice (2012 and 2014), but failed to pass in the Senate.
The Obama administration, Fed chair Bernanke, and Treasury Secretary Geithner “vigorously opposed” the bill in 2009. Conditions are different today. President Trump tweeted in favor of the move during his campaign and now Republicans have a slight majority in the Senate.
See the full article here.
Sometimes, when central bankers talk, they reveal within the very same discussion a sign of complete obliviousness. The ECB's Peter Praet recently gave an overview of monetary policy and price stability. By way of reminder, price stability refers to the central bank's efforts to keep the prices we pay from dropping lower. This would be terrible.
In his overview, he describes what preceded the 2008 crisis with this:
In 2008 the global economy faced a calamity unparalleled since the Second World War. The crisis had been preceded by a mood of over-optimism in several advanced economies. Expectations about future income were at odds with slowing underlying growth, giving rise to an "expectations gap". In the euro area, expectations were reinforced by a revived sense of economic prosperity that was associated with the introduction of monetary union. Firms were borrowing against their future income expectations in some countries; households and governments were doing likewise in other countries.
So the problem, in Praet's view, was too much borrowing/spending based on unrealistic expectations. Then everything turned and there was too much debt and balance sheets everywhere were severely damaged. Following this, the recession reared its ugly head.
Now, consider how Praet describes the central bank's "success:"
Our measures are working their way through the financial system and have led to a major easing of financing conditions for euro area firms and households, benefited credit creation and contributed to a more robust and sustained economic recovery.
Monetary policy is playing a central role in supporting consumption: lower interest rates are ensuring favourable borrowing conditions and encouraging households to bring forward durable consumption as well as firms' investment. Consumption of durable goods has rebounded in recent years, and especially in countries where credit was previously very tight.
The relation between what was described as the problem and what is being offered as proof of success is clear to anyone who is not a professional monetary bureaucrat. They recreated the problem and claimed it as a trophy of achievement!
This is quintessential central banker. They don't see a monetary problem until it punches them in the face.
With the Fed continuing to portray a "hawkish" message, focused on three or four 2017 rate hikes, the ECB is too having to decide whether their easing policy should be cut back. The Fed began its tapering of (official) QE years ago and is therefore now onto rate hikes and balance sheet efforts. The ECB, however, is still heavily in asset-purchasing mode.
In a recent interview with the the Wall Street Journal, Dutch central bank governor Klaas Knot, made it clear: Euro area interest rate hikes are not going to take place until the asset purchase program has been brought to a close.
Knot:
The question you raise is about rates. Our forward guidance is pretty clear on this front. It states that we will first end the net purchase phase of the asset purchases, and only then begin to lift off interest rates. That forward guidance reflects also the experience that other central banks like the Federal Reserve and the Bank of England have gained in this context. There is a certain logic, I would say, in that sequence, a logic that also applies to the eurozone. So for the moment I don’t see a need to revisit that logic.
In other words, the ECB is much further behind the Fed on the path toward interest rate "normalization." Normalization, of course, being a misleading code word for slightly tinkering with an interest rate target that is basically economically meaningless.
Knot continues with the classic central banker position of [my paraphrase] "everything is great, but we need more inflation." It's the balance of making sure everyone knows the swell job the bankers are doing, but at the same time that their heroic efforts are still needed.
When asked how close they were to completely halting the purchase of assets, Knot merely replied: "we'll simply have to see where the situation is." That is, they really don't know. At the same time, Knot claims that "what we have to do is be as predictable as possible." If this seems to be confused sentiment, Knot also says: "I don't want to express myself in absolute terms." Obviously.
What has been dubbed "FedSpeak" is simply "Central Bank speak." Central bankers all over the world don't know what's going on, they don't know how to steer an economy. No one does, of course, as only the market actions of individuals can reveal the price of money and the proper allocation of capital. But instead of letting go, they try to appear knowledgeable and perfectly in control.
The problem is, few actually believe them anymore, despite the tremendous efforts of financial media.
[Editor's note: Shostak employs a different measure of the money supply than the Rothbard-Salerno money supply measure used here. For a more full explanation, see here.]
On October 2016, the US Money Market Fund (MMF) industry underwent a reform with new requirements for US institutional prime and municipal MMFs becoming effective.
Under the new US MMF regulations, institutional prime and municipal MMFs are required to change from a fixed net asset value (NAV) to a floating NAV and adopt provisions to consider liquidity fees and redemption gates. However, government and Treasury MMFs were given a reprieve from these structural changes because of their perceived low risk and high liquidity.
RELATED: "Money Supply Growth Falls to 17-month Low in February"
The changes that took place in October were announced two years earlier. In response to this since the end of 2015, there was a massive increase in the demand for Treasury bills. Consequently, government deposits, or the cash balances, with the Federal Reserve jumped from $75 billion in October 2015 to $394.6 billion by November 2016 — an increase of 426.1%. An increase in government deposits with the Fed reduces the supply of cash in the federal funds market, all other things being equal.
Consequently, this puts an upward pressure on the federal funds rate. In order to keep this rate at the target, which was set by Fed policymakers, the US central bank is compelled to lift the money supply by buying assets.
Note that while the increase in government deposits does not change the money supply, the Fed’s policy to protect the federal funds rate target results in an increase in money supply. Indeed the yearly growth rate in AMS jumped from 3.4% in October 2015 to 16.7% by November 2016.
Using our model, we forecast that government deposits are likely to follow a horizontal trend during 2017 to 2018. After closing at $323.9 billion in February, the level of deposits is forecast to close at $359 billion by December. By November next year, the level is forecast to climb to $445 billion before settling at $388 billion by December next year. According to our model, which incorporates the effect of government deposits among other variables, the yearly growth rate of AMS forecast is to close at 7% by December versus 8.5% in January before settling at 8% by December next year.
As often noted, the Fed's economists and bureaucrats operate on the assumption that everything they do is part of the solution, but they are never part of the problem. Yellen's recent speech at the National Community Reinvestment Coalition is centered around the theme of "creating a just economy." Allegedly, a just economy needs an institution with the authority to bail out banks, subsidize the world's largest financial institutions, and explicitly aim to increase the cost of goods and services for people everywhere.
To solve the problem of stubbornly high unemployment rates in lower-income areas, Yellen has some ideas. Spoiler: there's nothing about halting the Central Bank's interest rate manipulation, which destroys capital by misallocating resources and makes economies less wealthy. There's also nothing about the effect of minimum wage laws on those trying to find work, but who are priced out of the labor market.
Instead, we get this, as solution number one:
Probably the most important workforce development strategy is improving the quality of general education.
As if merely "educating people" (having them spend 14 years of their lives in the classroom with government approved curriculum) can solve the problem of an increasingly stagnant economy.
Yellen says:
While the job market for the United States as a whole has improved markedly since the depths of the financial crisis, the persistently higher unemployment rates in lower-income and minority communities show why workforce development is so essential.
It appears that Yellen stumbled upon the fact that all the Fed's tremendous Treasury buying and balance sheet expansion hasn't really solved the employment problems in the lower-income community. And yet, the Fed has joined the "inequality" narrative.
The most obvious way to help the employment situation in these specific communities is actually to remove the restriction on hiring them! There is no mention of the fact that there are all these people willing and wanting to work, and yet cannot because it is illegal. That's what the minimum wage laws do.
Yellen and other central bankers need more self-reflection. The economy is not fixed by their efforts, it is torn apart by their desire to use the tools of monetary interventionism to fulfill their goals. Central banks cannot create a "just economy" (a phrase with no definition), no matter how hard they try.
As the Fed continues to increase the rate of interest it pays on excess reserves, the Fed's profits that are left over are slowly going to shrink in size. Since the Fed sends its profits to the US Treasury each year, the US Treasury will be receiving less. The Wall Street Journal reported on Friday:
The Federal Reserve sent $91.5 billion in profits to the Treasury Department last year, a $6 billion decline that officials have long expected as a result of rising interest rates.
The Fed’s total net income declined by $7.6 billion, to $92.4 billion, according to the Fed’s audited financial statements released Friday. The decline was primarily the result of higher interest payments it made to banks on the reserves they keep at the central bank.
David Howden has explained this process — and the implications for "Fed independence" — rather nicely:
Each year, the Fed remits to the US Treasury its net income, and thus provides the federal government with an important source of funding.
For the US Treasury, Fed remittances are something of a free lunch. When someone buys a Treasury bond, the government must pay them interest. This applies to the Fed as well, but then at year-end the Fed remits the interest back to the Treasury.
As much as economists talk about the independence that the Fed holds from Congress, these remittances represent a strong link. In fact, since they enable federal spending they create a form of quasi-fiscal policy for the Fed to use, in addition to its more common monetary policy options.
The slowly decreasing profits remitted to the Treasury each year is going to have implications for the increasing tension between the Trump administration and the Fed. If Trump wants to get his tax cuts through, he's going to need all the revenue help he can get. It may be even worse:
The payments are likely to shrink in the coming years as the Fed raises short-term interest rates—a process that involves paying banks higher interest on reserves they keep at the Fed—and when it eventually shrinks its balance sheet. Fed economists estimate the payments will fall to around $40 billion annually by 2020 but would likely rebound to about $65 billion a year by 2025.
A $40 billion payment in 2020 is less than half this year's $91.5 billion payment, which means that, assuming today's budget levels there's a massive $50 billion drop in revenue for the Federal Government, all things equal. Of course, spending goes up every year and so by 2020, who knows what may happen.
In the meantime, will the Fed eventually be "forced" to reverse course on interest rates to put a band-aid on the absurd Federal budget?
In an essay on Edmund Burke's view of the nature of government, Murray Rothbard quoted him as saying:
In vain you tell me that Artificial Government is good, but that I fall out only with the Abuse. The Thing! The Thing itself is the Abuse!"
Our complaint isn't just with "abuse of the system," it is with the system itself! The system is the abuse. Everything else is a symptom, a surface issue.
When BOE Governor Mark Carney spoke on various banking sector abuses at the Banking Standards Board Panel, he misses the entire point. The title of the speech is “Worthy of trust? Law, ethics and culture in banking” and he is concerned that such abuses have produced a "crisis of legitimacy."
"This immense progress has been overshadowed by a crisis of legitimacy. A series of scandals ranging from mis-selling to manipulation have undermined trust in banking, the financial system, and, to some degree, markets themselves."
Bad behaviour went unchecked, proliferated and eventually became the norm.
What can we say? When you place one institution in charge of the entire monetary sector within a given economy, abuses should hardly be a surprise. But rather than questioning the government-granted monopoly, the outlawing of free competition in money and banking, Carney and others of the Bureaucratic persuasion can see only one solution: more regulations and more oversight. He states:
Changes to incentives, new codes and a clearer mapping of responsibilities will all help improve conduct and lay the groundwork for better culture.
We are seeking to raise expectations and norms by using a combination of hard and soft law, with much of the latter developed by the private sector.
They are trying to address various manipulations in the foreign exchange markets, interest rate controversies, and crony business relationships. But how could any of these things be a problem if central banks were not granted exclusive legal control over money and interest rates in the first place? These crony relationships and backroom deals are merely symptomatic of the mandated existence of these monopoly banking institutions.
More laws which aim to stem abuses of the system presuppose that the system itself is ethically pure. Opponents of central banking should not be mere opponents of abuses, but opponents of central banking itself!
Carney characterizes himself as wanting to issue a hard crack down on the "bad apples," but the solution should simply be to eradicate any possibility of these bad apples getting these positions in the first place. How can a bad apple fill a bureaucratic position that does not exist?
The supply of US dollars has slowed during early 2017 with February's year-over-year percentage increase hitting a 17-month low of 7.7 percent. Monthly year-over-year growth rates in the money supply have been falling each month since October.
Over the past eight months or so, money supply growth rates have become somewhat volatile with the growth rate surging from 6.7 percent in late 2017 up to 11.3 percent by late 2016, and down again to under 8 percent by February of this year.
This recent period of volatility comes after a long period of relatively sedate and consistent growth in the money supply through most of 2013, 2014, and 2015.
The "Austrian" money supply measure (AMS) used here is a measure of the money supply pioneered by Murray Rothbard and Joseph Salerno and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.
The "Austrian" measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler's checks, and retail money funds).
Since 2014, money supply growth has ranged from about 7 percent to 8.5 percent. In October of last year, money supply growth hit a seven-year low of 6.8 percent, although this proved not to be an indication of any new trend.
February's drop to a 7.7 percent year-over-year growth rate shows a return to the sort of growth that has been common in recent years.
Recent variations in growth rates in AMS — compared to M2 — is being driven partly by historically large increases and decreases in treasury deposits at the Fed. The federal government has become increasingly liquid in recent years, with unusually large amounts of spend-ready dollars available. Looking at total deposits at the fed, for example, we can see that until recently, totals had reached well beyond what has been seen in the past:
As of February there were 269 billion dollars in deposits at the Fed, which is a decrease of 1.7 percent from February 2016. Deposits nevertheless remain at a relatively high level. This follows a long period of sizable increases in Treasury deposits which can be seen in the graph below:
Since December, however, treasury deposits began to fall quickly, and if we look at a similar measure that is available weekly — namely, "Deposits at the Federal Reserve other than reserve balances" — we find that totals have dropped to their lowest point in a year:
This appears to have affected our overall measure of money supply and is helping to push down money supply growth.
What have treasury deposits been disappearing so quickly? David Stockman theorizes it is the result of political posturing.
In a recent interview on CNBC's Squawk Box, Neel Kashkari explained his dissenting position on the March rate hike. His position was that there is not yet enough inflation. In fact, he thinks that the Fed's 2% inflation target shouldn't be seen as a hard ceiling. He even stated that predictions of coming inflation worries are baseless:
For the last five or six years, the Federal Reserve keeps predicting inflation is around the corner. And those predictions end up being wrong.
Of course, with the massive expansion of the Fed's balance sheet going into areas like the stock, bond, and housing markets, the Fed's measures of inflation don't even reveal what is happening to the economy's capital structure. Distortions in the capital markets are far more serious than than the PCE represents. It's frustrating enough that the central bankers are trying to increase the cost of living. But then we are reminded that they don't even know how credit expansion impacts the boom and bust cycle.
What is interesting though, is Kashkari's opinion that addressing the gigantic balance sheet should come prior to any further rate hikes:
As we move forward, we allow the balance sheet to start running off. Then we can return to fed funds rate hikes when the data call for it. The balance sheet should be the next move.
This preference of balance sheet before rate hikes is also unique among the FOMC members — everyone else wants the balance sheet scaled back to follow additional rate hikes. It will be interesting to see whether Kashkari's opinion on this gains any ground among the other members. Perhaps we will get a further indication as we approach the May and June Fed meetings.
On 15 March, the Federal Reserve (Fed) raised the federal funds rate by 0.25 basis points, bringing the band of the official rate to 0.75 – 1.00 percent. The move was widely expected. However, the market seemed surprised when the Fed reaffirmed that it would stick to its plan to raise rates no more than three times this year because inflation has already taken off. In February, the consumer price index was up 2.7 percent compared to last year, while the “core inflation rate” stood at 2.2 percent — well above the 2 percent mark typically seen as the level of “targeted” inflation. As a result, the current short-term interest rate in the US, when adjusted for current inflation, stands at around minus 1.7 percent.
The slowness with which the Fed is bringing rates back up suggests that they are certainly not in a hurry to put an end to ongoing debasement of US-dollar money balances and US-dollar denominated debt. There is, however, a reason why the Fed might actually be quite keen to keep real interest rates into negative territory: If the interest rate borrowers have to pay on their debt is lower than the economy’s growth rate, the economy’s overall debt-to-GDP level comes down over time; or the debt-to-GDP ratio increases at a slower pace even if borrowers keep running into even higher debt.
In the US — as well as in basically every other industrialized country in the world — interest rates have been brought down by central bank policies over the last decades, while public debt has grown. At the same time, interest payments on public debt have come down thanks to central banks having pushed interest rates to ever lower levels. With US short-term interest rates having remained well into negative territory since around the start of 2008, the US debt burden has been eased considerably. Against this backdrop, it becomes apparent that the Fed’s room for maneuvering has been reduced substantially.
For if it brings interest rates back up (especially in real terms), the US budget would have to cope with increasing interest expenses — which is undesirable politically speaking. Furthermore, higher borrowing costs would almost certainly have an adverse impact on the business cycle, especially since the extended period of artificially lowered interest rates has made consumption and investment increasingly dependent on the continuation of the low interest rate policy. In fact, the production and employment structure that has been built up under artificially lowered interest rates would disintegrate once rates were to start hiking.
The ongoing regime of exceptionally low interest rates is accompanied by an expansion of the quantity of money through bank credit extension. This practice does not only debase the currency. It also increases overall indebtedness and thus the default risk in the international money and credit system. And here you go: If push comes to shove, central banks — under the leadership of the Fed — will do whatever is needed for preventing the debt pyramid from collapsing. In order to prevent such an event from occurring, central banks will keep interest rates low and churn out ever greater amounts of money to keep struggling borrowers afloat.
This is presumably the truth behind the Fed’s half-hearted attempt to increase interest rates in nominal and in particular in real terms. If and when the Fed wishes to continue the artificial boom fueled by the relentless issuance of fiat money, it is most likely that interest rates in nominal and real terms will have to remain at extraordinarily low levels; and that in particular short-term interest rates will have to remain in negative territory. This trickery with the interest rates may well go on for quite a while. That said, savers and investors should bear in mind what the Austrian school of economics has to say in this context.
It was Ludwig von Mises who pointed out that the fiat money system will most likely end up in inflation, for
In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about.Ludwig von Mises, Human Action (Auburn, Ala.: Mises Institute, 1998), p. 574.
Holders of fiat currencies and fiat denominated bonds should therefor watch out. The signs are already on the wall: The Fed’s half-hearted attempt of monetary tightening appears to tie in nicely with Ludwig von Mises’s conclusion.
ECB Executive Board member Peter Praet recently gave a speech in Brussels. The underlying theme captures the convenient positioning of world central banks. They want to be seen as saviors of collapsing financial markets, but neither the cause of the instability nor the continued struggle for economic growth. From the speech:
Faced with a prolonged crisis, the ECB's unconventional policy measures have been essential to provide additional accommodation to the economy and prevent a self-sustaining fall in inflation — and they have been a clear success. Easier credit conditions have fed into a domestic demand-led recovery that has spread across countries and sectors. The economic outlook today is now better than it has been for many years.
And yet, as he admits, the ECB has been in crisis mode since 2008. So they want appreciation for bringing forth recovery, but want the world to look elsewhere for the reason why these economies aren't self-sustainable. He even blames the crisis in the first place, not on central bank activity from 2000–2007 but on the masses themselves!
The first [cause of the crisis] was the bout of over-optimistic expectations which took hold in several advanced economies in the pre-crisis years, reinforced in the euro area by a renewed sense of security and economic prosperity following the launch of monetary union. Despite slowing potential growth, agents in a number of economies overestimated their future income and borrowed against it, accumulating excessive debt. In some countries this over-leveraging was centred [sic] on firms, in other countries on households and in others still on the state.
Well, one might ask where this "excessive debt" came from. Does it not come from central bank policy? What Harry Browne once noted of governments equally applies to central banks: "Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, 'See, if it weren't for the government, you wouldn't be able to walk.'"
One of the consequences of living in an unfree world is the aggravating subjection to condescending Official Narratives. It's not just that our Monetary Saviors get to make money supply and interest rates decisions on our behalf, it's also that we are being saved from our own over exuberant actions. We ruin the economy, and then we get pulled from our own fires. And the bureaucrats hardly get a thank you!
Now, unfortunately, the end of their blessed interventionism is not on the horizon. Praet expresses with disapproval that inflation rates are still too low:
Given the softness of underlying inflation, however, we cannot yet be sufficiently confident that inflation will converge to levels consistent with our aim in a durable manner. Inflation dynamics also remain reliant on the present, very substantial degree of monetary accommodation, so they have not yet become self-sustained.
Indeed, because what we all hope for is a sustainable trend of rising costs for goods and services. This is what keeps the central bankers up at night. Central bankers are not yet satisfied with what they've done to us. And so they march on. What would we do without them?
As much as the Fed pretends it is data dependent, in actuality they do what they want and use the data to justify their actions. Or, in the case of GDP, they shoo it away as if it doesn't matter. We always hear how important GDP is as a summary of the economy's health (the Austrian view is that the GDP is quite overrated). But when the narrative is that "it's all good!" the Professional Monetary Bureaucrats can't let a lousy GDP number get in the way.
Just before the FOMC's announcement, the Atlanta Fed's forecast put the Q1 GDP number below 1%. When asked about it during her press conference, Yellen simply stated that "GDP is a pretty noisy indicator."
Of course, regardless of the actual GDP headline, the economy's fundamentals are never on the right track if the "growth" is built on the artificial expansion of the money supply. But as much weight as economists and other academics place on this precious statistic, it's wholly amusing when it doesn't really matter if it contradicts the official story.
Despite the low GDP forecast, Yellen said that she expected 2017 to result in a 2 percent average GDP overall. Even this is hilarious, if she's bragging about it. The WSJ writes that this "new stage of monetary policy [raising rates] is being driven by a central bank now more focused on the possibility that the economy could outperform forecasts." Well, one might suppose that if your forecasts are in the gutter, outperforming them is indeed possible. Two percent GDP itself, if one is to use GDP as a measure of economic flourishing, is hardly something to be proud of.
What we need, of course, is a complete repudiation of this entire dilemma of rate hikes vs. no rate hikes. The Fed has been an abject failure. Interest rates, like money itself, should be set and discovered via the market process.
The Wall Street Journal writes on tomorrow's FOMC rate announcement that "[a] long era of ultralow interest rates and bond-buying programs may be drawing to a close." This is remarkable. The minuscule uptick from the .5-.75% range to a .75-1% range is hardly leaving behind ultralow interest rates. As can be seen in the chart below, a quarter percent rise in the federal funds rate will barely show up, when looking at rates from a longer-term perspective.
With the latest GDPNow forecasts coming in at a paltry 1.2%, the idea that the Fed is simply going to continue any sustained effort to bring rates up to historically normal levels seems quite the exaggeration at the moment. The entire model relied upon by the Fed's economists assumes that raising rates into a slow growth environment is precisely the opposite of what must be done. Of course, their models rest on indefensible foundations and they therefore can't even explain where either real economic growth or artificial booms originate (nor can they distinguish between them).
Our era of suppressed interest rates is here to stay (at least while the Fed still has the delusion of control). That's what the whole "lower for longer" theme is about. Aside from the fact that the "Professionals" who run our monetary policy subscribe to variations of the Keynesian vision and therefore "advise" low interest rates, there also remains the cozy relationship between the Treasury (government) and the Fed. Explained by David Howden:
For the US Treasury, Fed remittances are something of a free lunch. When someone buys a Treasury bond, the government must pay them interest. This applies to the Fed as well, but then at year-end the Fed remits the interest back to the Treasury.
The federal government paid out $223 billion in interest payments last year. The Fed remitted almost $100 billion back, leaving the net interest expense at around $125 billion. It’s not just historically low interest rates that are making it easier for the Treasury to borrow in a way that, if it were done by anyone else, would classify them as subprime. The Fed is also chipping in and helping out where it can. ...
Consider that since Treasury debt is almost never repaid in net terms (old issues are retired but replaced with new debt issuances), the true cost of financing the US government’s borrowing is not the gross amount of debt outstanding but the annual interest expense it faces. Viewed this way, nearly half of the Treasury’s borrowing was financed by the Fed last year. Absent these Fed remittances, Congress would need to look at either an alternative funding source (though I am not sure how many takers there are for the Fed’s $2.5 trillion Treasury holdings) or make some serious cuts.
Regardless of what happens tomorrow (and it looks like there's going to be a hike), the idea that this signals the close of the Fed-induced low interest rate era is quite the exaggeration.
We previously mentioned the budding struggle between the Yellen and Trump factions relating to the strength of the dollar and monetary and fiscal policies. It is the monetary status quo versus the populist rhetoric, and the showdown is worldwide. CNBC:
The European Central Bank (ECB) is faced with an unprecedented political challenge this year as key member states prepare to elect new leaders, though not everyone is convinced the central bank has the tools necessary to weather a populist storm.
The CNBC story goes on to explain that the ECB's Mario "whatever it takes" Draghi has unleashed a monetarily "nuclear" option to save the eurozone from the brink of a debt-laden collapse. They've been in crisis mode for four years.
But if the populists take control in France and Marine Le Pen renegotiates their EU membership, another Brexit-Trump moment of official challenge to the monetary establishment would be dealt. And indeed, Maria Demertzis tells CNBC that such victory and challenge to the EU would result in monetary fallout:
"The ECB has several lines of defense if there is a surprise result in the elections this year but if Le Pen is to announce, as she promised, she is going to hold a referendum to quit the EU then I don't see the ECB granting any lines of defense to try and help."
The financial markets worldwide depend heavily on the central bankers giving it all they've got in regards to "accommodative" policies. If the populists continue their success, and the ECB begins to slowdown its monetary efforts in stubborn response, who knows what might happen to the fragile bubbles around the globe.
Central bankers pride themselves in their ability to prop up markets. But regular people just don't care. In fact, worldwide they are boiling mad at the loss of their purchasing power and savings, coupled with their staggering debt levels. They aren't impressed by the self-congratulatory nature of Professional Economists.
And these economists and the bureaucrats they justify didn't even see the populist revolt looming. But now it's here. The showdown builds.
The recent news in the Bitcoin world is China's building attempt to regulate and oversee its use to a point where it is rendered nearly useless for Chinese consumers. They've realized that they can't truly kill it per se, but they can regulate the exchanges to a point where they can effectively stymie ts attractiveness.
Bitcoin, whether one considers it sound money or not, is a challenge to the established system monopolized by central banks everywhere. The War on Cash narrative fits in with the reality that central banks and governing authorities feel a need to address the lack of control and centralization in the currency world. Just as Bitcoin challenges the use of government protected clearing systems, so cash allows some inkling of freedom by consumers to withdraw from central-bank-driven monetary insanity.
It is no surprise that monetary bureaucrats worldwide have all but declared war on these "alternatives." It's all about control — about knowing what everyone is up to at all times. Instead of allowing the individuals to choose on the market, central bankers are all over the budding technology. They want to both challenge the existence of alternatives (Bitcoin) and embrace the technology behind it.
The New York Times observes, creepily:
For the central banks, the promise of the technology is that it would allow them to track every pound or renminbi on every step of its travels through the financial system in real time — something that is impossible now. The goal would be to make the financial system more transparent, fast, efficient and secure.
Indeed, while declaring war on Bitcoin itself, we discover that Chinese banks are experimenting with their own central-bank-approved version of a purely digital currency:
The digital currency, known to the broader world as “ChinaCoin,” but officially referred to inside China as digital renminbi, or RMB, was developed by the PBOC in partnership with other private and public entities.
Eventually, Chinese authorities hope digital RMB will help the government strengthen oversight of the country’s banks, while helping to prevent financial crime.
It's not really about fighting crime and promoting stability. It's about total financial domination. Even at the Federal Reserve, Lael Brainard, the Fed governor who oversees new technology, is behind the trend:
We are paying close attention to distributed ledger technology, or blockchain, recognizing this may represent the most significant development in many years in payments, clearing and settlement," Ms. Brainard said.
And Janet Yellen too:
A week before Ms. Brainard of the Fed gave her speech on distributed ledgers, the chairwoman of the Fed, Janet L. Yellen, was asked about the technology at a congressional hearing. She said that “innovation using these technologies could be extremely helpful and bring benefits to society.”
Benefits to society, of course, refers to the benefits to the central bankers and the various cronies who leech on to the monopolization of money and banking. The reality is that any benefits brought on by these centralizations of budding technology is strictly reserved for the crony financial establishment, and it is the poor suckers on main street that will pay the price.
Talk of the Fed's upcoming FOMC meeting, which takes place March 14–15, has largely been centered around the prospects of a rate hike — with a plethora of Fed members coming out with a hard "hawkish" push. Here is a round up of their recent comments.
Fed Chair Janet Yellen:
We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect.
New York Fed President William Dudley:
So, put it all together, I think the case for monetary policy tightening has become a lot more compelling ... sooner rather than later.
Fed Governor Lael Brainard:
Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.
Dallas Fed President Robert Kaplan:
We want to guard against a situation where we get behind the curve on inflation.
Fed Vice Chairman Stanley Fischer:
If there has been a conscious effort [to hike in March] I’m about to join it. ... I think the advice that has been given by a large number of members of the Fed, of the [FOMC], is correct, and I strongly support it.
Philadelphia Fed President Patrick Harker:
Seeing any data that is not consistent with what I see as continued growth in the economy. We'll see. But I don't think March should be taken off the table at this point.
Fed Governor Jerome Powell:
The case for a rate increase in March has come together.
Cleveland Fed President Loretta Mester:
I'd be comfortable, if the economy continues on, for interest rates to be higher than they are now.
Richmond Fed President Jeffrey Lacker. (Referring to the idea that the Fed should hike to avoid inflationary pressures):
Monetary policy in the 1960s makes for a sobering tale, but I believe we can avoid repeating those mistakes.
San Francisco Fed President John Williams:
In my view, a rate increase is very much on the table for serious consideration at our March meeting. We need to gradually ease our foot off the gas in order to avoid a 'too hot' economy that in the end isn’t sustainable.
St. Louis Fed President James Bullard was the only major dissenter of the above hawkishness:
I wouldn’t see any reason to be especially aggressive about interest-rate hikes in this environment.
What actually ends up happening remains to be seen. Next week is the final week before the March meeting. Anything can happen and we will be sure to report on any changes in the narrative.
Well that was fast. Yesterday we observed the silliness of Fed president Kaplan's idea that it was consumers that were going to push GDP up over 2%. Today, we learn the following (source):
Turning to spending and income, personal consumption expenditures could muster only a 0.2 percent gain, 1 tenth below the Econoday consensus in a marginal gain that belies the enormous strength underway in consumer confidence. And when adjusted for inflation, spending fell 0.3 percent for the largest drop since September 2009.
There goes the consumer-led GDP hopes. In response, the Atlanta Fed's GDPNow model dipped hard: from a 2.5% forecast to a 1.8%.
Just yesterday, the Fed was referring to a "surprisingly strong economy" which was used as support for interest rate hikes "sooner than later." So much for that. Further against the strong economy theme is the fact that, while GDP forecasts for first quarter 2017 were above 3% due to construction data forecasts, today's construction numbers actually fell 1%!
Let's summarize: the GDP rate was supposed to grow due to consumer spending, which came in much lower than expected. Meanwhile, the GDP forecasts had been higher in the first place due to construction forecasts, which today came in much lower as well.
But we're all supposed to scratch our heads and fathom what would we do without the Fed at the helm?
The story is that it is consumers that are going "to push the economy to grow more than 2 percent this year." That's Dallas Fed President Robert Kaplan's recently expressed view. It's the old fallacy of spending — rather than saving — our way into growth. It's remarkable that no one talks about the fact that the economy since 2008 was built on little but cheap debt, and therefore depends on the continued flow of such debt.
To raise interest rates in that environment, will lead to the very conditions that the Fed fears the most. Of course, Austrians would praise such a blessed blow to the artificial boom. However, since the Fed, operating through a Keynesian lens, sees no inherent instability in such an economic environment. They don't see how much this would severely undermine the alleged stability they think they've achieved.
Kaplan and the rest of them are depending on indebted consumers, exhausted by their credit levels, to push the economy all the way up to 2 percent growth. That it's come down to this speaks volumes about the Fed's alleged success over the years. Aside from the terrible labor participation rate is the fact that we are now supposed to be impressed by a GDP growth print above 2 percent. And even worse, the economy is so bad that in order to hit this 2 percent mark, we have to rely on the consumer.
Beyond this, we just got the 2016 fourth quarter GDP numbers and guess what: it came in at a seriously lousy 1.9 percent. The "expectations" were in the 2.1 percent range. It gets even better: this low number was in spite of a 3 percent increase in consumer spending. This of course means that the spending isn't helping. And without it, where would economic growth be then?
If the Fed raises rates, where will the "recovery" go? Or more accurately, where will the facade of a recovery go?
Minouche Shafik of the Bank of England recently spoke to the Oxford Union in defense of the monetary Experts. The “Experts,” she pointed out, “have come in for a great deal of criticism of late.” She suggests this phenomenon may have something to do with the 2008 financial crisis. She also mentions various currency manipulation and interest rate scandals as possible motivations for public outrage. We applaud her keen insight.
However, she warns, it was due to the Experts that we have “gained about 20 years of life expectancy since 1950,” essentially eradicated polio, seen massive increases in world incomes, experienced a plunge in global poverty, and so on. She also brings up sanitation, roads, and education. Thus, it shouldn’t be surprising that so many decisions have been delegated to experts. Even Caesar (that bastion of freedom) turned to the experts to help him manage the empire.
More specifically to monetary problems, we learn that governments have created independent central banks full of Experts to decide on monetary policy. This was to protect the monetary policy decision making from the influence of politics. Politicians couldn’t adequately run an effective monetary system, so they outsourced it to the Experts. Seriously.
Of course, there’s no mention of how the “experts” got it wrong in 2008, or why we should keep trusting them. We do get some dismissal that the whole thing was a simple “failure of collective imagination of many bright people… to understand the risks to the system.” Presumably, these “bright people” are the experts and one wonders how self-blinded they are to overlook the fact that they caused the very risks they don’t even understand!
The lesson we simpletons are to take from all this is that the experts have everything under control. They are the ones “who sift through all the information and make informed judgments," according to Shafik. We just need to trust them, to keep the faith. Sort of like one of those “let go and let God” kind of things, except the god in this case would be the Experts.
Now, if the reader thinks referring to this special class of officials as “The Experts” is a little creepy, the entire tone of the speech reads the same. She has a self-labeled “agenda” to communicate and speak to the frustrations of the masses in a way that will make them more trusting of what the experts have in store. On one hand, it's the same ancient need of the regime to maintain control via propaganda. But on a more optimistic note, perhaps these speeches are signs of a concerned regime that is aware of an angry populace.
We don't want their expertise, thank you very much. In the words of Mises:
There is no other planning for freedom and general welfare than to let the market system work. There is no other means to attain full employment, rising real wage rates and a high standard of living for the common man than private initiative and free enterprise.
Well, the Fed released the minutes of its January FOMC meeting and lo and behold, there was nothing of interest. It was the same bland "Real Soon Now" talk regarding rates, coupled with a dose of "we don't really have a clear picture just yet." Imagine that. They're going to keep their eye on inflation trends and the unemployment rate, which is comforting given the fact that they are the source of inflation and unstable labor markets.
The Financial Times reports:
After lifting rates twice in two years, Janet Yellen, Fed chair, and her fellow rate-setters are contemplating stepping up the pace of increases as economic growth accelerates and prospects rise of tax cuts by the Republican-controlled Congress.
The thing is, the rate-setters have been in deep contemplation for almost a decade. But they won't give up until they've got rates back to normal! Talk about job security. But here's the good news: they reflected on the acceleration of economic growth, which is depicted below. If you don't see any growth (after all, the Obama years marked the first administration since Hoover without a single full year of 3% GDP growth), just use your imagination.
The entire rate hike narrative is a sham, and the only reason they are talking about it is because they have to maintain the idea that they "fixed the economy." A fixed economy shouldn't require absurd monetary policy. They know that. So they keep kicking the can, pretending like all they are looking for is more verification from the data. But as was mentioned Monday, such data accumulation plays right into their central planning hands. They can always interpret it however they want, whenever they want.
It's amazing how the same set of economic data can create two very different opinions on the overrated Fed Funds hike issue. In two Bloomberg opinion pieces last week, we see the stark difference:
Tim Duy: It's Way Too Early for the Fed to Consider a March Rate Increase
Charles Lieberman: The Fed is Behind the Curve
To make their cases, both cite the employment numbers and the consumer price inflation rate. Duy states that the Fed wanted the unemployment rate to be around 4.5 percent, but it's still at 4.8 percent. So allegedly, it's got "room to run." Lieberman looks at the unemployment on a broader timeframe and concludes that the current levels have "historically been universally regarded as full employment."
On price inflation, here is Duy: "Core inflation, as measured by the Fed’s preferred price index, was running at just 1 percent on an annualized basis in the final three months of 2016."
And then Lieberman states that price inflation is already above 2 percent "for all the primary inflation measures, except the Fed’s preferred measure, the core personal consumption deflator, which may also soon rise above 2 percent."
In other words, statistics are not standalone, self-interpreting declarations of the nature of reality. Rather, they are highly interpretable and theory-dependent, in sharp contrast to the positivism of modern economics. The Fed and economic commentators are blinded and stuck in perpetual contradiction with each other. The solution is not better statistics or "more clear data," which the Fed seems to have been dependent on for the last 8 years since the crisis. The solution is better theory, an entire new framework. Without theory, statistics are useless.
Fed Vice Chairman Stanley Fischer's February 11th speech at Warwick Economics Summit was built around a story from his youth:
Eureka moments are rare in all fields, not least in economics. One such moment came to me when I was an undergraduate at the London School of Economics in the 1960s. I was talking to a friend who was telling me about econometric models. He explained that it would soon be possible to build a mathematical model that would accurately predict the future course of the economy. It was but a step from there to realize that the problems of policymaking would soon be over. All it would take was a bit of algebra to solve for the policies that would produce the desired values of the target variables.
Unfortunately, he expresses in his conclusion, this Central Planner's Dream is proving more difficult than he once thought:
... the eureka moment I thought I had 50-plus years ago was a chimera. Why is that? First, the economy is very complex, and models that attempt to approximate that complexity can sometimes let us down.
"Sometimes let us down." Call him Stanley "Understatement" Fischer.
The entire lesson of monetary central planning since the gold window was closed in 1971 (and arguably since the founding of the Fed) is that central bank bureaucrats and their various models are a systematic let down writ large.
Fischer wants to take a jab at the rising "rules-based" monetary policy trend that is seeking to threaten the "discretionary policy" nature of the Bernanke-Yellen regime. His point is that models (and therefore rules produced by models) aren't perfectly adaptable to the changing nature of economic conditions. Thus, Fischer defends the alleged need for policymaker discretion.
The problem, of course, is that the "changing economic conditions" are actually simply the various and ever-shifting actions of human agents throughout the economy. And thus not only is the model itself unsuitable for predicting their behavior, but no amount of "discretion" no matter how well educated, can make a beneficial one size fits all decision regarding money supply and interest rates.
The time preferences and supply and demand relationships as communicated through the price system are not up to the discretion of the monetary bureaucrats. And thus, the actions of the Stanley Fischers of the world, rather than supporting "economic man" undermines and frustrates the plans of the individual.
The lesson that Fischer should draw from the failure of econometrics to predict the path of the economy is not that the models need adaption and tinkering. No! What the central planners and their academic lapdogs need to understand is that no amount of modeling and centralized (political) decisionmaking can aid the economy. The economy is merely an analogy for human interaction, it's not a machine to be tinkered.
Fischer finishes with the following:
What Samuelson said was this, "I'd rather have Bob Solow than an econometric model, but I'd rather have Bob Solow with an econometric model than without one." And Samuelson, who was a shameless eclectic, would almost certainly have said essentially the same thing about policy rules.
Better idea: End the Fed and do away with the government economists, econometric models, and policy rules once and for all.
On Yellen's Humphrey-Hawkins testimony, the Reuter's headline says it best: "Fed on course to raise interest rates at an upcoming meeting." Translation: Fed continues on path to do something someday.
Her time before Congress was a continuation of Yellen's unique ability to say absolutely nothing while pretending that she's got everything under control. There was no further information on the overrated Fed Funds rate hike issue — overrated because it is both meaningless and a distraction to the real problems at hand. We cannot emphasize Joe Salerno's point strongly enough:
The targeted variable and its targeted level are not important per se. It is the increase of bank reserves and the resulting expansion of the money supply when banks loan these reserves out that artificially reduces market interest rates and misleads entrepreneurs and capitalists into investment decisions that result in malinvestment and overconsumption. These inflation-fueled malinvestments result in bubbles in real estate, commodity, and financial markets and a distortion of the real structure of production that invariably culminate in financial crises, unemployment and recession or depression.
The Fed and the feebleminded financial press are obsessed with interest rate talk and ignore the elephant in the economy: malinvestment and the destruction of capital.
But of course, it's not just the lack of new information on a meaningless rate increase; it's also the convoluted and contradictory approach of "Fed Speak." On one hand, we get this: "As I noted on previous occasions, waiting too long to remove accommodation would be unwise." As if upping the Fed Funds target another 25 basis points (.25%) is "removing accomodation." On the other hand, however, she was eager to emphasize how "gradual" rate hikes would be.
Being worried about waiting too long and bending over backward to stress how slowly "rates" would rise hardly communicates knowledgeable resolve. Instead, it reinforces the increasingly obvious idea that the Fed has no clue what it is doing and it is merely buying time; trying to save face and save bureaucratic positions in Washington.
Regarding the balance sheet issue, the WSJ reports that "the Fed has no plans to use the balance sheet as an 'active tool of monetary policy management.'" By this, she clearly means what has been obvious to anyone paying attention: the Fed is afraid to reverse its absurd monetary policy of soaking up massive amounts of Federal debt. There's little desire to sell its holdings because no one wants to prick the bubble.
On interest rates, the balance sheet, Dodd-Frank repeal, and fiscal policy, Yellen's testimony is best summed up as: "I'm not sure, we'll just have to see." In this light, Yellen has been entirely consistent, unsurprising. She's always employed convoluted FedSpeak to communicate nothing of substance.
On most fronts, the Trump era is off with a bang — both upsetting the status quo, but also offending numerous Austro-libertarian free market principles. Particularly, there is growing tension within the spheres of monetary and regulatory policy. Those who made themselves comfortable in the Obama administration are swiftly being uprooted by a new narrative in the Eccles Building.
The Trumpians — including Treasury Secretary nominee Steven Mnuchin — have been pushing a "too strong dollar" narrative. Trump himself is pushing the same idea:
Mr. Trump said the U.S. dollar was already “too strong” in part because China holds down its currency, the yuan. “Our companies can’t compete with them now because our currency is too strong. And it’s killing us.”
The yuan is “dropping like a rock,” Mr. Trump said, dismissing recent Chinese actions to support it as done simply “because they don’t want us to get angry.”
On the other side, the story at the Fed is that we are now in a rising interest rate environment. Yellen herself is talking up a "strong dollar" policy via both Fed Funds hikes and also addressing the Fed balance sheet.
In effect, then, Yellen and Co. are jawboning the dollar upward while those on Team Trump are talking it lower. There's a clear collision here, between the Fed and the White House. This brings us to Yellen's congressional testimony Tuesday and Wednesday of this week. Bloomberg lists a few important topics that will likely be discussed at the hearings: balance sheet plans, the Dodd-Frank Act, and even Yellen's future at the Fed. On each of these, the coming clash between the Trump narrative and the Obama-era cohorts is obvious.
Yellen will continue to talk about monetary policy "normalization" (which means policy lunacy, just at a slower rate) and she will defend the Dodd-Frank regulations. Meanwhile, Trump will continue to push for a weaker dollar, Dodd-Frank repeal, and a Trump-friendly Fed board. Yellen's term expires next February — which gives her one year to accomplish her goals, assuming the probability that Trump will seek a replacement for her as Fed Chair.
There's a showdown brewing between the current Fed and the Trump administration. To go to even greater lengths to push the dollar down would be to prolong the capital-draining nature of bubble economics; to reverse policy and address the balance sheet or more aggressively pursue higher interest rates would be to prick the bubble.
The WSJ is reporting that Daniel Tarullo has submitted a resignation letter and will be departing the Fed Board in early April. This is an interesting resignation in light of the recent regime change in Washington. One narrative of the Trump administration has been "deregulation." The WSJ notes that one of the two (now three) vacancies on the Fed Board is the vice chairman position, which is "in charge of bank oversight." Tarullo took up the regulatory tasks in the absence of the chairman.
Tarullo is an Obama appointee, whose term is not supposed to expire for another 5 years. But since he had become the go-to man for regulatory matters and Trump is expected to pick his own preference for the vice chairman position, there was likely to be a budding conflict within the Fed. His exit creates a much simpler environment for the Trumpians to pursue their goals. Whether or not there is actual deregulation or another government sham under the label of deregulation remains to be seen. What is important is the extent of the regime change.
This news comes on the the heels of another Fed man — general counsel Scott Alvarez — who made his own retirement announcement earlier this week. Alvarez has a long history at the Fed, but most relevant to the deregulation theme is this from a WSJ piece several years ago:
He was at the center of efforts to stabilize the financial system in 2008, and has fiercely defended the Fed’s role and its authority to provide support for big banks during the crisis. Mr. Alvarez also has played a key role in writing the new rules implementing Dodd-Frank, which was aimed at protecting the system from future crises.
Now that we see a theme in the people retiring, we will watch to see how these vacancies are filled.
For those that follow the Fed's rate hike hoopla, one of the more obnoxious aspects is all the "economist expectations" that are reported on throughout the year. They've been vocalizing their lousy expectations since 2010. Consider this one, based on a survey of "leading economists:
2012 came and went and there were no hikes. And every year since then, economists — professionals that they are — gave their routine expectations, all of which came up short. Nothing happened until December 2015. In a recent speech, the St. Louis Fed president even gave the following graph, which hilariously exposes the fact that these economists and the projections are always missing the mark.
Even just this week there was another report on a WSJ survey which indicates that "Most Economists Expect Next Fed Rate Increase in June." The funny thing about it is that it is the exact same headline as a 2016 survey which ran the previous year. That June, of course, nothing happened.
The economists continue to project, to expect, and depend religiously on their models. Models though can't account for human action and correspondingly, can't account for what is actually happening to the capital structure upon which the economy rests.
By now, decades of absurd monetary policy should have completely disgraced mainstream economics. But alas, we still suffer through the announcement of their expectations filling the headlines.
CNBC claims that the Fed has been “crying wolf” and will back off raising interest rates even a tiny bit more.
See the article by Hunter Lewis on the Mises Wire:
Will Janet Yellen Lend Trump a Helping Hand?
In our last update on money supply — using the "Austrian" measure of money supply developed by Murray Rothbard and Joseph Salerno — we found that money supply growth hit a 46-month high of 11.2 percent in October.
Growth has moderated since then, however, with year-over-year growth in US dollars dropping to 10.3 percent in November and 8.8 percent in December.
This change somewhat follows a change in M2 over the same time period as M2 growth hit a multi-year high of 7.5 percent in October, but fell to 7.3 percent and 7.0 percent in November and December, respectively.
The Rothbard-Salerno measure of money supply tends to see bigger swings than M2, and in this case the bigger swing is due partially to continued changes in US Treasury deposits at the Fed, which is not included in M2. In October and November, these deposits hit new highs unprecedented in scope, with total growth in October topping 500 percent. As described by the Atlanta Fed, "These deposits are roughly akin to the Treasury's checking account, which is to say the amount held in the account is determined by the Department of the Treasury based on its needs."
During the 2008-2009 period of historically large stimulus spending, Treasury deposits reached unprecedented growth levels. In late 2016, we saw some of the highest growth levels seen since 2008-2009, and this has helped to drive up money supply totals.
With the Trump administration's focus on fiscal policy stimulus — including large increases in military and infrastructure spending (plus the proposed border wall) Treasury spending looks to increase again the near future, and this would likely contribute to ongoing increases in money totals.
What is the significance of this in relation to the business cycle?
Historically, periods of significant decline in the money supply have preceded periods of economic recession. This was the case in the period before the 1990-1991 recession, the 2001-2002 recession, and the 2008-2009 recession. with money supply growth at or above 8 percent right now, however, this does not point to a recession in the immediate future. As with any economic indicator, however, it's impossible to guess when the current trend may substantially change.
2017 is off with a drab whisper as the FOMC, as expected, kept the Fed Funds rate target unchanged at .5-.75%. Further, there was no mention of the alleged three 2017 hikes, which “experts” might consider as to be a dovish move.
The press release was optimistic about the economy and cited a strengthening labor market, economic expansion, and consumer sentiment. Perhaps they haven’t seen the delicate fourth quarter GDP numbers?
One of the themes of 2017 is the issue of the Fed Balance Sheet and whether the Fed is going to be talking up some sort of effort toward shrinking it. On this front, we read:
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way.
Because the Fed would likely begin balance sheet changes by halting — or at least slowing down — the amount of “reinvestments,” this statement is indicating that it has no actual plans to address the balance sheet in the foreseeable future. Go figure. But the statement also emphasizes that addressing the balance sheet won’t take place if the Fed Funds rate normalization process is much further down the road.
This, coupled with the decisions to not touch the Fed Funds target and not even mention 2017 rate hikes indicates that the balance sheet topic probably won’t be seriously discussed for some time. Of course, touching the balance sheet is something the Fed is quite fearful of. Pricking the bubble is a massive no-no that the bureaucrats in every position in Washington want to avoid like the plague.
The FOMC (non)decision is typical of what we have come to expect from the Fed. They pretend they are optimistic about the economy, while at the same time bend over backward to not upset those who depend on such radically “loose monetary policy.”
It’s the most damaging and devastating example of “kicking the can down the road” that the world has ever seen. But those in power and their lobbyists are addicted to easy money. And so they keep it flowing and never look back.
Now that the Fed has slightly upped its Fed Funds rate target twice, there is talk of a much more ominous issue: shrinking the balance sheet. Late last year, St. Louis Fed president James Bullard affirmed that 2017 “possibly might be a good time to play that card.”
What that would entail, of course, is reversing the years of a ballooning balance sheet by selling the securities that it previously attained. In selling assets, the Fed sops up bank reserves and they can no longer be used in the economy.
The entire economy — as well as the so-called recovery — since the Fed began it’s unprecedented asset purchase has been a giant mirage. It rests on the band-aid of financial moves from the Fed that papers over the reality of the situation. The problem with band-aids (monetary expansion) in our context is that no one notices the rot underneath (the destruction of real capital).
If the band-aid is ripped off, the underlying reality is exposed. There is some worry that “the market” will respond poorly. Indeed! Why? Because the whole reason that “the market” has achieved new heights over the years is because it knew the Fed was there to backstop losses and buy assets! Reversing this trend doesn’t create a new crisis, it allows — finally — the healthy correction to complete itself.
It is for this reason that the Fed and the Official Economists want to delay this as long as possible. Hence, in his most recent post, Ben Bernanke urges extreme “patience” [sic for “I hope we never have to do this”] in addressing the size of the balance sheet.
Bernanke had “indicated in testimony in 2013 that the FOMC was considering slowing asset purchases” and this resulted in the so-called “taper tantrum” in which the financial markets roared in disapproval. As Bernanke recalls, “FOMC members pushed back” against the idea that all this talk meant rates were going to rise. In other words, the market threw a fit at the possibility to lessen cheap money and the FOMC rushed in to promise open spigots.
With all the talk in Fed circles of “avoiding [market] disruptions” in the fake quest to shrink the balance sheet it appears to be a brewing financial theme without much substance. Just as the Fed undertook a 7 year narrative of raising the Fed Funds rate, it may take the entire Trump era to “talk about” shrinking the balance sheet.
As 2017’s first FOMC meeting approaches this Tuesday and Wednesday, we will once again wait on the edge of our seats for the insight of the “Experts.” Last year’s fourth quarter GDP blew a massive hole into the recovery narrative, but with Donald Trump promising a major infrastructure spending package and large tax cuts, there seems to be a renewed push toward raising the Fed Funds rate target to counter rising prices.
While the odds of a rate hike at this meeting are low, the first meeting under the new administration may give hints to major 2017 themes. FOMC meeting minutes are usually remarkably bland as the Fed balances the task of communicating “everything is peachy” with “the economy still needs our unprecedented interest rate manipulation.” It’s been this way since 2010. But in case you are wondering, yes, you are still to take them Very Seriously.
On the other side of the Pacific, the Bank of Japan also meets this week. We can wish the BOJ a happy anniversary as this meeting is the one year mark for official negative interest rate policy. We should all resolutely criticize the ludicrous actions of Bernanke and Yellen, but BOJ governor Haruhiko Kuroda makes those two look like Paul Volcker. The Fed has gone haywire in the purchase of bonds and mortgage backed securities, but to the BOJ that’s just adorable child’s play. The BOJ is now “a top-10 shareholder of 90% of Japan’s stock market.”
The major late 2016 theme for the BOJ has been a “yield curve control policy” in which the BOJ aims to have 10-year Japanese Government Bonds yielding nothing. That’s right: we live in such a bizarro world that it is considered sane and reasonable for over-indebted governments to borrow at no cost for an entire decade. The question of course is how much longer this can continue. Nonetheless, what we expect to see at the meeting this week is both a defense and a continuation of the lunacy.
The BOJ has taken the opposite approach as the Fed in the sense that the former has indicated no sign of truly “tightening.” As the BOJ continues to maintain their loosening monetary policy, this makes it more and more difficult for the Fed to “raise rates” alone. But more will be revealed in this week’s meetings.
As Jeffrey Lacker leads the pack on the Fed’s “concern of overheating” front, last Friday’s 2016 fourth quarter GDP numbers completely contradict the narrative. Coming in at a paltry 1.85% growth rate, the Fed was handed yet another excuse to push off the so-called “normalization of interest rates” further into the future. The Fed's FOMC again confirmed as much at its February meeting.
The Fed has stated for years — since 2008 — that it needed to keep interest rates low in order to support a sustainable recovery. The Fed was allegedly paying close attention to it’s Congressionally-sourced dual mandate to determine when it could start allowing rates to rise. But now it is 2017 and the Fed’s bureaucratic statistics relating to unemployment and price inflation say things are just dandy. But the GDP numbers, which purport to measure growth, scream the opposite.
This is the Fed’s predicament. They’ve held that the dual mandate was their only guide, but it’s becoming quickly evident how irrelevant those numbers are. As it turns out, the third quarter’s 3.5% GDP number was not a sign of coming paradise, but was rather a mocking anomaly. In the past six quarters, only once (third quarter 2016) did the GDP growth rate come in above 2%.
Moreover, things are getting worse, not better. 2016’s average growth rate was worse than both 2014 and 2015. Needless to say, Yellen’s credibility, to use a word of the mainstream, should be absolutely shattered. Stimulus and quantitative solutions have been an epic failure.
In light of this, the Fed’s decision to raise the target Federal Funds rate over the coming months is especially painful. Should they choose to do so, they do it in the face of a growth rate that is barely treading water. But if they choose to prolong these target rate hikes, they do so as their own dual mandate components tell them they should be normalizing monetary policy by now.
Of course, these PCE (personal consumption expenditure) and Official Unemployment numbers tell us almost nothing about the real economy. But then again, the Fed can’t admit this either can they?
Finally, all the above doesn’t even take into account that Fed Funds rate itself is just a smoke-and-mirrors target that is actually not very important. What truly matters, as Joe Salerno points out, is the expansion of the money supply. That is the true villain in all this.
Richmond Fed president Jeffrey Lacker is allegedly one of the hawks, though that term can’t mean what is used to — not in a world where it takes 8 years to get to .5%–.75% on the Fed Funds Rate target.
Monday, Lacker repeated his position that the Fed is “getting behind the curve.” This puts him sharply at odds with “Dovish” Yellen who in her recent Stanford speech opined the opposite on “getting behind the curve.” Lacker wants a few more minuscule rate increases than Yellen.
What a meaningless disagreement over quarters of a percentage point on a meaningless interest rate. Right under their noses, of course, Fed’s monetary actions over the years have driven financial asset prices skyward, home prices to absurdity, and commodity prices up 40% (even after dropping since 2014). But all they see on the price inflation front is less than 2% on the personal consumption expenditure (PCE) statistic!
But despite all the faux concern over an “overheating economy,” lies the fact that manufacturing sales have largely plateaued since 2012, industrial production has fallen since 2014, and Obama is the first president since Hoover to not have a single year of over 3% GDP growth.
What a time to be alive. Not only has the Fed successfully stagnated the economy, but we are still getting the same tired talk of a push toward interest rate normalization. With a stagnating economy and rising prices, they used to call this stagflation. Now it is dismissed as “the new normal.”
And indeed this has become the new normal, seemingly. But perhaps instead of conducting the same old tired monetarist/Keynesian econometric experiments, the Fed should take a look in the mirror. We certainly can’t expect a growing economy while the world’s central banks actively undermine our vital pool of funding via fiscal and monetary interventionism.
In a cry of desperation, Tim Duy takes to Bloomberg to warn the world about the possibility of “hard-money” advocates getting into the Fed. Why, there’s potential that new Fed governors might not be “divorced from political pressures.” Wouldn’t that be a radical shift.
The hilarity of this article is that the “hard money” label is being applied to defenders of a policy rule; specifically, John Taylor of “Taylor Rule” fame. Yes, the advocates of formula based interest rate shifts, who deride the true hard money of the classical gold standard, are now in the extremist hard money camp.
This is a classic case of taking a minuscule difference between apologists for monetary interventionism and blasting it out of proportion to redefine the debate. After all, if the rule-based advocates are the dangerous fringe, then the current fiat regime is normal and orthodox! Indeed, Duy makes it crystal clear that it is the Bernanke/Yellen clique that has saved the world and the “hard money” Taylorites are about to ruin it. This is the entire spectrum of monetary theory! No mention whatsoever of the true hard money camp: the Austrians and defenders of the 100% gold backed currency.
Duy warns that if these hard money villains had been in charge, their monetary policy would have been too tight and recession would have come by now. Of course, the job of the Fed shouldn’t be to avoid recession at all; it is the boom, not the bust that we ought to criticize. A recession, a liquidating of all the malinvestments caused by a loose Fed, is the healing process that we desperately needed. But we never got it. Hence the current sluggish economic condition.
To finish off, Duy complains that these rule-based advocates would turn policy far too tight, given “underlying economic conditions.” That’s always the ironic rub in the mainstream narrative. The Fed was allegedly the hero who saved the global economy, brought it forth into harmonious recovery. But this “recovered economy” isn’t even ready for a few rate increases after 8 years? Swell recovery.
Fed Chair Janet Yellen’s recent speech at Stanford University certainly was much like Ms. Yellen herself: predictable and safe. She is less opaque than Alan Greenspan, and less combative that Ben Bernanke. But she shares both men’s ability to say very little that is interesting or controversial.
Yellen opened with self-congratulatory Fed-speak. Citing the falling official unemployment number as a sign of Central Planner heroism, Yellen completely washes over the troubling reality of the participation rate. The statisticians, in true form, put the attention on how many in the labor force have a job, but shoo away the fact that the denominator— the labor force itself— is hardly in a healthy state. After all, if tens of millions who need a job have given up looking and are no longer calculated in the labor force, how can this be a labor market recovery?
Consider the problem in graph form, courtesy of Jeff Snider at Alhambra Partners.
Yellen expressed resolve to achieve even more devaluation of the currency on her quest toward 2% inflation. Of course, being well-trained central bankers Yellen and Co. are completely oblivious that their interest rate manipulation devastates the very pillar of a sound economy: the intertemporal structure of production. The aim to “heat up” the economy by tampering with interest rates doesn’t just put upward pressure on consumer prices, it also sets the economy up for a future recession.
Yellen thoroughly defends the honor of the discretionary policy advocates by clearly warning about the dangers of a policy rule. That is, whether monetary policy should be left up to the “discretion” of the FOMC (discretionary monetary policy) or in accordance with predetermined rules, such as the Taylor Rule, Yellen upholds the former. She argues that the Fed needs a level of flexibility to respond to unforeseen events that various “rules” don’t provide. Of course, this entire debate over discretionary vs. rule-based is ludicrous: both of these positions aim to set money supply and interest rates at variance with what the market would provide.
What we need is the market to properly allocate scarce capital according to price signals and in response to the desires and decisions of individual actors throughout “the economy.” In other words, we don’t need more “policy.” We’ve suffered enough.
THE AUSTRIAN: What is the “Great Monetary Experiment” you refer to in your book?
Brendan Brown: The Federal Reserve has sought by using non-conventional monetary tools to produce a stronger than normal economic expansion following the Great Recession. The resort to such tools has occurred in a context where money market rates have already fallen to near zero, meaning that the conventional tool of rate cuts is not available. The ECB and Bank of Japan joined in the experiment with a considerable lag behind the Federal Reserve.
The non-conventional tools have included massive expansion of the monetary base, manipulation of long-term interest rates — and in the case of Europe — sub-zero interest rates. The tools have been applied toward achieving an inflation rate over the medium-term (in practice two years) of 2 percent per annum.
The setting of an inflation target pre-dates the Great Monetary Experiment. Transcripts reveal that at an FOMC meeting in summer 1996, then-Governor Janet Yellen presented a paper (invited by then-Chair Greenspan) arguing that the aim of “price stability” should be interpreted to mean perpetual “low” inflation.
The architects claim the monetary experiment has been a great success even though this is the slowest US economic expansion ever. And of course we cannot estimate the full costs including malinvestment until the record of the full business cycle including its asset price deflation phase is available.
TA: What does it mean that investors have become starved for yield? In your book you call it “interest-income famine.”
BB: The nineteenth-century English financial journalist Walter Bagehot coined the concept of “yield starvation” when he said that “John Bull will stand for many things but not interest rates below 2 percent.” He meant that in such a situation the investor would act “madly.” In today’s terms, we could translate that into the observation that if interest income from safe investments is very low, then investors, in their desperation for yield, chase uncritically a succession of speculative ideas. These apparently justify high and rising prices (relative to sober valuations) in presently hot asset classes. Investor decision-making reveals abnormally flawed mental processes.
Of course, sometimes even under a sound money regime interest rates would reach very low levels as during a recession. But so long as these are regarded as transitory and there is no serious danger of an erosion of wealth by the eruption of inflation, rationality would dominate especially as longer term interest rates would remain substantially positive. But under the Great Monetary Experiment investors have been deeply troubled by the far-out danger of inflation — especially given the bloated size of the monetary base. They also fear that the Experiment will eventually bring a crash which would be followed by an even bigger experiment.
Time-horizons also shorten for many investors as they enter into desperate gambles to make returns before the Day of Reckoning. Companies get rewarded by the equity markets for paying out cash and making profits from financial engineering rather than for undertaking bold long-gestation investments.
TA: You speak often of asset-price inflation. It seems that measuring inflation is easier said than done, however. What are some of the challenges in measuring inflation?
BB: Asset price inflation is hard to measure and diagnose because it involves a comparison between actual capital-market prices as influenced by strong irrational forces, and hypothetical prices that would exist under conditions of sound money. Moreover, asset price inflation does not affect all markets simultaneously. Indeed there is a mid-phase of the disease when speculative temperatures may be rising in some markets at the same time as falling in others.
These difficulties in measurement and diagnosis of asset price have been seized on by some critics to say that the disease does not exist. Other critics admit that there are periods in economic history when irrational exuberance in various forms is evident but maintain that the essence of the phenomenon is purely psychological (i.e., created by “animal spirits”). One answer to these criticisms is to take these episodes through history and demonstrate each time that monetary disorder has been present in a big way. The other part is to outline a clear chain of causality between monetary disorder and the growth of the irrational forces in asset markets. I try to do both in my book.
TA: In the past, we’ve seen the dot-com boom and the housing boom. This time around, the boom is different. What are the boom industries right now, and why has money gravitated toward those industries?
BB: This time the boom has been in the oil industry (including shale), in other commodity extraction industries, in emerging markets (including their real estate sectors), in export sectors in the advanced economies supplying the emerging markets especially China, and in Silicon Valley. Much of this boom (but not all) has turned to bust.
These stories fueled the flow of funds into high-yield credits and currencies in the pursuit of yield. Fantasy prices for high-yield credits were an essential condition for the boom in the private equity industry which in turn invested in the sub-prime auto finance and aircraft leasing sectors on a highly leveraged basis. Similar things happened in the shale gas and oil industry. Alongside there has been the boom in the currency carry trade into China and emerging markets whose economies were very dependent on the China boom. This speculative inflow into Chinese and wider emerging market currencies and credits as driven by the Great Monetary Experiment created economic boom and bust. The closest historical parallel to the carry trade boom in this cycle was perhaps the huge inflows of capital into the Weimar Republic between 1924–28 as fueled by the combination of monetary disorder as generated by the Benjamin Strong Fed, and the fantastic speculative activity surrounding the German “miracle economy” emerging from the destruction of war and hyperinflation.
TA: There are a lot of people out there who have been predicting a meltdown for years. You, on the other hand have identified several reasons as to why the current boom has not yet collapsed. What are some of these reasons?
BB: Each episode of asset price inflation disease through history has some elements common with others and some distinct. Since the early years of this episode — back in, say, 2010–12 — I have sought to diagnose the stage of the disease that we are in. Yet in my work I have been very aware of Mises’s advice against firm predictions in such matters. The weak overall economic expansion in the US and other advanced economies meant that an early end to the cycle was not going to come from general overheating accompanied by a substantial rise in interest rates. Indeed the economic sluggishness could be explained by huge monetary uncertainty weighing on business confidence. Instead, the end phase of the disease this time could arrive through a speculative burn-out — a disappointing reality causing rose-colored spectacles to splinter.
It’s easy to get discouraged in the Age of Obama, a man who can say, in Castro’s Cuba, that there is not much difference between communism and capitalism. And in his warped mind, I guess it’s sort of true, since his program is a mixture. That is, it’s fascist.
Combine his corporatism with envy, perpetual war, negative interest rates, the police state, fascist health care, total surveillance, vicious political correctness, and a host of other horrors, and you can wonder about the future. The other pols, with very few exceptions, aren’t much better, or even worse.
Is the cause of freedom, private property, sound money, and—to be moderate—taking a meat axe to the government and all its works—irretrievably lost? Do we have to sit back and accept a form of economic and social Marxism?
NEVER.
And why is that? Because the truth, no matter how seemingly battered and bruised, still shines through. It can never be wiped out, no matter how rotten the regime. In the end, the truth will triumph over deceit.
Our opponents are the party of lies. Lies about economics, history, and political philosophy. Lies about the Fed and other government chains on society. Lies about the nature of the state and its deeds. Lies about the heroes to be admired and emulated, and the villains to be despised.
In the media and the classroom, entrepreneurs are smeared as greedy and destructive, when in fact they are heroes, essential to human flourishing. Instead, we are supposed to worship politicians and officials who are no better than common thieves. Yet far more destructive.
Time to despair? No, because the ground is shifting under the feet of the entire establishment, here and around the world. They are panicking.
Especially among young people, we are making huge progress. Yes, some go the deadly way of Bernie. They see even more government as the answer to all the problems caused by government. And they are infected by PC.
But the smart ones, those of good brains and good hearts, the diligent and hardworking, the truth seekers, are moving our way. How heartening it is to see it. The future can be better than the present. We are not trapped on the road to Hades, no matter the corrupt news from the corrupt state and its propaganda.
This fools the weak-minded, but our young people are anything but.
To these kids, many professors might as well be wearing sandwich boards proclaiming them to be liars. The lies about capitalism, war, taxes, controls, history, and the government are endless, mixed with what Mises referred to as statolatry.
Then there is the constant political correctness, more properly called cultural Marxism. Belong to the wrong race? Then you are responsible for all the bad things in the world. Left-wing hysteria, combined with the censorship of our ideas, rules the roost. But there is an opposition. Good students, even if they don’t have the knowledge to refute all this, understand that something is drastically wrong. They love truth and freedom, and they refuse to be pigeonholed and defamed. These are the young people who flock to our selective summer Mises University. This extraordinary program is not for everyone. There are also the nihilists, who go along to get along, and the statists who see big government as the all-knowing eye, the protector and provider, god walking on earth.
But the good kids come to us, and it would do your heart good to see them. These bright-faced students are smart, principled, and hungry for the truth. They are also polite and well-mannered. As you can imagine, they’re a good teacher’s dream. No wonder Mises University also attracts the best teachers of Austrian economics and libertarianism.
This summer will be the 30th year of Mises U. Over that time, thousands of young people—including almost everyone who is anyone in Austrian economics and the freedom movement—have studied with us, and had their lives changed. They’ve come from all 50 states and 54 foreign countries, and from more than 500 colleges and universities.
The internet, especially mises.org, is our great recruiter. Just as often, good professors recommend us to their best students, and even more effective, Mises U. alumni tell their friends that their experience on our campus was the intellectual experience of a lifetime, that it is what higher education should be like, but so often isn’t.
We get young men and women majoring in economics, business, history, philosophy, theology, physics, mathematics, pre-law, pre-medicine, and other disciplines. To be admitted, they must be stars—in their grades, in their recommendations, in their dedication.
Many of our graduates are now professors themselves, and sending us their own students. Others are spreading Austrian economics and liberty in their businesses and professions.
Because of the rigorous application process, we get the smartest kids interested in our ideas. Indeed, we turn down more than we accept. That just makes Mises U. more desirable, of course.
All day and into the evening, from money and banking to entrepreneurship, from regulation to methodology, from history of thought to socialism, from fascism to Keynesianism (not a long distance), from central banking to taxation, from the free market to the hampered market. They learn, in the great tradition of Austrian economics, why freedom means human flourishing, and statism means ripping off the productive for the unproductive. Our students learn about the open and covert ways in which government intervention into the economy brings penury and injustice, and that laissez-faire equates not only to the highest standards of living, but to a moral society.
And our kids are voracious. Even outside of class, during meals and social hours, the smart discussions are nonstop. Strong friendships emerge. No one, no matter at how leftist a school, feels alone anymore.
I mentioned that our faculty is the best. Even outside of class, they continue talking and teaching as long as the kids want them to. No wonder we have to warn the students to pace themselves during Mises U. Otherwise, they are not getting enough sleep, so exciting is this kind of learning.
I am so proud of our teachers and students, of all that they have accomplished over the years, and will accomplish in the future.
This is an expensive undertaking. As with all Institute programs, however, we watch every dime, since it is the generosity of people like you that makes all we do possible. We are always aware of our fiduciary responsibility to our donors.
It’s a big job. After all, we are countering long years of indoctrination, not only from government-biased education, but from the media, Hollywood, and television, too.
It’s a big job, but isn’t it worth doing? Among all our brilliant kids, there might be another Mises or Rothbard, Ayn Rand or Isabel Paterson, Hazlitt or Hayek.
We’re determined not to let the bad guys get away with it. There’s far too much at stake, for us and our children and grandchildren, for all of society.
But though we have the truth on our side, we can’t do anything without you.
Please make a generous tax-deductible contribution to the 2016 Mises University. Help us keep changing the world.
It’s a thrill to see all that this program has accomplished over the years. Help us build on that for the next 30 years. Everything is at stake.
Warmest regards,
Llewellyn H. Rockwell, Jr.Founder and Chairman
PS: We have the privilege of carrying forward a great heritage. Please help us do so, for all the ideals we share.
PPS: Please see the comments from some of our alumni. You’ll be as impressed as I am. A scholarship for one of these young people can be named in your honor, or in memory of a loved one.
Your generosity has given me a wonderful opportunity this week to expand my knowledge of Austrian economics and libertarianism. Not only was the academic aspect of the conference refreshing and enjoyable, I was able to interact with my classmates on a level that I have never experienced in my life. For this reason I find it hard to express my gratitude. Thank you.— Andrew Heinen, Indiana University
My experience at Mises University has been life changing. I would not be libertarian without the Mises Institute. Indeed, my country, France, is not exposed enough to libertarian ideas. But the Mises Institute helps the French classical liberal tradition to survive. Thank you for making this possible.— Louis Rouanet, Sciences Po Paris
Thank you very much for sponsoring my attendance at Mises University. It has been a great experience and opportunity to learn more about Austrian economics. I am grateful to be able to learn from some of the best economics scholars. I recently graduated from Grove City College, and am now considering grad school in economics. Thank you again for your support.— Andy Herbener, Grove City College
Thank you, once again, for being the reason I was able to attend Mises U this year. Once again, it was an amazing experience that I will always cherish. I am eternally grateful.— Anton Chamberlin, Loyola University New Orleans
Thank you very much for your generous donation that helped make Mises University possible. I would not have had the opportunity to participate in this program without your support. Mises University has provided me with a solid foundation in Austrian economics that I would not have had otherwise. There is no other program like this in the world. I will work hard to advance the Austrian school of thought and hope to be in the position to sponsor a student someday myself.— Michael Malin, University of Alaska
Thank you so very much for your generosity, which has provided me with the opportunity of a lifetime. For those of us who love liberty and have discovered this beautiful science, economics, there is no nobler cause than the work of the Mises Institute. I wouldn’t be here were it not for your support, and for that I am extremely grateful. Thank you again.— Benjamin Goes, SUNY Albany
Thank you so much for your sponsorship this week. I have so enjoyed my time at the Mises Institute, and have learned so very much about Austrian economics over the course of a rigorous course load, comprised of around 30 courses on Law, Economics, and Political Philosophy. I have especially enjoyed my time in the Judge’s Constitutional Law class, and have been inspired to study law, in part due to this week.— Lucas Carroll, University of North Carolina
“Our greatest enemy today, in short, is the economic illiteracy and confusion on the part of those who insist on “planning,” “stabilizing,” and straitjacketing the economy and who have the political power to do it.” So wrote Henry Hazlitt in 1946, words that sadly retain their relevancy today. The consequences of this pervasive fallacy takes many forms. Ryan McMaken this week highlighted how soaring university tuition is fueled largely by a government fueled boom in student loans, while Paul-Martin Foss highlighted the alarming signals coming from international shipping. Around the world, people are coming to realize what Austrians have long warned, that the increasingly absurd policies of central banks offer no hope for true, sustainable economic growth. Sadly there is a firmer grasp of economics to be found in a Harry Potter novel, than the halls of the Federal Reserve.
Mises Weekends this week focuses on the true foundations for economic prosperity: innovation and entrepreneurship. At last week’s AERC, Hunter Hastings — a leading business and marketing consultant — discussed how technology breakthroughs and smart machines can power a new age of individualism.
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Keynes in 1939: The Coming War Will Solve Our Unemployment Program by Carmen Elena DorobățAnd So It Begins… Negative Interest Rates Trickle Down in Japan by Paul-Martin FossRothbard: Essentials of Money and Inflation by Murray N. RothbardThe Fed's Firepower by Jonathan NewmanEconomists as Modern Astrologers by Ryan McMakenCash Banned, Freedom Gone by Thorsten PolleitDumb and Dumber – From Negative Interest to Helicopter Money by Paul-Martin FossThe Fed Can't Save Us by Robert MurphyMises: Politics and Liberty by Ludwig von MisesThe Real Meaning of Competition by Peter KleinWhat Harry Potter Can Teach the Federal Reserve by Tho BishopMill Power Is Trump's Card by Joseph SalernoDon’t Confuse the Cost of College with the Cost of Education by Ryan McMakenLiberty Defined by Ron PaulWhat Would Trump Economics Mean for America? by Mark ThorntonThe Skyscraper Index Meets the Supertanker Index by Paul-Martin Foss30 Years of Mises University by Ryan McMakenThree Lessons Learned from Tesla’s Success by Mateusz Machaj"Free Stuff" Isn't All That It's Cracked Up to Be by Louis RouanetHazlitt, 1946: Inflation, Deflation, Confusion by Henry Hazlitt
Liberty means to exercise human rights in any manner a person chooses so long as it does not interfere with the exercise of the rights of others. This means, above all else, keeping government out of our lives. Only this path leads to the unleashing of human energies that build civilization, provide security, generate wealth, and protect the people from systematic rights violations. In this sense, only liberty can truly ward off tyranny, the great and eternal foe of mankind.
The definition of liberty I use is the same one that was accepted by Thomas Jefferson and his generation. It is the understanding derived from the great freedom tradition, for Jefferson himself took his understanding from John Locke (1632–1704). I use the term “liberal” without irony or contempt, for the liberal tradition in the true sense, dating from the late Middle Ages until the early part of the twentieth century, was devoted to freeing society from the shackles of the state. This is an agenda I embrace, and one that I believe all should embrace.
To believe in liberty is not to believe in any particular social and economic outcome. It is to trust in the spontaneous order that emerges when the state does not intervene in human volition and human cooperation. It permits people to work out their problems for themselves, build lives for themselves, take risks and accept responsibility for the results, and make their own decisions.
Our standards of living are made possible by the blessed institution of liberty. When liberty is under attack, everything we hold dear is under attack. Governments, by their very nature, notoriously compete with liberty, even when the stated purpose for establishing a particular government is to protect liberty.
Take the United States, for example. Our country was established with the greatest ideals and respect for individual freedom ever known. Yet look at where we are today: runaway spending and uncontrollable debt; a monstrous bureaucracy regulating our every move; total disregard for private property, free markets, sound money, and personal privacy; and a foreign policy of military expansionism. The restraints placed on our government in the Constitution by the Founders did not work. Powerful special interests rule, and there seems to be no way to fight against them. While the middle class is being destroyed, the poor suffer, the justly rich are being looted, and the unjustly rich are getting richer. The wealth of the country has fallen into the hands of a few at the expense of the many. Some say this is because of a lack of regulations on Wall Street, but that is not right. The root of this issue reaches far deeper than that.
The threat to liberty is not limited to the United States. Dollar hegemony has globalized the crisis. Nothing like this has ever happened before. All economies are interrelated and dependent on the dollar’s maintaining its value, while at the same time the endless expansion of the dollar money supply is expected to bail out everyone.
This dollar globalization is made more dangerous by nearly all governments acting irresponsibly by expanding their powers and living beyond their means. Worldwide debt is a problem that will continue to grow if we continue on this path. Yet all governments, and especially ours, do not hesitate to further expand their powers at the expense of liberty in a futile effort to force an outcome of their design on us. They simply expand and plummet further into debt.
Understanding how governments always compete with liberty and destroy progress, creativity, and prosperity is crucial to our effort to reverse the course on which we find ourselves. The contest between abusive government power and individual freedom is an age-old problem. The concept of liberty, recognized as a natural right, has required thousands of years to be understood by the masses in reaction to the tyranny imposed by those whose only desire is to rule over others and live off their enslavement.
This conflict was understood by the defenders of the Roman Republic, the Israelites of the Old Testament, the rebellious barons of 1215 who demanded the right of habeas corpus, and certainly by the Founders of America, who imagined the possibility of a society without kings and despots and thereby established a framework that has inspired liberation movements ever since. It is understood by growing numbers of people who are crying out for answers and demanding an end to Washington’s hegemony over the world.
And yet even among the friends of liberty, many people are deceived into believing that government can make them safe from all harm, provide fairly distributed economic security, and improve individual moral behavior. If the government is granted a monopoly on the use of force to achieve these goals, history shows that that power is always abused. Every single time.
Over the centuries, progress has been made in understanding the concept of individual liberty and the need to constantly remain vigilant in order to limit government’s abuse of its powers. Though steady progress has been made, periodic setbacks and stagnations have occurred. For the past one hundred years, the United States and most of the world have witnessed a setback for the cause of liberty. Despite all the advances in technology, despite a more refined understanding of the rights of minorities, despite all the economic advances, the individual has far less protection against the state than a century ago.
Since the beginning of the last century, many seeds of destruction have been planted that are now maturing into a systematic assault on our freedoms. With a horrendous financial and currency crisis both upon us and looming into the future as far as the eye can see, it has become quite apparent that national debt is unsustainable, liberty is threatened, and the people’s anger and fears are growing. Most importantly, it is now clear that government promises and panaceas are worthless. Government has once again failed and the demand for change is growing louder by the day. Just witness the dramatic back-and-forth swings of the parties in power.
The only thing that the promises of government did was to delude the people into a false sense of security. Complacency and mistrust generated a tremendous moral hazard, causing dangerous behavior by a large number of people. Self-reliance and individual responsibility were replaced by organized thugs who weaseled their way into achieving control over the process whereby the looted wealth of the country was distributed.
The choice we now face: further steps toward authoritarianism or a renewed effort in promoting the cause of liberty. There is no third option. This course must incorporate a modern and more sophisticated understanding of the magnificence of the market economy, especially the moral and practical urgency of monetary reform. The abysmal shortcomings of a government power that undermines the creative genius of free minds and private property must be fully understood.
This conflict between government and liberty, brought to a boiling point by the world’s biggest bankruptcy in history, has generated the angry protests that have spontaneously broken out around the country—and the world. The producers are rebelling and the recipients of largess are angry and restless.
The crisis demands an intellectual revolution. Fortunately, this revolution is under way, and if one earnestly looks for it, it can be found. Participation in it is open to everyone. Not only have our ideas of liberty developed over centuries, they are currently being eagerly debated, and a modern, advanced understanding of the concept is on the horizon. The Revolution is alive and well.
The goal is liberty. The results of liberty are all the things we love, none of which can be finally provided by government. We must have the opportunity to provide them for ourselves, as individuals, as families, as a society, and as a country.
[This is excerpted from the introduction of Ron Paul's Liberty Defined: 50 Essential Issues that Affect Our Freedom.]
Some politicians want to ban cash, arguing that cash is helping criminals. The first steps in that direction are the withdrawal of big denomination notes and the limits imposed on cash payments.
Proponents of a ban on cash claim that this will help fight criminal transactions — involved in money laundering, terrorism, and tax evasion. These promises of salvation are used to get the general public to agree to a society without cash. But there is no convincing proof for the claim that the world without cash will be a better one. Even if undesirable behavior is indeed financed by cash, you still need to answer the question: will the undesirable behavior disappear without cash? Or will those who commit the undesirable acts take to new ways and means to reach their goal?
Take the example of the 500 euro note. If we do away with it, won't those who wish to use cash pay with five 100 euro notes instead? Or ten 50 euro notes? And what about the costs imposed on the large majority of respectable people, if you put a ban on their cash? Using the same logic, should we ban alcohol, because some can't handle it properly?
It’s Really about Central BanksThe plan to restrict the use of cash, or to abolish it step by step, has nothing to do with the fight against crime. The real reason is that states (and their central banks) want to introduce negative interest rates.
Although central banks have long pursued inflationary policies that devalue the debt owed by governments, negative interest rates offer a new and powerful tool to do this. But, to make negative interest rates work well, you have to get rid of physical cash.
Otherwise, if you apply negative rates on bank deposits, customers in the short or long run will try to avoid the costs that negative rates impose on their bank deposits. So, depositors will, in many cases, hoard cash. To block this last escape route, proponents of the ban on cash want to do away with it.
The Natural Rate of InterestIncidentally, some reputable economists are supporting the plan, claiming that the “natural rate” has become a negative rate. Because of that, central banks were forced to push interest rates below zero, being the only way to foster growth and employment. The assertion that the balanced interest rate has become negative doesn't stand up to a critical examination though.
[RELATED: The “Natural Interest Rate” Is Always Positive and Cannot Be Negative]
It is inherently impossible that the balanced interest rate is negative. Market rates, which entail the balanced rate, can fall below zero, but not the balanced rate itself. The policy of negative rates is no cure for the economy but causes massive economic problems.
Competition and Property RightsBanning cash is infringing on the freedom of citizens on a massive scale. In withdrawing cash, the citizen is bereft of choice for his payments. After all, the state has the monopoly on the production of money. There is no competition on cash. Thus, nobody but the state can satisfy the demand for money by citizens.
If the state bans cash, all transactions must be executed electronically. For the state to see who buys what when and who travels when where is then only a small step away. The citizen thus becomes completely transparent and his financial privacy is being lost. Even the prospect that a citizen can be spied upon at any time is an infringement on his right of freedom.
Cash helps to protect the citizen from an unfettered intrusiveness by the state. If the state increases taxes too much, citizens at least have the option to avoid the tribulation by paying in cash. The knowledge that citizens can do so, makes states hold back a little.
States will give up any restraint once cash has been banned. The justified concern isn't at all rendered obsolete by the cases of Sweden and Denmark, where the cashless society is said to function to its perfection. The citizens of those countries can still use foreign cash if they want.
The plan to ban cash — step by step — is a sign of the fundamental ailment of our time: the state is destroying more and more of the freedom of citizens and businesses, once it has turned into a territorial monopolist and highest judge of all conflicts.
The fight to keep cash may bring something good though: it will shed light on the need to take the power away from the state as we know it, by applying the same principles of law on its actions as on those of each and every citizen. That way, the state’s monopoly on producing cash would come to an end and the citizen wouldn't need to worry that he may be deprived of his cash against his will.
What is Europe? It seems that no rigorous answer can be provided. Europe is not exactly a continent. It is not a political entity. It is not a united people. The best definition, in fact, may be that Europe is the outcome of a long historical process that engendered unique institutions and a unique vision of what men ought to be. The idea that men ought to be free from violent government interference. Europe has no founding fathers. Its birth was not orchestrated but completely spontaneous. Its development was not imposed by armies and governments but was the voluntary product of clerics, merchants, serfs, and intellectuals who were seeking to interact freely with each other. Europeans were united by their freedoms and divided by their governments. In other words, Europe was built against States and their arbitrary restrictions, not by them.
After the fall of the Roman Empire a period of political anarchy followed where cities, aristocrats, kings, and the church all competed with each other. Therefore, as Dr. Ralph Raico noted in his article “The European Miracle,”
Although geographical factors played a role, the key to western development is to be found in the fact that, while Europe constituted a single civilization — Latin Christendom — it was at the same time radically decentralized. In contrast to other cultures — especially China, India, and the Islamic world — Europe comprised a system of divided and, hence, competing powers and jurisdictions.
In other words, over the centuries, a long evolution of the institutions gave birth to personal liberty. Although the European aristocracies and states were restricting freedom, they were forced to grant more autonomy to their subjects, for, if they did not, people were opting out by migrating or using black markets. As Leonard Liggio puts it, after 1000 A.D.:
While bound by the chains of the Peace and Truce of God from looting the people, the uncountable manors and baronies meant uncounted competing jurisdictions in close proximity. ... This polycentric system created a check on politicians; the artisan or merchant could move down the road to another jurisdiction if taxes or regulation were imposed.
Europe was where the road to freedom began. It was in Europe that the values of individualism, liberalism, and autonomy rose from history and gave humanity a sense of progress that no civilization had ever experienced to such an extent before. Unfortunately, the values and institutions that made Europe great vanished under the pressure of political centralization, nationalism, statism, socialism, and fascism in the nineteenth and twentieth centuries. Today, however, a new danger looms over Europe — the European Union.
The European Institutions Against the Free MarketContrary to what is often said, the European Union has nothing to do with peace, freedom, free trade, free capital and migration movement, cooperation, or stability. All this can very well be provided in a decentralized system. The European Union is nothing more than a cartel of governments that tries to gain power by harmonizing the fiscal and regulatory legislation in every member State. Article 99 of the Treaty of Rome (1957) clearly states that indirect taxation “can be harmonized in the interest of the Common Market” by the European Commission. As for Article 101 of the same Treaty, it explicitly restrains regulatory competition “where the Commission finds that a disparity existing between the legislative or administrative provisions of the Member States distorts the conditions of competition in the Common Market.”
Since the very beginning, with the creation of the European Coal and Steel Community (ECSC) in 1951, the European institutions were more planning agencies than anything else. Indeed, the coal and steel industries at the time were mostly nationalized and the goal of the ECSC was to coordinate governments’ activities in these two sectors, not to liberalize activity. The fact that the ECSC was not about free trade but about government planning was known by everybody at the time. It was Robert Schuman, the French minister of foreign affairs, who proposed in his declaration of 9 May 1950, that the Franco-German coal and steel production be placed under a common High Authority within the framework of an organization in which other European countries could participate. Also, the ECSC created for the first time European anti-trust legislation, which as Austrians know, is nothing less than government planning in the name of an erroneous vision of what competition is. Even the Treaty of Rome (1957), the basis of the EU as we know it, despite enacting the free movement of goods, capital, and persons, remains a highly statist treaty. Indeed, it is often forgotten that among other things, the Treaty of Rome created a “European Investment Bank,” a “European Social Fund,” the highly protectionist “common agricultural policy,” the “common transport policy,” and reinforced European anti-trust legislation. Therefore, if in the short and medium run, the Treaty of Rome, by breaking the neck of protectionism, was a boon for the European economy, it created institutions that could easily expand their regulatory power in the future, and that is exactly what they did.
Many free marketers support the European Union on the ground that even if their regulations are bad, they are still far better than those produced by our very prolific national governments. Such a line of argument, often used in more socialist countries such as France, is sheer nonsense. It is the equivalent of saying: “I don’t mind being robbed twice because the second thief will be much nicer to me.” The question is not how to make “better” regulations but how to expand free trade.
Europeanism: True and FalseIn 1946, F.A. Hayek wrote a pathbreaking article named “Individualism: True and False” where he distinguished two different individualist intellectual traditions. One, as Hayek calls it, is “true individualism,” based on evolutionism, the idea that institutions and individuals’ behaviors are not planned consciously but are rather the result of a spontaneous process. True individualism follows the tradition of the Scottish Enlightenment. False individualism, on the contrary, is based on extreme rationalism and solipsism. False individualism is based on the idea that society, freedom, and markets, can be planned and should be planned. This false individualism is the heir of the 1789 and — even more clearly — of the 1793 French Revolutionaries.
These two sorts of individualism are today at the root of two different sorts of Europeanism. True Europeanism admits that most of what made Europe was not planned but rather spontaneous. The implications are that we ought to have as much decentralization as possible for Europe to continue to strive and to safeguard human liberties. On the other hand, false Europeanism thinks that Europe can only truly become Europe if planning by common political institutions exists. False Europeanists believe that the only alternative is between Nation States and the European Union. Their defense of a centralized European political entity is based on the erroneous idea that political centralization is positively linked to the process of civilization because society, law, markets, prosperity, and the “European spirit” ought to be designed by rulers. Europe during the Middle Ages, those thinkers say, lacked trade integration because it lacked political unification. It follows that we must be grateful today for the existence of the European Union. In their narrative, economic progress took place only when “Europe” slowly began to develop new trading alliances that combined some aspects of military protection with something akin to a free-trade area. But this version of history is very far from the truth. In the Middle Ages for instance, the lex mercatoria, the law of merchants, was purely private. Furthermore, the protective tariffs were mostly ignored anyway by Europeans. Smuggling was so widespread that England in the late Middle Ages should be in fact considered as a nation of smugglers rather than a nation of merchants. As Murray Rothbard noted in Conceived in Liberty:
Too many historians have fallen under the spell of the interpretation of the late nineteenth-century German economic historians (for example, Schmoller, Bucher, Ehrenberg): that the development of a strong centralized nation-state was requisite to the development of capitalism in the early modern period. Not only is this thesis refuted by the flourishing of commercial capitalism in the Middle Ages in the local and non-centralized cities of northern Italy, the Hanseatic League, and the fairs of Champagne. … It is also refuted by the outstanding growth of the capitalist economy in free, localized Antwerp and Holland in the sixteenth and seventeenth centuries. Thus the Dutch came to outstrip the rest of Europe while retaining medieval local autonomy and eschewing state-building, mercantilism, government participation in enterprise — and aggressive war.
Thus, the idea that a centralized authority, in our case the European Union, is necessary for free trade is pure fantasy, It is false Europeanism. Its constructivist approach has prevailed in European institutions since the beginning. For example, one of the goals advanced by the Treaty of Rome was to “create markets” through a unified European Anti-trust legislation. Similarly, the official justification of the Common Agricultural Policy introduced in 1962 was to create a unified agricultural market. But markets do not need States or treaties to exist and they certainly do not need the European Union.
The parallel between false Europeanism and false individualism is also relevant when it comes to their respective imperialistic tendencies. Whereas the French revolutionaries wanted to invade Europe to impose their “universal values” through force, the European Union does not tolerate, in the name of Europe, independent States that do not want to submit to Brussels. Switzerland, for instance, is forced by the European Union to adopt countless regulations concerning food safety and gun ownership. If the Swiss confederation does not comply with many provisions of European law, the European Union threatens to cut Switzerland’s access to the single market.
The most incredible political success of the European Union zealots is their constant shaming of those who refuse to submit to a European hegemonic super-State. But we must understand that only so-called “Euro sceptics” can truly be pro-Europe. Only “Euro sceptics” can be loyal toward the history and liberal values of their continent. In other words, the European Union is a highly anti-European institution.
We Need DecentralizationOn June 23, 2016, the British will vote on whether they want to stay in the EU or not. If the NO vote wins, it might be the end of the European Union as we know it. Historically, Britain played a major role in the maintenance of a fairly decentralized European order. Whether it was with Napoleonic France, or the German 2nd Reich, or Nazi Germany, it has always been Britain that ultimately helped to break up the hegemonic endeavors of empires on continental Europe. The question is, then, will Britain play its historical role this summer against the imperialistic European Union? We should consider any attempt to establish a more decentralized system with more competition between States as a boon for Europe and the Europeans. To be sure, the Nation-States must be dismantled, but not if it means the creation of an even bigger European Leviathan. It is, on the contrary, the regionalists and independence movements that must be supported, whether it is Scotland, Catalonia, or Corsica. The European miracle can be revived only through extreme political decentralization. What history teaches us is that Europe is greater than the individuals that compose it only insofar as it respects liberty. Insofar as it is controlled or directed by a monolithic and central political authority or by bellicose Nation-States, Europe is limited by the inability of Europeans to escape the arbitrary restrictions of their governments.
This weekend, over 130 scholars from over 10 countries and 58 colleges and universities gathered in Auburn for the 2016 Austrian Economics Research Conference. The continual growth of AERC is a testament to the growing strength of the Austrian school, both in America and abroad. As Lew Rockwell wrote this week:
Austrian economics is flourishing, with the number of academics working in an expressly Rothbardian tradition growing every year. Meanwhile, the texts of Rothbard are being consumed voraciously, indeed more than ever before, and especially by bright young minds seeking out something more intellectually satisfying than the stale platitudes of official “liberalism” and “conservatism.”
One of the most special parts of AERC is that it brings together a number of scholars that have gone through the student programs offered by the Mises Institute — a special community that forms the intellectual backbone to the continued growth of the Austrian tradition.
If you are interested in becoming a Mises Institute Alumni, opportunities are still available to register for this year’s Mises University and Rothbard Graduate Seminar.
Don't miss the two remaining named lectures from AERC:
At 10:45 central time, you can listen to the live broadcast of the The Ludwig von Mises Memorial Lecture (Sponsored by James Walker): Jeffrey Herbener from Grove City College will talk on "Time and the Theory of Cost."
At 4:15 central time, you can listen to the live broadcast of The Lou Church Memorial Lecture (Sponsored by the Lou Church Foundation): Jörg Guido Hülsmann from the University of Angers, will talk on "The Political Economy of Gratuitousness."
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
The Legalization Cure for the Heroin Epidemic by Mark ThorntonPrice Controls May Be On the Way by Paul-Martin FossEconomics: It's Simpler Than You Think by David GordonMurray Rothbard Soars, Bill Buckley Evaporates by Llewellyn H. Rockwell Jr.Will North Korea and Cuba Ever Be Wealthy? by Ryan McMakenThe Austrian Theory of the Trade Cycle and Other Essays Now Available in JapaneseWhat the Federal Reserve Could Do by Paul-Martin FossNew York Finally Legalizes (and Heavily Taxes) Mixed Martial Arts by Matthew DoarnbergerOnly the Private Sector Can Determine the "Correct" Number of Immigrants by Ryan McMakenMises: The Individual Within Society by Ludwig von MisesCalifornia Weighs a $15 Per Hour Minimum Wage by Jonathan NewmanTerrorist Attacks Made Worse by Government Failure in Europe by Ron PaulStatistics: Achilles' Heel of Government by Murray N. Rothbard
After years of claiming to embrace revolutionary Marxism, the Cuban state is, for reasons of necessity and pragmatism, moving toward becoming a more traditional authoritarian state. Even once Raul and Fidel Castro are dead, it's rather unlikely that the Cuban government will suddenly turn to a political system that leans heavily in favor of relatively free markets. As has been the case with China, the ruling class of Cuba will find ways to perpetuate itself and maintain political control while keeping for itself a substantial amount of the wealth produced by the labors of the common people. It will likely loosen up on its control of the economy because it recognizes that more-free economies are more productive than less-free economies. But, don't look for Cuba to become a haven for entrepreneurship any time soon.
Even as the economy becomes slightly more free, however, Cuba will remain poorer than most of its neighbors indefinitely, and even if Cuba turned into a Caribbean version of Singapore — something that's exceedingly unlikely — it would remain far poorer than even many of its Latin American neighbors for decades.
This is because, in spite of what our politicians may tell us, people cannot be made more prosperous by the government's simply wishing it to be so. After all, if wealth could be produced by government fiat, then the Cuban and North Korean regimes, neither of which have faced any organized political opposition, have both enjoyed nearly untrammeled power to "improve" the economy without limit.
In real life, though, wealth can only be built through the arduous process of work, saving, and capital accumulation. There is no question that some people can benefit from government mandated redistribution of wealth, but to have wealth, it must first be created by producing things or services of value, and by foregoing consumption now in order to invest and obtain more consumption later.
It's easy to state this, but it is far more difficult to actually do it. And most frustrating of all: even after a society embraces relatively free markets, it can still take decades to achieve a wealthy society by modern standards. And worse yet: in the process of building wealth, many ideologues and politicians will point to the discrepancy between rich and poor countries and blame markets.
The Case of East Germany and Eastern EuropeWhile there is no such thing as a truly controlled experiment in the fields of economics or politics, we do have some cases that convincingly demonstrate how political revolutions are insufficient to effect an economic one all by themselves.
For example, even 25 years after the fall of the Berlin Wall, the areas of Germany that once groaned under the soviet-style regime known as the German Democratic Republic remain poorer than the areas of Germany that once formed what was commonly called West Germany.
In 2014, the Washington Post reported how East Germany has lower levels of disposable income, high unemployment rates, and is generally less prosperous. This in turn has led to the old East Germany having fewer young people, many of whom move west for better jobs.
Fortune's Chris Matthews went on to observe "If you look at statistics such as per capita income or worker productivity, they also point to the large disparity in economic development between east and west."
And Claudia Bracholdt further notes: "Today, Germany’s east has many structural problems similar to those of countries like Greece and Spain, though on a much smaller scale."
During the Cold War, numerous opponents of Communism pointed to Germany as the perfect example of how soviet-style communism destroyed economic prosperity. But that was then. Nowadays, the East German regime is gone, and Germany is, relatively speaking, one of the most market-oriented economies on earth. Eastern Germany shares a government with western Germany. So, why is eastern Germany still poor compared to its western German neighbors?
The answer lies in the fact that even though the legal and political systems in eastern Germany are the same as in the West, the East suffers from the fact that it lost out on decades of capital accumulation and growth in worker productivity while under the boot of the Soviets.
The German case offers the most excellent comparison of course, because prior to World War II, western and eastern Germans enjoyed similar political systems for many decades. Moreover, the western and eastern Germans were similar both ethnically and culturally. Thus, the comparison allows us to focus on regime differences in the age of the Cold War.
We can look beyond just the East Germans as well. We might ask ourselves, for example, why Poland, with its Western orientation and long tradition of parliamentary and decentralized governments remains so relatively poor.
The same might be said of the Czech Republic as well, where the principal city, Prague, was once the second city of the Austrian Empire and was a center of European wealth and culture. The Czechs too, have never regained their relative place in terms of European wealth.
Part of the explanation lies in the fact that the legacy of an abandoned political system can live on for decades even after regime change. As Nicolás Cachanosky has observed in the context of South American regimes:
Institutional changes ... define the long-run destiny of a country, not its short-run prosperity. ... For example, as China opened parts of its economy to international markets, the country started to grow, and we are now seeing the effects of decades of relative economic liberalization. It is true that many areas in China continue to lack significant freedoms, but it would be a much different China today had it refused to change its institutions decades ago.
Clearly, the fact that the old Eastern Bloc countries have moved toward liberalization has set those countries on a path toward greater economic prosperity. That by itself, however, cannot put it on a par with countries that never suffered the effects of decades of communism.
Korea: An Extreme, but Relevant, ExampleThis will become all the more obvious if and when North Korea's regime collapses, at which point it is likely to be absorbed into South Korea. When that happens, we will then be looking at a country in which the northern areas, in spite of an identical ethnic makeup and an extremely similar long-term history, will be much, much poorer than the southern areas.
Some Germans to this day are resentful of how much in taxpayer wealth poured out of the west into the east. But that will look like nothing compared to the taxpayer wealth that will flow from the South to the North following a reunification of Korea. As the BBC observed:
Incomes in South Korea are 10 to 20 times higher than they are in North Korea — a much bigger gap than that between East and West Germany. That means that if reunification happened, the economic jolt would be much, much greater.
Already, North Koreans who defect find that their skills aren't adequate for South Korea. Doctors who defect from the North often fail to pass standard South Korean medical exams. This all indicates that the immense effort and money required for reunification would dwarf the scale of the task in Germany.
Under such a scenario, all the same issues found in Germany would be magnified many times over in Korea. Younger workers would flock to the south in search of work and education. The North would become a land of impoverished pensioners living off social benefits paid for by southern workers. Only over many decades would capital slowly move north, and North Korea might even take on the characteristics of a frontier state where the economy is based largely on resource extraction, and where labor must be imported from other parts of the country, or even from abroad.
Certainly, this process could be sped up by forced transfers of wealth and capital paid for by the South, but this would of course come at great cost to the southern Koreans.
The Political BacklashBut even when it is self evident that market systems bring greater wealth and prosperity, such changes in Korea and Cuba will bring a political backlash, just as happened, to a certain extent, in Eastern Europe. The social ills present in the newly Westernizing countries will be blamed on "excessive capitalism" as workers migrate to follow capital, leaving behind a hollowed-out economy in the formerly communist areas. Since wealth cannot be made to magically appear everywhere at once, significant poverty will still persist in many areas, but now, instead of being blamed on domestic bourgeois reactionaries, it will be blamed on capitalism in general, and now, the the actual presence of capitalism will make the argument far more convincing. The relative poverty of the old communist areas will endure, in spite of immense gains in standards of living. Capitalists will be blamed for these inequalities as well. As Andrei Lankov wrote in the Korean context:
Affluence and poverty are, essentially, relative categories. There is little doubt that in the first years that follow unification, the average North Korean assembly line worker or rice farmer will compare their new lives with what had been the norm under the Kim family — with such comparisons being decisively in favor of the new system. However, it is only a matter of time, perhaps merely a few years, before the focal point shifts to the contemporary South. North Koreans will begin comparing their lot not with their pre-unification past, but with South Korea’s present, and these comparisons are not going to be very favorable or seriously encouraging.
In other words, scratching out a subsistence under the North Korean regime will be replaced by a drive to keep up with the Joneses. With it will come nostalgia for a "simpler" time and a drive to blame capitalism, yet again, for persistent inequality. The lessons of what prevented affluence in the first place will be quickly forgotten.
Something similar is likely to happen in Cuba. If Cuba continues to slowly liberalize (economically, if not politically) it will nevertheless remain far poorer than the United States, and also Mexico, Chile, and all the so-called "Pacific Pumas" that continue to move toward more market-based economic systems in Latin America.
Consumed by the perceived inequality, the Cubans will then demand "change," but rather than liberalizing further, they may instead go down the path of Venezuela looking to yet another quick fix in what could unfortunately be a nearly endless cycle.
Fifty years ago this year, Murray N. Rothbard offered his thoughts on National Review, the flagship magazine of American conservatism, which had commemorated its tenth anniversary in late 1965.
He went on to tell the full story in The Betrayal of the American Right, at once an intellectual history and a memoir.
Murray’s primary complaint: what had once been a movement skeptical of or opposed to overseas adventurism and empire-building had now, under the influence of editor Bill Buckley, come to be defined by those very things.
In Buckley’s infamous formulation, it would be necessary to erect a “totalitarian bureaucracy” within our shores in order to battle communism abroad. The implication was that once the communist menace subsided, this extraordinary effort, domestic and foreign, could likewise diminish.
Since government programs do not have a habit of diminishing but instead seek new justifications when the old ones no longer exist, few of us were surprised when the warfare state, and its right-wing apologists, hummed right along after its initial rationale vanished from history.
As it turns out, by the way, the Soviet threat was grossly exaggerated, as such threats always are. The wickedness of the Soviet regime was never in doubt, but its capabilities and intentions were consistently distorted and overblown.
According to Matthew Evangelista, writing in Diplomatic History, “Despite the fact that the Russian archives have yielded ample evidence of Soviet perfidy and egregious behavior in many other spheres, nothing has turned up to support the idea that the Soviet leadership at any time actually planned to start World War III and send the ‘Russian hordes’ westward.” Some people tried making similar arguments at the time, to no avail.
Pushing the preposterous narrative of a socialist basket case as an overwhelming military threat was a group of neoconservatives who became known as “Team B” (“Team A” being the analysts of the CIA, who were accused by the neocons of being willfully blind to growing Soviet military power). In 1976, CIA director George H.W. Bush gave these neoconservatives extraordinarily access to classified CIA documents as they prepared a report excoriating the agency for its alleged failure to perceive a Soviet military buildup.
Team B claimed, for example, that the Soviets had a non-acoustic antisubmarine system. There was about as much evidence of this as there was years later that Saddam Hussein had a fleet of unmanned drones. When CIA analysts protested that they could find no evidence of such a system, Team B described the lack of evidence as a further indication of just how wily and clever the Soviet adversary was.
“If you go through most of Team B’s specific allegations about weapons systems,” wrote analyst Anne Cahn, “and you just examine them one by one, they were all wrong.” So in case you thought bringing ideological pressure to bear on the intelligence community began with Iraq, there you go.
The neocons of Team B, so eager were they to find the vibrant Soviet Union, even fell for the laughable left-wing claims (advanced by left-liberal economists like Paul Samuelson) about rising Soviet GDP. Team B concluded that the USSR had a “large and expanding Gross National Product.”
Despite the dubious foundations on which the hysterical claims behind the alleged “Soviet threat” rested, its existence ossified into one of the unchallengeable orthodoxies of National Review and of the broader conservative movement then being born. When Murray pointed out the silliness of the whole thing, not to mention the counterproductive nature of American military intervention abroad, he quickly became an un-person at National Review, which had published him in its early years.
Well before there was an official “conservative movement,” with its magazines, its crusty orthodoxies, its ineffectual think-tanks (complete with sinecures for ex-politicians) and its craving for respectability, there was a loose, less formal association of writers and intellectuals who opposed Franklin Roosevelt (in both his domestic and foreign policies), a group Murray dubbed the “Old Right.”
There was no party line among these intrepid thinkers because there was nobody to impose one.
Even into the 1950s and the advance of the Cold War, voices of restraint amidst the remnants of the Old Right could still be found. In his 1966 article, Murray points to the right-wing group For America, a political action group whose foreign-policy platform demanded “no conscription” as well as the principle, “Enter no foreign wars unless the safety of the United States is directly threatened.”
Murray likewise pointed to the Jeffersonian novelist Louis Bromfield, who wrote in 1954 that military intervention against the Soviet Union was counterproductive:
One of the great failures of our foreign policy throughout the world arises from the fact that we have permitted ourselves to be identified everywhere with the old, doomed, and rotting colonial-imperialist small European nations which once imposed upon so much of the world the pattern of exploitation and economic and political domination. ... None of these rebellious, awakening peoples will … trust us or cooperate in any way so long as we remain identified with the economic colonial system of Europe, which represents, even in its capitalistic pattern, the last remnants of feudalism. ... We leave these awakening peoples with no choice but to turn to Russian and communist comfort and promise of Utopia.
Murray likewise made note of a 1953 article by George Morgenstern, editorial writer for the Chicago Tribune, in Human Events (“now become a hack organ for the ‘Conservative Movement,’” Murray lamented in 1966) that deplored the imperialist tradition in American history. Morgenstern ridiculed those who “swoon on very sight of the phrase ‘world leadership,'” and wrote:
An all-pervasive propaganda has established a myth of inevitability in American action: all wars were necessary, all wars were good. The burden of proof rests with those who contend that America is better off, that American security has been enhanced, and that prospects of world peace have been improved by American intervention in four wars in half a century. Intervention began with deceit by McKinley; it ends with deceit by Roosevelt and Truman.
Perhaps we would have a rational foreign policy. … If Americans could be brought to realize that the first necessity is the renunciation of the lie as an instrument of foreign policy.
With the advent of National Review, these increasingly isolated voices would be silenced and marginalized. Even the heroic John T. Flynn, whose anti-FDR biography The Roosevelt Myth had reached number two on the New York Times bestseller list, was turned away from National Review when he tried to warn of the dangers of a policy of military interventionism.
Fifty years after Murray’s article, the situation at National Review is far worse. The magazine has become more enthusiastic for foreign interventions as those interventions have become more ridiculous and self-defeating.
In the old National Review, moreover, it was still possible from time to time to encounter discussions of controversial questions, perhaps most notably the legacy of Abraham Lincoln. Frank Meyer, Willmoore Kendall, and (most famously) M.E. Bradford took on the pro-Lincoln Harry Jaffa in its pages. Such a thing is unthinkable today, given the magazine’s yearning for mainstream respectability. It was Jaffa’s role, says fellow Straussian Charles Kesler, to make clear “what respectable conservatives should think about Lincoln.”
And what a surprise: what respectable conservatives should think about Lincoln just happened to be what respectable left-liberals thought about Lincoln.
Looking back on the careers of Murray, Buckley, and National Review, it’s hard not to point to a striking comparison. Who today reads the long-forgotten books of Bill Buckley, or holds conferences discussing his thought? Where is the cadre of college students devoting themselves to devouring the works of Buckley?
I think we know the answer.
Meanwhile, interest in (and foreign-language translations of!) Murray’s work only continues to multiply. Austrian economics is flourishing, with the number of academics working in an expressly Rothbardian tradition growing every year. Meanwhile, the texts of Rothbard are being consumed voraciously, indeed more than ever before, and especially by bright young minds seeking out something more intellectually satisfying than the stale platitudes of official “liberalism” and “conservatism.”
Murray, with a Columbia University Ph.D. and a body of work of extraordinary quality, quantity, and scholarly significance, spent much of his academic career laboring in obscurity, refusing to say either what the Keynesians of the left or the military interventionists on the right wanted to hear. But today, over 20 years after his death, Mr. Libertarian is the undisputed intellectual godfather of the ongoing libertarian renascence among bright American students. The handful of National Review‘s young followers, whose idea of fun is listening to a Mitt Romney speech at CPAC, do not similarly impress.
Bill Buckley, on the other hand, spent his life in the spotlight. And he policed the conservative movement to ensure it was sufficiently respectable, its positions well within the ideological limits set out by the left-liberals he professed to despise. But while Buckley may have been a prominent figure during his lifetime, he essentially died in obscurity, despite enjoying every establishment advantage one could ask for.
There is a lesson here.
Terrorism gripped the headlines again this week as terrorists struck the airport and metro station in Brussels, Belgium. Naturally, as Jeff Deist points out, this massive failure in government security will lead to calls for more government funding, and more control over the lives of citizens. Unfortunately, it’s the ordinary citizens who suffer the most from the West’s tone-deaf foreign policy that helps the terrorists recruit new followers while increasing the targeting of Europeans and Americans.
For most Western governments, though, it’s just business as usual with the usual efforts for more taxes, more controls on trade, and a disregard for the lessons of socialist regimes, both past and present.
The answer, as always, lies not in more government violence, but in voluntary exchange.
This week on Mises Weekends, Jeff Deist joins Jay Taylor on his radio show to discuss how both central banks and commercial banks are poised to change your life in some very unpleasant ways.
Central banks, and central bankers, are in uncharted waters. They don't know how to create economic growth, they don't know how to fight the great boogeyman of deflation, and they don't know how — or if — they'll ever be able to return to a time of "normal" monetary policy. Their pretense of knowledge, of being able to effectively control currencies used by billions of people, is coming to an end.
Here are this week’s new contributions to Mises Daily and the Mises Wire:
Job Growth Doesn’t Mean We’re Getting Richer by Ryan McMakenGive Us More Tax Revenue, Or Else by Matthew DoarnbergerMarkets Are Our Best Hope for Peaceful Cooperation by Andrew SyriosStalinism Through a Child’s Eyes by J. WiltzRubio’s Failure: How Our Broken Economy Fuels Voter Rage by Hunter LewisTibor Machan, RIP by David GordonPot Legalization: Obama, SCOTUS Defend Local Control Against GOP Attacks by Ryan McMakenThe Batman Movie They Should Have Made by Tho BishopRon Paul: Protectionism Won't Help by Ron PaulA Boom Town Recession That Could Save Us All by Mark ThorntonRadical Ideologies Are Only One Part of the Terrorism Equation by Ryan McMakenThe Inequality of Wealth and Income by Ludwig von MisesJanet Yellen: Armed, Dangerous, And Lost by David StockmanA Better Approach To Terrorism by Jeff DeistBrussels Bombings: More Blowback for Europe by Ryan McMakenFebruary Austrian Money Metric: Money Supply Growth Falls to Four-Month Low by Ryan McMakenSocialism Starves the People: Cuba Edition by Shawn RitenourMore Resources on Cuba by Shawn RitenourThe Myth of Tax "Reform" by Murray Rothbard
In response to recent claims by the Obama administration and others that “millions of jobs” have recently been created, I examined the data here at mises.org to see if the claims were true. It turns out that job growth since the 2008 recession has actually been quite weak, and hardly something to boast about.
Nevertheless, our conclusions from these analyses tend to rest on the idea that job growth is synonymous with gains in wealth and economic prosperity.
But is that a good assumption?
In an unhampered market, the answer would be no, for several reasons.
First of all, as worker productivity increases, workers would need to work fewer hours to maintain their standard of living.
Second, as goods become less expensive (as a result of rising productivity) it would also be necessary to work fewer hours to maintain the same standard of living.
This need for fewer man-hours could translate into shorter work weeks and shorter days, but it could also manifest itself at the household level in the form of changes from two-income households to one-income households. Or, people may retire earlier, thus leaving the work force.
In other words, in a well-functioning economy over time, less human labor will be necessary to maintain standards of living, all things being equal. (If consumers wish to constantly increase their standard of living of course, they will choose more labor over more leisure for the sake of more consumption.)
Historical Trends in Work HoursEven in our hampered and un-free economy, we can still see this basic trend at work. The number of work hours necessary to maintain the standard of living our grandparents enjoyed, for example, is less today than it was in 1950.
If middle-class consumers were satisfied with a two-bedroom residence in an unstylish neighborhood, one car, a single phone line, no air conditioning, and no internet access, many of them would require far fewer work hours than is necessary to maintain a common middle-class standard of living today.
In the 1950s for example, my mother shared a bedroom with three brothers in a two bedroom house in central Los Angeles. She went to a private Catholic school where there were 50 students to a classroom. For her family, there were certainly no European vacations or airline travel to seaside resorts.
And yet, no one would have described this lifestyle as “impoverished” or “lower class.” It was a middle-class lifestyle, but this lifestyle could only be maintained by far more than 40 hours of work at the family business each week, where both parents labored regularly.
This experience was not atypical.
In spite of increases in the standard of living since then, working hours have actually decreased. Indeed, according to Robert Fogel in The Fourth Great Awakening and the Future of Egalitarianism, from 1880 to 1995 the number of hours spent on work during an average day for a male head of household decreased from 8.5 hours to 4.7 hours. Meanwhile, leisure time increased from 1.8 hours to 5.8 hours.
In a separate study by Thomas Juster and Frank Stafford, it was found that from 1965 to 1981 in the United States, “market work” hours per week fell from 51.6 hours to 44 hours for men. For women, market work rose from 18.9 hours to 23.9 hours. We would expect an increase for women over this period as women began to take on “market work” at higher rates than before. This was for wage work only, though, and if we include “housework” we find that “total work” for women during this time period fell from 60.9 hours to 54.4 hours. Women exchanged some housework for market work over this period, but overall, the work hours decreased. Total work for men decreased also, from 63.1 hours to 57.8 hours. (Housework increased for men over this period.)
In yet another study by Mary Coleman and John Pencavel, average weekly hours worked fell for white men from 44.1 hours in 1940 to 42.9 hours in 1988. It fell for white women from 40.6 hours to 35.5 hours over the same period.
The typical standard of living increased over these periods, as the square footage of housing units increased, automobiles became more common, and amenities like telephones, washing machines, personal computers, and climate control became more common. The work itself also became less hazardous over this time period.
The Invention of “Retirement”Even as work hours were falling, productivity was rising enough to allow large numbers of workers to leave the work force early in the form of a new-fangled concept known as “retirement.” As explained by W. Andrew Achenbaum in The Wilson Quarterly, working well into one’s so-called golden years was common in the 19th century and before. Prosperous farmers who owned land could afford to significantly cut back hours as they aged, but common laborers generally needed to work as long as possible or face penury.
It was only during the late 19th century, as worker productivity rapidly accelerated, that workers could withdraw from the workforce at an increasing rate. Many became obsolete whether they liked it or not, however. Achenbaum writes:
The obsolescence of the older worker is one reason the period around 1890 marks the beginning of the long-term trend toward the withdrawal of the elderly from the work force. In that year, about two-thirds of men aged 65 and older were still in the labor force — roughly the same proportion found today in developing countries such as Brazil and Mexico. By 1920, that number had dropped to 56 percent, and by 1940 it was down to 42 percent. Today it is 27 percent.
In the bad old days of subsistence wages, workers could labor for decades without many opportunities to accumulate capital, and thus “retirement” was just another word for poverty. As worker productivity and capital accumulation rose, however, private firms could afford to create a new thing called “pension funds” which accelerated the retirement trend.
The advent of government pensions accelerated the trend as well, with large transfers of wealth from current workers to past workers. The fact that these wealth transfers did not reduce the current workers to subsistence levels themselves was also due to the productivity gains of the new industrialized and mechanized workplace. Essentially, workers were now supporting both themselves and current pensioners, while still experiencing perceptible increases in the standard of living. Such a situation would never have been politically feasible in an earlier age when workers would likely have revolted against a new tax that would have impoverished them for the sake of retired workers. This new world in which workers could support their families, plus some strangers they never met, was a triumph of markets that ironically allowed governments to get away with higher taxes.
So, Is Job Growth Progress?Once upon a time, we measured economic progress in terms of the ability of households to feed themselves and sleep in a warm bed. We still do this in the developing world where “extreme poverty” is a real problem.
In the industrialized world, however, “extreme poverty” does not exist, and 78 percent of “the poor” have air conditioning, and a majority have cell phones. The lifestyle enjoyed by my mother in the 1940s would today be deemed “overcrowded” and “substandard” by federal agencies. At the time, such conditions were considered to be quite middle class. But, as Ludwig von Mises once remarked, “the luxury of today is the necessity of tomorrow.”
Apparently, if we were to measure necessary work in terms of the need to fund basic food and shelter, the number of work hours needed today would hardly constitute a full-time work schedule.
This is why over decades, we find that the amount of labor done by human beings has declined over time. Machines now do the work that many people once did, and more economically.
This is why the US now has more industrial production today than in the past, even though fewer people are employed in manufacturing. This is why our grandparents worked more hours than our parents, even though standards of living are higher now than they were in the 1960s.
So, over the long term, we cannot say that more jobs equals more prosperity. In fact, one could just as easily argue that fewer jobs, fewer work hours, and fewer workers illustrates gains in prosperity. Child laborers, for example, are no longer essential to maintaining a family’s standard of living. All those jobs are long gone.
So, how should we respond when politicians claim to have “created millions of jobs”? Should we assume this is a measure of economic improvement?
Over the short term, this may yet be a useful metric. We must ask ourselves if the economy changed fundamentally over the past ten years that would lead far fewer people to need employment. More importantly, we must consider if the price of goods and services has decreased significantly. Are more people voluntarily electing to adopt a lower standard of living for the sake of more leisure or to pursue non-market work?
These are all questions that should be considered when we speak of jobs and economic improvements. Really, the only measure that matters is real household wages and wealth, and what can be acquired with it. Anything else is groping for answers with tangential data, and the whole endeavor illustrates the limits of aggregated economic data.
Nevertheless, there’s nothing wrong with skeptically picking apart government claims about economic successes, especially when it makes Washington look bad.
If you thought negative interest rates were as bad as it could get with central banks, you might be in for a surprise. Central banks have been so spectacularly unsuccessful with their accommodative monetary policies that they are discussing pulling out all the stops to get the results they want. They fail to realize that the reason prices aren’t rising is because they really want and need to fall. Bad debts weren’t liquidated during the last financial crisis, the debtors were merely bailed out. Overpriced assets weren’t allowed to be reduced in price. Central banks pumped trillions of dollars into the economy to attempt to paper over the recession. Market forces want to drive prices down, while central banks attempt to prop them up. So what to do when central banks aren’t getting their way?
Central bankers may very well recommend price controls in an attempt to “jolt the economy out of its doldrums.” Of course, economies don’t go into doldrums and they can’t be jolted out of them. Recessions are not something endemic to the economy but are rather the result of central bank monetary intervention. Because central banks refuse to acknowledge their culpability for causing recessions, their methods for responding to recessions end up being more of the same thing that caused them in the first place: monetary easing. And now that those methods are proving ineffective, more drastic measures might be on the way. Remember that the last time all-out wage and price controls were implemented in the United States was in the early 1970s, also a time of great monetary turmoil. In fact, the price controls were instituted by President Nixon at the same time as he closed the gold window in 1971.
As Ludwig von Mises pointed out many decades ago, once you begin to institute price controls, you inevitably lead to socialism.
It must add to the first decree concerning only the price of milk a second decree fixing the prices of the factors of production necessary for the production of milk at such a low rate that the marginal producers of milk will no longer suffer losses and will therefore abstain from restricting output. But then the same story repeats itself on a remoter plane. The supply of the factors of production required for the production of milk drops, and again the government is back where it started. If it does not want to admit defeat and to abstain from any meddling with prices, it must push further and fix the prices of those factors of production which are needed for the production of the factors necessary for the production of milk. Thus the government is forced to go further and further, fixing step by step the prices of all consumers’ goods and of all factors of production — both human, i.e., labor, and material — and to order every entrepreneur and every worker to continue work at these prices and wages.
That is why no one should be surprised that the governments of Japan, Europe, and the United States might resort to price controls to try to achieve what monetary policy could not. It follows logically, after all, since central bankers are in the price-setting and price control game to begin with. The interest rates that central bankers target or set are themselves prices, prices of money being loaned overnight or of money being deposited with the central bank. The aim of targeting or setting those interest rates is to influence interest rates and prices in the broader economy. So if that limited price-fixing doesn’t work, governments will expand their efforts to fix even more prices. It may not come directly, at least at first, but rather through some sort of incentivization. Pressure may be brought to bear to raise wages, using tax policy as either a carrot or a stick. The aim and the effect, though, will be to move prices to where the government thinks they ought to be, not what the market can actually bear.
If price controls are in fact enacted, it will make it all the more obvious that economic planning on the parts of central banks and governments must be firmly opposed. It will separate the wheat from the chaff, those who actually support economic freedom from those who are willing to rationalize central planning. Anyone who claims to stand for free markets, free trade, and limited government but who attempts to defend the existence or importance of the Federal Reserve or central banking is a liar. Either you support free markets and freedom of pricing or you support central bank price-fixing and creeping socialism. There is no third way or middle road — socialism and the free market are mutually incompatible. A little bit of socialism in the form of price-fixing is like a little bit of gangrene, if left unchecked it will eventually infect and kill the whole. Now that governments and central banks may endorse further price controls as a remedy, the monetary policy facade has been torn away to reveal the reality that it is just another tool that leads to intensified central planning. Will enough people rise to the occasion to oppose further transgressions against monetary and economic freedom, or will they shrug their shoulders as our society continues to slouch toward socialism?
A heroin epidemic has been spreading across the United States, expanding enormously for the last several years. With it, the number of people dying has also increased dramatically. While politicians offer failed solutions like “securing the borders,” the real solution is to legalize drugs.
The number of drug overdoses in the US is approaching 50,000 per year. Of that number nearly 20,000 are attributed to legal pain killers, such as Oxycontin. More than 10,000 die of heroin overdoses. I believe these figures vastly underestimate the number of deaths that are related to prescription drug use.
The “face” of the heroin epidemic has changed since the 1960s when it was largely contained to urban “junkies” and Vietnam veterans. In recent years the epidemic spread to suburbia as heroin became a low-cost substitute for other drugs. In more recent times, the epidemic has spread to rural areas such as fishing villages in Maine and coal mining towns in Pennsylvania and West Virginia.
The problem of the epidemic rests with two causes. The first is the War on Drugs which creates profit incentives in the black market for the distribution of the most dangerous drugs. The second is the pharmaceutical-medical-FDA complex, or Big Pharma, which profits from treating pain with dangerous pharmaceutical drugs.
The Problem with Illegal OpiatesThe War on Drugs makes the business of black market drugs more risky and expensive. Hundreds of thousands are arrested every year for illegal drug violations. If drug smugglers can make their shipments of, for example, 1,000 doses or units smaller, they are better able to avoid detection, capture, and punishment. The best and most obvious way to achieve this is to smuggle more potent versions of the drug, or more potent drugs.
Marijuana growers sought to meet the demand of smugglers by offering better processed, better grown, and eventually genetically engineered products tightly packed into “bricks.” As a result, the potency of THC in marijuana increased from less than 0.5 percent when the War on Drugs began in the early 1970s, to almost 10 percent today.
Of course, the incentive from the War on Drugs does not stop there. It also encourages producers to switch to other drugs that are more compact and potent. Therefore, marijuana as a class of drug is disadvantaged compared to more potent and more dangerous drugs like cocaine and heroin. This leaves a black market where one dose of marijuana is relatively more expensive than one dose of heroin.
In the black market consumers do not know how potent their purchases will be until after the product has been consumed. In the free market, the potency of a Bayer aspirin is always the same. In the black market, the potency of products can vary widely over time. Also, a consumer’s tolerance for a drug changes over time. Daily users may have to increase their dose over time, while new users or relapsed addicts may only need small doses. If any individual takes much more than the appropriate dose for them, then they will stop breathing and can die.
Phillip Seymour Hoffman’s overdose death helps illustrate the pitfalls created by the War on Drugs. Hoffman was a drug addict that had been off of drugs for many years. When he became overwhelmed with personal problems he relapsed and died from a combination of prescription and potent illegal drugs. There have also been numerous reports about heroin being sold that contains both heroin and a legal opiate, Fentanyl, which is often lethal.
In a free market, heroin would come in an unadulterated pharmaceutical grade form of various indentified doses. It would have warning labels and instructions. You might have to consult a medical doctor or pharmacist before purchasing heroin, or you might have to go to a clinic. The producers, distributors, and retailers would have some liability for negligence. Before it was made illegal in 1914 one of the most popular heroin products was Bayer’s Heroin.
The Problem with Legal OpiatesOne of the biggest problems with legal opiates and heroin is that the medical-pharmaceutical-FDA complex has achieved a much greater use rate in recent years. Essentially, the pharmaceutical companies bribe medical researchers, doctors, and heath bureaucrats to recommend to authorities such as the FDA to promote the use of drugs such as Oxycontin and Vicodin, instead of less powerful and less addictive alternatives that were used in the past. Of course, the taxpayer ends up paying for most of the bill.
A couple of years ago while traveling I went to a “Doc in the Box” for a minor medical issue. I was examined by a physician’s assistant and was asked what pharmacy I used. I picked up the prescription after leaving and took one pill when I arrived at the motel. I sat in a chair and later became groggy and almost lost my balance when I stood up. As soon as I steadied myself, I went to check the prescription. To my amazement, it was Oxycontin!
The problem gets worse from there because physicians are also under pressure from the government to not overprescribe strong painkillers. They, for example, cannot continue to prescribe pain killers after a wound has obviously healed. The result is that people are addicted and then cut off from these powerful opiate prescriptions.
Their alternatives include entering an addiction treatment program which can be expensive, time consuming, and ineffective. As a result, these freshly minted addicts can turn to the black market for Oxycontin and Vicodin. The problem here is that it can cost $10–25 per pill and addicts require multiple pills per day. Also the supply of such pills can be erratic.
Their next alternative is the black market heroin which seems to be more available than ever and often at a lower price per dose. If you buy in large quantities you can obtain a dose for as little as $4.00 and possibly lower.
Legal Use Leads to Illegal UseThis explains why we have seen the heroin epidemic spread across the country. Doctors are prescribing legal opiates to people like fishermen and coal miners who sustain painful injuries on a regular basis. They become addicted and then get cut off. Eventually they cannot afford the black market prescription drugs, so they turn to the often deadly alternative, heroin.
How can the drug legalization help solve this vexing problem? First of all, in a free market you would not have Big Pharma rigging the medical practices of doctors around the country creating thousands of addicts each month. Second, drug addiction treatment programs could use the maintenance and withdrawal method which was used somewhat effectively prior to the passage of the Harrison Narcotics Act in 1914.
Third, in a free market, drugs like heroin would be produced and sold on a commercial basis. It would be a standardized product(s) and companies that sold dangerous and addictive products would do so under several legal constraints, such as liability and negligence law. Fourth, cannabis would be legal and produced for several medical purposes, like it was prior to the Marijuana Tax Act of 1937. Many of the pre-prohibition products were used to treat pain, as well as many of the symptoms associated with opiate withdrawal, such as muscle aches, anxiety, inability to sleep, nausea, and vomiting.
With drug legalization the number of overdose deaths would plummet and tens of thousands of families would not have their lives ruined every year.
The budget crisis in Louisiana is so bad that it apparently threatens the upcoming college football season. This is according to the state’s new Democratic governor John Bel Edwards. The current yearly budget deficit has reached $940 million. The situation is so dire that higher education in the state faces the realistic possibility of running out of money and taking college sports with it.
Even though all Louisiana state funded colleges are faced with this harsh reality, the focal point of much of the public’s scorn is directed at the possibility of no LSU football this coming season. Much of the old south is Southeastern Conference (SEC) country and college football commands more attention there than even professional sports. Thus, the emotion that comes with the threat of not having LSU football looms much larger in the minds of many Louisianans than the threat of cancellation of other school’s athletics or even the possibility of academic shutdown on campuses. In the land of the SEC, college football will grab headlines over most other issues. This is especially true when its very existence is being threatened.
Upon closer inspection of Louisiana’s state budget, one can see that a major culprit for the deficit has been corporate giveaways. Under former governor Bobby Jindal’s predecessor, money given to the six largest recipients of government subsidies totaled $200 million. But under Jindal, that amount grew to $1 billion. Combine this with the state’s 400 other handouts, plus the raiding of rainy day funds to cover shortfalls and you have a recipe for a budget disaster.
So in order to put Louisiana’s fiscal house back in order, Governor Edwards has proposed one of the largest tax increases in state history. Taxes on cigarettes, alcohol, rental cars and other items are due to be increased as a part of the governor’s proposal. But given that Edwards is facing a legislature controlled by Republicans, many of these tax increases appear unlikely. A bipartisan compromise will probably be reached combining some tax hikes with some spending cuts.
But of all the things to threaten to shut down, why did Edwards target higher education and college sports? The answer lies in an old political trick called Washington Monument Syndrome (or sometimes Mount Rushmore Syndrome). This is a phenomenon where a government facing some sort of revenue shortfall or budget crisis will cut government funds which cause the most visible pain. Once the public witnesses this pain, opinion shifts in a direction that the government desires it to go. In this case, the state’s governor wants to pass certain tax increases. If he doesn’t get what he wants, college football could be cancelled statewide. In the state of Louisiana, few actions would cause more pain and public outcry than the cancellation of a college football season. Thus, a public official will use this to threaten the people he supposedly serves in order to pass his desired legislation.
The peculiar thing about LSU specifically is that they are one of only seven Division One programs which don’t accept state subsidies (the others being Texas, Ohio State, Oklahoma, Penn State, Nebraska, and Purdue). In fact, LSU’s athletic program generated so much revenue last year that it transferred over $10 million to the school’s academic program. Clearly LSU football can survive without taxpayer money, since they do so already. Again, cancelling of the state’s biggest college football program is simply a scare tactic used to further a political agenda. After the aforementioned compromise is most assuredly reached between Edwards and the legislature, politicians from both parties will probably point to LSU’s football team taking the field in the fall as some great political achievement even though the school’s athletic department didn’t need or spend their money in the first place.
As for the rest of the state of Louisiana’s higher education system, this sad state of affairs is an unfortunate lesson in what can happen when government assumes control of an institution. The competency of that institution will be subject to the whims of those who control that government. Any budgetary failings of public officials who dole out this money will inevitably affect those that are so reliant on it. If colleges were independent of government, then the influx of money would not be based on an appropriation from a government but the ability to provide a service (education in this case) to the public. After all, there is no imminent crisis in Louisiana regarding the sale and purchase of food, electronics, or automobiles. This is because people generally spend their own money on these things without intervention from the government. If education were treated like any of these things, then it would be independent of government failings and different educational institutions would be sinking or swimming based on their own merits. But sadly, these colleges and universities will likely not learn their lesson and continue to look for funding from the very organization that is causing their current laundry list of problems.
In my previous column, I noted both the fallacy that libertarianism is inherently “atomistic” as well as the scientific fact that while morality — such as the Golden Rule, may be applied universally — human cooperation and empathy are not. We are hemmed in by “Dunbar’s number” which limits the number of social relationships any one person can have at any given time to approximately 150.
The question left before us is what societal arrangement does such a nature best lend itself to. Karl Marx envisioned a future that would be “From each according to his ability, to each according to his need.” But as the biologist E.O. Wilson cleverly noted of communism, “Wonderful theory, wrong species.” Yes, what works well for ants doesn’t so much for human beings.
Violence and State PowerHumanity’s natural state is that of small tribes that have little or no contact with each other. When they do come into contact, the results have generally been bloody. It would be making the “naturalistic fallacy” to argue that because this is our natural state that we should thereby live in it. Indeed, as Steven Pinker has pointed out, studies of hunter-gatherer societies show them to be extraordinarily violent. He quotes the work of the archaeologist Lawrence Keeley, showing that for eight separate tribal societies, the percentage of male deaths caused by warfare “… range from 10 percent to almost 60 percent.”The Blank Slate, p. 57.
Furthermore, some of the unfortunate side effects of this mental limit are racism and xenophobia and contrary to many leftist, pseudo-agrarian fantasies, these are actually more acute in such tribal societies. As Robin Dunbar, Louise Barrett, and John Lycett note,
In many, if not most, such societies, the word which refers to members of the tribe is usually best translated as “men” or “humans”; those who belong to all other tribes are, by extension, considered to be “not-men.”Evolutionary Psychology, p. 199.
Steven Pinker credits the growth of the state as a method to tame such violence. We’ll leave aside any debate between anarchism and minarchism for now, but Pinker’s claim is highly suspect. R.J. Rummel’s estimates for the number of people governments have murdered (not including war) during the twentieth century alone came out to 262 million! At the very least, this should make it obvious that any sort of totalitarian or oligarchical government is not the best way for human societies to be structured.
To his credit, Steven Pinker does support strongly limiting the state’s power. He emphasizes how liberalizing economic policy was a major factor in the reduction of world violence, particularly people thinking more like a (classically liberal) economist, “That sets [them] in opposition to populist, nationalist, and communist mindsets that see the world's wealth as zero-sum and infer that the enrichment of one group must come at the expense of another.”The Better Angels of Our Nature, p. 664.
Of course he credits many other things, including, as many others have, democracy.
Democracy Can Not Be Applied UniversallyWhile democracy is certainly preferable to totalitarianism, it falls back to many of the same fallacies regarding universalism that the Left has made regarding human nature.
Indeed, what if we had a worldwide democratic government that somehow — however unlikely — maintained strong democratic institutions in spite of facing no competition from other states? Would the Chinese voters simply bow to the whims of the global majority, if it was contrary to the interests of the Chinese voters? Or more likely, given their population, would the voters in the United States bow to the will of Chinese voters?
Democracy may be a useful tool, but its best application is at the local level where the individual vote actually means something. Unfortunately, many proponents of democracy see it as something that it is clearly not; a method for universal cooperation. Given that the research has clearly shown such universalizable cooperation is a utopian fantasy, what does that make democracy?
Violence or Voluntary Exchange?Cooperation is a great thing, but it has only been shown to work in small groups. All that’s left with regards to large group interactions is force or exchange. So democracy, on a large scale, is merely people voting on if, when and how to use force against each other.
It’s for this reason that so-called anarcho-syndacilism or anarcho-communism would fail. As Murray Rothbard pointed out,
All of the left-wing anarchists have agreed that force is necessary against recalcitrants. But then the first possibility means nothing more nor less than Communism, while the second leads to a real chaos of diverse and clashing communisms, that would probably lead finally to some central Communism after a period of social war. Thus, left-wing anarchism must in practice signify either regular Communism or a true chaos of communistic syndics. In both cases, the actual result must be that the State is reestablished under another name. It is the tragic irony of left-wing anarchism that, despite the hopes of its supporters, it is not really anarchism at all. It is either Communism or chaos.
It should be no surprise that any such examples were short-lived, usually existed at a time of war where a clear opponent could rally people together and were not nearly as pleasant as many of their proponents seem to believe. The Paris Commune executed some hundred priests and clergymen and as Bryan Caplan puts it, the Spanish Anarchists of the 1930s carried out “… large-scale murders of people believed to be supporters of the Nationalists.”
Of course, the list of sins of official governments is much, much longer (the French government killed many more people than the Commune during that conflict). But the few examples help prove the rule of anarcho-syndacilism inherent flaws. It should further be noted that many similar experiments were tried in the United States in the nineteenth century with little success, even on a relatively small scale. Here’s Jonathan Haidt’s description of the anthropologist Richard Sosis’s work on the subject,
… [Sosis] examined the history of two hundred communes founded in the United States in the nineteenth century. Communes are natural experiments in cooperation without kinship. Communes can survive only to the extent that they can bind a group together, suppress self-interest, and solve the free rider problem. … For many nineteenth-century communes, the principles were religious; for others they were secular, mostly socialist … just 6 percent of the secular communes were still functioning twenty years after their founding.The Righteous Mind, p. 298.
The religious communes did better, with 39 percent still going after twenty years. But that still leaves a lot to be desired. And remember, these were small-scale communes filled with people from a similar culture who joined voluntarily, not large states with millions and millions of people of different cultures spread across a large geographic region.
While there’s no libertarian objection to such communes, they simply do not represent a universalizable system to emulate. On a large scale, we are simply left with the three choices that Frederic Bastiat so aptly pointed out;
- “The few plunder the many2. Everybody plunders everybody.3. Nobody Plunders anybody.”The Law, p. 19.
No matter how you organize society, people will arrange themselves into shifting, but relatively stable small groups. Families and kin will generally care more for each other than strangers and so on. While “othering” of any sort is an obvious concern when coming to the conclusion that human beings naturally form small groups and see the others as outsiders. I can see no better way to soften these relations than by engaging in mutually beneficial trade. It may not be utopian, but it’s certainly better than using force (be it through tyranny or democracy) to bring other people and groups into line with one’s own desires.
The State Supplants Local-Based CooperationIt should also be noted that there is a great irony in the government for being labeled as an institution to bring about the community such “atomistic” libertarians oppose. In the early twentieth century, vast numbers of workers belonged to various mutual aid societies that provided assistance when needed, medical and other services as well as a sense of comradery. Mutual aid societies, just like all sorts of businesses, churches, charities, and social groups, represented just another example of human’s ability to self-organize.
However the mutual aid societies were short-lived. The large expansion of the welfare state in the 1960s all but supplanted these voluntary institutions with the cold, faceless bureaucracies no rational person could describe as communal.
What about family? This is certainly one of the least atomistic arrangements that exist. Well, after the government implemented welfare and supplanted the traditional role of the father, family formation, divorce, and illegitimacy rates skyrocketed. In 1960, out-of-wedlock births made up about 6 percent of the total. Today, they are over 40 percent.
And the strain put on military families and communities when the government decides to go to war should be self-evident.
The best way to evaluate the strength of communities are various tools to measure what is called social capital (basically social networks buttressed by trust, reciprocity, and cooperation). Robert Putnam has found that most forms of social capital began to precipitously decline after the implementation of The Great Society programs of the 1960s. For example, he finds that membership in voluntary associations “… peaked in the early 1960’s, and began the period of sustained decline by 1969.”Bowling Alone, p. 55.
While Putnam believes the welfare state actually ameliorated the fall of social capital, the timing seems unlikely. Charles Murray, another social scientist, has made the case that happiness and social capital are built on four virtues; industriousness, honesty, marriage, and religion. And the government interferes with each to varying degrees. For example, welfare dependency reduces industriousness and incentivizes family breakdown and a lack of family formation. This argument certainly fits better with the timeline and what we know about human nature.
This is especially true given that force is not a good means to build a cooperative society and the government uses little more than force.
No, the government destroys a sense of community and pits groups of people against each other. Human societies organize naturally through voluntary means, just as libertarians have predicted. And furthermore, a market economy based on mutually beneficial trade is the only way yet found for multiple groups of disparate and overlapping “tribes” or groups of “Dunbar’s numbers” to live peacefully and prosperously in a large, interconnected, and complex modern society.
In a 2012 interview with The Horn Book, Inc., Russian author Eugene Yelchin seemed to take quiet pride in his Newbery Award-winning book Breaking Stalin’s Nose and its special designation as “the first children’s book about Stalin.”
This pride was well-deserved. Like Watership Down and Maus before it, Breaking Stalin’s Nose tells a story that is not always pleasant, but which advanced young readers will enjoy and ask important questions about nevertheless. It is an incredible teaching tool for a world that has largely footnoted, rewritten, or forgotten about the murderous reign of Joseph Stalin.
Myth vs. Reality in Breaking Stalin’s NoseThe protagonist of Yelchin’s tale is ten-year-old Sasha Zaichik, an idealistic boy living in the Soviet Union during the Stalin-era. Raised by his father, a state security officer whom he adores, young Sasha is a true Communist believer whose “greatest dream,” according to the fan letter he writes to Stalin in the book’s opening pages, is “to join the Young Soviet Pioneers — the most important step in becoming a real Communist like my dad.” Throughout his first person narrative, he and the supporting characters around him continually sing the praises of their State-controlled society.
The Soviet Union is “the most democratic and progressive country in the world.” Sasha lives in a communal apartment with forty-seven other people who are “all equal.” Together, they share a single kitchen and toilet “as one large, happy family.” There is not enough food for everyone, but this is okay because “Communism is just over the horizon; soon there will be plenty of food for everyone.” Sasha is a student in the Soviet school system, “the most democratic in the world.” When he is confronted by a classroom bully, he does not retaliate because “The Pioneers rules are clear on this: no fights.” And presiding nobly over this most virtuous of social orders is the godlike Comrade Stalin, “our great Leader and Teacher.”
Even without the benefit of hindsight, Yelchin’s readers can see that these platitudes are transparently false. Sasha and his neighbors may be theoretically equal, but his father is an employee of the State and thus enjoys a much larger apartment than many of his comrades who are crammed into closets and stairwells with their wives and children. At least one member of Sasha’s “large, happy family” apparently resents this and plots to take over the apartment after (falsely) reporting Sasha’s father for being a spy. When a plaster bust of Stalin is accidentally damaged in Sasha’s school auditorium (the broken nose that gives the book its title), the non-violent students of the world’s most democratic school system are asked to compile enemies lists naming the schoolmates they believe to be responsible. Far from being the most progressive country in the world, the Soviet Union of Breaking Stalin’s Nose is a secret police state where poisonous rumors are circulated, confessions are coerced, food shortages turn into famines, and children’s pictures are blotted out of classroom photographs.
Will the Real Joseph Stalin Please Stand Up?The role Stalin himself plays in this tragic system is still a topic of debate more than sixty years after his death. Because his armies were instrumental in defeating Nazi Germany, it has become fashionable in some pockets of the radical Left to view Stalin as a great twentieth-century champion of anti-fascism and anti-imperialism. In both North America and the UK, members of the Stalin Society work to “defend Stalin and his work on the basis of fact and to refute capitalist, revisionist, opportunist, and Trotskyist propaganda directed against him.”
Those who actually knew Stalin were not quite as positive with their reviews. In 1956, just three years after he passed away, Stalin was denounced by Soviet Secretary Nikita Khruschchev in front of the Twentieth Congress of the Communist Party. Stalin’s “grave abuse of power,” Khruschchev said, “caused untold harm to our party.” Elaborating on this point, he went on to say that Stalin had betrayed the fundamental spirit of Marxism-Leninism with his grotesque cult of personality and “brutal violence, not only toward everything which opposed him, but also toward that which seemed to his capricious and despotic character, contrary to his concepts.”
Sadly, many young people now attending American universities do not truly know enough about Stalin to consider him a hero or villain. To them, his is simply a name that gets thoughtlessly tacked to Hitler’s whenever a list of dictators is compiled.
This view of Stalin is not possible for Sasha Zaichik, of course. To him, Stalin is an omnipresent second father figure. Even after his biological father is arrested by Stalin’s goons in the middle of the night, Sasha’s first instinct is to run to Red Square, where he wholeheartedly believes he can meet with Stalin and set everything right. Instead, he is quickly chased away by armed guards — a heartbreaking metaphor for the State’s indifference to individual citizens and unwillingness to address the problems it has created.
By illustrating these and many other lessons, Breaking Stalin’s Nose — which could easily be adapted as a film, stage play, or graphic novel — has the power to introduce a new generation of readers to the cruel realities behind the fantasies of State power. In a children’s book and film market overflowing with fictional dystopias, Eugene Yelchin has given us a remarkable look inside the real thing. Well done, comrade.
Rubio post-mortems miss the point. In the end, it is just more fall-out from crony capitalism.
None of the post-mortems of Rubio’s campaign I have seen mention the real reason why the young senator, so articulate, so successful, recently touted as the future of his party, never got launch speed in his campaign for the presidency. It is actually Senator Charles Schumer (D-NY)’s handiwork, aided and abetted by Rubio’s misjudgment.
Shortly after the 2012 election, the GOP was worrying about Romney’s poor showing among Hispanics. At the same time, Senator Schumer and other Democrats were thinking that Rubio, himself Hispanic, was by far the most electable Republican candidate in 2016. How to bring him down?
Schumer’s plan was simple: lure Rubio into the gang of eight immigration bill promising eventual citizenship to all illegal immigrants. Success in this would effectively kill Rubio’s chances in 2016 with GOP primary voters. Rubio would not only have gotten out of step with those primary voters; he would also have reversed the position he took in his Senate race and thus appear to be dishonest.
Would Rubio walk into this trap? That it was a carefully plotted trap was clear enough to me and others at the time. But he did. Once he did, the odds of his gaining the GOP nomination were always poor. They became even poorer as President Obama increasingly refused to enforce border protection laws, thereby stirring up GOP voters on the issue.
Immigration Reform was Rubio’s RomneyCareIt is possible that had Rubio run in 2012, before all this happened, he might be president today. The GOP primary voters in 2012 were clearly looking for some alternative to Romney and Rubio might have been that alternative. The only thing against him in 2012 was his youth and John Kennedy had overcome that handicap. If he had run and gotten Romney’s vote but done better with under 30 year olds and Hispanics, he would have had the votes to be elected.
Ironically, party donors begged Chris Christie, Rubio’s recent nemesis, to enter the race then too, and if he had, he might have won the nomination. His chances against President Obama, however, would not have been as good, if only because Rubio could run as the first Hispanic candidate for president, which would have helped when running against the first black president.
Was there any way Rubio could have recovered from his miscalculation? There was one possibly effective tack to take. When Rubio signed onto the gang of eight bill, he said that if legislation was not passed, President Obama was going to take dictatorial and unconstitutional action on the border. By 2015, Rubio could have cited his earlier comment, totally disavowed the gang of eight bill, claimed that it had been intended solely to stop President Obama, and that having failed to do so and in the wake of President Obama’s actions, it no longer deserved support. It is doubtful this would have worked, but it might have been more effective than what Rubio did, which was to temporize and obfuscate and even pretend that Senator Cruz had supported the bill, which was not true.
This is not unlike Mitt Romney’s tortured stance on RomneyCare in 2011 and 2012. Romney might have done better to disavow completely RomneyCare in Massachusetts as a failed experiment rather than temporizing and obfuscating about it. In the absence of a complete abandonment of RomneyCare, he could never really mount an effective attack on Obamacare, RomneyCare’s lookalike, and he needed such an effective attack in order to win election. Tactics aside, Romney may not have wanted to do this because he really believed in RomneyCare and the same may have been true of Rubio. He may not have been able to disavow the gang of eight bill because, deep down, he still believed in it, and his conscience would not let him lie.
The Politics of a Failing EconomyNone of this may seem to be connected to economics, but the connection is actually quite close. The economy has performed so poorly for so long that tens of millions of primary voters are very, very worried. The more they worry about getting or keeping jobs, the more they worry about job competition from immigrants, and the more easily they become inflamed about open borders. Voters also sense that the crony capitalists are getting richer while they are getting poorer, which is true, and they identify the crony capitalists with the unlimited immigration position. Big business in particular wants the cheapest labor possible, they reason, and this means big business wants open borders.
There is an irony here. Free and open markets, with free and open prices, not controlled by government, are the only way to create prosperity and jobs for the poor and middle class, not just those enriching themselves from government connections. Yet a declining economy often produces political waves that are inimical to free and open markets.
Meanwhile, the greatest harm done to the economy has been done by the world’s central bankers. Entrusted with protecting the value of global currencies, they have instead trashed them, in the process creating today’s cycles of bubble and bust. No economic logic, no valid theory, no empirical evidence supports what these self-appointed central economic planners have done, but the more their radical ideas fail, the more they double down on them. The only beneficiaries are the crony capitalist rich and is it any wonder that, under these circumstances, primary voters would be angry and look to unconventional candidates?
A Declining EmpireThe reasons for the decline and fall of the Roman Empire have been endlessly debated. In my own view, there were three, highly interrelated causes. The first was noted by Ludwig von Mises: the Emperors debased the currency and by doing so destroyed what had been a thriving economy, what might be called the world’s first “global” trading economy. So far, we are doing the same.
Second, the emperors increasingly opened the borders to immigrants. This might have turned out better if the economy had been thriving. But with the economy in sharp decline, it made a bad situation worse and eventually led to outright invasions.
Third, pandemics arrived, massive pandemics that wiped out large proportions of the population. We have not yet experienced anything like that, but medical authorities continually warn us that it could happen anytime, and could take the form of a viral pandemic, for which there would be no cure, or a bacterial pandemic such as TB, because we have allowed antibiotic resistant forms to flourish through antibiotic misuse.
It is a long way from Marco Rubio back to Marcus Aurelius, the “good” emperor who nevertheless persecuted the Christians, or the many incompetent or mad Caesars, but humanity does tend to make the same errors over and over again and rarely takes the time or trouble to learn from the past.
Janet Yellen was forced to wave a white flag this week, admitting what was long obvious — the Federal Reserve overestimated the strength of the global economy and will not be able to go through with its planned four rate hikes in 2016. As David Stockman noted in his take down of the FOMC announcement, “Listening to even a small portion of Simple Janet’s incoherent babble makes very clear that the nation’s central bank is well and truly impaled on its own petard.” Meanwhile, Ryan McMaken notes that diminishing foreign government holdings of US debt creates another issue for the Fed, possibly requiring the central bank to resume monetarizing public debt.
In the Fed’s desperation to hold off the pain that will come from the eventual popping of our current easy-money fueled bubbles, will Yellen start listening to the advice of her predecessor Ben Bernanke and embrace the absurdity of negative interest rates? We are already seeing the consequences of such policy play out in Switzerland and Germany and Japan.
At least the sight of Brazilians taking to the streets demanding Less Marx, More Mises can offer hope in our battle against the folly of “public policy.” As the ideas of Mises, Rothbard and the Austrian school continue to spread around the world, the closer we come to being able to achieve prosperity, freedom, and peace.
On the newest episode of Mises Weekends, Jeff joins Dennis Tubbergen of Everything Financial Radio to dive deeper into the bizarre world of negative interest rates.
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
We Are Headed Toward a Cashless Society? by Thomas DiLorenzoDemagoguery vs. Data on Employment in America by Tyler WattsWe Need the Pain that Comes with More Saving by C. Jay EngelIncluding the Ocean Floor, the Feds Own Much More Land than You Think by Mark BrandlyTo Oppose Free Trade Is To Embrace Violence by Ryan McMakenSwitzerland: Negative Interest Rates Result in Rising Mortgage Rates by Paul-Martin FossHillary Clinton Wins the Federal Reserve Primary by Tho BishopThe "We've Created Millions of Jobs" Myth by Ryan McMakenHope in Brazil as Millions March Against Rouseff by Tho BishopRothbard: The Progressive Movement by Murray RothbardThe Rage Against Wall Street Isn't Just Anti-Capitalism by Ryan McMakenFed Waves White Flag: "Foresees Fewer Rate Hikes" by Ryan McMakenMises: The Fight Against Error by Ludwig von Mises"Who Will Pay for It?" is the Wrong Question To Ask Politicians by Matthew McCaffreyImpaled On Its Own Petard — The Fed’s Folly Festers Further by David StockmanForeign Regimes Dumping US Debt — Will the Fed Just Monetize the Debt Instead? by Ryan McMakenFree Trade, and the US as "an Antiquated and Unnatural Construct" by Ryan McMakenMarc Faber: Some Misallocation Is Worse than Others by Ryan McMakenAgainst Public Policy by Jeff DeistGerman Response to Negative Interest Rates: Safe Deposit Boxes by Paul-Martin FossA New Italian Translation of Human ActionMateusz Machaj on the Taylor RuleSalerno Reviews Grant's The Forgotten Depression
Supporting free trade is simply a matter of taking no action when another person exchanges in non-violent exchange with another person. That person may be right down the street, or that person may be in another country somewhere. No “free trade agreements” or other paperwork of any kind is required.
To oppose free trade, on the other hand, is to engage in the imposition of fines, prison terms, and other sanctions on people for engaging in non-violent exchange.
The Moral ArgumentThat latter part is usually ignored by average people who support restrictions on free trade for whatever reason. They frame their opposition to trade as if it were a mere academic question, and as if the reality of restricting free trade were simply a matter of saying “don’t do that” and then everyone will agree to stop doing it.
But, of course, anyone who favors restrictions on free trade needs to go the next step and outline exactly what fines and jail sentences should be imposed on merchants and others who have committed the “crime” of purchasing goods from non-government-approved sources, or who have sold goods to non-government-approved recipients.
Shall fines be $1,000 or $100,000? Shall perpetrators serve 90 days in jail or 5 years in prison? These are the questions that any opponent of free trade must answer. And if the answer is “yes” to any of these questions, let’s then outline which taxpayer-funded government agencies shall be in charge of hunting down the lawbreakers, prosecuting them, and jailing or fining them. The (presumably well-paid and well-pensioned) government agents won’t work for free. What spy apparatus shall be employed to keep an eye on all the potential violators?
And, of course, ignorance of the law will be no excuse, so everyone who wishes to import a trinket or widget from a foreign country will need to know all the laws, regulations, and sanctions that come with such a business venture. To not know this all could mean one’s life will be ruined by federal prosecutors.
For example, if you don’t know the details of the US law known as the Lacey Act, you could be serving harsh prison sentences for violating foreign laws, or for importing fish peacefully acquired, or for engaging in a seemingly endless list of activities that any normal person’s common sense would suggest are peaceful and legal.
Similarly, when Gibson Guitar Corporation was raided by a SWAT team for running afoul of some arcane law about the importation of wood, that was just the natural outcome to be expected from restricting free trade. Those laws were in place to protect domestic lumber industries from imports. But hey, the law’s just there to protect American, workers, right? So, apparently, it’s fine if those Gibson guitar people have their livelihoods and families ruined by legal fees, fines, and jail sentences.
Opponents of free trade, like supporters of the anti-Cuban embargo, for example, like to talk a good game about supporting freedom and liberty, but when all is said and done, their policies amount to nothing more than the sordid jailing and prosecution of non-violent merchants and consumers.
The anti-trade crowd likes to tell themselves that these laws only punish cigar-chomping villains in skyscrapers, but that’s not how laws work. Since laws aren’t written to apply to specific companies, they punish certain behaviors instead. Such laws may indeed restrict big, evil corporations, but they also end up applying to small entrepreneurs and small business owners, most of whom lack an army of attorneys, and usually end up in a far worse position than any big company might. Like the owners of the Gibson Guitar Corporation, many small- and medium-sized business owners simply seek out the lowest-cost goods so they can offer goods to their customers at a lower price. Those goods are often located in foreign countries. But, without an immense legal team, most ordinary people will be caught up in the net of trade restrictions.
The Economic ArgumentSo far, this all ignores the economic arguments against restricting free trade. Those of us not engaged in the direct importation of goods will also suffer when goods are restricted. Trade restrictions on pharmaceuticals, auto parts, food, and whatever else only makes those goods more expensive. And not all those goods are consumption goods, of course. Entrepreneurs use those goods to create new goods and then must charge higher prices to his customers also. A janitor who must pay higher prices for a truck or a shop vac due to trade restrictions must pass on a portion of that cost to the customer. And, with higher prices, the janitors will have fewer customers and fewer profits. Shopkeepers in turn must then have dirtier shops because they can afford fewer janitorial services.
Yes, a tiny portion of the population that’s engaged in the domestic manufacture of shop vacs and trucks will benefit. But, it’s the janitors and their customers (the hair salon and sandwich-shop owners) who are paying the price of subsidizing the factory workers.
These issues aren’t part of an intellectual exercise. The downside of restricted trade is very real for real people.
But, we don’t need me to explain the economic problem with restricting trade. Adam Smith, Ludwig von Mises, and the entire line of liberal, laissez faire economists agree on this point.
The Nationalist ArgumentThe nationalist program of using protectionism to shield American workers from competition is based on the idea that trade with outsiders hurts the local economy. But many who accept this idea in the international sphere then promptly forget the idea when applied domestically.
For example, we’re told by the nationalists that it hurts California workers if Californians buy goods from neighboring Mexico, but it’s apparently A-OK for Californians to buy goods from Illinois or New York, both of which are distant economies that likely contribute far less to the economic well-being of Californians than the economy of northern Mexico.
Murray Rothbard mocked this mindset in the context of immigration when he wondered why it’s not a problem when someone moves from Massachusetts to take a job in Michigan. In that case, the response is never to complain about how people from Massachusetts are stealing the jobs of people in Michigan. No, the argument is only applied if someone crosses an international boundary to do the same.
As with trade, then, it’s bizarre to argue that goods imported from Virginia to California are perfectly tolerable — and even beneficial — while imports from neighboring Tijuana are somehow damaging.
Rothbard noted the idea becomes more absurd the more local you get. The proposed economic justification for “Buy American” is no different from the demand to “Buy North Dakotan” or “Buy 55th Street.” While there certainly are groups that promote only buying goods from one’s home states (i.e., the “ABC — Always Buy Colorado” campaign), such efforts rarely rise above being a marketing gimmick and virtually no one supports trade restrictions between states.
Thus, by their actions, the demonstrated preference of Americans is to take advantage of the benefits of buying and using goods made thousands of miles away by people they’ll never meet. That is, they clearly accept the benefits of trade with a far-away economy (as is the case of trade between San Francisco and St. Louis), but they then turn around and reject the same reality when dealing with international trade.
At the heart of this mindset is pure mysticism, of course, since it requires one to believe that a person in Brownsville, Texas, has the same economic interests as a person in Portland, Maine, but entirely different interests from a person in nearby Monterrey, Mexico. It requires a belief in some sort of metaphysical or perhaps physically objective difference between humans in Monterrey and humans in Portland.
Even the most basic powers of observation should disabuse one of such a strange notion, and yet, American discussions of trade accept the idea as a given.
Left to their own peaceful trade, of course, such ideas would evaporate quickly as people pursued mutually beneficial economic relationships across borders and barriers of every kind.
Today however, we must continue to deal with people who accept an anti-trade ideology that prefers violence to peace, and coercion to freedom. Unfortunately, governments are perfectly happy to oblige them.
The endgame of monetary side manipulations is upon us. Since 2008, central banks have done what they thought was needed to bring the markets back from the pain they experienced during the crash. The problem, of course, is that these Keynesians and Monetarists placed the high level of stock markets as the goal of “policy” and confused booming asset levels with economic growth.
The enemy of prosperity, in the eyes of global economic policymakers, is the desire of the consumer to save and businesses to refrain — even in the short term — from investment. As such, their “solution” was the very poison that has infected the Western world over the decades: more credit, lower costs of money, more push for “consumer demand.”
The Current Orthodoxy Is FailingBut “easy” monetary policy has merely led to debt-ridden economies and a bubble that is increasingly being exposed as a complete farce. January saw a market pullback tease that reminded investors that what was pushed up artificially can’t be sustained forever. Monetary policy, even if it goes to negative interest rate territory with a vengeance, isn’t going to be the miracle drug needed to provide a better economic foundation. Austrians have long known this. The mainstream is just starting to publicly admit it.
The Savings-Glut MythHowever, the right lessons are not being learned by either the economic policymakers or the financial pundits. In fact, the most dangerous economic fallacies still underlie their entire financial worldview. For instance, there is the ever-constant theme that there is a “glut of savings” and that low consumer demand is the chief villain that stands opposed to economic stabilization. Martin Wolf, writes in The Financial Times:
that the global economy is slowing durably. The OECD now forecasts growth of global output in 2016 “to be no higher than in 2015, itself the slowest pace in the past five years”. Behind this is a simple reality: the global savings glut — the tendency for desired savings to rise more than desired investment — is growing and so the “chronic demand deficiency syndrome” is worsening.
The proper economic way of thinking does not blame the economic pain on savings, nor does it desire an artificial, government-driven, attempt to coax people into consuming and “investing.” In fact, the economic reality of the situation is that savers are to be praised, not admonished; and that the refraining from consumption is the very means by which malinvestment can be most swiftly liquidated.
For the Austrian-school thinkers, the collapsing of the bubble that results from people “hoarding” their money and refusing to purchase over-priced “assets” is the precondition for future economic growth. This is because it is the bubble, not the bust, that is the problem. The bubble is the time of malinvestment and mismatch between consumer time preferences and resource allocation that results from the artificial expansion of the supply of money. It is the falsification of interest rates that encourages investment into areas that the economy is not prepared to handle. And while in the near term the bubble appears as prosperity and good times, it is actually the very seeds of destruction being sown. It is this piece of the boom-bust cycle that is destructive and impoverishing. The bust is merely the needed adjustment that gives society the wonderful opportunity to “start over” and do it right this time. Unfortunately, we never actually get to do things right, because the economic bureaucrats in our unfree-market system fear the bust more than the boom. They have it all backward!
How Saving Heals the Problems Caused by BubblesSo then, the so-called “global savings glut,” has the economic role of encouraging the readjustment of capital asset prices back toward their proper levels. The refusal to participate in the bubble, it is true, is harmful for the overvalued stock market levels worldwide. But what the mainstream does not understand is that overvalued stock market levels is a result of the underlying rot in the system itself. The pain to be experienced in a collapse will surely shock an entire generation of unprepared retirees, especially those relying on pension levels which are tied closely to stock market performance in the near to medium term.
But if the economy is ever going to slough off generations of central bank-induced malinvestment, if the economy is ever going to shift to a proper and sustainable foundation of capital accumulation, if future generations are going to live in a truly prosperous world, the pain is unavoidable. Propping up the markets and encouraging misguided consumption and malinvestments will be the death blow to western civilization. Only near-term pain can allow long-term growth. Economic savings are the cure, and to be welcomed with open arms.
The Importance of Economic Calculation In “Economic Calculation in the Socialist Commonwealth,” Ludwig von Mises challenged the socialists to explain how economic calculation could be performed in a socialist economy absent prices. Mises concluded that economic calculation in a socialist economy is impossible, therefore socialism is impossible.
Mises wasn’t saying that you couldn’t have a socialist society, he was saying that it’s not an economy, in the sense that decision makers are economizing regarding their decisions about the allocation of resources.
Socialism, at the time, was defined as a system where the state owns the means of production. The state owns the natural resources and the capital, such as the factories necessary for use in the production process. Given this state ownership, the resources are not being traded in any market and since there are no markets for the resources there are also no market prices for the resources.
In an economy where resources are privately owned, the exchange of those resources would provide us with market prices. And those prices provide us with a sound basis for assigning resources to their most productive uses.
This rational calculation is impossible in a socialist economy.
Mises concluded, “Thus in the socialist commonwealth every economic change becomes an undertaking whose success can be neither appraised in advance nor later retrospectively determined. There is only groping in the dark. Socialism is the abolition of rational economy.” (p. 23)
Land Socialism in the United States My interest in this topic was inspired by Yuri Maltsev. A few years ago, Dr. Maltsev gave a talk at Ferris State University focusing on the evils of Soviet socialism (a portion of the presentation can be seen here). Nobody disagreed with Yuri’s point that the Soviet economy was socialized, however, some took heavy issue with Yuri’s claim that the US economy was also socialized to a large degree.
This led me to consider the degree of land socialism in this country. This is a critical issue. Starting with the available land and labor, the structure of production is determined by the available technology and the capital that we derive from the available land and labor. Government control of the natural resources gives the government tremendous control of the whole economy, distorts prices, and diminishes the efficacy of our economic calculation.
Is US land ownership heavily socialized? Let’s begin answering this question by considering the states with the largest percentages of government-owned lands.
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Nevada has the largest percentage, 84.9 percent, of federally owned lands, but 30 percent of Alaska is state owned, so Alaska has the largest percentage of government-owned lands. As you can see, due to the Louisiana Purchase and other factors, much of the federal land ownership is in the Western states. I included New York on the list because New York has the highest percentage of state-owned land.
Admittedly there is some false precision in these numbers as the states and the federal government have some difficulty in accurately providing statistics on their land ownership.
Next, consider the largest federal agencies ranked by land ownership.
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Texas, with 171 million acres, is the second largest state. We see here that the BLM and the Forest Service are both larger than Texas. And the fourth largest agency, the National Park Service, is larger than all but four states, Alaska, Texas, California, and Montana, slightly larger than New Mexico’s 77.6 million acres.
Note that these numbers do not include the Bureau of Indian Affairs. The federal government claims that the 55 million acres of BIA lands are Indian lands not federal lands. I don’t know if the Indian tribes agree with this assessment. The Indian lands, if they were a state would be the 11th largest state, almost equal in size to Utah’s 54.3 million acres.
The Department of Defense administers 14.4 million acres of land, according to a 2014 Congressional report. (By the way, a 2012 Congressional report with the same title as this report claimed that the Department of Defense administers 19 million acres of land. There is no explanation for the missing 4.6 million acres in the 2014 report.)
The federal government, according to this report, “owns and manages roughly 640 million acres of land” and there is an estimated 200 million acres owned by the various state governments. Therefore, 37.1 percent of US dry land is owned by some government.
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A map of the government land ownership will help us put things in perspective.
Note that this map shows only the federal holdings and the Indian lands and omits the 200 million acres of state lands. Still, it provides us with an illustration of the degree of land socialism in this country. The federal government owns most of the land roughly from the Continental Divide west to the Pacific Ocean.
Government-owned Lands in the Oceans What about the submerged lands? The federal government also claims ownership over what they call the submerged lands of the US. These claims began with 1799 legislation regarding the “customs waters,” allowing the boarding of foreign flag vessels within 12 nautical miles of the coast. Over time, these claims have expanded and in 1945, Harry Truman declared US government jurisdiction and control over the continental shelf. During the next decades, governments of the world claimed increasingly larger amounts of the ocean beds. Problems occurred, however, if two governments disagreed over these claims. This became a United Nations issue in the 1970s, and in 1982, at the United Nations Convention of the Law of the Sea, the countries of the world came to an agreement regarding their Exclusive Economic Zones (EEZ), whereby each country owned the sea and the sea beds out to 200 nautical miles offshore.
Due to Congressional resistance of United Nations treaties, Congress did not ratify this agreement. But Ronald Reagan, in 1983 simply proclaimed sovereign rights over the US Exclusive Economic Zone. He ratified the agreement by presidential mandate.
According to a Department of the Interior report, there are 3.9 billion acres in the US EEZ. Reagan’s proclamation was the biggest land grab in US government history.
Consider this map of the US that includes the US EEZ. The various colors highlight the regions of the EEZ.
The federal government owns the sea beds out to 200 nautical miles off of the Atlantic and Pacific coasts and much of the Gulf of Mexico. Due to the Alaska Peninsula and the Aleutian Islands, there is a tremendous amount of EEZ lands off of the Alaskan coast. And the US government claims ownership over immense amounts of the Pacific Ocean, much of which is due to the military use of small islands during World War II.
For instance, the Johnston Atoll in the Pacific was used as an airstrip of about one square mile during WWII. Since this tiny island is now a federal holding it allows the government to claim ownership over 166,000 square miles of ocean sea bed, which is approximately the size of California.
We can now consider the total amount of US government lands.
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One point to make here is that there is over 70 percent more submerged lands in the US than the total amount of dry land in this country. That is, the federal government owns more submerged land than the total amount of land in the 50 states.
Thus, 76.9 percent of total land in the United States is government owned. There is no doubt that regarding this essential resource, land, our economy is heavily socialized.
Back to the Calculation Problem The government ownership of lands leads to several economic problems. Government officials can use their control of the natural resources to reward politically favored industries and punish their political enemies. Second, government restrictions on the use of resources on government lands limits economic growth. Third, and this is Mises’s point regarding socialism, land socialism will create economic calculation problems.
The first calculation issue here is the government’s decisions regarding the use of this land and the resources on and under the land. Since the government owns the land, we see no prices for these resources. The government has no way to economize on these resources in the sense that government officials, even if they wanted to, could not efficiently allocate these resources. They make these allocation decisions based on political considerations, so they end up allowing the private sector to access the wrong resources, wrong in the sense that if we were allowed to have private ownership of these resources, we would choose to use the resources much differently, and more efficiently.
The second issue is that the economic calculation of private businesses is distorted by government control of the resources, because government ownership distorts the prices of the resources. If the prices were based on the private ownership of land and resources, for instance, we would see a different array of energy prices. The prices we see for resources do not accurately reflect the underlying realities of resource availability. Even though we are engaged in calculation when we allocate these resources, we are not economizing on the resources in the sense that Mises described.
Due to the high degree of government land ownership, the US government distorts economic calculation in the exact manner that Mises explained and predicted in 1920.
Demagogue politicians love to play on popular fears that low-wage foreigners are “stealing” good paying American jobs by way of outsourcing and globalization. The claim is made by protectionists of all political stripes, whether leftists complaining of a “rigged economy” or rightists speaking of other countries “beating us” economically.
A sound economic analysis of the claim about job losses due to international trade should address two questions: First, is it true that the US has lost jobs due to trade (or other factors)? Second, is this phenomenon good or bad overall for the US and world economies?
On the first point, it can appear as though the US has lost jobs. For example, as Figure 1 shows, manufacturing employment in the US has declined by about 2 million from pre-Great Recession levels, and is down by over 7 million, or 37 percent, from the all-time high reached in 1979.
Figure 1: Total Manufacturing Employment, 1940–2016
The problem, though, is that by looking at manufacturing in terms of jobs, we’re missing the full picture of industrial production.
Nevertheless, the demagogues still argue that, even though high-paying service sector jobs have more than replaced lost factory jobs, “we don’t make things here anymore” and we should lament this. This oft-heard refrain is patently false. We don’t make certain things, such as garments, toys or electronics, because global free trade and technological advances tend to shift America’s output into those industries in which our comparative advantage is greatest. But Americans do indeed make things — quite valuable things.
This can be seen in Figure 2, which shows the US Industrial Production Index for the “de-industrialization” period. After the expected steep decline following the Great Recession of 2008–2009, US manufacturing has slowly bounced back and is now producing more products, in value-added terms, than ever before. Indeed, this index, which consists mainly of manufacturing, has grown by over 100 percent since the 1979 peak in manufacturing employment.
Figure 2: Industrial Production Index for the United States, 1979–2016
In other words, thanks to productivity gains, we need fewer workers to make more stuff.
From an economic perspective, nothing could be better news. US manufacturing creates 100 percent more value with 37 percent fewer workers. Creating more value with fewer workers means we’re more efficient than ever, or put another way, more productive than ever. These awesome productivity gains have many sources, especially in the form of technological advances in areas like software, robotics, and communications. Globalization and outsourcing have also played a role, as they allow American workers a greater degree of specialization in those sectors where our productivity edge is largest.
The good news gets better, though: not only have we gained jobs on net, but jobs have grown faster than the population over time. Since the 1979 peak in manufacturing employment, the US adult population grew by 53 percent, whereas employment grew by 59 percent, as shown in Figure 3.
Figure 3: Population Growth vs. Employment Growth Since 1979
Source: Federal Reserve Economic DataDespite these generally positive facts, some still contend that we’ve replaced “good” manufacturing jobs with lousy service sector jobs. Well, of course it must be true that, if we’ve lost manufacturing jobs, but gained jobs overall, then all of the job gains must have come from non-manufacturing sectors. And indeed the service sector, broadly defined, has seen employment growth of 90 percent since our 1979 benchmark. But beware of making hasty earnings assumptions about a sector that employs nearly 124 million people. To see whether the newly-created “service sector” jobs really don’t pay as well as the vaunted manufacturing jobs, we need to drill down into the employment and earnings data. What we’ll find is that a large majority of the new service sector jobs pay just as well or much better than manufacturing jobs.
Table 1 presents Bureau of Labor Statistics data on the 15 largest sectors and sub-sectors of the US economy, which together represent over 96 percent of the total net increase in payroll employment for the post-peak manufacturing jobs era (1979 to 2016). This might come as a surprise to the anti-globalization crowd: despite the loss of 7 million manufacturing jobs (and some mining, logging, and utilities sector jobs), we’ve seen a net increase of nearly 53 million total jobs. Of these net new jobs, fully 62 percent of them feature, as of January 2016, average hourly earnings equal to or greater than current average hourly manufacturing earnings. In other words, most of the 53 million new jobs pay the same or better wages than the demagogues’ benchmark “good” manufacturing jobs. So we lost 7 million good jobs, only to gain about 32 million equal or better-paying jobs, along with about 19 million lower-paying jobs (about 38 percent of net new jobs pay less than manufacturing).
Table 1: Employment Changes and Current Earnings by Sector
Source: Bureau of Labor StatisticsWe’ve established that, despite a major decrease in employment in the manufacturing sector, we’ve gained many more jobs than we’ve lost in the past 35 years or so, and that most of these new jobs pay better to boot. Economic changes, while painful in the short run, have brought gains in output and employment not only for the US, but for the rest of the world as well. Overall, this is good news for the US and world economies.
So, as the campaign season heats up, let’s not be misled by baseless arguments about America “losing jobs” or other countries “beating us” at trade. Trade is a positive sum game, and the benefits for both the US and world economies are, shall we say, “yuge.”
In this article, Claudio Grass, Managing Director at Global Gold Switzerland, talks to economist and Mises Institute Senior Fellow Thomas DiLorenzo. This exclusive interview covers central bank monetary policies, Keynesian economics, the economic“recovery,“ political correctness, and much more.
Claudio Grass: Thomas, it is an honor to have this opportunity to talk to you. I am also pleased to announce that you will be delivering the keynote speech at the BFI Inner Circle Wealth Forum in Florida on April the 18th and 19th. Let’s get started! Given the limited impact of loose monetary policy thus far, where do you think we are headed on the central bank front? Do you think it is likely that the Fed moves interest rates into negative territory, like many central banks across the globe have already done? What would the implications of such a step be?
Tom DiLorenzo: On the central bank front, we are headed where Japan has been over the past twenty years or so: more and more easy money in a quixotic quest to push interest rates into negative territory, a truly crazy idea. The craziness of this stems from the fact that the entire academic economics profession abandoned Keynesianism in the 1970s. Its failure to explain stagflation was considered to be the final nail in the Keynesian coffin. Franco Modigliani’s presidential address to the American Economic Association in the late '70s was a remarkable white-flag-of-surrender speech by one of the prominent Keynesians. He confessed that Keynesian “stabilization policy” had been a failure. Then, like a bad horror movie, Keynesianism reared its ugly head fifteen or twenty years later as though it had never been discredited. Thus we now have the crazed policy of negative interest rates based on the thoroughly-discredited idea that only “aggregate demand” matters, and if we can just have the central bank push interest rates low enough, people will spend more and businesses will invest more, and all will be good. After the crash of 2008, caused by these same Fed policies, I recall the old Keynesian propagandist/economist Alice Rivlin on TV advising everyone to go out and spend wildly on anything. “It doesn't matter what you spend it on,” she said, “just spend it.”
In reality, what this new policy — which is the same as the old policy — does is induce businesses to invest more on durable goods like cars and houses, which is why there are new bubbles in these markets, at least in some regions. The price-per-square-foot of Las Vegas real estate, for example, is now higher than it was just before the crash of 2008. There’s also a student debt bubble and a stock market bubble, in my opinion, thanks to the Fed’s single-minded and very simple policy of print, print, and print some more. Rather than reducing some of the wild and reckless speculation on Wall Street, the government bailouts of the speculators created a “moral hazard problem” that will encourage even more reckless speculation. If the speculative investments pay off, they keep the profits; when they go bust, they can count on another round of “too-big-to-fail” bailouts.
CG: The only way it seems feasible to move interest rates substantially into negative territory would be to either ban or at least massively restrict the use of cash. In our view, there is a clear “war on cash” being promoted in the media. Do you have any thoughts on the issue and are we headed toward a cashless society?
TD: Yes, there is a war on cash being promoted by the Fed, in particular, and the government, in general (and its lapdog supporters in the media). The main reason for this is that if people can hold cash, it makes it more difficult for the Fed to centrally plan the economy. Also, Keynesianism has always been at war with savings since its principle tenet is that savings are bad, consumption is good (there you have all of Keynesianism in a nutshell). This began with the silly theory of the “paradox of thrift” that said that savings is harmful to the economy; therefore, the more we save now, the poorer we will all become, and the less able we will be to save (and consume) in the future. The Keynesian central planning authorities at the Fed and elsewhere would like to see a cashless society because keeping cash can be a form of savings instead of consumption. I think we are headed toward a cashless society unless the public wakes up and begins to protest this.
CG: What do you think the implications of a cashless society are when we combine this with other legislation like the PATRIOT Act? Do you think we are headed toward a totalitarian state in the US, where private property rights will no longer be protected?
TD: An important reason why the state would like to see a cashless society is that it would make it easier to seize our wealth electronically. It would be a modern-day version of FDR’s confiscation of privately-held gold in the 1930s. The state will make more and more use of “threats of terrorism” to seize financial assets. It is already talking about expanding the definition of “terrorist threat” to include critics of government like myself. The American state already confiscates financial assets under the protection of various guises such as the PATRIOT Act. I first realized this years ago when I paid for a new car with a personal check that bounced. The car dealer informed me that the IRS had, without my knowledge, taken 20 percent of the funds that I had transferred from a mutual fund to my bank account in order to buy the car. The IRS told me that it was doing this to deter terrorism, and that I could count it toward next year’s tax bill.
Property rights in the US have been under assault for a very long time and the assault is proceeding at an accelerated rate with such monstrosities as “Obamacare,” which forces Americans to buy government-prescribed “health insurance,” and all the Soviet-style regulation and regimentation of financial markets in the wake of the government-created Great Recession of 2008.
CG: We believe that history doesn’t repeat itself, but rather rhymes (Mark Twain). Do you think there are historical parallels to be found in US history to the current situation (economic socialism, restrictions on private gun ownership, etc.)?
TD: I don't know if history rhymes, but there are some things that are true of all governments at all times. One thing is a deep distrust, resentment, or even hatred of Adam Smith’s “invisible hand”: the idea that individuals, in pursuing their self-interest in the free market, coincidentally benefit the rest of society in most instances without any “czar” or central planning authority involved. Peaceful, voluntary trade leaves little room for politicians to plan everyone’s life and make themselves rich and famous through plunder. Thus, they are eternal enemies of free enterprise in particular, and freedom in general, with very few modern-day exceptions, such as former Congressman Ron Paul. So despite hundreds of years of miserable failures of socialism and government “planning” of every other kind, governments ignore this history because it is in their self-interest to do so.
With regard to gun ownership, all governments have promoted, to some degree, the idea that only the government’s police and military should have guns. This policy has been less successful in America than in any other country, thank God. The main reason for the Second Amendment’s right to bear arms in the US Constitution, according to the “father of the Constitution” James Madison, was so that an armed population could defend itself from a future government that wanted to enslave them.
CG: Why do you believe the economic recovery has been so weak? What impact do you think this will have on precious metals and other assets with real value?
TD: The recovery has been so weak because of (1) Fed policy and (2) most other government policies. The bright side to any recession is that businesses are finally forced to liquidate bad investments and do everything they can to become more profitable. The Fed delayed and interfered with this process by continuing the same easy-money policies that caused the recession in the first place. This resulted in significantly more bad investments and the creation of another bubble economy. Much of the rest of government policy has created tremendous uncertainty, what economist Robert Higgs calls “regime uncertainty.” Businesses still have only a vague idea of what Obamacare will cost them, for example. A high degree of uncertainty makes it difficult, if not impossible, to plan for the future so many businesses simply stay where they are until the government steps back. This is what happened after FDR’s death. There were no longer constant threats of new taxes, regulations, or confiscations of gold and other assets, and so capital investment finally began to increase after being negative throughout the 1930s. In this atmosphere, which I don’t see as changing very significantly, the smart investors will include more gold and precious metals in their portfolios.
CG: You often talk about the dangers of political correctness (PC) in your articles. We believe that under the guise of PC, free speech as we know it is being limited and PC is being used to try to implement a sort of “thought control.” Would you share your views on the topic?
TD: Most Americans do not realize that the academic elite at most universities are what are known as “cultural Marxists.” After the worldwide collapse of socialism in the late ‘80s and early ‘90s, the academic Marxists redefined themselves. They largely abandoned the old “class struggle” rhetoric involving the capitalist and worker “classes” and replaced them with an oppressor and an oppressed class. The oppressed includes women, minorities, LGBT, and several other mascot categories. The oppressor class consists of white heterosexual males who are not ideological Marxists like them. Another branch of the Marxist Left decided to continue promoting socialism under the guise of “saving the planet.” I call these people “watermelons” — green on the outside, red on the inside.
The cultural Marxists have adopted the advice of the philosopher Herbert Marcuse, who is really the “godfather” of cultural Marxism. He preached that free speech is really a tool of oppression because it leads to critiques of “utopia,” by which he meant communism. This is where all the vicious crackdowns on campus free speech come from: the cultural Marxists will say that they are doing the morally-correct thing to censor speech by conservatives or libertarians, for such speech may be critical of their ideology. They are totalitarian-minded, fascist thought control police and dominate almost all university administrations in the US. It is creating a real dumbing down of American youth, for much of their university education is now indoctrinated in left-wing platitudes rather than the development of critical thinking. The big exceptions, however, are the students who stick to studying business, economics, engineering, math, etc., and largely ignore the PC circus.
CG: Now to the presidential election in the US. Who do you think will be the likely winner of this race? It is believed that if Trump wins the election that the US will move toward a more isolationist foreign and economic policy. What are your thoughts on Trump?
TD: Right now my money is on Donald Trump being the next president. If that happens, there will be a less “isolationist” foreign policy, for Trump does not want to risk starting World War III, unlike all of the “neoconservatives” who run both of the main political parties. That is why he is so hated and despised by the Republican Party establishment. He would like to do more business with countries like Russia rather than start a nuclear war with the Russians. They, on the other hand, want to see endless military aggression in the Middle East and elsewhere. This is why they will do everything possible to defeat Trump, including putting all of their Big Money behind Hillary Clinton or whomever the Democrat Party nominee is. If I were Donald Trump I would also double or triple my personal security detail.
As for economic policy, Trump could hardly be worse than Obama or his predecessor. He has said that he hates taxes and does everything in his power to minimize his own tax burden, which is certainly a good instinct. Since he’s a billionaire, he can’t be bought off on any policy, which is really the main reason why the GOP oligarchs hate him with a red-hot passion. But if he wins and becomes a politician, there is always the chance that he will succumb to a more interventionist economic policy so that the media will say nicer things about him. Vanity seems to be one of the man’s hallmarks.
This weekend, Americans move forward their clocks for daylight saving time, one of the more absurd (outdated) examples of insane government control. Notes James Alexander Webb, the government mandated spring forward is simply another example of “disrespect for the principle of simply leaving people alone.” Unfortunately the principle of lassiez-faire is one too often ignored in today’s world. The consequences of our government’s rigged society are all around us, be it the increasing reliance on food stamps, a far reaching tax system, or the gratuitous examples of well-connected elites enriching themselves from state intervention.
This all begs the question of whether it is democracy itself that may be to blame? That’s the subject of the next episode of Mises Weekends. This week we feature a past talk given by Hans-Hermann Hoppe highlighting some of the key points he makes in his book Democracy: The God That Failed. Hoppe’s lecture not only shows how democratic elections often lead to bad results, but illustrates how political democracy is often incompatible with human liberty.
And in case you missed any of them, hereW are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Free Trade Is the Path to Prosperity by Georgi VuldzhevBernie vs. Ron Paul: There's No Comparison by Lew RockwellHumans Are Hard-Wired to Value Some People Over Others by Andrew SyriosFreedom vs. Justice: Are They in Conflict? by David GordonDaylight Saving Time: A Government Annoyance by James Alexander WebbAnatomy of a Bank Run by Murray N. RothbardMyth: Half of Americans Don't Pay Federal Taxes by Ryan McMakenNegative Rates May Be Ineffective and Dangerous by Joseph SalernoThanks, Bush and Obama: 1 in 7 Americans Were on Food Stamps in 2015 by Ryan McMakenFormer ECB Chief Economist Disses Negative Interest Rates and Praises Deflation by Joseph SalernoBernie, It’s Government That "Rigs" The Economy by Tho BishopMises: The Meaning of Lassiez Faire by Ludwig von MisesThe Undeserving Rich by Jeff DeistDowntrend in Money-Supply Growth Poses a Threat to Bubble Activities by Frank ShostakThe European Central Bank Finally Throws in the Kitchen Sink by Ryan McMakenThe Problem with "Expressive Voting" by Gary GallesInvesting Responsibly in an Irresponsible World by Doug FrenchWe Need to Talk about Frank (Fetter) by Matt McCaffreyA "Libertarian" Argument for the Welfare State by David GordonRothbard: The Genius and the Man, and How to Approach His Work by Joseph Salerno and Tom WoodsMoney, Bank Credit, and Economic Cycles Now Available in Japanese
Libertarianism doesn’t often attract attention from The Atlantic, but a recent article, “The Information Revolution’s Dark Turn,” features philosopher Alistair Duff who attacks libertarianism in general, and Murray Rothbard specifically. Unfortunately, the article misrepresents libertarianism, but does so in a superficially plausible way. Many critics of libertarianism, I suspect, view it in the same way the article does.
The article is an interview of Alistair Duff, who teaches information society and policy at Edinburgh Napier University. Duff is interested in the information revolution in Silicon Valley, and he thinks that people who work there are too anti-statist.
Duff says of libertarianism, “I think it’s a mistaken philosophy.”
I have read [Robert] Nozick’s Anarchy, State, and Utopia, and Murray Rothbard’s Ethics of Liberty, and Milton Friedman’s Capitalism and Freedom — I’ve read it all, and it’s a flawed philosophy. The ultimate value is not liberty: It is justice. Liberty has to fit within the context of social justice. And where it violates justice, I’m afraid justice trumps liberty.
Libertarianism says that freedom is the paramount value. But I don’t think that’s the case. I’m a follower of John Rawls, the great Harvard political philosopher, and in his Theory of Justice, he makes clear that justice is the paramount virtue in political life.
It should incorporate a great deal of freedom, including some inalienable freedoms, but you cannot trump justice with liberty in the way Tim Cook is doing.
In brief, according to Duff, libertarians think that freedom is the highest value, but justice is in fact more important.
Readers might expect me to say that Duff is mistaken: freedom outranks justice; but this would not be a good way to proceed. To do so would be to accept the way Duff characterizes libertarianism, and it would be wrong to do so.
At first sight, one might think that Duff was correct. After all, Murray Rothbard says “Libertarianism does not offer a way of life; it offers liberty, so that each person is free to adopt and act upon his own values and moral principles. Libertarians agree with Lord Acton that ‘liberty is the highest political end’ — not necessarily the highest end on everyone's personal scale of values.” Further, Rawls says, “Justice is the first virtue of social institutions, as truth is of systems of thought.” (A Theory of Justice, 1st edition, p. 3)
Isn’t this exactly the contrast that Duff has set forward? Libertarians rank liberty first: supporters of Rawls think that justice outranks liberty. What could be clearer?
We Need the Correct Theory of JusticeThe contrast that Duff draws in fact rests on a false assumption. As libertarians see matters, liberty and justice are not separate values that need to be ranked. Rather, “liberty” refers to the system it supports of rights based on self-ownership and property rights, and precisely this system is “justice” as libertarianism characterizes it. The difference between libertarians and Rawls concerns the correct theory of justice, not whether “justice” or “liberty” has greater importance. Rothbard makes this vital point clear in his discussion of Isaiah Berlin, who did speak of “liberty” unmoored from other values. He writes, “Berlin’s fundamental flaw was his failure to define negative liberty as the absence of physical interference with an individual’s person and property, with his just property rights broadly defined.” (The Ethics of Liberty, p. 216) Nozick takes exactly the same position. Anarchy, State, and Utopia offers an alternative to Rawls’s theory: it is not an endeavor to elevate liberty above justice in the hierarchy of values.
Duff may have gotten the wrong idea about libertarianism because when he thinks of “justice,” he has in mind his own view. He says, “There is massive inequality, which is unacceptable. Inequality should not be so great that it crystallizes into class distinctions — master-servant relations — and I think you have that in Silicon Valley, to some extent.” It’s certainly right that libertarianism doesn’t value equality of income and wealth, but this is not a rejection of justice. Duff cannot see that his view of justice is not the only one on offer. By the way, why Duff thinks that inequalities of wealth lead to master-servant relations is not obvious. Are the employees of Silicon Valley companies who earn less than the billionaire owners of these firms the “servants” of these owners? Why think that?
Duff might respond to the line of criticism I have suggested by saying, “So what! Even if libertarianism does have a theory of justice, it’s the wrong one. Rawls’s theory is better.” If Duff were to say that, though, he would have to argue for the superiority of Rawls’s theory to the libertarian one. It would not suffice merely to dismiss libertarianism for preferring liberty to justice. Duff’s tactic is no more than a rhetorical trick.
Duff’s Odd Notions of JusticeThere is another questionable claim in Duff’s interview. In a statement I have already quoted, he says that “public life should incorporate a great deal of freedom … but you cannot trump justice with liberty in the way Tim Cook is doing.” He is talking about Cook’s refusal to obey the FBI’s demand that Apple engineer software to help unlock the iPhone of one of the San Bernardino shooters. Duff is adamant on this matter. He says, “I’m with the state on that, absolutely. I think Tim Cook is out of his mind. It’s a clear case where the state’s rights prevail over the right of individual privacy, and I say that as an advocate of privacy. We’ve got to get common sense on privacy, not fanaticism.”
It is difficult to see why Duff regards Cook’s position as one that unduly prefers liberty to justice. Rawls’s theory, which Duff favors, doesn’t directly address conflicts of this sort between liberty and national security. Why, then, does Duff take what is at stake to be a conflict between liberty and justice? Perhaps Duff would appeal to Rawls’s discussion of conscription (A Theory of Justice, 1st edition, pp. 380ff.), but in the absence of a fuller account by him, his claim is baffling.
Duff says about libertarian theory that he has “read it all,” but he has not done so very carefully and thoughtfully.
Super Tuesday may have been the beginning of the end for the Bernie Sanders campaign, but the ideas that propelled it are likely to linger for quite some time. With some writers comparing Bernie to Ron Paul (not in terms of economics and philosophy, of course, but as insurgent candidates), now seemed like an opportune moment to examine the Sanders message and legacy, and compare it to Ron’s.
Like Ron, Bernie surprised all the pundits with his fundraising, polling, and electoral success. In fact, so successful has Sanders been that Hillary Clinton has been reduced to a pathetic and unconvincing “me, too” campaign — I can be just like Bernie, if that’s what you rubes want!
Bernie has gained a lot of traction from his complaints that Hillary is in the tank for Wall Street and the big banks. He’s likewise pointed to the six-figure honoraria Hillary has earned from speeches given to the big banks.
The best the now-hapless Bill Clinton could do in reply was to note that Bernie, too, had been paid to give speeches. Technically, Bill was right. Bernie had earned money from public speaking: a whopping $1,800 over the course of a year. The year before that, Bernie had earned $1,300 from public speaking. All of this money was donated to charity, as is the requirement for US senators.
It’s true that Bernie is better than Hillary on foreign policy, but in keeping with Rothbard’s Law — everyone concentrates in the area in which he is worst — Bernie speaks very little about issues of war and peace. And even there, consistency and principle are elusive: he supported Bill Clinton’s bombing of Serbia over Kosovo, an act of terror based on propaganda that rivaled anything George W. Bush ever peddled. Sanders favors the ongoing drone campaigns, too, and even supported the F-35, one of the biggest boondoggles in the Pentagon’s long and sorry history.
Bernie’s primary legacy will be to have resuscitated the idea of socialism in the minds of many Americans. It is a very confused socialism, to be sure. The young people who follow Bernie can’t even seem to define socialism, according to recent surveys. And in fact Bernie’s economics is really just a hyper-Keynesianism rather than out-and-out socialism. But by suggesting that the Scandinavian countries constitute a model that the United States should emulate, he has encouraged the idea that only large-scale, systemic change in the direction of vastly increased government power can produce the kind of society Americans want.
Capitalism ought to be our default position, since it conforms to the basic moral insights we acquired in our youth: keep your word, live up to your agreements, don’t take what doesn’t belong to you, and do not cause anyone physical harm.
But thanks to years of propaganda to the contrary, socialism has come to appear to many people as not simply a morally plausible position but clearly and obviously desirable and superior to the capitalist alternative. The free market, they are convinced from what they recall from their elementary school textbooks, leads to “monopoly” and oppression.
Bernie speaks as if the system is rigged against the people because of business influence in government — a fair enough point, as far as it goes — but it’s hard to take this criticism seriously when his proposed solution is to extend the influence of politics over more and more areas of life and increase the powers and scope of the very government he is supposed to be criticizing.
The Sanders narrative is rooted in two major historical claims, both of them dead wrong.
First, Sanders believes “capitalism” was to blame for the 2008 crash. But as mises.org readers know, that downturn, like the Great Depression before it, was preceded by years of Federal Reserve credit expansion. According to the Austrian theory of the business cycle, the artificial lowering of interest rates below free-market levels sets in motion an unsustainable economic boom. The economy is set on a path that could be sustained only if real resource availability were greater than it really is. Eventually, when real savings and resources turn out not to exist in the abundance that the Fed’s interventions misled people into expecting, projects have to be abandoned and the phony prosperity becomes real recession.
Sanders supporters will no doubt point to the great number of bad mortgages originated by private lenders. But would these mortgage loans have been extended in the first place if institutions like Countrywide couldn’t sell them to the government-privileged Fannie Mae and Freddie Mac? Fannie and Freddie enjoyed special tax and regulatory advantages and had a special line of credit from the US Treasury — a line of credit everyone knew would be essentially limitless if push ever came to shove.
It was the perfect storm: the Fed’s crazed monetary policy injected huge quantities of additional credit circulating throughout the economy, and the federal government’s various mandates and regulations made real estate an artificially attractive outlet for all that new money. When this ramshackle edifice came crashing down, capitalism — which, in the midst of all this money creation and regulatory lunacy, had never been tried — took the blame.
Indeed, what could be intellectually easier than blaming the “free market” for a phenomenon a critic doesn’t understand? Ron Paul, on the other hand, never tired in his own presidential campaigns of going beyond surface explanations to account for what really happened in the disaster of ’08, and identify who the real culprits were.
The other part of the Sanders story — Scandinavia — is shallow and misleading, too.
In fact, Denmark’s own prime minister, Lars Lokke Rasmussen, finally had to correct the Vermont senator’s references to his country as “socialist.” “I would like to make one thing clear,” Rasmussen said. “Denmark is far from a socialist planned economy. Denmark is a market economy.”
Still, there’s no question Denmark has a large public sector. And it’s starting to suck the life out of the place. Denmark’s various benefits subsidize idleness to an absurd and unmanageable degree. In the country’s 98 municipalities, guess how many have a majority of residents working. If you answered three, you know far more about Denmark than Bernie and his supporters do.
It’s a similar story in the rest of Scandinavia. For instance, Sweden’s welfare state was able to develop only because of the wealth created by decades and decades of a prosperous market economy. Private-sector job creation was anemic to nonexistent in the decades following the radical expansion of the Swedish welfare state. And as for Norway, there are lots of “free” things there, it’s true — if you’re prepared to pay a 75 percent effective tax rate.
The comparison of Bernie to Ron goes like this: both launched insurgent, anti-establishment presidential campaigns while in their 70s, shook up their respective party establishments, and attracted large youth followings. But Bernie is no Ron.
Just on the surface: Bernie is a grump and difficult to work with; Ron is a kindhearted gentleman who always showed his appreciation for the people in his office.
More importantly, Ron urged his followers to read and learn. Countless high school and college students began reading dense and difficult treatises in economics and political philosophy because Ron encouraged them to. Bernie’s followers receive no such encouragement. And why should they? Bernie’s platform merely regurgitates the fallacies and prejudices his young followers already imbibed in school. What more is there to read?
Ron’s followers, meanwhile, were curious enough to dig beneath the surface. Is the state really a benign institution that can costlessly provide us whatever we might demand? Or might there be moral, economic, and political factors standing in the way of these utopian dreams?
Bernie’s supporters demand material things for themselves, to be handed to them at the expense of strangers they have been taught to despise. But like Ron himself — who as an OB/GYN opposed restrictions on midwives even though doing so was not in his material interest — the young Paulians embraced the message of liberty without a thought for material advantage.
It’s not hard to cultivate a raving band of people demanding other people’s things. Such appeals arouse the basest aspects of our nature, and will always attract a crowd. It’s very hard, on the other hand, to build up an army of young people intellectually curious enough to read serious books and consider ideas that go beyond the conventional wisdom they learned in school about government and market. It’s hard to build up a movement of people whose moral sense is developed enough to recognize that barking demands and enforcing them with the state’s gun is the behavior of a thug, not a civilized person. And it’s hard to persuade people of the counter-intuitive idea that society runs better and individuals are more prosperous when no one is “in charge” at all.
Yet Ron accomplished all these things. And that is why, when we position the Vermont senator against the Texas congressman, Ron’s achievement is so much greater and more historic.
Murray Rothbard would have turned 90 years old on Wednesday, and his contributions to economics have never been more relevant. As more Americans wake up to the Federal Reserve’s shell game and frustration continues to grow from our dead beat Uncle Sam, Rothbard’s uncompromising assault on the state has made him one of the rare scholars to see his influence and following grow exponentially, even after his passing.
One of the qualities that makes Rothbard special is the incredibly wide scope of scholastic work. Beyond his contributions to Austrian economics that directly led to its revival in America, he was a masterful libertarian political theorist, strategist, revisionist historian and even the occasional playwright.
The new Rothbard Reader, released this past Wednesday, offers readers a convenient way to sample Rothbard’s many contributions to the libertarian tradition.
Dr. Matthew McCaffrey, who along with Dr. Joseph Salerno, served as an editor to this new collection, joined Jeff Deist for the latest episode of Mises Weekends. Matt discusses Rothbard’s amazing range of interests and knowledge, his relationship with Mises, his great opus Man, Economy, and State — written in his early 30s — and his enduring legacy in a sea of forgotten mainstream economists.
In case you missed any of them, here are articles from this past week’s Mises Daily and Mises Wire:
The Long History of Government Meddling in the American Marketplace by Mike HollyDid Free Markets Cause the Flint, Michigan Water Disaster? by Dale SteinreichUnderstanding the Federal Reserve's Shell Game by Dan SanchezA Conversation with my Neighbor "Sam" by Mark BrandlyEconomists for the Nanny State by David GordonNegative Rates, Negative Outcomes by Sean CorriganThe Greatest Entitlement by Jeff DeistClaudio Grass on Swiss Decentralization and Double Majorities by Ryan McMakenHow Sweet It Is! The Maple Syrup Cartel Crumbles by Joseph SalernoRothbard’s Depression Analysis Is Now More Relevant than Ever by Antony P. MuellerThe JetBlue Democracy Experiment by Jonathan NewmanMurray Rothbard at 90 by David GordonIntroducing the Rothbard ReaderA New Working Paper from Joseph SalernoBernie Sanders Meets Romanian Internet by Carmen Elena DorobățThe Economics of Hunting and Species Conservation by Ryan McMakenThe Container Ship Curse? by Mark Thornton
On March 13 Americans will, in their tolerant nature, acquiesce once again to a government initiated (and hardly popular) loss of one hour, and the setting of clocks out of sync with our planet’s celestial rhythm.
After an earlier (unpopular) 1918 trial of Daylight Saving Time and its later repeal in 1919, it was re-enacted nationwide under Nixon under the “Emergency Daylight Saving Time Energy Conservation Act of 1973.” It’s now a relic of inappropriate interventions of the early seventies that included wage-price controls and the 55 mph speed limit. It represents what we don’t need. Consider some of the reasons for repeal:
Nature: It unbalances what is naturally harmonious. High noon should be when the sun reaches its apex, or as near as this can be, given the use of time zones.
Sleep Cycles: The (circadian) sleep cycle need not be disrupted twice a year, even if accomplished by a show of hands. In truth, the legislative process should be called out for its shortsighted habit of running roughshod over established peaceable social order. Here it smacks of social engineering with a disregard for workers, not to speak of an insensitivity to children losing sleep in the adjustment.
As reported at telegram.com “The Fatal Accident Reporting System found a 17 percent increase in traffic fatalities on the Monday after the shift.” This article cited findings in a University of Colorado at Boulder study of an increase in fatal motor vehicle accidents the first six days after the clocks spring ahead. This study suggests that the time change may even increase the risk of stroke.
Freedom: If those in a workplace agree to change their hours of work they are free to do so. Such “emergency” legislation imposed by the Federal government, on the other hand — however minor they seem — mandate conformity at the expense of basic freedoms.
Efficiency: Moreover, with the advent of LED-lights, the old cost-of-lighting argument has faded, especially because the start of the day has already been advanced about one hour as mentioned above. In fact, with more air-conditioning, the bias is for increased use of electric power under the time-shift, as people come home earlier in the hot season and turn up their air-conditioning.
Inconvenience: One has the annoyance of twice a year resetting clocks. This may take only 10 minutes, but over a 60-year span it’s 20 hours.
We all know what it feels like to arrive at work on time to find that everyone else had dutifully changed their clocks, so that we turn out to be one hour late.
There are real-world effects on major industries as well. Train and transport schedules cannot be easily adjusted. Amtrak, for instance, idles trains (and passengers) for one hour to keep on schedule in the fall and then tries to make up an hour in the spring by hurrying. More hourly work schedules need adjustment now that more businesses are open 24-7.
Affrontery: Perhaps worst of all is the fact is that there is no gain whatsoever in the number of minutes of sunlight in a day. It is hence presumptuous to maintain that the culture and habits of the people, as expressed by their arrangements and choices, were in error before the change. The benefit of the doubt should logically rest with conventional time.
Principle: Resetting clocks and watches not once but twice a year, is less a compromise of effort than of principle. It contributes to the habituation of interference by the state. We already prostrate ourselves filling out 1040 forms that tax the sale of our labor, including a required signature in disregard of the Fifth Amendment protection against self-incrimination. If we ever want to undo such an affront to freedom, annoying impositions such as time-shifting are a good place to start.
Sunset Old Laws: Thomas Jefferson suggested an automatic sunset provision for legislation: “… every law, naturally expires at the end of nineteen years.” In an April 2016 Reason article by Veronique de Rugy: “What Government Can Learn from Moore’s Law,” is suggested a sunset provision (that could be retroactive) in all Federal statutes and regulations to require an updated renewal within two years. Even better, might be a required supermajority for renewal. In Jefferson’s day, by the way, clocks were known as “regulators,” but such regulation stemmed not from legislation, but from social convention that produced efficient governing without the state.
As with a plethora of interventions some may be minor inconveniences, but like time-shifting, they share in a disrespect for the principle of simply leaving people alone. Mandated time shifting affects everyone while standard time imposes on no one.
One of the most persistent — and fallacious — argument against the libertarian or laissez-faire position is that libertarianism is an “atomistic” and “selfish” philosophy that denies the obvious truth that human beings are a “social species” who long for a strong sense of community.
Perhaps David Masciotra’s semi-coherent rant best illustrates this line of thinking as libertarianism is a political program that “eliminates empathy” and “denies the collective.” That it is in “Opposition to any conception of the public interest and common good, and the consistent rejection of any opportunity to organize communities in the interest of solidarity” and is nothing but a “… rejection of all rules and regulations, and the belief that everyone should have the ability to do whatever they want.” To sum up, “It is infantile naïveté.”
Voluntary Relationships Are Extremely ValuableMost good straw men are as self-evidently true as they are irrelevant. While it may be true that some libertarians want so much to be left alone that they would prefer to be left alone by not just the government but, well, everyone. The vast majority of people — including libertarians — understand quite well that human beings are a social and communitarian species. Libertarians simply believe human beings can self-organize and that it should be left to the individual which communities he or she will join and on what terms.
While a deontological argument could pretty much end there, critics will once again point to the scientific fact that human beings are a social animal and that a “selfish” value system at odds with our nature is a utopian (or maybe dystopian) fantasy.
While libertarians focus on the primacy of the individual, that focus does not in any way necessitate atomism. The plethora of libertarian gatherings and meet-ups should prove that by itself. Nor does it infer selfishness (although Ayn Rand — who explicitly denounced libertarianism, but is often associated with libertarianism — might argue this point). Selfishness and altruism are not mutually exclusive. As the psychologist Robert Wright describes, “Love … makes us want to further the happiness of others; it makes us give up a little so that others (the loved ones) may have a lot. More than that: love actually makes this sacrifice feel good.”The Moral Animal, p. 341. The famous self-help guru Dale Carnegie made the same observation,
Every act you have ever performed since the day you were born was performed because you wanted something. How about the time you gave a large contribution to the Red Cross? Yes, that is no exception to the rule. You gave the Red Cross the donation because you wanted to lend a helping hand; you wanted to do a beautiful, unselfish, divine act.How to Win Friends and Influence People, p. 43.
People can be selfless, sure, but they do so in a selfish way.
Not All Human Relationships Are the SameThis goes beyond a simple misunderstanding of libertarian theory, though. These critics, usually from the Left, have confused the science on human empathy and altruism. In fact, libertarianism is probably the only philosophical framework that can rectify human nature with the modern world in a peaceful way. The mistake stems from attempts to universalize humanity’s natural social instincts. This can be illustrated by an interview Steven Pinker discusses between Zach De La Rocha and Noam Chomsky,
[De La Rocha]: Another unquestionable idea is that people are naturally competitive, and that therefore, capitalism is the only proper way to organize society. Do you agree?
Chomsky: Look around you. In a family for example, if the parents are hungry do they steal food from the children? They would if they were competitive. In most social groupings that are even semi-sane people support each other and are sympathetic and helpful and care about other people and so on. Those are normal human emotions. It takes plenty of training to drive those feelings out of people’s heads, and they show up all over the place.Quoted in The Blank Slate, p. 246.
Chomsky’s mistake is so self-evidently ridiculous it almost beggars belief. He is effectively drawing an equivalence between someone’s own children and some guy that person has never met on the other side of the planet. Does it really take “plenty of training” for someone to care more about their own children than strangers? As Steven Pinker notes,
Unless people treat other members of society the way they treat their own children, the answer is a non-sequitur: people could care deeply about the children but feel differently about the millions of other people who make up society. The very framing of the question and answer assumes that humans are competitive or sympathetic across the board, rather than having different emotions toward people with whom they have different genetic relationships.The Blank Slate, p. 247.
Indeed, Adam Smith noticed this very thing back in the eighteenth century when he wrote,
Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all the humane sentiments had been once fairly expressed, he would pursue his business, take his repose or his diversion, with the same ease and tranquility, as if no such accident had happened. The most frivolous disaster which could befall him would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.The Theory of Moral Sentiments, pp. 126–27.
While we were all shocked and saddened by the tsunami in Indonesia in 2004, the earthquake in Haiti 2010, the tsunami and subsequent nuclear meltdown in Japan in 2011 as well as every other such tragedy, how many people do you know that actually lost any sleep over it?
Scientists explain this selective empathy through either kin selection for family (they share our genes) or reciprocal altruism, which develops friendships; both of which are lacking to strangers and even most acquaintances. So while tragedy abroad comes off to most as an unfortunate curiosity, we have all seen, and likely know, of people taking extreme risks or making huge sacrifices to help people they know, love and care about. Siblings will donate kidneys or part of their liver to each other; parents will take absurd risks to save their children and the like. Yes, strangers can do these things too sometimes. Occasionally there will even be an anonymous kidney donation from a living donor, but it’s quite rare. Indeed, the usual activism expressed at the suffering of strangers is to press the retweet button or to join some group that furthers one’s own self-identity.
The Limits of Human RelationshipsThis would further explain why the pop stars and movie stars are elevated so high in technological societies. It’s not like the average pop star is thousands of times more talented than those that “didn’t make it.” Indeed, the exact same song that makes it to the top of the charts would usually be lost in obscurity if released by a “no name” artist. And we know this without any doubt because the same few people who write pop songs do so for many different pop stars. What happens is that individuals can only keep track of so many different people at once and thereby pick only a select few artists to care about. People associate music or movies they like with that celebrity and despite not knowing the person personally, that celebrity basically becomes a one-way “friend” of sorts.
Much of this may seem quite obvious, but it underlies the fact the human beings are neither purely competitive nor purely cooperative. Even within competitive institutions, there is a substantial amount of cooperation. Other than commission-based industries, virtually all companies rely first and foremost on internal cooperation to fulfill a competitive aim. Businesses even have to cooperate with each other, for example, when it comes to outsourced vendors and suppliers. The term “Co-opertition” has even been coined to describe this phenomenon.
As noted above, the mistake the Left makes when criticizing libertarianism is to mistake humanity’s cooperative instincts as universal. There’s something called Dunbar’s number that notes that human beings can only comfortably maintain approximately 150 stable relationships. There has been some bickering amongst various psychologists about whether the number is actually 100 or 250 or thereabout, but there is basic unanimity that the general thesis is true.
Malcolm Gladwell described in his book The Tipping Point that the company W.L. Gore and Associates discovered by trial and error that social problems started occurring in any building that housed more than 150 people and thus reorganized to avoid such problems. Many other companies have started doing the same. Indeed, most groups, from social clubs to military units and the like tend to cluster around this number or even smaller. Even studies on social media have found that Dunbar’s number holds true. Yes, you may have more than 150 Facebook friends, but how many of those are really, truly friends?
A study in Nature looked at how people played the prisoner’s dilemma (a game that rewards cooperation, but only if all parties cooperate). As Christopher Allen describes, they created,
100 independent simulations with group sizes ranging from 2 to 512, and then [executed] each simulation 1,000 to 2,000 times. Each generation of the "players" was allowed to evolve different strategies of cooperation vs defection, the classic successful strategy being Tit for Tat. They would then evaluate the percentage of players who had cooperative strategies.
If punishment of defections was ruled out, they discovered that over the 1,000+ generations of the simulation that the rate of cooperation quickly crashes, such that at the group size of 8 a little over 50% cooperation evolved, and for groups that are larger than 16 none cooperate.
In essence, the evidence shows the humans either evolved or were created as a tribal species. And this fact is found in the typical group sizes of hunter-gatherer societies that still exist today. As Maria Konnikova notes, “The average group size among modern hunter-gatherer societies (where there was accurate census data) was 148.4 individuals.”
Indeed, the evidence even indicates that this general phenomenon is true across all primates. As Robin Dunbar, Louise Barrett, and John Lycett note,
… a series of studies … showed that relative neocortex volume correlates with various measures of social complexity across primates … [and] Humans fit this primate relationship between group size and neocortex size surprisingly well.Evolutionary Psychology, p. 114–16.
For most monkeys and apes, their “Dunbar’s number” for group size falls between five and 50.
So while human beings are not naturally atomistic, group cohesion, and cooperation are not univeralizable as many on the Left believe (or at least, want to believe). Of course we should treat everyone we come across — be it family, friend, or stranger with decency and respect. But, if naturally-cohesive human groups are small, as the scientific evidence clearly shows, then what sort of societal arrangement would best suit our species in the complex, modern would our minds are clearly not designed for? One governed by a massive state apparatus, or one of more localized, federated communities?
The political circus of the 2016 presidential election has revived and reinvigorated popular belief in age-old protectionist fallacies. Currently both Donald Trump and Bernie Sanders, are both in favor of expanding protectionist trade policy, with both of them arguing that free trade “destroys” jobs and hurts domestic workers and producers by exposing them to foreign competition. Both candidates espouse an utterly misguided zero-sum view of economics, in which one side to an exchange wins only when the other side loses. Both men are, of course, completely wrong.
Free Trade Does Not Destroy JobsIt is true that greater competition between domestic and foreign workers can lead to a decline in wage rates and possibly unemployment in some sectors of the economy. But this is only a short-term effect. Free competition between foreign and domestic producers also naturally leads to lower prices for the goods and services which can now be freely imported from abroad. So, while nominal wage rates are pushed down in some sectors, real wage rates rise overall for everyone in the economy because of the decline in prices.
Thanks to free trade consumers spend less money on certain goods and services and this allows them to spend more money on others, which leads to rising demand and thus profits in the sectors providing the latter, and consequently leads also to more investment by entrepreneurs. This higher rate of investment naturally leads to the creation of more jobs in these sectors and thus offsets any original rise in unemployment that might have occurred.
Alternatively, the consumers may choose to save the extra disposable income that was freed up by the decline in prices. This rise in the savings rate will lead to a decline in interest rates, which makes profitable certain long-term capital-intensive projects which were not profitable beforehand. Seizing the opportunity presented by this increase in savings, entrepreneurs will start borrowing and investing in those long-term capital intensive projects, which on its own already creates more jobs, but it also leads to a rise in demand for capital goods, which raises profits in the capital goods industries and consequently leads to more investment and job openings in those sectors.
Free Trade Is Win-WinFree trade not only doesn’t “destroy” jobs, but it also promotes specialization between nations, which improves the efficiency and productivity of workers, and leads to a rise in living standards for all. Trade is not some kind of a zero-sum game in which if one side wins, the other has to lose.
When two countries such as the United States and China, for example, trade freely with one another, their citizens are incentivized to specialize in those lines of production in which they have a comparative advantage. Due to the difference in factors of production endowments it is best for different countries to specialize in producing those types of goods and services which they can produce most efficiently in comparative terms. A higher level of specialization, through the effect of economies of scale, makes production more cost-efficient.
By specializing in a certain line of production and then exchanging the goods and services produced for those that others are specialized in producing, the people of a given country can substantially raise their living standards because the gains in productivity are naturally followed by an increasing supply of goods and services and thus rising real incomes. This way free trade allows for the flourishing of what can be called an “international” division of labor. Just like a greater degree of division of labor can lead to big gains in productivity and thus real incomes on an intra-national (i.e., internal for a given country) level it can also do so on an international level.
Protectionism Makes You PoorWhen international trade is restricted, for example, by protectionist legislation which places tariffs on certain imports, this process of specialization is hindered and thus the gains in productive efficiency are diminished. By artificially raising the price of imports, tariffs allow otherwise uncompetitive and inefficient domestic businesses to remain in operation. Consumers are forced to pay higher prices for the goods the importation of which is penalized by tariffs, and this effectively constitutes a redistribution of resources from the consumers to the domestic producers.
More importantly, protectionism hinders the process of specialization described in the previous section and thus prevents living standards from rising in the long-term, or worse — it can even lead to their decline. By propping up the profits of comparatively inefficient domestic producers and keeping in business, tariffs prevent the labor shift from those inefficient sectors, to more comparatively efficient ones. Consequently, because this prevents a higher degree of specialization from taking place, or even reverses it, the benefits that specialization leads to cannot be obtained. Productivity does not increase (or at least not to the same degree as it could) and thus real incomes do not rise.
Contrary to the popular political rhetoric nowadays, free trade does not “destroy jobs.” It can only lead to a shift of resources (labor, capital, and other factors) from one comparatively inefficient sector or group of sectors in the domestic economy to another more comparatively efficient one. This process of specialization in the comparatively advantageous lines of production not only does not destroy jobs, but it also enables big gains in efficiency and productivity to take place, which leads to a rise in real incomes. This is how, far from somehow hurting the domestic workers, free trade actually does the opposite — it makes them richer. It is, in fact, protectionism which makes us all poorer, workers included, by artificially propping up inefficient businesses, leading to a misallocation of resources and a decline in standards of living for us all.
In the wake of numerous cases of lead poisoning through Flint, Michigan’s government-managed water supply, some commentators immediately began looking for ways to blame the private sector. Shortly thereafter, David Brodwin of U.S. News and World Report wrote “Flint: The Big Cost of Small Government.”
According to Brodwin, what caused lead-tainted water to gush forth from faucets in Flint were “attacks on investment in public infrastructure and on regulation of all kinds.” For these he blames “right-leaning libertarian interests,” although he does not name a single one.
America, writes Brodwin, has fallen under an “obsession with tax cuts [which] has reduced budgets to the point where they can no longer sustain basic infrastructure.” Attacks on regulation supposedly caused the failure of the Michigan Department of Environmental Quality to do its job. “Either its staff was buffaloed by those in power, or its professionals had been replaced by political hacks willing to ignore the mission of the agency.” Brodwin does not support these assertions with evidence.
But then comes a strange concession from Brodwin: “Local officials of the federal [Obama administration] Environmental Protection Agency failed as well.”
Brodwin’s conclusion is that “[i]f we don’t address the underlying ideologies that led to this problem, we’ll face it again and again, all over the United States.”
If you are wondering at what point in its history Flint, Michigan jumped onto the cutting edge of free-market thinking and practice, join the club.
Obviously Brodwin’s contradictory essay doesn’t begin to explain how small government caused lead-tainted water to pour out of Flint’s taps. From an economics perspective, what all the facts of the Flint case clearly point to is the all-too-typical failure of central planners to adequately think through the most important implications of a decision.
On 25 March 2013, Michigan state officials and the Flint city council (by a 7–1 vote) decided to switch the city’s water source from the Detroit Water and Sewerage Department (DWSD) to the new Karegnondi Water Authority (KWA), which would not begin operating until 2016.
In the meantime, an alternate source of water had to be found. The 26th of June 2013 was when the actual decision by the city (signed by the state-appointed emergency manager, Ed Kurtz) was made to hire an engineering firm to put Flint’s water plant into full-time operation, thus switching Flint’s water supply from Detroit to the Flint River. (The river was already Flint’s back-up water source.)
What city, county, and state officials all failed to do was take measures to ensure that the river’s corrosive water was sufficiently treated so that it did not absorb toxic lead from Flint’s water network.
Far from being unusually negligent for a government, this sad story is unfortunately understandable and predictable. Unlike the numerous suppliers of private bottled water, central planners have no competitive pressures to rigorously think through any and all of their decisions.
One civil servant in Spain, for example, just recently ended a stint of not showing up for work for six years. Successfully executing such a stunt in a private-sector job in a competitive industry is just about impossible.
Sebring, Ohio; Jackson, Mississippi; and the Trouble with Government WaterWhile most readers of this site will have undoubtedly heard a lot about the lead-tainted water in Flint, Michigan, the stories that comparatively few will have heard about are lead in the water in Sebring, Ohio and last Wednesday (February 24) in Jackson, Mississippi.
Again, what should come as no surprise is that the same type of government bungling that put lead in Flint’s waters is on full display in Sebring and Jackson as well.
On 17 February 2016, the Ohio Environmental Protection Agency fired two of its employees and demoted a third. The first employee who was terminated failed to verify that lab test results were received by a field office. In turn, this employee’s boss was terminated for not double checking the work of said subordinate who had a long record of incompetent job performance.
The third employee, the one demoted, was a manager who failed to notify his bosses that Sebring officials ignored warnings about their town’s lead-contaminated water.
None of the three individuals are being publicly identified. So much for state transparency.
In Jackson, Mississippi, of a hundred homes tested in January of 2016, almost a dozen had tap water with levels of lead that require correction. Fifty-eight of these homes had been tested in June of 2015 but the Mississippi State Department of Health did not (as required) notify Jackson officials that some homes had forbidden levels of lead in their tap water until January of 2016.
The Progressive Jihad Against Bottled WaterProgressives have placed a spotlight on Flint but not Sebring and Jackson because their ideology precludes them from acknowledging systemic problems with government and its central-planning process. Progressive economists such as Brodwin lay the blame at the feet of libertarian ideology. Worse than their delusions about the state, the ultimate dream of progressives is to outlaw just about all competition to government water.
They (including filmmaker Michael Moore) are apoplectic about Flint (and by extension Sebring and Jackson) residents consuming bottled water: it has to be transported in on “pollution-spewing” trucks and it creates waste and environmental damage in the form of empty plastic bottles.
When progressives succeeded at banning bottled water at the University of Vermont in 2013, the number of empty plastic bottles being discarded on campus actually increased as students, staff, and faculty members switched from consuming bottled water to less healthy bottled soft and other drinks. In other words, even in Bernie Sanders’s government-worshipping Vermont, consumers did everything they could to avoid government taps.
Before Lead, There Was Viagra and Anti-PsychoticsYears before the Flint, Sebring, and Jackson contaminations, an AP investigation in 2008 discovered everything from antibiotics, antidepressants, sex hormones, erectile-dysfunction drugs, to tranquilizers in the water supplies of twenty-four metropolitan areas with 41–46 million Americans exposed.
Consuming government water is a bad idea. At its very best, it has a repulsive over-chlorinated swimming-pool smell and even worse off-putting saturated chemical taste. At its worst it can be tainted with everything from trace or higher levels of Viagra or estrogen to dangerous levels of lead. Only a complete fool would regularly and solely consume it to the exclusion of its private alternatives.
Lately, I’ve wondered how my neighbor, Sam, affords to buy so much stuff. He appears to have an unlimited budget. When I asked him about this, Sam asked, “Do you think I’m spending too much?”
“That depends,” I said, “How much money do you make?”
“I take home $100,000 a year.”
That surprised me. I would guess that he’s spending more than that. But I tried to be encouraging, “That sounds like plenty of income. With a little planning, you should be able to budget your spending and be financially stable.”
“But my finances are a mess,” Sam replied. “I spend more than I take home. Last year I had to borrow $12,000 just to cover my spending.”
“Well maybe things will be better this year,” I said, hoping that Sam’s spending issues was a one year problem.
“No,” Sam replied. “Actually, in the first three months of this year, I’ve already spent $19,000 more than I’ve made. It looks like my budget deficit this year will be much worse than it was last year.”
Now I was starting to worry. “Have you been borrowing money to cover your spending for a long time?”
“Oh yes. I have a lot of debt. Part of the problem is that I owe myself $150,000.”
I wondered if Sam misspoke, “Wait, wait, wait, you owe yourself $150,000? Why do you think that you’re in debt to yourself?”
“Well you see, over the years I promised myself that I was going to use my paychecks to pay for a fund for my children’s education, but instead of spending $150,000 on colleges, I spent the money on other expenses. So I figure that I owe myself this money so that I can pay for my children’s college tuitions.”
Obviously Sam doesn’t understand the definition of the word “debt.”
I tried to be polite in my response: “That doesn’t make any sense. It’s true that you’ve made some horrible decisions regarding your spending, but it’s ridiculous to claim that you owe yourself money. A debt occurs when one person owes another person money. Just because you changed your mind about how to spend your paychecks doesn’t mean that you’ve borrowed money from yourself.
“So the first thing you need to do is to think clearly about the amount of debt you have. You don’t owe yourself any money. Now, forgetting about this ridiculous notion of self-debt, how much do you owe?”
“Alright, I think I see your point. Let’s just talk about the rest of my debt. I owe various banks about $420,000. This debt is more than four times my take-home income.”
Sam often lies about his income and spending issues, but he always understates his budget problem. If he’s lying now, then I can be sure that the problem is even greater than he says. I wanted more information.
“That a pretty high debt to income ratio. But that might be somewhat manageable, although unwise, if you’ve borrowed that money at low interest rates.”
“I have some good news and some bad news,” Sam said. “Interest rates are low. In fact, in the last fourteen years, my debt has more than quadrupled, but my interest payments have increased less than 50 percent. That’s because interest rates have collapsed during that time. Isn’t that good news?”
“I suppose, but do you know that interest rates are going to increase over the next several years?”
“Yes, that’s the bad news. In the past year, I only paid $7,000 of interest, but within ten years my debt will increase over 50 percent, and possibly much more, and with higher interest rates I expect to be paying at least four to five times that much in interest annually.”
“That’s a huge problem. So to be able to make your loan payments, I assume that you’ve taken out some long-term loans.”
“No, no, no. In order to take advantage of the low interest rates, most of my borrowing is short term. I rollover my loans quickly. In the past year my principal payments on these loans totaled $207,000.”
“Let me get this straight. Your loan payments, including principal and interest, are well over twice your take home pay?”
“Yes, I take home a little over $8,000 per month and my loan payments are over $17,000 per month. But it’s no problem. In the past year I borrowed $223,000 to cover everything.”
Shocked, I said “How can you say borrowing more than twice your income is not a problem?”
“I simply borrow all the money I need to make all of my loan payments. I never pay any of the loans down. I’ve been doing this for years, ever since I started spending more than I make.”
“Okay. Most of your borrowing goes to cover your increasingly large principal and interest payments. And as interest rates rise, interest payments will become a bigger percentage of your spending. When that happens, your total debt will increase faster than your income. What is your plan, say in the next ten years, to correct this situation?”
“Well I don’t have a plan for correcting anything, because I don’t see how I can cut my spending.”
“What if the banks stop loaning you money to make your payments on your loans? What happens then?”
“I guess I’m assuming that won’t happen.”
Sam’s Budget Situation in Real NumbersIf one of our neighbors budgeted in this manner, we would obviously conclude that the guy is crazy. No such plan could work. Eventually lenders would refuse to fund Sam’s spending.
However, Sam’s situation looks a lot like the federal government budget plan. Take a look at some recent federal budget information and some Congressional Budget Office projections:
In FY (fiscal year) 2015, the feds had a budget deficit, counting only debt held by the public, of $339 billion, which is about 10 percent of their tax revenues of $3,248 billion. The deficit has been declining the last few years, but that is now changing.In fact, in the first three months of FY 2016, according to the Treasury Department, federal debt held by the public increased $548 billion. Admittedly, some of this debt was due to the fact that the feds were cooking the books in FY 2015 when they hit the debt ceiling limit. Nonetheless, the first quarter 2016 deficit is already 60 percent larger than the overall 2015 deficit.The federal government claims to owe itself over $5 trillion (they call it intragovernmental debt here). This $5 trillion represents tax revenues that were earmarked for specific spending programs, such as Social Security, but were spent on other programs. Since the feds collected taxes to pay for Social Security, but spent the money on something else, they conclude that they owe it to themselves to collect those tax revenues again. That’s the essence of intragovernmental debt. We should not count this as debt. Give the Treasury Department credit for ignoring this type of “debt” in their Daily Treasury Statements and in their end of the year debt reports.As of September 30, 2015, the feds had $13.1 trillion of debt owed to the public. FY 2015 tax revenues totaled $3.248 trillion. So just like Sam the government has a 4 to 1 debt to tax revenue ratio.In the past fourteen years, from September 30, 2001 (the start of George Bush’s first budget) to September 30, 2015 (the end of Barack Obama’s sixth budget), debt owed to the public increased from $3,339.3 billion to $13,123.8 billion. That’s an increase of 293 percent.According to the Daily Treasury Statements, in the past fourteen years, interest on treasury securities increased from $162.5 billion in fiscal year 2001 to $233.1 billion in fiscal year 2015. That’s a 44 percent increase during the same period when federal debt owed to the public almost quadrupled.In FY 2015, again according to the Daily Treasury Statements, the feds borrowed $7,251.4 billion (see the Public Debt Cash Issues for September 30, 2015), an average of almost $20 billion per day. They spent $6,740.3 billion of this borrowing rolling over their debt. So, Federal principal and interest payments are more than double federal tax revenues.According to the Congressional Budget Office’s baseline projections, debt held by the public in 2025 should exceed $21 trillion and during that time interest rates are expected to increase. Interest rates have been kept artificially low for years. If interest rates return to a more normal level, say to the rates they were paying when George Bush took office fifteen years ago, then interest payments in 2025 will exceed $1.2 trillion. That’s over a 400 percent increase compared to the FY 2015 interest payments. I should note here that the baseline budget projections are optimistic. We should expect the debt situation in 2025 to be significantly worse than these projections.The federal government’s debt has exploded under the Bush and Obama administrations. Low interest payments due to the low interest rates have masked their budget problems. As interest rates and the spending gap on entitlement programs such as Social Security both increase, the budget problem will compound.
The government’s plan is to borrow all of the money they need to pay all of their principal and interest payments and to also pay for the budget deficits in their spending programs. The question we should ask is: what’s going to happen when the world’s lenders refuse to bankroll DC’s spending schemes?
The Federal Reserve is a key component of the American Transfer State. Under the guise of “macroeconomic management,” it redistributes vast amounts of wealth on an ongoing basis through inflation. The victims of these transfers are ordinary Americans. The beneficiaries are the government and its elite cronies.
The Fed masks the nature of this surreptitious taxation and corporate welfare by performing a simple shell game that is just complicated enough to confound the general public.
First, let’s imagine the government performing this kind of inflationary transfer without the shell game.
Imagine Uncle Sam sitting at a desk, representing the Federal government. His right hand is the Treasury. It has the government’s main bank account, represented by a ledger on the desk. Uncle Sam also has revenue collecting powers, represented by a gun resting on the desk, which he uses to extort taxes from the public. Whenever he confiscates money, the cash balances of the public decline, and Uncle Sam’s ledger increases by the same amount.
Now let’s say Uncle Sam wants to raise $200 million for current expenditures: bureaucrat salaries, weapons purchases, welfare payments, etc. The problem is, the public has a limited tolerance for overt taxation. So, at a certain point, if Uncle Sam simply gestures to his gun again to levy the funds, he might face a tax revolt.
So let’s say instead of using his taxing power, Uncle Sam uses his fiat money power: his ability, based on the government’s monopoly control over the money supply, to inflate (defined here as monetary expansion). As the God of the Bible could say “let there be light” (in Latin, fiat lux) and it was so, the modern omnipotent State can say “let there be money” (fiat money or fiat pecunia) and it is so. With his right hand, Uncle Sam adds $200 million to his Treasury bank balance by simply writing it on his ledger. Voilà, he now has $200 million, simply because he says so. He can then transfer the new money to his workers, contractors, and dependents.
It would seem the public wasn’t taxed at all. Uncle Sam’s balance increased, but the cash balances of the populace did not diminish. So no skin off the backs of the people, right? Does anybody lose when the government gains in this magical way? When you think about it, somebody must lose. After all, it’s not really magic.
The true wealth of society — what actually sustains human life and makes it more comfortable and delightful — is the stuff we buy with money; not money itself. It’s the food, clothing, housing, smartphones, mountain bikes, and other consumers’ goods. It’s also the farmland, factories, robots, raw materials, labor and other producers’ goods used to make those consumers’ goods. I covered this point in detail in a lecture I gave which is on YouTube, and in my essay based on that talk, “How Inflation Drinks Your Milkshake.”
Creating new money does not create any additional stuff to go around. So if creating money got the government more stuff, that means others sharing the same world of scarcity must have less stuff. It’s a zero-sum game; a win-lose situation. If the government wins something through inflation, somebody has to lose. So who loses?
Well what if the government did not have the money needed to hire the bureaucrats? Then that labor would have had to enter the private market. And what if the government couldn’t afford its weapons purchases? Then that capital would have been liquidated, even scrapped, and would have also been reallocated to the private market. So the losers include the private market actors that would have acquired the labor and resources, had they not been outbid by the government’s inflation-enhanced purchasing power.
But the government paymasters are not the only one who gained from the inflation. The bureaucrats and contractors themselves did too, because their wages and selling prices were bid up higher than otherwise. And then since the government suppliers also have more money to spend, their own workers and suppliers benefit similarly.
Does that mean that as the new money filters through the economy’s supply chains, everybody’s selling prices get bid up? Yes, that’s an alternative definition of “inflation”: the general rise in prices caused by monetary expansion. But does that make everybody better off? That is impossible, because again, that would mean more stuff had been created, when it wasn’t.
The new money reaches some people early and some people late. By the time the new money reaches the late receivers, bidding up their selling prices, it has already bid up the prices of the things they buy to an even greater extent. So the late receivers get poorer, while the early receivers get richer. (In economics, these are called “Cantillon effects.” For more about this process, see my inflation essay mentioned above.)
And the earliest receivers always include the government and its partners, while the late receivers are usually workers and small business owners who don’t have such lofty connections. So these “commoners” are effectively taxed for the benefit of the government-connected elite. But, since the taxation was effected through inflation, the public doesn’t realize that. They know they are poorer, but not why. They never saw a tax bill or had to cut a check. They just see their wages and revenue fail to keep pace with the rising costs of living and costs of doing business. And as a result, they see their ability to get actual stuff diminish. But they don’t see the government’s role in it.
Instead of obnoxiously demanding that the public hand over its wealth, the government just quietly siphons it away. This way it avoids public outrage and resistance, and so is able to maximize the loot. As Jean Baptiste Colbert (finance minister to King Louis XIV of France) put it, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.” With inflation, the geese hardly hiss, because they think they are simply molting, and are unaware they are even being plucked.
Yet, it is in the hands of central bankers that the art of taxation truly nears perfection. The inflation tax is sneaky, but by itself it’s not quite sneaky enough. Even with inflation’s quiet method of wealth transfer, the jig would eventually be up if the government simply kept adding to its own account. Even if people don’t realize how they are losing, they can see that the government is simultaneously gaining, which would be suspicious. That correlation needs to be blurred somehow, else the more astute geese will start honking. That’s where Uncle Sam’s shell game comes in.
Let’s say instead of the Treasury creating the $200 million, it borrows it from an investment bank, like Goldman Sachs. Let’s see if, working together, Uncle Sam and Goldman can inflate, and both come out richer with a stroke of a pen, at the expense of the public, without it being clear that they did.
To borrow the funds, Uncle Sam’s Treasury right hand writes on a piece of paper: “IOU $200 million.” That represents a bond issue. Goldman lends the government money by purchasing the bonds. $200 million transfers from Goldman’s ledger to Uncle Sam’s. And in return, Uncle Sam gives Goldman a transferable IOU which gives the holder the right to collect $200 million from Uncle Sam later, plus interest. Then, the Uncle Sam transfers the newly borrowed $200 million to his bureaucrats, contractors, and dependents. And now the Treasury owes Goldman $200 million plus interest.
But that’s where Uncle Sam’s left hand finally comes into play (shell games usually require two hands). His left hand is the Federal Reserve. In the US government’s real-life arrangement, it is the Fed, not the Treasury, that has the power to create new money.
Now the Fed goes shopping for government debt. Lo and behold, it finds that Goldman Sachs is selling $200 million in Treasury bonds. Let’s say the Fed then pays $205 million for the bonds, giving Goldman a tidy profit. But of course the Fed has its own peculiar way of paying. Uncle Sam just reaches over with his Federal Reserve left hand and credits Goldman’s account $205 million by simply writing it directly on the investment bank’s ledger. Keep your eye on the ball! That money was conjured out of thin air. That is where the inflation occurs in the slightly more elaborate process. “Fiat pecunia!” says Fed Chair “Hermione” Yellen. For all its technocratic jargon, this sleight-of-hand is pretty much the only “magic” trick the Fed knows.
Now let’s review. Who benefits? Goldman Sachs has $5 million in profit. And Uncle Sam was able to pay off his crew. At what cost? Well, the Federal Reserve has $200 million in Treasury IOUs. But that only means the Treasury owes the Fed $200 million plus interest. In other words, Uncle Sam’s right hand owes his left hand some money. But it’s all Uncle Sam; it’s all the same government. As Boston University economist Laurence Kotlikoff has pointed out:
Yes, the Treasury pays interest and principal to the Fed on the bonds, but the Fed hands that interest and principal back to the Treasury as profits earned by a government corporation, namely the Fed.
Uncle Sam gave up nothing. There are no costs for the government or its buddies. They are simply enriched. And again, inflation cannot enrich early receivers of new money without commensurately impoverishing the late receivers. The monetary expansion simply aggrandized the government, its bureaucrats, its contractors, and (now) its banking buddies at the expense of the general public, just as it did in the simpler example.
But that is not clear to most observers, because they get distracted and confused by the Treasury/Fed/private bank shell game that Uncle Sam plays. The thinking goes: “Well, the Treasury isn’t getting something out of nothing, because it’s just borrowing, which means it’ll have to pay it back. And Goldman Sachs is getting new money, but that’s not for nothing either, because it’s selling a bond; it makes sense that they would accrue a profit. And the Fed is doing the money creation, but that’s not going directly to government spending. It’s just compensating Goldman Sachs for its investment. Also, I heard on CNBC that the Fed’s open market operations stabilize the price level and minimize unemployment. Anyway, it’s all very complicated and technical. But they’re the experts, and I’m sure they’re just looking out for us.”
It’s all a con, and a cheap one at that. Unfortunately, sometimes the most successful con artists are the ones who keep it simple.
Dissatisfaction with the Federal Reserve appears to have gone mainstream with presidential candidates Trump, Sanders, Cruz, and Rubio all expressing a need for reform of the central bank.
An understanding of how central banks work has become more important than ever as central banks across the world, have been putting their faith in increasingly radical forms of monetary policy, which now includes negative interest rates and paying interest on reserves.
As always, a solid understanding of sound economics remains at the center of the fight against statism.
Earlier this week we celebrated the birthday of Carl Menger, founder of the Austrian school. Ludwig von Mises, who credited Menger’s Principles of Economics for making him an economist, recalled that not only was Menger a revolutionary thinker, but a prophet for the devastating wars that engulfed Europe in the first half of the twentieth century.
Unfortunately it is easy to look at the world today and see the same troubling trends that Menger saw in the early 1910s. Be it governments weaponizing the financial sector at the expense of innocent people, or the dangerous consolidation of industries due to legislation named after obnoxious politicians — far too many people with influence continue to fail to learn the lessons of history. It is no surprise that populism seems to be sweeping the globe.
This time on Mises Weekends, Jeff Deist recaps his recent talk in Houston entitled "Socialist Left vs. alt-Right: What it Means for Liberty" — a talk which generated plenty of comments from libertarians, progressives, and the alt-Right. Jeff discusses why we should celebrate the death of supposed "democratic consensus," why the progressive left doesn't care about winning votes, how the alt-Right turns identity politics against social justice warriors, and what libertarians should learn from populism and even demagoguery.
In case you missed any of them, here are articles from this past week’s Mises Daily and Mises Wire:
Bernie Sanders Criticizes the Fed for the Wrong Reasons by C. Jay EngelWhere Negative Interest Rates Will Lead Us by Patrick BarronDemocracy Has Been Weaponized by Ralph RaicoCentral Banks Should Stop Paying Interest on Reserves by Brendan BrownThe Economics of "Free Stuff" by Jonathan NewmanNegative Interest Rates (and Fear) Mean We'll Save More, not Less by Charles Hugh SmithRothbard and the Importance of Freedom in Education by Ryan McMakenCarl Menger: Founder of the Austrian School by Jörg Guido HülsmannEurope Continues to Splinter: A British Exit Looms Large as Schengen Dies by Ryan McMakenThe Dodd-Frank Oligopoly by Mark ThorntonLegal Marijuana Businesses Must Pay 70% Tax by Ryan McMakenWill Donald Trump Reform the Fed? by Ryan McMakenThe Us Banking System as an Arm of US Foreign Policy by Paul-Martin Foss
Despite zero-interest-rate-policy (ZIRP) and multiple quantitative easing programs — whereby the central bank buys large quantities of assets while leaving interest rates at practically zero — the world’s economies are stuck in the doldrums. The central banks’ only accomplishment seems to be an increase in public and private debt. Therefore, the next step for the Keynesian economists who rule central banks everywhere is to make interest rates negative (i.e., adopt negative-interest-rate-policy or “NIRP.”) The process can be as simple as the central bank charging its member banks for holding excess reserves, although the same thing can be accomplished by more roundabout methods such as manipulating the reverse repo market.
Remember, it was the central bank itself that created these excess reserves when it purchased assets with money created out of thin air. The reserves landed in bank reserve accounts at the central bank when the recipients of the central bank’s asset purchases deposited their checks in their local banks. Now the banks have liabilities that are backed by depreciating assets (i.e., the banks still owe their customers the full amount in their checking accounts), but the central bank charges the banks for holding the reserves that back the deposits. In effect, the banks are being extorted by the central banks to increase lending or lose money. The banks have no choice. If they can’t find worthy borrowers, they must charge their customers for the privilege of having money in their checking accounts. Or, as is happening in some European banks, the banks try to increase loan rates to current borrowers in order to cover the added cost.
In European countries where NIRP reigns, so far, the banks are charging only large account holders for their deposits. So, these large account customers are scrambling to move their money out of banks and into assets that do not depreciate. The scramble for high grade securities has resulted in some securities being sold at a premium (i.e., the customers will get back less than they invested).
How can this be? Well, the premium amount is less than the charge by the banks, so the large account customer is slightly less worse off. He loses somewhat less money. But this really does not solve the problem; it just means that the excess reserves are moved somewhere else, simply creating the same problem for a new set of banks that ended up with the money after the first group of investors ditched their cash for securities.
But that is not what the central banks want. The central banks want to force the commercial banks to lend money in order to avoid the excess reserve charge. They appear poised to increase the so-far-nominal cost of a half percent or less. If the central banks can charge a half percent, they can charge anything they wish and, given the Keynesian mindset that led to the insanity of negative rates in the first place, probably will do so.
What Interest Rates Are ForNegative rates violate numerous tenets of sound economics. For example, the basis of interest rates is consumer time preference, described by David Howden in an article written almost three years ago about the loss of Canadian manufacturing.
Time is a factor necessary for production, and unique in the sense that we cannot economically allocate it like other inputs. The choice of time is always “sooner or later” and never “more or less” (as is the case with other input factors). Interest rates help us determine how soon we should consume a good, or how long a production process should be. Low interest rates imply that the future is not heavily discounted. At a low rate you will be willing to wait a longer period of time to realise the enjoyment of consumption or the profits of an investment. High interest rates invoke the corollary — you will want to consume earlier, or employ production processes that pay off in as short a time as possible.
Dr. Howden goes even further to show how central bank production of money out of thin air in order to drive down the interest rate causes disequilibrium between borrowers, investors and savers. The very purpose of the interest rate in an unhampered economy, however, is to create equilibrium between these two groups.
Disequilibrium in the time structure of production (primarily an overinvestment in longer term projects), and an inevitable boom-bust business cycle that follows, results from the fact that real savings had not increased to provide the real goods necessary for the increased investments. First, businesses go bankrupt, then the banks, and then the population as a whole.
The Inevitable BustBut can’t the central bank just print more helicopter money to save everyone? Unfortunately, no. More money cannot cure what too much money created.
Of course, an economy that has been thrown into disequilibrium by negative interest rates may display many weird anomalies before succumbing to the “crack up boom,” as described by Ludwig von Mises.
One early indication of loss of confidence in money is a commodity boom in precious metals. Prices rise faster and faster and production collapses. The public understands that the monetary authorities have no intention of reversing their negative interest rate policies and restoring sound money and banking. In a mad rush to save their wealth from total destruction, the public will start to buy what it hopes to be assets that will not depreciate. This sets off a huge boom in some asset categories; thus the “boom” portion of Mises’s “crackup boom” scenario. But the crackup follows on the boom’s heels.
The real pity is that the busts and crackups could all have been avoided if central bankers recognized that falling prices eventually create the conditions for a normal economic revival. Deflation is not a death spiral as the Keynesians believe. In a functioning market, the public’s demand to hold money will be satisfied when their reserves of money balances are sufficient in relation to the price level, when they are once again confident of the future, and when they are willing to invest for the long term.
Thus, the suppression of interest rates has been unnecessary and harmful. Nevertheless, expect more central banks to follow the early leaders — Switzerland, Sweden, Denmark, and even the European Central Bank itself — into negative interest rate territory. The crying shame is that it will not work and will cause great harm to hundreds of millions of people.
Bernie Sanders’s advice on fixing the Fed demonstrates the fact that being “anti-Fed” is not enough. One must not just be a critic of the Fed. One must also know what the Fed is doing that is bad, and what the better solution would be. Unfortunately, those of us who think that the Fed has been an engine of trouble in the US economy over the last many decades are sometimes lumped together with socialist critics of Fed policy. But the free market approach to money and banking has nothing in common with Bernie Sanders.
Sanders took to The New York Times last month to lament that the “recent decision by the Fed to raise interest rates is the latest example of the rigged economic system.” Now, perhaps it is true that the decision by the Fed is an example of rigging the system. But it is only true in a way that Sanders never intends. For Sanders, it is the suppression of interest rates that should be the goal, not their being raised. But in fact, both raising and suppressing the rates of interest is, by definition, rigging the economy.
Interest rates function in an unhampered market as a result of the interaction between creditors and debtors, capitalists and borrowers. It is the effort to change the interest rate either up or down away from the market rate of interest that constitutes a system being “rigged.”
Moreover, Sanders complains that interest rates should only be raised if and when policy officials begin to see rising prices. Since “price inflation” has been low over the last several years, the assertion is made that there should be no hurry to leave the position of near-zero interest rates. The problem of this argument — especially from the Austrian view — is that price inflation per se is not the problem, it is only one possible symptom of the problem. It is akin to arguing that the cause of internal bleeding is of no concern because there is no external wound that yet warrants a band-aid.
The problem with low interest rates, if they are low due to suppression by the central bank, is that they come about artificially; that is, they come about not because people have saved more and want to allocate their savings to investments, but rather because the banks have expanded the supply of money and credit in the economy.
But money is not wealth. Money is a claim on wealth (i.e., real resources). Thus, an expansion of the money supply gives the illusion of an increase in wealth; but in reality there are now simply many more claims to a fixed amount of wealth. This can lead to price inflation, but more importantly, it leads to the misallocation of resources to the first holders of the new money.
Sanders’s entire plan rests on the idea that what the economy needs is an influx of new lending: he wants the Fed to encourage — instead of discourage — commercial banks to increase their extension of loans. But this is completely the wrong model. What is needed is not more cheap debt. Rather, what is needed is improvement in capital formulation. What is needed is deleveraging and liquidation. What is needed is the thing that Keynesian economists fear most: savings, deferment of mass consumption, and a sound currency.
Although the causes of economic crises recurring throughout US history and often spreading worldwide can’t be proven using empirical means, oppressive government regulations favoring special interests in relevant industries have preceded every crisis.
Typically, cronyism involves support of politicians in exchange for regulations denying others the freedom to compete with the moneyed interests (e.g., monopolies). Less competition leads to higher costs and lower quality. It reduces economic growth, jobs, wages, innovation, and productivity. Attempts to control economic growth through government spending and/or manipulating interest rates (e.g., stimulate growth with low rates) generally leads to more severe crises.
None of these things are recent phenomena, but can be found again and again throughout American history.
MercantilismAfter the Revolutionary War, when the agrarian economy was beginning to industrialize, politicians pursued British-style mercantilism, including colonialism, against natives and regulations blocking competition in banking and manufacturing. Financial panics and depressions resulted under a national bank in 1792 and from 1819–21 and state-regulated banks from 1837–43 and 1857–59.
The Civil War was a dispute between Republicans representing manufacturers in the North that blocked free trade with import tariffs against Europe, and Democrats representing agricultural plantations in the South that refused to replace slavery with mechanization using the North’s high-cost goods.
MonopolizationThe “Gilded Age of Capitalism” shifted the economy from agriculture to industry led by “robber barons” who lobbied mostly Republicans. The government helped create railroad monopolies with low-interest loans, land grants, and special frontier privileges. The railroads formed a conglomerate that monopolized much of the rest of the economy by favoring large over small customers (e.g., Rockefeller’s Standard Oil over farmers), large suppliers (e.g., Carnegie Steel), and big banks (e.g., J.P. Morgan).
Both railroads and banking (with both national and state banks) were implicated in the severe financial panics from 1873–78 and 1893–97, occurring during the Long Depression of 1873–96, and another panic in 1901. Banking regulation led to the panic in 1907.
During the Progressive Era, the US used regulation to form many of today’s monopolies. From 1906 to 1910, Republicans led efforts to create state-regulated electricity and natural gas utility monopolies, and the Seven Sisters oil and physician oligopolies. In 1913, Democrats sanctioned the telephone monopoly and founded the Federal Reserve banking monopoly (i.e., which regulates the banks). After World War I, the Fed raised interest rates which led to the depression of 1920–21, which bankrupted many companies and led to manufacturing oligopolies, including in the automotive industry.
Thanks to these new frontiers in a regulated economy, by the 1920s, only 200 corporations controlled over half of all US industry and the richest 1 percent of the population owned 40 percent of the nation's wealth. As in recent times, the Fed responded by providing easy credit at low interest rates, which led to increased consumer and business debt, uneconomic and risky investments, and inflated assets, including stock prices (further increasing wealth disparity). After the Fed tried to raise interest rates, the result was the Great Stock Market Crash of 1929.
NationalizationDuring the 1930s, the crash led to the Great Depression, the worst financial crisis in US history, and then spread from the world’s largest economy globally, albeit with less severity abroad. Democrats, led by President Roosevelt (FDR) and supported by bankers, agriculture, oil, and labor, tried to redistribute wealth by limiting competition through government takeovers, including trucking, airline, and housing industries, and restricting the supply of food and oil. This led to continued global depression and World War II, which was financed with debt.
Finally, the post-war boom or “Golden Age of Capitalism” saw a dismantling of wartime regulations and growing opportunities especially in manufacturing (like China today). During global rebuilding, the US became the world’s economic leader with about 4 percent annual growth, even with increasing interest rates, decreasing debt, and high taxes. Although wealth disparity was historically low, Democrats increased regulation of necessities, leading to today’s high costs.
FDR had taken money from taxpayers to subsidize home loans at low interest rates including guarantees from the Federal Housing Administration (FHA) since 1934, and securitization by the Fannie Mae secondary mortgage monopoly since 1938 (and Democrats added Freddie Mac to form a duopoly in 1970). After the war, the subsidies led to unsustainable demand for more expensive and larger homes, urban sprawl, and a shortage of affordable housing.
FDR had also taken money from taxpayers to subsidize favored farm crops, which discouraged alternative crops. After 1946, Democrats increased subsidies leading to inflated prices for farmland. Since 1973, the US has subsidized food overproduction leading to dumped exports that retard agricultural and economic development in the developing world and uneconomical bio-fuels protected by tariffs against Brazilian ethanol (until 2012). FDR had led support for the nationalization of oil industries (e.g., Mexico), and military spending to defend dictators in oil-rich countries (e.g., Saudi Arabia).
In 1965, Democrats led nationalization of about half of health care purchasing through Medicare and Medicaid. These programs, and later Obamacare, subsidized increased demand while the supply of doctors and hospitals has been restricted. The resulting health care crisis led to skyrocketing costs nearly triple those of other developed countries.
Psuedo-DeregulationThe dreaded stagflation of the 1970s is considered tied for the second worst financial crisis in US history. The Fed responded to inflation by raising interest rates, leading to the Great Recession of the early 1980s, which led to the Savings and Loan Crisis, and spread as the Latin American Debt Crisis. Since then, the Fed has been lowering rates overall.
Meanwhile, politicians claimed to be trying to increase cost efficiency through privatization of public industries, and foster competition through partial deregulation of private industries. Worldwide, politicians allowed the monopolists to write the rules, including preferential bargain sales to cronies, which led to even nastier deregulated monopolies.
Deregulation was limited mainly to common carrier industries, including airlines in 1978, trucking in 1980, telecommunications in 1996, and electricity and natural gas utilities during the 1990s, and also banking in 1999. For example, states allowed utilities to design rigged trading schemes, gain preferential access to transport lines, and sell assets to affiliates for pennies on the dollar. Deregulation declined after manipulations led to the California Energy Crisis of 2000.
CorporatismAfter the energy crises and bursting of the internet bubble in 2000, big business Republicans and big government Democrats practiced corporatism. The US House Budget Committee explains: “In too many areas of the economy — especially energy, housing, finance, and health care — free enterprise has given way to government control in partnership with a few large or politically well-connected companies.”
In 2003, regulations led to increased ethanol production from corn, but after that led to the 2007–08 Food Crisis, growth was stopped by mandates that the fuel be made from expensive-to-process cellulose.
Meanwhile, George W. Bush promoted home loans securitized through the Fannie and Freddie duopoly and the Fed’s big banks, while encouraging the Fed to lower interest rates, leading to a bubble in home ownership and prices. Soon after the Fed started raising rates, the bubble burst leading to the 2007–09 Subprime Mortgage Crisis, 2007–08 Financial Crisis (considered tied for the second worst financial crisis in US history), 2008–10 Automotive Crisis, and 2008–12 Global Recession.
In 2010, Dodd Frank gave politicians more oversight over the Fed’s big banks, increasing influence peddling, and risks of crises. The Fed has been loaning trillions of dollars at low interest rates to the big banks. Lower rates can encourage financial engineering, like mergers, which allow bankers and corporate executives to bleed profits from large corporations, who receive preferential tax treatment, especially abroad. Since 1998, the financial sector has spent over $6 billion lobbying Congress.
The Bank for International Settlements, or so-called “bank of central bankers,” warns another global debt crisis is coming, and the debt-trap is now even worse than before 2007. The US has led many nations to continue to lower interest rates and accumulating private and public debt. Now, a slowing economy could make the debt toxic and lead to a financial crisis that would be hastened as the Fed raises rates. The Bank warns: “It is unrealistic and dangerous to expect that monetary policy can cure all the global economy’s ills.”
Obamacare could allow bureaucracies to control patient treatments and prices, while lobbied by the industry. Since 1998, medical interests have spent over $6 billion lobbying Congress.
The Free Market SolutionToday, there is no party that favors true privatization or free markets. Republicans favor monopolization, while claiming support for free markets and blaming the Democrat’s high taxes and regulations for crises. Democrats favor nationalization, while blaming non-existent free markets for crises. Meanwhile, many Americans appear to be embracing the regulatory nationalism of crony capitalist Donald Trump or the democratic socialism of Bernie Sanders.
The solution, however, is simply to take as much power as possible out of the control of corruptible politicians and their special interest supporters.
In 2008, the Federal Reserve began paying interest on reserve balances held on deposit at the Fed. It took more than seven decades from the US leaving the gold standard — in 1933 — for the fiat regime to do this and thus revoke a cardinal element of the old gold-based monetary system: the non-payment of any interest on base money.
The academic catalyst to this change came from Milton Friedman’s essay “The Optimum Quantity of Money” where he argued that the opportunity cost of paper money (any foregoing of interest compared to on alternative money-like instruments such as savings deposits) should be equal to its virtually-zero marginal cost of production. Opportunity cost could indeed be brought down to zero if base money (bank reserves, currency) in large part paid interest at the market rate. Under the gold standard, the opportunity cost of holding base money largely in metallic form (gold coin) was indeed typically significant. All forms of base money paid no interest. And the stream of interest income foregone in terms of present value was equal in principle to the marginal cost of gold production (this was equal to the gold price).
Interest on Reserves are Important to Controlling Markets and Imposing Negative RatesFriedman, however, did not identify the catch-22 of his proposal. If the officials of the fiat money regime indeed take steps to close the gap between the marginal production cost and opportunity cost of base money, with both at zero, then there can be no market mechanism free of official intervention and manipulation for determining interest rates.
That is what we are now finding out in the few years since central banks in the US, Europe, and Japan started paying interest on reserves. (The ECB was authorized to do this since its launch in 1999, while the Fed and BoJ began following the 2008 financial crisis.) Central banks can now bind the invisible hand operating in the interest rate market to an extent almost unprecedented in peacetime. In some cases, central banks have even deployed a negative interest rate “tool” which would have been impossible under the prior status quo where base money paid no interest.
How We Got HereThe signing into law of the Financial Services Regulatory Relief Act in 2006 authorized the Federal Reserve to begin paying interest on reserves held by depository institutions beginning October 1, 2011. On the insistence of then Fed Chief Bernanke, that date was brought forward to October 1, 2008 by the Emergency Economic Stabilization Act. He was in the process of dispensing huge loans to troubled financial institutions but wanted nonetheless to keep interest rates at a positive level (one purpose here was to protect the money market fund industry).
Accordingly, the Federal Reserve Board amended its regulation D so that the interest rate paid on required reserves and on excess reserves would be at levels tied (according to distinct formulas at the start) to market rates. An official communiqué explained that the new procedure would eliminate the opportunity cost of holding required reserves (and thereby “deregulate”) and help to establish a lower limit for the Federal Funds rate, becoming thereby a useful tool of monetary policy.
This was useful indeed from the viewpoint of rate manipulators: by setting the rate on excess reserves the Fed could now determine the path of short-term interest rates and strongly influence longer term rates regardless of how the supply of monetary base was growing relative to trend demand. By contrast, under the gold standard and the subsequent first seven decades of the fiat money regime, interest rates in the money market were determined by forces which brought demand for base money into balance with the path of supply as set by gold mining conditions or by central bank policy decision respectively. A rise in rates meant that the public and the banks would economize on their direct or indirect holdings of base money and conversely.
Back Before the Fed Paid Interest on ReservesYes, under the fiat money system the central bank could effectively peg a short-term rate and supply whatever amount of base money was needed to underwrite that — but the consequential growth of supply in base money was a variable which got wide attention and remained an ostensible policy concern. Right up until the Greenspan era, the FOMC implemented policy decisions by directing the New York Fed money desk to increase or reduce the pace of reserve growth and changes in the Fed funds rate occurred ostensibly to accomplish that purpose. This old method of determining money market interest rates under a fiat regime — in which banks’ need for reserves was minute given deposit insurance, a generous lender of last resort, and too-big-to-fail — depended on the banking industry enduring what was essentially a tax on its deposit business, which was then magnified by fairly high legal reserve requirements. Thus, it is not surprising that the original impetus to paying interest on reserves, whether in the US or Europe, came from the banking lobby. There was no such burden under the gold standard even though the yellow metal earned no interest. Banks in honoring their pledge to deposit clients that their funds were convertible into gold had to visibly hold large amounts of the metal in their vaults or at hand in a reserve center. Actual and potential demand for monetary base by the public is more limited under a fiat money regime than under the gold standard as bank notes are hardly such a distinct asset as gold coin from other financial instruments.
More Problems with Friedmanite “Solutions”Friedman, when he advocated eliminating the opportunity cost of base money under a fiat regime, hypothesized that this could occur under a long-run declining trend of prices rather than by the payment of interest. The real rate of return on base money could then be in line with the equilibrium real interest rate. This proposal for perpetually declining prices would also have been problematic, though. The interest rate would fluctuate, and in boom times be well above the rate of price decline. In any case, the rate of price decline would surely vary (sometimes into positive territory) in a well-functioning economy even when the long-run trend was constant (downward). The equilibrium real interest rate would be below the rate of price decline sometimes (for example, during business downturns), meaning that market rates even at zero would be too high. That situation did not occur often under the gold standard where prices were expected to be on a flat trend from a very long-run perspective and move pro-cyclically (falling to a low-point in the recession from which they were expected to rise in the subsequent business expansion, meaning that real interest rates would then be negative).
What Can Be Done?So what is to be done to escape the curse? A starting point in the US would be for Congress to ban the payment of interest on bank reserves. And the US should use its financial power with respect to the IMF to argue that Japan and Europe act similarly within a spirit of G-7 coordination such as to combat monetary instability. We have seen in recent years how rate manipulation and negative rates are made possible by the payment of interest on reserves, and are potent weapons of currency warfare. Yes, the ban in the immediate would force the Federal Reserve to slim down its balance sheet so that supply and demand for base money would balance at a low positive level of interest rates. The Fed might have to swap its holdings of long-maturity debt for T-bills at the Treasury window so as to avoid any dislocation of the long-term interest rate market in consequence. That, not the Yellen-Fischer “rate lift off day and beyond,” is the road back to monetary normalcy.
Is it time to abolish the Supreme Court? This was the question Ryan McMaken asked following the death of Justice Antonin Scalia. While the high court may have been created with the lofty ideals of being above the political fray, the desperate scrambling of politicians on both sides of the isle illustrates how broken and partisan the court has become in practice. As Jeff Deist notes, the increased centralization of the rule of law has seen the court play a role in further dividing the country.
Of course, the loss of faith in the Supreme Court simply mirrors the larger global trend of deteriorating faith in central intuitions. With every day comes a new headline of governments and other central planners desperately trying to regain control, be it Japan’s central bank panicking in their embrace of negative interest rates (which are doomed to fail), or Saudi Arabia scrambling to respond to the current oil market, or escalations in the global war on cash. Try as they might, the global planners will not be able to return to the unsustainable status quo.
Luckily it is in times like this that spur people to look for real solutions. This week, Mises.org set new records in website traffic. Thank you to all of our incredible donors, supporters, and readers who help us spread the ideas of Austrian economics, freedom, and peace.
We dive deeper into negative interest rates on the latest Mises Weekends. Paul-Martin Foss, founder of the Menger Center, former monetary aide to Ron Paul, and frequent Mises Wire contributor, joined Jeff to discuss the ramifications of such a policy. With a growing chorus of mainstream economists calling for it, including former Federal Reserve Chairman Ben Bernanke, could the Federal Reserve turn to negative interest rates as their next Hail Mary?
In case you missed any of them, here are articles from this past week’s Mises Daily and Mises Wire:
How to Reverse the Innovation Slowdown by Peter St. OngeWhy Negative Interest Rates Will Fail by Frank HollenbeckHow Government Buys Your Support by James BovardMade-up Government Stats Inflame Contempt for Britain’s Obese by Mark ToveyWhy Women Pay Higher Prices for the "Same" Products by John DostonScalia's Fate by Jeff DeistCould Banks Become Public Utilities? by Paul-Martin FossAbolish the Supreme Court by Ryan McMakenDark Clouds over Auburn by Mark ThorntonRepublican Debate: What Makes A Candidate Strong? by Hunter LewisThe Shooting War on Cash Begins by Joseph SalernoOne-Third of Americans Don't Know Who Scalia Was by Ryan McMakenCartel Catastrophe: Saudi Arabia’s Oil Dilemma by Troy VincentIs This Why the Bank of Japan Hit the Panic Button? by Ryan McMaken"Monopoly" Goes Cashless by Joseph SalernoProfessor Richard Vedder on the Great Depression by Joseph SalernoHow US States Compare to Foreign Countries in Size and GDP by Ryan McMakenWar on Cash: The Fix Is In by Paul-Martin FossIs Democracy the Problem? by Ryan McMakenCan Trump's Anti-Iraq-War Stance Win in South Carolina? by Ryan McMakenThanks to NATO, Americans Pay for Turkey's Wars by Ryan McMakenWhy Breaking Up Big Banks Is No Solution by Paul-Martin FossRothbard Gets Credit by Jonathan NewmanIs the Fed Flashing A Recession Sign? By Mark ThorntonTreasury Deposits at Fed Prop Up Money Supply Again in January by Ryan McMaken
The perennial promises of free stuff from political candidates are front and center again now that we are ensnared in another US election cycle. The knee-jerk response from some economists and libertarians is “TANSTAAFL!” And of course it’s true that There Ain’t No Such Thing As A Free Lunch, because somebody must bear the costs of the supposedly “free” stuff. Nothing is free because every action has an opportunity cost.
Especially when the government is involved in doling out the gifts, all it means is that it was bought with money taken from others. Or, sometimes, the money is taken from the person receiving the gift, who thinks he’s gotten something for nothing. (This is a sleight-of-hand political trick that has fooled many for centuries.)
But what if we interpret “free” in a more colloquial sense? Is it still preferable for the government to give away free stuff? Do unhampered markets provide for free stuff?
Two Definitions of “Free”Today’s promises include free college, free healthcare, free paid time off of work, and all sorts of goodies. Although the above conclusion (no such thing as “free”) applies to all of these, I want to consider a different, more liberal definition of “free”: gifted.
For example, if Bernie gives Jonathan an apple that Bernie either grew in his orchard or bought at the store and Bernie expects nothing in return, the apple is a free gift from Bernie to Jonathan. The production, purchase, and loss of the apple is costly, but Jonathan bears none of these costs. Jonathan would technically have to expend some time and effort to hold and consume the apple, and he would lose an apple’s worth of carrying capacity on his person, but ignoring these and other technicalities, we can casually say that the apple is a free gift from Jonathan’s perspective.
So now consider this definition for the above examples: freely gifted college, freely gifted healthcare, freely gifted time off, etc. We realize that these already exist, and would exist absent government provision.
There are innumerable scholarships offered by individuals, organizations, and colleges who want certain students to attend college. Organizations like St. Jude’s, Doctors Without Borders, and Operation Smile offer freely given medical services to patients. And many businesses already allow their employees vacation days, medical leave, and family leave without them skipping paychecks, although there is an important caveat here that this would be priced into their regular salary or wage unless the employing entrepreneurs want to give from their own means.
This is all not to mention the freebies, BOGO coupons, “freemium” apps, and other marketing strategies retail stores employ.
Why Do People Give Gifts?First, we must have more than we want to keep for ourselves.
Widespread abundance like this is only possible with relatively unhampered markets and roundabout production in place, where entrepreneurs are correctly guessing consumer demands and a large capital structure made possible by saving yields plenty of consumer goods. We have to create wealth before we can exchange it, consume it, or give it away.
But once we have such an abundance of means, the reasons for giving are countless and outside the scope of economics. An altruist might give out of generosity, but even a greedy businessman could give because of increased storage costs for all of their inventory, or as a plan to attract customers.
It should be noted that self-interest motivates both the altruist and the greedy businessman. The altruist’s actions are self-interested because he is satisfying one of her own ends by relinquishing ownership of the donated means to somebody else.
Voluntary vs. Involuntary GivingWhen the giver gives voluntarily and the receiver accepts the gift, we can say it represents a mutually beneficial arrangement. The same cannot be said for forced redistribution.
When Bernie gives Jonathan the apple, Bernie is satisfying the highest ranked end he has for that apple. If, however, Bernie stole the apple from somebody else before giving it to Jonathan, then we can say with certainty that the exchange of the apple is not mutually beneficial.
The same goes for college scholarships and medical care. If the government takes the means to give somebody free college, then it does not represent a mutually beneficial arrangement, or else the individual would have voluntarily donated the money for the student to go to school.
Unlike private charities and scholarship funds, the government has no reason to dispense the gifts prudently or to minimize their own cut to maintain a donor base that is confident their donations are used efficiently and for the intended cause.
Forced redistribution also tends to spur bitterness and conflict, as opposed to gratitude and goodwill.
Proponents of Free Stuff Should Look to Capitalism, not RedistributionismThe conclusion we can draw here is that we get just the right amount of “free” stuff through the voluntary interactions of individuals in unhampered markets. And, not only that, but as capitalistic economies inevitably grow and the people become increasingly wealthy, charitable giving can increase as well. As the supply of goods that satisfy our ends gets larger, those marginal goods are more likely to be valued in terms of giving them away rather than keeping them ourselves.
Therefore, those that desire more free stuff should try to encourage more voluntary giving (maybe even leading by example), not forced redistribution. They should also be the loudest proponents of unhampered markets as any voluntary giving must come from wealth that has already been created and in such abundance as to allow for greater giving.
These days it seems that everything in our lives revolves around taxes. Taxation has always caused problems. Taxes distort the structure of production and the price system reducing the real wealth of society.
Yet not everything that people consider a “tax” is indeed a tax. A tax is something that a person is forced to pay, under threat of punishment, by the government. This does not include what has become known as the “pink tax.” The pink tax is the notion that women pay more than men for products that are female-oriented. For example, those who believe in the pink tax often claim that women pay more than men for razors, and that these women’s razors are the same product as men’s razors.
Men and Women Are Not IdenticalWhen discussing the pink tax, we can dispense with the notion that women pay more money for exactly the same products that men use. In order for goods to be identical, the two products must be viewed as homogenous units by the consumers themselves.
Clearly this is not the case, and hygiene products — even ones designed to do similar things — are viewed differently by men and women. First of all, men’s and women’s products generally smell different from one another. This fact alone is enough to distinguish them as separate products if the sexes treat the products differently.
Moreover, in terms of physical amenities, men’s and women’s razors are different in a number of ways. As indicated here, women’s razors are often larger and have more stuff around the blades to help women shave a larger area.
Women pay more for dry cleaning and haircuts. This is partially due to the fact that women’s dry cleaning and women’s haircuts takes more time, and is more labor intensive. More importantly, female consumers of dry cleaning are willing to voluntarily pay the higher prices. But these facts haven’t stopped some from calling for a federal law outlawing differences in prices.
Perhaps the largest “injustice” related to the pink tax is the fact that women often pay more for health insurance. As pointed out here, however, women are more likely to have chronic health conditions. And, as studies suggest, women use health care services differently than men.
Prices Are Not ArbitraryThe cost of producing a good will affect the price, but ultimately, how the goods are valued, relies on the subjective valuations of the consumers. This valuation manifests itself in the form of objective money prices, and it is the consumers who actually determine what products are on the market, and what the price of these consumer products will be.
In the case of hygiene products, it must be remembered that men and women have different standards of hygiene leading to very different demand curves.
Thus, prices in a functioning market will be set at the point where the aggregation of the supply and the demand schedules intersect. That is, it will be set at the level where both sellers and buyers can agree to voluntarily exchange money for the goods.
Companies must set the price as close to this equilibrium price as possible because above this price the company will have a surplus of product to sell, and if it is below this price the company will have shortages, causing a loss in revenue. This works for whole industries too; if suppliers of women’s products are actually charging a higher price for an identical product, and reaping profits, then other firms will start producing women’s products, thus increasing supply and, ceteris paribus, drive prices down.
By continuing to buy differently priced goods for men and women, the consumers have indicated that they think there is nothing wrong with there being price differentials between men’s and women’s products. On the contrary, this “price discrimination” is achieving the most efficient distribution of goods to those who value them the most. If the two different products were truly the same, then women would simply buy the male version of the products.
Moreover, nobody forces these women to pay more for the products they purchase. These products reflect what a woman deems as her most preferred product on the market with given prices. In an unhampered market there are no correct or incorrect prices. There are only the prices that people freely choose to pay. To believe that women only buy women’s products that are identical to men’s due to clever advertising campaigns would be to assume that women have no brains and can be endlessly manipulated by firms. If this where the case, why would companies not just raise their prices for all products and shift most of their funds to advertising?
This Is Not About EqualitySupporters for abolishing the nonexistent pink tax do so under a façade of “equality,” and many groups who believe in the pink tax advocate for legislative action to force companies to lower the price of women’s products so they are equal to prices charged for men’s products. This is nothing more than a form of price control, which as shown here, eventually leads to very bad things.
In the cramped carriages of trains on the London underground, the bumping of body parts periodically furnishes occasion for a few murmured words between strangers. Aside from these apologetic exchanges, the passengers usually avoid getting involved with one another. Last November, however, this culture of British indifference was contravened when a group called Overweight Haters Ltd., apparently rapt by a sense of public duty, began an on-train shame campaign against fat Londoners, which involved giving out cards: “We disapprove of your wasting NHS [National Health Service] money to treat your selfish greed. ... You are a fat, ugly human.”
This odious act was, in part, sociological fallout from Britain’s nationalized system of health care. Single-payer medicine makes intimate health issues fair game for crass debate in the public square.
The government-employed statisticians and health experts, however, is the subject for analysis today. Writers of reports on obesity policy options are obliged, it seems, to include a section on the social cost of obesity — and the higher the number generated, the better. Their entire program of interventions dearly depends on this section for its implementation. In the words of one government source: “If rational individuals pay the full costs of their decisions about food intake and exercise, economists, policymakers, and public health officials should treat the obesity epidemic as a matter of indifference.” Theoretically, if the social cost is found to be low or zero, the rest of the report (all 150 pages of it) should end up in policymakers’ recycling baskets. Given this incentive structure, it is perhaps unsurprising that the UK Government Office for Science reported a number so obviously flawed.
How the Report Exaggerates CostAs a Crown-stamped document, the report emanates authority. This makes its estimate suitable for uncritical regurgitation by journalists, politicians, and pundits. It is now etched into the British psyche: obese people are an ungodly drain on our NHS. To fully comprehend what it means to be cast as an enemy of the NHS in modern day Britain, note that, in protest of the Conservative Party’s quasi-reformist healthcare policies, in the county of East Sussex last Guy Fawkes Night a giant, naked effigy of Prime Minister David Cameron was paraded, jeered, and burnt.
The report in question, Foresight Tackling Obesities: Future Choices Project, claims the cost of obesity to the NHS was £3.9 billion in 2015 — this includes the direct cost of treating obesity, as well as a proportion of the cost incurred by treating obesity-related diseases, e.g., diabetes, coronary heart disease, stroke. However, and this is the point we want to stress, no effort is made in the report to account for the fact that obese people die earlier, and so often do not cash out their state pensions. That is, it gives the gross cost of obesity, when it is the net cost (which is much, much lower) that is the true indicator of obesity’s burden on the public purse.
Let’s estimate the net cost. The National Audit Office, an independent parliamentary body, estimates that obesity accounted for 30,000 excess deaths in 1998 in England alone (no data is available for the rest of Britain). On average, each individual died nine years earlier than they would have done had they not been obese. Assume that, in every year following 1998, the same was true: 30,000 people died nine years early. It follows that there were 270,000 fewer people alive in England to collect their pensions in 2015 due to obesity. (The formula is number of deaths multiplied by number of years lost per person due to premature death, and the logic underpinning that formula is captured in the diagram below.)
Figure 1: Number of people not collecting a state pension every year on account of their having died an early, obesity-caused death.
In the diagram: Each dot represents 30,000 people “missing” from society due to untimely death. The first wave of people died nine years prematurely in 1998, and so there were 30,000 fewer people alive to collect state retirement payments from 1999 to 2007 — represented by red dots. The second wave of 30,000, who died in 1999, are represented by pink dots. By 2007, the number of people absent from society levels out at 270,000 (= 9 x 30,000). There are six dots above 2004, seven above 2005, eight above 2006; but nine above 2007, nine above 2008, nine above 2009, etc. Given the assumed death rate and years of life lost, 270,000 is the “long-run” number of English people missing from society because of obesity.
The state pays up to £8,300 per year to over-65s, which includes pension, top ups, heating allowance, and a TV license. Because in 2015 there were 270,000 fewer over-65s alive on account of premature death, the state’s liabilities in England alone were reduced by over £2.2 billion. This puts the net cost of obesity at about £1.7 billion, which is less than 2 percent of the NHS’ 2015/16 budget, and 56 percent lower than the gross cost. If we’d had the necessary data to include the rest of Britain (Scotland, Northern Ireland, and Wales), we might well have found the net effect of obesity on the state’s coffers in 2015 to be nil, or close thereto.
Of course, some obese people do claim out-of-work sick payments from the government, which inflates the net burden of obesity — but the amount is paltry (approximately £50 million a year) and this does not upset the conclusion of our analysis.
Government as an Agent of Social ConflictIn short, by highballing their estimate of the social cost of obesity, the report’s interventionist authors have unnecessarily contributed to the stigmatization of obese people in British society. Remember, Overweight Haters Ltd. cited the burden of obesity on public finances as their primary grievance.
Multiple studies have shown that fat-shaming causes obese people to gain more weight. This should be obvious given that obsessive eating is rooted in negative emotional states, from which sweet and fatty foods — calming opioids — provide fleeting respite. In fact, 69 percent of adults undergoing gastric bypass surgery report having suffered abuse as children, which makes sense given that tormented youngsters are more prone to suffer mental health issues in later life, and to use food as a conciliatory mechanism.
This is an age-old story: interventionists are known in libertarian circles for compounding the very problems they seek to solve. For example, when the Federal Reserve lowered interest rates after the dot-com crash, it stoked a housing bubble; when Western forces swore to defeat terrorism, they created ISIS; when Chairman Mao ordered the killing of grain-stealing sparrows, he caused a famine. This time, the interventionists sought to solve the obesity problem — and again they made the problem worse.
It is now just a matter of time before the US central bank follows the central banks of Japan, the EU, Denmark, Sweden and Switzerland in setting negative rates on reserve deposits.
The goal of such rates is to force banks to lend their excess reserves. The assumption is that such lending will boost aggregate demand and help struggling economies recover. Using the same central bank logic as in 2008, the solution to a debt problem is to add on more debt. Yet, there is an old adage: you can bring a horse to water but you cannot make him drink! With the world economy sinking into recession, few banks have credit-worthy customers and many banks are having difficulties collecting on existing loans.
Italy’s non-performing loans have gone from about 5 percent in 2010 to over 15 percent today. The shale oil bust has left many US banks with over a trillion dollars of highly risky energy loans on their books. The very low interest rate environment in Japan and the EU has done little to spur demand in an environment full of malinvestments and growing government constraints.
Central bank policies have also driven government bond yields into negative territory. Nearly $7 trillion of government bonds are currently trading at negative rates.
But, economic theory presupposes that negative rates are an impossibility. After all, why would you buy a one-year treasury bill for $1,005 that will get you $1,000 in a year, when you can stuff your mattress with the $1,005 and still have $1,005 in a year? Some would say that storing money is costly and risky, but that is also true for most assets.
The reason is actually quite simple and shows how distortive monetary policy has become worldwide: It makes sense to purchase a bill for $1,005 if you intend to sell it before it matures to the central bank for more than $1,005. In today’s world, the central bank is often ultimately expected to purchase the bill and lose money on it. It’s just another type of debt monetization.
(And it is, by the way, something the Germans emphatically wanted to avoid when the ECB was initially created.)
We Just Need to Print More Money!The real problem is the way monetary policy is taught in almost every undergraduate and graduate program in the world. Pick up any macroeconomics textbook and it will explain how interest rates are determined by the demand and supply of liquidity. The economy is treated as a car, and interest rates are viewed as the gas pedal. When reality does not match up with the model, today’s economist, instead of questioning the model and theory, assumes that more of the same will ultimately force reality into the model.
The problem arises from a fundamental misunderstanding about the role of interest rates. Mises in 1912 had this to say about our current enlightened view on money:
[This view of money] regards interest as a compensation of the temporary relinquishing of money in the broader sense — a view, indeed, of unsurpassable naiveté. Scientific critics have been perfectly justified in treating it with contempt; it is scarcely worth even cursory mention. But it is impossible to refrain from pointing out that these very views on the nature of interest holds an important place in popular opinion, and that they are continually being propounded afresh and recommended as a basis for measures of banking policy.
In fact, interest rates reflect the ratio of the value assigned to current consumption relative to the value assigned to future consumption. That is, money isn’t just some commodity that can solve our problems if we just create more of it. Money serves a key function of coordinating output with demand across time.
So, the more you interfere with interest rates, the more you create a misalignment between demand and supply across time, and the greater will be the adjustment to realign output with demand to return the economy to sustainable economic growth with rising standards of living (see here and here). Negative rates will only ensure an ever greater misalignment between output and demand.
As with Japan, Western economies that pursue a long-term policy of low or negative interest rates can expect decades of low growth unless these “unorthodox” monetary policies are rapidly abandoned. Recessions are not a problem of insufficient demand. They are a problem of supply being misaligned with demand.
The War on CashMeanwhile, a goal of some of the attendees at Davos and others has been to push the world toward a cashless society since an increase in cash holdings would limit the effectiveness of negative rates. They know that if they eliminate cash, central banks will have greater control over the money supply and the ability to guide the economy toward their macroeconomic goals.
As long as there is physical cash, people will hold cash in times of uncertainty. It is a wise alternative when all other options seem unproductive or irrational — and keeping cash in a bank at a time of negative rates is, all things being equal, irrational. Central banks, not surprisingly, would therefore like to take away the ability to hold cash outside the banking system. Worst of all, people who hold cash outside the system might be saving it instead of spending it. Naturally, from the Keynesian perspective, this must be stopped.
This is just the latest frontier in the radical monetary policy we’ve been increasingly witnessing since the 2008 financial crisis. The best monetary policy, however, is no monetary policy at all, and central bankers should take an extended holiday so that the world economy can finally heal itself.
Is innovation slowing? Will it stop? A new paper by one Jonathan Huebner in the awesomely-named journal Technological Forecasting & Social Change argues that innovation is slowing, indeed it’s halved in the past hundred years.
Because Huebner is a physicist, he naturally looks for abstract and generalizable reasons. These take him to dark places: he worries that technology has an “economic limit” or perhaps that our brains have a limit we’re bumping against. He concludes, “The rate of innovation reached a peak over a hundred years ago and is now in decline. This decline is most likely due to an economic limit of technology or a limit of the human brain that we are approaching.”
A central problem with Huebner’s theory is that economics is not physics. Because people have brains, we come to do things, or come to believe things, in clusters or “cascades.” And these cascades depend on being personally influenced, personally incentivized, or personally forced.
Economies aren’t smooth machines; they’re lumpy things, influenced by particular individuals with particular motivations and desires using particular resources.
Comparing with the Golden Age of InnovationThe biggest lump in Huebner’s comparison is that he’s comparing today to a period known popularly as the “Gilded Age” and which met its end under particularly suspicious circumstances.
The term “gilded” is a journalistic slander for what’s more naturally called our “Golden Age.” Why Golden? The pace of innovation in the last part of the nineteenth century should dazzle even a jaded iPhone-waving, Tinder-swiping hover-boarder. A partial list reads: electricity, telegraph, automobile, flight, steam turbine, moving pictures, wireless communications, broadcasting, plastics. We went from whale oil to kerosene then gas cooking. From Pony Express to telegraph then wireless broadcasting nationwide. The Golden Age reads straight out of sci-fi. Indeed, for all the gee-whizzery of today, I’d argue it’s quite debatable whether we even match these three decades from 1870 to 1900.
Progress Stymied by the Progressive EraWhat makes the “Golden Age” doubly interesting is that it didn’t just dribble away. No, it ran into that great world-striding ideology: the Progressive Era. It was an era that promised a “scientific” reorganization of society, with one of their first priorities to tame the rampant beast of runaway capitalism; to replace the Law of the Jungle with a humane version that would take care of everybody.
Concretely, the reformers aimed to domesticate corporations using a never-ending stream of regulations, backed by criminal prosecution for disobedience. This leash replaced the traditional control on corporate irresponsibility of tort law. The change from tort to regulation transformed the US system into one where companies become something between a felon on parole and the domesticated pets of government. Taxes were raised, sure, but the main mechanism was constraining business through regulations, fiat commands, and forced cartelizations such as the FDA, FCC, Federal Reserve, and hundreds of industry-specific regulators tasked with “rationalizing” competition in their fiefdoms.
The result of this taming of business was, not shockingly, less innovation. After all, those rampant corporations weren’t doing all that innovation out of kindness, or to advance the torch of civilization. They were doing it so the greedy bastards could get rich. In a free market, the quickest way to make a fortune is to build a better mousetrap and sell it to the world. Edison, Carnegie, Rockefeller responded to incentives, making unimaginable advances so they could be rich.
Once these great innovators were tamed by regulatory micro-management and ever-increasing burdens, they start to settle down to a more-comfortable life. In many cases they switched their innovation investments into investing in regulations themselves. Milking what they got, buying further innovation-hobbling rules and cartels to feather their nests, instead of disrupting industry after industry.
Essentially, the Golden Age ended in a classic protection racket, trading protection for the leash.
The disruptors were tamed.
And, naturally, innovation collapsed. It wasn’t gone, but it was cut empirically by half. Giving us Huebner’s data in which — a zooming 1870s eventually ground down into a progressive slog. Innovation continues, to be sure, since we can stand on the shoulders of giants. But there’s nothing remotely like the TopHat Singularity of the 1870s.
With that narrative, I’ll dig into each of Huebner’s particular concerns.
There’s No Such Thing as An Economic Limit to InnovationFirst, the “economic limit” to technological change. There’s absolutely no economic reason for a limit to technology in terms of either speed or an end-point. Because technology is akin to creating new recipes — new ways to combine inputs into output. Given there are a quadrillion potential sandwich combinations at Subway, there are clearly more potential technological recipes than atoms in the galaxy. Meaning there is effectively no limit to creativity. There’s no sneaky hidden economic mechanism that stomps on the brakes when we’re innovating “too fast.”
Nor have we used up our brains. Because the number of potential technology “recipes” is so large, we’ve gone from exploiting the equivalent of a single grain in the Sahara in 1870 to perhaps 1.3 grains in the Sahara today. The percent of possible innovations we’ve exploited in those interceding 145 years is, in the grand scheme, nothing.
I don’t blame Huebner for the pessimistic mistake. Indeed, it’s very common. I think this is so for two reasons: first is undervaluing the relationship of policy and innovation. And second is simply perspective. For example, is a hundred people a lot or a little? If you’re used to crowds of thousands then one hundred is lonely. And if you’re expecting three people for dinner, hundreds of people is quite a crowd.
Similarly, is it a crazy sci-fi world we’re spinning in, or are we trudging along in a pathetically primitive state, barely above the chimps? It depends what you expected. Most observers look at the past and say “Wow.” If, however, we look at the missed potential — if we extrapolate from the Golden Age — it’s easy to be embarrassed by today’s technology. It becomes easy to see that it’s not natural limits to economics or brains that’s holding us back. It’s simply bad policy. Policies that burden startups, harass and tax innovation, even outlaw it. We haven’t killed the Golden Goose yet. But we’re working on it.
Without the Progressives, Where Might We Be Today?So where are we today? Working off Huebner’s numbers, the regulatory state has managed to kill off about half of innovation. This is fairly catastrophic when you run the numbers. Had the rate of innovation continued at Gilded-Age rates, and if innovation is proportional to productivity, I think a reasonable estimate is we’d be something north of five times richer today (based on post-war BLS numbers, extrapolating to 1900).
Five-fold GDP would be something like $200,000 per person. In other words, we’d be looking at the purchasing power of six-figure salaries for waitresses, janitors, or music teachers. Most people would retire at thirty-five to create art or sip margaritas in Tenerife. Perhaps we’d have had the internet by the 1940s and personal robots by the 1970s. Perhaps today we’d already be post-illness and death. I’ll refrain from dwelling on the hundreds of millions of loved ones, including my own, that we’ve lost to the reformers’ tech-slaughter and just leave it there.
So it’s important to keep in mind what we’ve lost with all that quashed innovation.
Despite the harm, the future is not entirely bleak: half-killed innovation is still, in historical perspective, quite good. Innovation continues, just not at the torrid pace it did before the regulators got their thrones. Indeed, the world economy has been growing around 3 percent per capita for decades now, which is quite spectacular when viewed in context. This growth, however, has largely come from simply adopting rich-country tech — an obvious freebie, albeit many countries were previously too badly run to even manage that.
Meanwhile, rich countries themselves are growing at about 1 percent per capita, which is actually quite pathetic considering our sabotaged Golden Age.
Still, we can’t just sit back. Given our 200-year run of technological growth, it’s easy to take it for granted that tech improves like the sun shines or the seasons change. But history is littered with Golden Ages that turned to dust. Typically because governments destroyed the economic incentives for innovation: from taxing and burdening producers — the late Roman Empire is a dramatic example — to outright bans on innovation like Ming China, which shutdown China’s economic miracle for a good 500 years.
And these Golden Ages all die the same way, and the way that we’re gradually strangling ours: ever-heavier burdens on the innovators, ever-tighter circles left open for innovation. We’ve bucked that trend in a few areas, most spectacularly with the Internet, where Bill Clinton set a precedent for hands-off treatment in the 1990s that has been impressively, if imperfectly respected since.
Janet Yellen testified before Congress this week and was forced to admit the obvious: the economy is in trouble and could get worse. While Ms. Yellen indicated the potential to a return to ZIRP, she seemed reluctant to follow the advice of her predecessor and other former Fed officials in embracing negative interest rates as her colleagues in Europe and Japan have done. As anger builds at the arrogance of central bankers, it’s becoming ever clearer that there is no plan for monetary policy to return to “normal.” As Robert Murphy explained at our recent event in Houston, the Fed’s magic trick just won’t work.
At the end of this month, the Mises Institute will be hosting an event celebrating Murray Rothbard in honor of his approaching 90th birthday. Mises Weekends this week features a tribute to Murray by three scholars who knew him as both a friend and mentor: Dr. David Gordon, Dr. Walter Block, and Dr. Joseph Salerno. Recorded this past summer at Mises U, the three share stories from their experiences with Murray and the role he played in shaping their passion for Austrian economics, freedom, and peace.
In case you missed any of them, here are articles from this past week’s Mises Daily and Mises Wire:
Three Reasons to Be Worried About the Economy by Yonathan Amselem2016's Economy Begins with a Whimper by David HaggithWhy I Have Hope by Ron PaulEuropean Central Bank Gets Ready for More Easy Money by Frank ShostakWhy Drafting Women Is a Terrible Idea by Ryan McMakenWhat Was Quicken Loans Thinking? by Mark ThorntonThe Central Planning Mindset Has Won by Paul-Martin FossPeyton Saves the Super Bowl Indicator? by Mark ThorntonIf You Want Bigger Government, Vote Republican by Ryan McMaken"Gridlock" in DC Does Little to Stymie Government Spending by Ryan McMakenHayek on CNBC by Mark ThorntonThe Bernie Sanders Reader by Ryan McMakenSocialism and the Battle of Ideas by Ludwig von MisesJanet Yellen Strikes Downbeat Tone on Economy, Claims Fed Won't Go Negative by Ryan McMakenWill Monetary Policy Ever Return to Normal? by Paul-Martin FossLaura Hillier, RIP by Joseph SalernoDid the NY Fed Plagiarize Rothbard? by Jonathan NewmanMises on Syndicalism by Ludwig von MisesTax Cuts Without Spending Cuts Are Pointless by Ryan McMakenWilhelm Röpke (1899 - 1966) by Shawn RitenourThe Telegraph Talks Mises and Hayek, Blasts "Arrogant Central Bankers" by Tho BishopEU to Follow the US's Example by Abolishing the 500-euro Bill? by Ryan McMaken3 New Books by Hunter Lewis Available Free on mises.orgThe January-February issue of The Austrian Is Online!
During last Saturday’s GOP presidential debate, the candidates were asked if they would support mandatory registration for women with the Selective Service System now that women are allowed combat positions in the US military. The Selective Service, of course, is the federal agency that maintains a list of potential conscripts should the US government ever decide to reinstitute the draft.
Most of the candidates applauded the idea while Ted Cruz denounced the notion. But, as is often the case, Cruz was right for the wrong reasons. Cruz seemed to base his reaction on sentimentalism and gender politics. He should be opposing an expansion of the draft for the simple reason that it’s potentially a massive tax increase. Here’s why:
Make no mistake about it. Expanding Selective Service from 50 percent of young adults to 100 percent is not about equality, or progress, or patriotism. While these notions will no doubt be used to bully people into supporting such a move, the real-world effect will be a massive expansion in government power over the lives of the population. Conscription, after all, is simply a draconian tax on the conscripts who lose their freedom for the duration, but who may also be coerced into being killed in order to promote the state’s policy agendas:
“Conscription is slavery,” Murray Rothbard wrote in 1973, and while temporary conscription is obviously much less bad — assuming one outlives the term of conscription — than many other forms of slavery, conscription is nevertheless a nearly-100-percent tax on the production of one’s mind and body. If one attempts to escape his confinement in his open-air military jail, he faces imprisonment or even execution in many cases.
Conscription remains popular among states because it is an easy way to directly extract resources from the population. Just as regular taxes partially extract the savings, productivity, and labor of the general population, conscription extracts virtually all of the labor and effort of the conscripts. The burden falls disproportionately on the young males in most cases, and they are at risk of a much higher tax burden if killed or given a permanent disability in battle. If he’s lucky enough to survive the conflict, the conscript may find himself living out the rest of his life as disfigured or missing his eyesight and limbs. He may be rendered permanently undesirable to the opposite sex. Such costs imposed on the conscript are a form of lifelong taxation.
Fortunately for those who escape such a fate, the term of slavery ends at a specified time, but for the duration, the only freedom the conscript enjoys is that granted to him by his jailers.
If the debate over this issue continues, we’re likely to hear a lot about how “fairness” and egalitarianism requires an expansion of the Selective Service System. But those claims are all distractions from the central issue here, which is the state’s power over the citizen.
After all, if women want to go help out Al-Qaeda in Syria (which is what the US is doing there), they are free to volunteer. Whether or not women can be directly involved in blowing up revelers at Afghani weddings, however, is a completely separate issue from conscription and the Selective Service.
The two issues are already being conflated, as was made clear by Chris Christie’s comment at the debate when he pounced on the issue of female conscription and declared it’s important that "women in this country understand anything they can dream, anything that they want to aspire to, they can do."
After hearing this, one is left wondering if Christie is aware that there’s a difference between being a soldier and being forced to be a soldier by the state.
Besides, if fairness is a concern, there’s an easy way to achieve fairness on this issue: abolish the Selective Service for everybody. It’s as easy as that. It wouldn’t even cost a dime of taxpayer money. Simply shred the records, fire everyone who works for Selective Service, and lease out the office space to organizations that do something useful. Then, we won’t have to hear anything about “discrimination” or the alleged sexism implicit in a policy that outrageously neglects to force women to work for the government against their will.
But Isn’t This Just a Symbolic Gesture?Some who want to expand Selective Service for egalitarian reasons are claiming that it’s all just symbolic anyway, because the draft “will never happen.”
“The US hasn’t had the draft since the early 1970s,” one columnist loftily intoned as if that were evidence that the draft could never return. Wow, the 1970s? Did they even have electric lights back then?
Moreover, it’s a mistake to think that the draft could never return because people would overwhelmingly oppose people being forced into combat. Even if that is the case, there is no reason at all why conscription could not be used to draft people for non-combat positions. After all, only a very small portion of the military ever sees combat. The vast majority of soldiers are involved in logistics, transportation, and desk jobs such as computer programming.
Only a small portion of military deaths occur in combat. Most deaths in the military are due to accidents.
Additionally, there is no reason that Selective Service could not be modified to be used to draft people for so-called “national service” positions in which conscripts would perform non-combat bureaucratic and manual-labor jobs. Austria and Switzerland (which have conscription) allow this option for those morally opposed to combat. And historically — such as during World War II — “service” was imposed on conscientious objectors who were forced to work on farms or perform other types of manual labor in special camps.
So no, the draft is not “hypothetical,” “symbolic,” or something that “will never happen.”
Numerous countries in Latin America, Europe, and Asia still employ conscription, and it is hardly some kind of never-used relic from the distant past.
Alas, much of the opposition to the expansion of Selective Service has taken the form of National Review’s opposition which is based on the idea that conscripting women is some kind of special unique evil, quite unlike conscripting men. Military service is one thing, the editors write, but forcing women into it is “barbarism,” they admit. They’re half right. It is barbarism to force women to fight wars for the state. But the same is also true of conscription for men.
On January 21, 2016 European Central Bank (ECB) President Mario Draghi signaled that the governing council may provide more stimulus at its next meeting in March. “There are no limits to how far we're willing to deploy our instruments,” Draghi predicted.
The ECB president is of the view that the monetary stimulus undertaken by the central bank since June 2014 had strengthened the euro area’s resilience to recent global economic shocks. The yearly growth rate of the ECB balance sheet (an indicator of monetary pumping) jumped from minus 8.5 percent in December 2014 to 31.3 percent by December 2015, whilst the policy rate of the ECB stood at a record low of 0.05 percent.
Notwithstanding this, the president of the ECB holds that so far the central bank has failed to bring the rate of inflation to its target of around 2 percent.
A major factor behind this is a sharp fall in the price of oil, according to Draghi. The yearly growth rate of the CPI stood at 0.2 percent in December.
According to my own models, the growth rate could fall to minus 0.1 percent in December this year. By December next year, I forecast a figure of 0.8 percent. Based on this, it is reasonable to conclude it is likely that the ECB is going to further strengthen the pace of monetary pumping.
The loose monetary stance of the ECB is manifested in the strengthening of the momentum growth of eurozone money supply (as measured by the Austrian money supply or AMS) with the yearly growth rate climbing to 13 percent in November 2015 from 6.5 percent in November 2014.
A strong rebound in the growth momentum of this monetary measure for eurozone AMS bodes well for economic activity in terms of industrial production in the months ahead (see chart).
So, it is likely the eurozone will again see growth, but as it is engineered by the central bank, it will be experienced in bubble industries, which will have the effect of destroying wealth in true wealth-creating industries. That is, we shall see growth in areas that are recipients of malinvested money.
Meanwhile, most mainstream economists and commentators regard monetary pumping as the correct policy to keep the economy “healthy.” For them, an increase in money raises the demand for goods and services, and via the famous Keynesian multiplier, strengthens overall economic activity. Their position is that demand creates supply. This way of thinking is flawed, however, since an increase in money supply always sets in motion an exchange of nothing for something. It is exactly the same dynamic that is generated by a money counterfeiter.
While mainstream thinkers would likely oppose ordinary money counterfeiting, they are totally supportive of monetary pumping by the central bank, which sets in place the same dynamic as a counterfeiter. It impoverishes the true wealth generators in favor of bubble industries.
This sort of thing can go on as long as the pool of real wealth is still growing. But, once it starts to stagnate or shrink, then no amount of new pumping can boost general economic activity. The amount of real funding needed to support more false activities (i.e., bubble activities) is no longer there.
January was the winter of our discontented stock market. It was the worst January since 2008, when the Great Recession officially began. It was, in fact, the worst January in the history of the New York Stock Exchange. According to Citigroup, Inc., it was also the worst January ever for credit markets.
During many Fed tightenings, the stock market and overall economy improved for years afterward because the Fed stimulus had actually brought a temporary form of economic recovery. But rarely, if ever, has the mood turned dark so fast after the Fed officially announced that the recovery is sound and the life support can be removed.
So, even while I knew the global economic news was bleak, I didn’t expect the market bulls to snuff out their own ecstasy the day after the ball began. I can only imagine how much the permabulls wanted to go on air that next morning to revel in their we-told-you-sos about how the economy would do just fine after a Fed rate hike. Only they could not. They woke up to face reality.
Now that the Fed has decided to hold the Fed Funds target rate steady at their January meeting, everyone is nervously guessing which way the market will continue.
The Party in the Bull Pen Is OverIn December, Federal Reserve Chair Janet Yellen looked visibly happy when she was able to make the announcement of her lifetime — the claim that things looked optimistic enough for the Fed’s recovery that the Fed could finally end its economic aid. Never before has a Fed chairman looked less dour and more ready to crack open the champagne for the big Fed Christmas party.
Markets gleefully rewarded her with an immediate rise of 200 points in the Dow Jones Industrial Average during the remains of the day (December 16) after she delivered her glad yule tidings.
The market, however, decided to crash the party along Wall Street the next morning by dropping 253 points on December 17 — farther than it had risen during the celebration. The real gravity of those numbers was proven when the fall picked up speed for a 367-point plunge the next day, bringing the stock market down over 600 points before it closed at the end of last week.
And, so, the Fed’s rate hike made December the most volatile December for the Dow since the economic crisis of 2008. Moreover, since 1990, Decembers have been the least volatile month of the year. So, something is different this time. Something is very deeply and disturbingly different if you compare this seventy-degree day of winter solstice in Washington to any other.
It wasn’t your typical placid and merry December. Friday’s sell-off was the sharpest one-day plunge since September (up until January 7th’s 374-point plunge), and trading volume has been higher than usual in December as investors jockeyed to position themselves for the Fed’s anticipated rate rise. This is the feel of something big beginning to creep.
The sharp sell-off in stocks across all sectors of the Dow in the heaviest trading of the year came because of news that oil prices were still falling and fear over what this means for banks that are heavily involved in financing highly leveraged oil companies. For the past several years, such news would have caused the stock market to rise because it would mean another year of struggle in which the Fed would be hard at work trying to re-inflate the economy by giving free money to its friends in the financial sector.
All ten sectors of the S&P 500 also closed in negative territory the week of the Fed’s announcement. For the Dow, it was the third weekly decline in four weeks. Reality, in other words, hit the face like a glass of ice water the morning after the party. For the market bulls, it was off to work with a hangover.
The sobering fact that bank stocks were the first to decline was a surprise to many (including myself). Common wisdom throughout the market expected bank stocks to rise the fastest when the Fed raised rates because the rise in interest would actually improve bank profits since so many of their adjustable-rate loans and credit cards are pegged to interest rates that are strongly affected by the Fed’s target.
Banks will be collecting more in interest but they will be slow to start paying more interest on deposits, so were expected to benefit. Yet, financials went down because banks ensnared in a commodities massacre look edgy.
Even high-tech stocks, which have been supporting the narrowly traded market have been falling with the king of stocks — Apple — down 15 percent since the rate hike.
The global market had gone into a similar slide two weeks earlier when the European Central Bank did a little “quantitative wheezing” that didn’t satisfy the demands of its junkies. It was the same with Japan, where five rounds of QE have now failed to jack up the economy any longer than the QE lasted. QE is so unsuccessful that Japanese income and household spending are in decline again, even with the Bank of Japan embracing negative interest rates for the first time ever.
This week’s Iowa caucuses mean that election season has officially begun, though the truth about politics stays the same. While the names may change, the spectacle every four years represents, as Lew Rockwell notes, “the triumph of compulsion over cooperation, coercion over freedom, and propaganda over truth.” Party banners are waved, campaign consultants gets paid, and government continues to grow — regardless of its consequences. Though while governments across the world — and the central bankers that enable them — continue to look for ways to tighten its grasp on an increasingly fragile globe, history will show it is no match for the human spirit. Innovation, reason and markets.
Or in the words of Jeff Deist at last weekend’s Mises Circle: The future is centralized vs. decentralized, it’s what works vs. what doesn’t. It’s reasonable people vs. unreasonable people. It’s political correctness vs. the truth.
The next Mises Weekends features Dr. Ron Paul’s speech from Houston. Dr. Paul puts today’s battle for liberty in historical perspective, highlighting how advancements in society have been rooted in respect for individual rights. Pointing to today’s technology that allows for the global dissemination of Austrian economics, freedom, and peace, Dr. Paul explains why he maintains his infectious optimism — even in the face of today’s depressing electoral season.
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
The Truth About Politics by Llewellyn H. Rockwell Jr.The Cozy Relationship between the Treasury and the Fed by David HowdenThe Continuing Demonization of Cash by Paul-Martin FossAre Harsh Sentencing Laws Driving Up Homicide Rates? by Justin MurrayHow the Blockchain and Gold Can Work Together by Thorsten PolleitMeasuring the Global ECONOMIC Temperature by Mark ThorntonAfter Lego, Barbie Now Criticized for Being Too PC by Ryan McMakenHow Would "President Rothbard" Keep Out the Zika Virus? by Ryan McMakenWas the Ethanol Lobby the Big Loser in Iowa this Year? by Ryan McMakenA Crack in the Central Bankers’ Armor? by Paul-Martin Foss"Reformulation of Austrian Business Cycle Theory" Now in PolishThe Fed Wants to Test Drive Negative Interest Rates by Joseph SalernoMises: The Case for Reason by Ludwig von MisesAlt-Right vs. Socialist Left: What It Means for Liberty by Jeff DeistFlint MI. Whistle Blower Says Public Science Broken by Mark ThorntonA Surprising Opponent of the War on Cash by Joseph SalernoMore Thoughts on Libertarian Populism by Jeff DeistMises on the War on Cash by Carmen Elena DorobățEven José Canseco Thinks Negative Interest Rates Are "Dumb" by Joseph Salerno
The very first votes of the 2016 presidential election season were cast this week in the Iowa caucuses. This is supposed to fill us with happy thoughts about self-government, civic virtue, rational deliberation, and about politics as the way the people’s will is put into effect.
But to the contrary, we should spurn what the establishment would have us celebrate. Politics operates according to principles that would horrify us if we observed them in our private lives, and that would get us arrested if we tried to live by them. The state can steal and call it taxation, kidnap and call it conscription, kill and call it war.
And yet we are taught to fear capitalism, of all things.
But what, after all, are capitalism and the free market? They are nothing more than the sum total of voluntary exchanges in society.
When we engage in a voluntary exchange — when I buy apples for $5, or when you hire someone for $25 per hour — both sides are better off than they would have been in the absence of the exchange.
We can’t say the same for our interactions with the state, since we pay the state under threat of violence. The state sure winds up better off, though. That’s for sure.
Business firms that increase their profits thanks to some new innovation cannot rest on their laurels. Other firms will adopt the innovation themselves, and those abnormally high profits will dissipate. The original firm must continue to press forward, striving to devise still newer ways to please their fellow men.
The state operates under no such conditions. It can remain as backward as it likes. Other firms are typically prohibited from competing with it.
The state’s priorities arbitrarily override your own. Ethanol “is important for the farmers,” one candidate says. So because the state has decided some interest group’s foolish and economically nonsensical pet project is “important,” what you yourself would have preferred to do with your money is simply set aside and ignored, and you are forced to subsidize what the state seeks to privilege.
Our schools and media portray corporations as sinister, and government as benign. But who wouldn’t rather take a sales call from Norwegian Cruise Line than an audit demand from the Internal Revenue Service?
Or imagine if a corporation fabricated a web of untruths, used them as a pretext to launch a violent attack on a people that had never caused Americans any harm, and brought about as many as a million deaths and millions more internal and external refugees. That corporation would be broken up and never heard from again. It would be denounced ceaselessly until the end of time.
Now all those things did happen, but they were carried out by the state. And as we all know, there have been no repercussions for anyone. No one has been punished. In fact, the perpetrators earn six-figure speaking fees. The whole thing is shrugged off as at worst an honest mistake. Some people are still outraged about it, but even they seem to take for granted that there’s really nothing that can be done about behavior like this on the part of the American regime.
Imagine there were a corporation that was somehow so entrenched that despite being responsible for a staggering death toll, it evaded all responsibility and simply carried on as before. The outrage would be deafening and overwhelming.
But so relentless has been the propaganda, ever since all of us were children, about the state’s benign nature that many people simply cannot bring themselves to think as badly about the state as they have been taught to think about corporations — even though the crimes of the state put to shame all the misdeeds of all existing corporations put together. Meanwhile, opponents of the state are routinely portrayed as incorrigible misanthropes, when in fact, in light of the state’s true nature, we are mankind’s greatest advocates.
The market brings people together. People of divergent and sometimes antagonistic racial, religious, and philosophical backgrounds are happy to trade with one another. Beyond that, the international division of labor as it exists today is the greatest and most extraordinary example of human cooperation in the history of the world. Countless firms produce countless intermediate goods that eventually combine to become finished consumer products. And the entire structure of production, in all its complexity, is aimed at satisfying consumer preferences as effectively as possible.
The state, on the other hand, pits us against each other. If one of us wins a state favor, it comes at the expense of everyone else. For one group to be benefited, another must first be expropriated. At one time or another the state has pitted the old against the young, blacks against whites, the poor against the rich, the industrialists against agriculture, women against men.
Meanwhile, all the anti-social effort devoted to extracting favors from the state is effort that is not available to produce goods and services and increase the general prosperity.
The market is about anticipating the needs of our fellow men and exerting ourselves to meet those needs in the most cost-effective manner — in other words, by wasting the fewest possible resources, and making what we offer as affordable as we can for those we serve.
Ah, but we need the state, virtually everyone tells us. Whether it’s “monopoly,” or drugs, the bad guys overseas, or the scores of other bogeymen the state uses to justify itself, we’re constantly being reminded of why the state is supposed to be indispensable. To be sure, these and other rationales for the state sound plausible enough, which is why the state and its apologists use them. But the first halting steps toward intellectual liberation come when someone considers the possibility that the truth about these things might be different from what he hears on TV, or learned in school.
The small minority of people who administer the state with funds expropriated by the productive private sector need to justify this situation, lest the public become restless or entertain subversive ideas about the real relationship between the state and themselves. And this is where the state’s various platitudes about the people governing themselves, or taxation being voluntary, or government employees being the servants of the people, enter the picture.
Think for a moment just about this last claim: that government employees are our servants. These people staff an institution that decides how much of our income and wealth to expropriate in order to fund itself. They will imprison us if we do not pay. And we are to believe that these people are our servants?
For those not gullible enough to fall for such a transparent canard, the rationales become mildly more sophisticated. All right, all right, the state may say, it’s not quite right to say that the people govern themselves. But, they hasten to add, we can offer the next best thing: the people will be represented by individuals chosen from among them.
As Gerard Casey has argued, though, the idea of political representation is not meaningful. When an agent represents a business owner in a negotiation, he ensures that the owner's interests are pursued. If the owner’s interests are defended only weakly, ignored, or downright defied, the owner chooses different representation.
None of this bears any resemblance to political representation. Here, a so-called representative is chosen by some people but actively opposed by others. Yet he is said to “represent” all of them. But how can this be, when he can’t possibly know them all, and even if he did, he’d discover they have mutually exclusive views and priorities?
Even if we focus entirely on those people who did vote for the representative, is their vote supposed to imply consent to his every decision? Some of them may have voted for him not for his positions or merits, but simply because he was less bad than the alternative. Others may have chosen him for one or two of his stances, but may be indifferent or hostile on everything else. How can even these people — who actually voted for the representative — seriously be said to be “represented” by him?
But the idea of political representation, while meaningless, is not without its usefulness to the modern state. It helps to conceal the brute fact that, despite all the talk about “popular rule” and “governing ourselves,” even the “free societies” of the West amount to some people ruling, and others being ruled.
When the results are announced this primary season amid cheers and celebration, then, remember what it all represents: the triumph of compulsion over cooperation, coercion over freedom, and propaganda over truth. The civics textbooks may write with breathless awe about the American political system, but this is by far the worst thing about the US. Rather than celebrate the anti-social world of politics, let us raise a glass to the anti-politics of the free market, which has yielded more wealth and prosperity through peace and cooperation than the state and its politicians could with all the coercion in the world.
The insidious nature of the war on cash derives not just from the hurdles governments place in the way of those who use cash, but also from the aura of suspicion that has begun to pervade private cash transactions. In a normal market economy, businesses would welcome taking cash. After all, what business would willingly turn down customers? But in the war on cash that has developed in the thirty years since money laundering was declared a federal crime, businesses have had to walk a fine line between serving customers and serving the government. And since only one of those two parties has the power to shut down a business and throw business owners and employees into prison, guess whose wishes the business owner is going to follow more often?
The assumption on the part of government today is that possession of large amounts of cash is indicative of involvement in illegal activity. If you’re traveling with thousands of dollars in cash and get pulled over by the police, don’t be surprised when your money gets seized as “suspicious.” And if you want your money back, prepare to get into a long, drawn-out court case requiring you to prove that you came by that money legitimately, just because the courts have decided that carrying or using large amounts of cash is reasonable suspicion that you are engaging in illegal activity. Because of that risk of confiscation, businesses want to have less and less to do with cash, as even their legitimately-earned cash is subject to seizure by the government.
Restrictions on the use of cash are just some of the many laws that pervert the actions of a market economy. Rather than serving consumers, businesses are forced to serve the government first and consumers last. Businesses act as unpaid tax agents, collecting sales taxes for state governments and paying excise taxes to the federal government, the costs of which they pass on to their customers. Businesses act as enforcers of vice laws, refusing tobacco sales to those under eighteen or alcohol to those under twenty-one. Financial institutions, which includes coin dealers, jewelers, and casinos, are required to report cash transactions above $10,000 as well as any activity the government might deem “suspicious.” Cash becomes such a hassle that it is almost radioactive, and many businesses would rather not deal with the burden. Using cash to buy a house is becoming impossible and it is probably only a matter of time before purchasing a car with cash will become incredibly difficult also.
Centuries-old legal protections have been turned on their head in the war on cash. Guilt is assumed, while the victims of the government’s depredations have to prove their innocence. Governments having far more time and money to devote to asset forfeiture cases than the citizenry, most victims of cash seizures decide to capitulate rather than attempt a Pyrrhic victory. Those fortunate enough to keep their cash away from the prying hands of government officials find it increasingly difficult to use for both business and personal purposes, as wads of cash always arouse suspicion of drug dealing or other black market activity. And so cash continues to be marginalized and pushed to the fringes. Stemming the anti-cash tide will require a societal attitudinal adjustment that views cash not as something associated with crime, but as a bastion of consumer freedom and a bulwark against overzealous governments.
Last year was a tough one for investors. Gold was down 10 percent. The Dow Industrials fell 2.5 percent, and most bond indexes finished down by at least that much.
One institution that performed remarkably well in 2015 was the Federal Reserve. It just finished its most profitable year on record. The $100 billion in net income earned last year was a slight improvement over the previous year. That total was also roughly three times higher than the Fed’s income from 2007, the last year before it initiated its Quantitative Easing programs in the wake of the financial crisis.
Since the Fed does not exist to generate profits, some may be confused as to how it could have such a great year at doing so.
Here’s how it works. Every time the Fed expands the money supply it buys an asset. Typically the asset is a financial security, like a US Treasury bond, and the counterparties are typically large banks. Figure 1 gives a simplified look at the Fed’s balance sheet at the end of 2015 and how it evolved over the year:
Figure 1: Simplified Federal Reserve Balance Sheet (in millions of dollars)Compared to previous years, 2015 was relatively uneventful at the Fed. Having completed the tapering of its Quantitative Easing programs in October 2014, the Fed’s asset holdings held constant over the year. This was in stark contrast to the previous six years, during which the Fed purchased $3.5 trillion of assets. The Fed earns interest on its assets but most of its liabilities are non-interest bearing, like the $1.4 trillion worth of Federal Reserve notes crumpled in people’s pockets or buried under our mattresses. The Fed does pay interest on Reserve Bank balances, but at the current rate of 0.5 percent, this figure was a drop in the bucket relative to its total income. (Almost all of the Fed’s assets earn interest, while it incurs an interest expense on less than half of its liabilities.
What Does the Fed Do With All That Income?The question that arises is what the Fed does with its profits.
Each year, the Fed remits to the US Treasury its net income, and thus provides the federal government with an important source of funding. Figure 2 shows how this figure has evolved since 2001.
Figure 2: Treasury Interest and Fed Remittances (in billions of dollars)A decade ago, back when the Fed was a smaller size, Fed remittances were fairly steady, in the neighborhood of $20 billion a year. This all changed after 2008 as the Fed’s Quantitative Easing programs increased the amount of interest-earning assets that would generate funds to transfer back to the Treasury. This year’s figure of $97.7 billion is more than four times the amount transferred just ten years ago, an annual growth rate of more than 16 percent. (At least something is growing quickly in this economy.)
Big Bucks for the US TreasuryFor the US Treasury, Fed remittances are something of a free lunch. When someone buys a Treasury bond, the government must pay them interest. This applies to the Fed as well, but then at year-end the Fed remits the interest back to the Treasury.
The federal government paid out $223 billion in interest payments last year. The Fed remitted almost $100 billion back, leaving the net interest expense at around $125 billion. It’s not just historically low interest rates that are making it easier for the Treasury to borrow in a way that, if it were done by anyone else, would classify them as subprime. The Fed is also chipping in and helping out where it can.
Also shown in figure 2 is the percentage of the federal interest expense that is remitted back by the Fed. For 2015, this figure neared 45 percent. That figure is a good way to think about the free lunch that the Fed gives to the Treasury.
In more “normal” times (i.e., prior to 2008) around 10 to 15 percent of the Treasury’s interest payments were paid back to it by the Fed. This figure has grown to almost four times that amount over the past seven years and it doesn’t look like this trend will abate anytime soon.
Implications for Fed “Independence”As much as economists talk about the independence that the Fed holds from Congress, these remittances represent a strong link. In fact, since they enable federal spending they create a form of quasi-fiscal policy for the Fed to use, in addition to its more common monetary policy options.
Consider that since Treasury debt is almost never repaid in net terms (old issues are retired but replaced with new debt issuances), the true cost of financing the US government’s borrowing is not the gross amount of debt outstanding but the annual interest expense it faces. Viewed this way, nearly half of the Treasury’s borrowing was financed by the Fed last year. Absent these Fed remittances, Congress would need to look at either an alternative funding source (though I am not sure how many takers there are for the Fed’s $2.5 trillion Treasury holdings) or make some serious cuts.
How serious? NASA’s operating budget was roughly $18 billion last year, so a lack of Fed remittances would cause the Treasury to cut around five NASA-sized programs. Alternatively, the governments Supplemental Nutrition Assistance Program (previously known as “food stamps”) cost $70 billion in 2014. Without the Fed’s remittances, Congress would have to stop paying out all food stamp recipients plus it would be forced to defund almost two NASAs.
More important in many Americans’ hearts is their monthly social security check. In 2014, $830 billion of social security checks were mailed out. Without Fed remittances, retirees might see their monthly check cut by about 12 percent.
For those concerned with the burgeoning size of the federal government, putting a stop to Fed remittances would put a serious dent in public finances and force some serious thought as to what programs need to be cut.
The topic of our Mises Circle going on in Houston this weekend is “Where Are We Headed in 2016?” (Click here to watch live on Saturday.) While Austrians understand that the future is unknowable, this week give us some clues as to what may be ahead. The Fed will continue to attempt to avoid blame for the cracks emerging in global markets, elites will desperately seek new means to maintain their power, politicians will call for more taxes, and vital issues like terrorism will continue to be misdiagnosed. But while there is never hope to be found in the wheels of government, it can always be found in the market. It is what frees us all to find the best ways to enjoy our lives and help others all around. Even if that sometimes means offending music snobs.
If you couldn’t make it to Houston for our #MisesCircle, you can follow it live here.
Want to join the conversation? Tweet us your questions using #AskMises
Our event schedule (times are Central Standard Time)
10:00 a.m. Jeff Deist, “Alt-Right vs. Socialist Left: What It Means for Liberty”10:25 a.m. Corie Whalen Stephens, “Liberty Will Always Be Popular”10:35 a.m. Bob Murphy, “Why the Fed’s Magic Trick Won’t Work”11:00 a.m. Q&A11:20 a.m. Break (last chance to purchase books to be autographed)11:40 a.m. Panel Discussion, “Where Are We Headed in 2016?”12:20 – 1:30 p.m. Lunch Break1:20 – 1:50 p.m. Photos with Ron Paul (on stage)1:50 p.m. Lew Rockwell, “3 Reasons for Hope”2:10 p.m. Ron Paul, “What’s Ahead”2:40 p.m. Q&A3:00 p.m. Adjourn On this week's episode of Mises Weekends, we feature a 2011 talk at the Mises Institute given by Hans-Hermann Hoppe on the subject of praxeology: the science of human action. It's a term and topic that can be intimidating to some people — and at nearly 50 minutes, Hoppe's talk is quite a bit longer than our usual weekend show — but it is vitally important to understand why praxeology is the proper economic methodology. Listeners will enjoy and benefit from Hoppe's razor-sharp discussion.
In case you missed any of them, here are this week’s most popular Mises Daily and Mises Wire articles:
The Fed Passes the Buck: Blame Oil and China by C. Jay EngelBrazil's Easy-Money Problem by Lucas VazMises on Protectionism and Immigration by Matt McCaffreyThe Market Doesn't Solve Problems; People Do by Louis RouanetAre Government Regulators More Virtuous than Everyone Else? by Iván CarrinoSoaking the Future Poor, by Carmen Elena DorobatNorway's Largest Bank Proposes a Raid on Cash by Joseph T. SalernoIs Terrorism a Disease? by Peter G. KleinNotes from Snowmageddon by T. Hunt TooleyThe Minimum Wage and Progressive Eugenics, Again by Ryan McMakenBubble Watch: Planes, Trains, and Automobiles by Paul-Martin FossConsumers Embrace the Bass by Peter G. KleinMises on Immigration: A Selected Bibliography by Matt McCaffreyCash Still Rules! by Joseph T. SalernoFed Leaves Interest Rates Unchanged, Markets Head Down by Ryan McMakenBank of Canada Holds Overnight Rate at 0.5%, Following Multiple Cuts in 2015 by Ryan McMakenBank of Japan Goes Negative, "Strong Dollar" Surges by Ryan McMakenMises.org Now at Business Insider
It is wrongly accepted by many liberals (i.e., libertarians) that most, if not all, social problems can be “solved by the market.” But clearly, the “market” cannot magically solve our problems. Let it be clear that there is no doubt that the best way to have social progress is to have a free market economy. However, free markets are not solutions to problems, per se, but are rather what gives us the opportunity to find our own solutions to our own problems by finding the most valuable way to serve one another. For example, Frédéric Bastiat famously wrote in The Law that: “At whatever point of the scientific horizon I start from, I invariably come to the same thing — the solution of the social problem is in liberty.”
By speaking about the virtues of the market, we tend to forget that markets do not have virtues, only people do. As Murray Rothbard once wrote, “it is overlooked that the ‘market’ is not some sort of living entity making good or bad decisions, but simply a label for individual persons and their voluntary interactions. … The ‘market’ is individual acting.”
The “What Should Government Do?” BiasDuring each crisis, politicians and intellectuals systematically presume that “we should do something.” Thus, when liberals emphasize the importance of not violently intervening in the free market order because of the harmful, but yet unseen, consequences of state intervention, they are often accused of favoring inaction. This is a misconception of the liberal argument.
The free market is not superior because it offers solutions. It is superior because its basis is freedom, a freedom that is used by individuals to find new ways for them that are in harmony with the interests of their fellow men. Of course, there are many problems and abuses with the market, but entrepreneurs — if not prevented from entering the marketplace by governments — seek to solve these problems in the pursuit of profits. Through these entrepreneurs, the market is a process that tends to satisfy the most urgent, not-yet-satisfied, needs of the consumers.
To be clear, liberalism — used here to denote the philosophy of laissez-faire — should not be considered as being the utopian opposite of socialism. It is not a magic recipe that guarantees perfect solutions at all times and for all things. Socialists like to imagine that liberals believe the market can cure every ill. In other words, they think liberalism is a mirror reflection of socialism. It is not. True liberalism does not promise perfection, it does not even promise a solution. There will always be problems. Our goal should be to find the best way to improve the situation, not to achieve an ideal world of fantasy.
When a social problem arises and somebody asks a liberal what must be done, he instinctively argues that “we” should free the markets, that “we” should liberalize, or that “we” should commit to deregulation.
But those proposals are not solutions to our problems at all, they are just a necessary step in the process of setting people free to solve problems. By pretending that “the market” is the solution that “we” should adopt, many liberals are victims of the top-down fallacy and deny the polycentric nature of markets. By calling “the market” a solution, we create the illusion that the free market is just another kind of government policy where the rulers offer us a solution. But the real solutions are offered by free individuals, by the free innovator, the free worker, the free capitalist, and the free entrepreneur.
Solutions to problems are not offered by the market, they are offered on the market. As development economist William Easterly brilliantly writes:
The “what should we do?” industry does not show any signs of going out of business soon. It gives us public intellectuals something to do and it gives politicians something to recommend. Much more positively, it does engage the very welcome idealism of altruists who want to make the world a better place. But the Sustainable Development Goals may be the best demonstration yet that action plans don’t necessarily lead to action, “we” are not necessarily the right ones to act, and that there are alternative routes to progress. Global progress has a lot more to do with the advocacy of the ideal of human freedom than with action plans.
Thus, free markets are a sort of meta-solution. They are the solution to the problem of finding solutions. And it is striking that liberalism might be the only political philosophy that does not have a blueprint for an ideal society.
The “Market Provides Incentives” MythAs the market is not a solution, the market does not give incentives. Leading institutional economists Acemoglu and Robinson, in their celebrated 2012 book Why Nations Fail, focused mainly on “incentives.” Whereas they — moderately — praise capitalism as an “inclusive institution,” they criticize “extractive institutions” because they “fail to protect property rights or provide incentives for economic activity.” They also write:
As institutions influence behavior and incentives in real life, they forge the success or failure of nations. … Bill Gates, like other legendary figures in the information technology industry … had immense talent and ambition. But ultimately responded to incentives.
There is no doubt that Why Nations Fails is, for the most part, a good book. However, Robinson and Acemoglu’s appraisal of incentives seems to be problematic. First of all, they assume that institutions should give “incentives.” But this is a constructivist fallacy, to use Hayek’s concept. It implicitly supposes that some external force should direct human actions.
Furthermore, it gives too much importance to top-down approaches. Acemoglu, like many other economists, seems to think something — e.g., the government — should incentivize. But what does it mean to say that government, property rights, or institutions give you an incentive? In fact, when wrongly used, the term “incentive” seems to invoke determinism. This is why Acemoglu writes that people “ultimately responded to incentives,” as if a mysterious force called incentives was influencing the choices each one of us make.
Incentives are not something that can be understood as being independent of individuals, they are purely subjective. An incentive can only be understood as the correct discovery of an individual’s own subjective preferences in order to lead him to act as you wish. Therefore incentives are not something you can “give,” it is something you have to discover.
The free market does not “provide” an incentive to work, it lets you work freely. The free market does not “provide” an incentive to invest, it lets you use your savings in order to make a profit by serving the consumer. There is no such thing as a god called “market” that will furnish you some incentive to be productive. However, the market is the best institutional framework to create harmony between the plans of a vast number of individuals — hence the title of Frédéric Bastiat’s magnus opus Economic Harmonies.
Because they are free, different individuals can understand each other’s preferences and exchange. Only in this way do people “give an incentive” to each other in order to commit to exchange and enhance their situation. Therefore, institutions do not provide incentives, people do. The sentence “the market provides incentives” contains the same problem as the sentence “the market is the solution.” It is just not so. The market is merely an institutional framework in which people can make plans freely. As Hayek says in a famous rap song “the question I wonder is who plans for who, do I plan for myself, or I leave it to you? I want plans by the many, not by the few.”
ConclusionThe modern state can be defined as the institution that pretends to have the monopoly of solutions to social problems. But since the state operates like a monopoly, it behaves like a monopoly and therefore exploits the very people it is supposed to serve. In fact, proponents of government action imply that the members of the civil society are not able to find their own solutions nor able to identify what the problems are. But the most competent men do not need the state to answer our problems, they just need freedom. When a problem arises, the right question is not “what can the government or the market do,” the right question is “what can I do.”
In recent years, there has been a growing awareness fact that the United States imprisons a far larger percentage of its population than many other nations. Much of this is due to the fact that what we call crime in the US is often not an imprisonable offense in the EU nations.
In the US, for example, a prison term is commonly employed for small-time drug offenders. According a study done by the Vera Institute of Justice, such sentences are rarely used for drug offenses in Germany and the Netherlands.
This is even true of more serious crimes. The report notes:
In most cases — even for relatively serious crimes such as burglary, aggravated assault, or other crimes considered felonies in the United States — prosecutors divert offenders away from prosecution or judges sanction offenders with fines, suspended sentences, or community service. In both the Netherlands and Germany, fines are used extensively as a primary sanction.
This reflects a basic difference in sentencing in the US. In the US, imprisonment is the primary sanction in many cases, leading to an unusually large prison population:
Jurisdictions across the U.S. and around the world grapple with the same basic questions regarding the role of punishment in their criminal justice systems: Who should be punished? How should offenders be punished? Under what conditions? For how long? By no means are these questions answered uniformly. Within the U.S., the rate of incarceration and the proportion of offenders sentenced to prison and community supervision differ from state to state. Indeed, the rate of imprisonment in state prison in the U.S. ranges from 147 per 100,000 residents in Maine to 865 per 100,000 residents in Louisiana. The overall imprisonment rate in the United States, including the jail and federal population, is 716 per 100,000 residents. The comparison to European rates is startling: 79 per 100,000 residents in Germany and 82 per 100,000 residents in the Netherlands are in prison.
The use and sale of prohibited narcotics makes up a majority of the US’s prison population. If we include immigration offenses and the category of extortion, fraud, and bribery, the non-violent prison population is almost 68 percent of all inmates and, therefore, nearly 68 percent of all individuals with a criminal record. Further non-violent offenses are buried in the remaining categories such as “other,” which includes a broad range of imprisonable offenses such as not paying the tag tax on your automobile or getting lost in a snowstorm.
Source: Bureau of Prisons, February 2009Does the Extensive Use of Prison Increase Violence?Despite the formal sentence handed down by a judge, a prison sentence is a life sentence. The simple fact is that being branded a criminal cuts off individuals from nearly all forms of employment opportunities. Non-violent offenses average between three to five years combined with prison and supervised parole. Even if employers ignored a person’s prior prison history in hiring decisions, the length of time absent from the workforce is significant, while the lost income during incarceration is frequently insurmountable. Being a guest of the State often carries an added sentence of perpetual state-induced poverty.
Prison itself is a dehumanizing experience. Confining people in degrading conditions generates a different attitude and behavior. Because of the philosophy of isolation as a means of punishment, individuals exposed to that environment develop behavioral patterns and mentalities vastly different from those necessary to function in civil society. These individuals are then thrown back into the general public or transitioned through ineffectual halfway homes where the social network of former inmates continues to be dominated by other unemployed ex-cons.
Indeed, both inside and outside prison walls, convicted criminals who are unable to find employment often end up spending their prime years learning new criminal trades and behaviors that only perpetuate criminal behavior.
In turn, this has led to a phenomenon in which we find an enormous correlation between having a criminal past and being a victim of homicide.
Statistics in several major metropolitan areas, including Milwaukee, Baltimore, and Newark, have shown a clear connection between the two. According to USA Today:
In Milwaukee, local leaders created the homicide commission after a spike in violence led to a 39% increase in murders in 2005. The group compiled statistics on victims' criminal histories for the first time and found that 77% of homicide victims in the past two years had an average of nearly 12 arrests. … Philadelphia also has seen the number of victims with criminal pasts inch up — to 75% this year from 71% in 2005. ... In Newark ... roughly 85% of victims killed in the first six months of this year had criminal records, on par with the percentage in 2005 but up from 81% last year, police statistics show.
A Connection Between Incarceration and Homicide?So, does the cycle of imprisonment and impoverishment actually lead to more serious crime? Given the economic impacts of a prison sentence, and thus the increased likelihood that one will continue to associate with others who have criminal records, it’s plausible that extensive use of prisons for so many offenses encourages the formation of violent social enclaves outside of prison.
This in turn leads us to the fact that a disproportionate number of homicide victims have criminal records.
In fact, if we look for a connection between incarceration rates and homicide rates in US states and European countries, we find a clear correlation (x and y axes: n per 100,000):
This chart compares the homicide rate of each of the fifty US States and a number of Western and Central European nations. The incarceration rate of the US is 716 per 100,000 compared to the average of Western and Central European nations, which is 102.
Making comparisons between countries and states on homicide is very problematic, and any number of factors can be at play. It’s difficult to show clear connections between homicides and other factors, such as gun ownership. Moreover, one might be tempted to claim that incarceration rates are higher because Americans are more violent due to some other outside factors. However, given the prevalence of criminal records among homicide victims, and the American propensity to create large numbers of people who have spent time in prison, it may be worth a second look at how our immense prison population may be a contributing factor to overall violent criminal activity. It may be just another example of one of the state’s efforts to “protect” us gone wrong.
In their new book, Phishing for Phools, Nobel-prize winning economists George Akerlof and Robert Shiller use a behavioral economics approach to criticize the “manipulation and deception” that can exist between businesses and consumers.
According to Shiller,
[a] fundamental concept of psychology is that people often make decisions they’re not happy about. … If businesses have a chance to profit by tempting us into making decisions that are good for them but bad for us, they will take it. They have just as powerful an incentive to provide us with what we don’t want as to provide us with what we do want.
According to the Wall Street Journal, this is one of the main contributions of the book: the market is the best mechanism to offer people things they do not want to have.
We Do Not Buy What We Do Not WantNo one denies that sometimes we do things we later regret. Most of us once bought something that we later regretted spending money on.
However, the fact that these errors in judgment may occur — on the part of the consumers — is not evidence that businesses attempt to sell products that customers do not want.
It’s important to understand that individual decisions are made prospectively, looking forward in time. When an individual buys a product or service, he does so because he expects it to remove his “uneasiness.” At the time of the transaction, this person making the purchase is indeed revealing his desire to have that good. Otherwise, he would not make the purchase. This does not mean that, in retrospect, our decision may be judged to have been a success or a failure, depending on whether it really served the purpose it was meant to serve.
But it doesn’t follow from here that the market is as good at delivering what people want as it is at delivering what people do not want. If this was the case, then business would continue to sell audio cassettes, VHS videotapes, and other products to consumers who have been “manipulated” into buying them.
Obviously, this is not what happens.
Who Regulates the Regulators?Another weak point in Akerlof’s and Shiller’s argument is their implied solution: government regulation. In a recent article, Shiller writes
While we confirm the importance of free markets, we have found that market regulation has been crucial, and believe that will continue to be true in the future. [Standard economic theory] usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception.
One can’t help but notice the central contradiction in this analysis. On the one hand, it is assumed that markets fail because of “normal human weakness.” On the other hand, it is assumed that regulation, which must necessarily be implemented by human beings with equal or greater “weaknesses,” will somehow solve the problem.
Akerlof and Shiller simultaneously demonize human beings who operate in the private sector while idealizing human beings who operate in the public sector.
Lessons From South AmericaFor evidence of the problem with this approach we need look no further than South America where government agents are quite adept at giving people “what we do not want.”
For example, we can note the fact that a process of impeachment recently began against the president of Brazil because, according to the allegations, she tried to hide the true extent of increases in public spending. Meanwhile, in Argentina, former Vice President Amado Boudou cannot leave the country because he is accused of misappropriating funds from the company responsible for printing pesos bills.
These are just some recent examples in a nearly endless list of corruption cases, and if democratically elected officials such as these are capable of such large-scale deception and malfeasance, why should we think that these same people can help reduce “manuipulation and deception” in the market place?
The situation we face in South America is exactly the opposite of the free-wheeling under-regulated markets described by Shiller and Akerlof. We live in highly regulated economies which are being suffocated and corrupted by an excess of political power.
Meanwhile, according to the latest IMF estimates, Venezuela, Brazil, and Argentina have been among the slowest growing economies from 2011 to 2015. Not surprisingly, all three of these countries have been implementing highly interventionist policies, boosting public expenditure, manipulating credit markets, and controlling prices of certain goods and services.
And, of course, South America is hardly the only place on earth that experiences political corruption.
The focus, then, contra Shiller and Akerlof, must be placed on how to dismantle this system, not in providing it with more weapons and arguments to continue growing.
A look into monetary history shows that people, when given freedom of choice, opted for precious metals as money. This doesn’t come as a surprise. Precious metals have the physical properties a medium must have to serve as legal tender: They are scarce, homogenous, durable, divisible, mintable, and transportable. They are held in high esteem and represent considerable value per unit of weight. Gold fulfills these requirements par excellence, and this is why it has always been peoples’ first choice in terms of money. Gold has proven its merits as money for millennia; it is the ultimate means of payment.
More recently, gold has been replaced by the state’s unredeemable fiat money — for reasons rather more political than economic. The state prefers money whose value can be altered at will — say, to influence overall demand, redistribute income, and to benefit some at the expense of the many. Gold money stands in the way of such machinations. Fiat money doesn’t. On the contrary, fiat money can simply be printed up; can be created out of thin air.
Fiat money has serious economic and ethical drawbacks, though. It is chronically inflationary, widens the gap between poor and rich, triggers boom-and-bust cycles, and compounds the economy’s debt burden. Most important, a fiat money regime allows the state to expand actually without limit, over time potentially transforming even a minimum state into a maximum state at the expense of individual liberty and freedom.
In the wake of the most recent financial and economic crisis of 2007–2008, many people have become concerned that their savings, mostly invested in fiat-denominated bank accounts and bonds, could be devaluated. This has prompted a search for “good” money.
Somewhat new to the mix are the digital currencies, most famous of which is the virtual unit “bitcoin.” It is a digital currency generated by decentralized, internet-based computers rather than a central authority.
Transactions through digital currencies such as bitcoin are confirmed, or validated, by a decentralized consensus system that uses a “blockchain.” The latter is essentially a public digital ledger, an account statement for transactions among computers. The blockchain is saved on many computers so that it is practically impossible to manipulate. In the case of bitcoin specifically, the blockchain ensures that only the bitcoin’s owner can make a transaction with his bitcoin, that the same bitcoin cannot be created manifold.
In this article, I’ll use bitcoin as my main example, although this technology can be applied to any number of similar digital currencies.
However, this technology has now been used to provide a new means of transferring assets among people: the “colored bitcoin.” A colored bitcoin — or something comparable using blockchain technology — represents a certain asset. For instance, physical gold can be made available for day-to-day transactions — for purchases and sales in supermarkets and on the internet — simply by transferring a gold-backed colored bitcoin from the bitcoin wallet of the buyer to the bitcoin wallet of the seller.
How could one obtain such a gold-backed bitcoin? You would buy, say, physical gold at a gold shop. The latter then issues a colored bitcoin, which represents the ownership of physical gold. The colored bitcoin is, economically speaking, a gold substitute (a money substitute, fully backed by physical gold). It can be used for making purchases and, upon the wish of its owner, it can be redeemed into physical gold at the gold shop at any time.
A colored bitcoin represents a physical thing or asset that exists outside the bitcoin network. It therefore carries with it a risk that the issuer will not live up to his promise. However, there are market solutions to this problem. For instance, the gold can be stored with a particularly trustworthy third party. Or, people hold colored bitcoins issued by various issuers. If the latter are seen to be of the same riskiness, they would trade at par to each other (after making allowance for possible storage and handling costs).
That said, the gold-on-the-blockchain technology appears to hold great potential when it comes to making possible a world of digital gold money transactions. So far, governments use regulation and taxation to inhibit and even prevent unencumbered competition among monies. However, the evolution of the blockchain largely circumvents many of the obstacles governments put in the way of a free market in money. Where it will lead is, of course, is impossible to predict with certainty.
In any case, when we’re comparing to government fiat money, digital currencies can offer attractive alternatives. The same goes for gold lovers, who may see blockchain technology as the means of conveying physical gold; and in the end digitized gold money could become a practical option.
The economic causes and consequences of immigration are among the most important issues facing the world today. Both pro- and anti-immigration advocates are digging in their heels, and both sides look increasingly unlikely to relent. Despite the bleak outlook, however, there is still hope for a peaceful and charitable discussion of the economics of immigration.
With that in mind, I want to consider Mises’s thoughts on the topic. For Mises, emigration and immigration are motivated by a simple economic fact: the conditions of production are not the same in all places. Natural and human conditions change constantly, and as a result, the productivity of land, labor, and capital do so as well. Therefore in order to take advantage of changing conditions and produce in the most productive ways possible, people must constantly migrate to those places where their contributions are most valuable (1919, pp. 84–85).
The desire to move from low-productivity to high-productivity regions is for Mises the fundamental explanation for the migration of peoples, and limits overpopulation (1919, p. 85). We can say a country is relatively overpopulated when the same amount of capital and labor is less productive there than in another nation. Reducing overpopulation means reducing this “disproportion” by allowing for the mobility of persons and goods (1919, p. 86). In Mises’s view, mobility was an achievement of liberalism:
The principles of freedom, which have gradually been gaining ground everywhere since the eighteenth century, gave people freedom of movement. … Now, however — as a result of a historical process of the past — the earth is divided up among nations. Each nation possesses definite territories that are inhabited exclusively or predominantly by its own members. Only a part of these territories has just that population which … it would also have under complete freedom of movement, so that neither an inflow or an outflow of people would take place. The remaining territories are settled in such a way that under complete freedom of movement they would have either to give up or to gain population. Migrations thus bring members of some nations into the territories of other nations. That gives rise to particularly characteristic conflicts between peoples. (1919, pp. 86–87)
Mises has two types of conflict in mind: economic and social. Economic conflict occurs because domestic workers resent that fact that immigration bids down their wages:
[I]n territories of immigration, immigration depresses the wage rate. That is a necessary side effect of migration of workers and not, say, as Social Democratic doctrine wants to have believed, an accidental consequence of the fact that the emigrants stem from territories of low culture and low wages. (1919, p. 87)
Social conflict can also arise. Mises emphasized, however, that in most cases immigrants are obliged to give up their national identity and adapt themselves to the culture of their new home. Only in relatively extreme cases, such as European imperialism, was it historically possible for immigrants to replace original inhabitants and their cultures (1919, p. 89). In fact, according to Mises, strong cultures need not resort to government in order to protect themselves:
A nation that believes in itself and its future, a nation that means to stress the sure feeling that its members are bound to one another not merely by accident of birth but also by the common possession of a culture that is valuable above all to each of them, would necessarily be able to remain unperturbed when it saw individual persons shift to other nations. A people conscious of its own worth would refrain from forcibly detaining those who wanted to move away and from forcibly incorporating into the national community those who were not joining it of their own free will. To let the attractive force of its own culture prove itself in free competition with other peoples — that alone is worthy of a proud nation, that alone would be true national and cultural policy. The means of power and of political rule were in no way necessary for that. (1919, pp. 103–04)
However, for Mises, cultural considerations are mainly an aside. In general, he saw conflicts over immigration as being driven mostly by protectionism rather than insurmountable differences in human beings or cultures (1935). In particular, domestic unions support government policies to restrict immigration and thus keep low-wage competition out of the labor market:
Public opinion has been led astray by the smoke-screen laid down by Marxist ideology which would have people believe that the union-organized “proletariat of all lands” have the same interests and that only entrepreneurs and capitalists are nationalistic. The hard fact of the matter — namely that the unions in all those countries which have more favorable conditions of production, relatively fewer workers and thus higher wages, seek to prevent an influx of workers from less favored lands—has been passed over in silence. (1935)
As Per Bylund notes, this is precisely what is happening in Sweden, where unions prevent the integration of immigrants so as to keep wages high. Protectionism at home also breeds protectionism abroad, as foreign nations try to cope with lower productivity through their own regulations designed to counter “unfair” competition on the world market. As economic conditions worsen in those countries where migration is prevented by the state, conflict becomes inevitable:
[People in these countries] will certainly still have just as much cause to complain as before — not over the unequal distribution of raw materials, but over the erection of migration barriers around the lands with more favorable conditions of production. And it may be that one day they will reach the conclusion that only weapons can change this unsatisfactory situation. Thus, we may face a great coalition of the lands of would-be emigrants standing in opposition to the lands that erect barricades to shut out would-be immigrants. … Without the reestablishment of freedom of migration throughout the world, there can be no lasting peace. (1935)
In this way, protectionist policies inevitably lead to conflict and the destruction of human life and welfare. In fact, Mises even hints that government policies aiming to control the movement and employment of individuals suffer from the same problems socialist central planning does (1919, p. 85). At the same time, entrepreneurship and the division of labor are the foundations of a rational social order, and neither is possible without free labor markets.
The main threat facing society then is illiberal ideology, and the only solution to this “principle of violence” is to develop a consistent liberal philosophy to serve as the basis for a peaceful society (1951, p. 49).
Mises believed that any society that rejected the values of liberalism was doomed. In an age of nationalism, protectionism, and war, it’s easy to see what he meant.
Brazil is undergoing what is considered its worst economic crisis in seventy years, and there is usually no agreement when it comes to the causes of this situation. President Rousseff and the Labor Party say that it was the corollary of the “International Crisis,” a ghost of the 2008 depression created in their minds. The reality, however, is different. Since ex-president Lula Da Silva of the Labor Party entered office in 2003, the government has clung to the typical Keynesian project of growth-by-government-spending. Interest rates were lowered constantly, the amount of loans grew to an unprecedented level, savings per capita dropped, and government spending continued to grow.
For the advocates of government intervention, the country’s economy was heaven on earth. It should be of no surprise that Paul Krugman, the defender of America’s Quantitative Easing, said that Brazil was not a vulnerable country. However, those policies so strongly defended by some economists and by bureaucrats led the country toward the terrible situation in which it is now.
From the Brazilian government’s point of view, it could hardly get any worse: the country is facing an economic depression that is likely to last at least two more years, the country’s rating was downgraded to junk by Standard & Poor’s, and a corruption scandal may lead to the impeachment of the country’s president, Dilma Rousseff. We must recognize, however, that even though this was the result of the government’s action, it simply put in practice the most prevalent ideologies of the country, which is a mixture of Marxism in politics and in the universities with Keynesianism in economics. This national ideology praises, in general, a complete dependence of the people on the government. The fact that “Brazil’s tax burden already amounts to 36 per cent of GDP” is held with pride by professors and economists throughout the country, who spread the word that public policies will create jobs and contribute to people’s welfare.
Brazil and the Austrian Business Cycle TheoryIn order to grasp what is happening to Brazil, and to understand why some economists have long ago predicted the current disaster, it is crucial to understand Austrian business cycle theory, since it yields a concrete critique of government’s involvement with currency and credit expansion — two factors that the Brazilian government used as tools for economic growth — and its misuse is what generated the crisis.
As Mises pointed out, “the cyclical fluctuations of business are not an occurrence originating in the sphere of the unhampered market, but a product of government interference with business.”
Indeed, those “boom-bust” cycles, as the one that happened in Brazil, are generated by monetary intervention in the market in the form of bank credit expansion. Thus, they are an outcome of central planning and government intervention, the very opposite of a free market.
It is, however, important to make the distinction between bank credit expansion in the form of loans to business and other forms of credit expansion. The former is usually a method that government uses to boost the economy of the country, lowering the interest rates “below the height at which the free market would have fixed it,” and this is why it is so important in our analysis.
On the graph below we can see the absurd rise in the amount of loans (given in millions of reais, the Brazilian currency) made to businesses, especially since 2006 (and reinforced from 2008 on, as a way to “fight” the international crisis) when the government tried to generate an unsustainable boom. (The red line represents the loans given by public banks and the blue line the loans given by private banks.)
Figure 1. Amount of Credit Lent to Business in Brazil Over TimeThis new type of credit that would not be available without the interference of the government generating the so-called “boom.” This boom caused businessmen to, as described by Rothbard in America’s Great Depression, “take their newly acquired funds and bid up the prices of capital and other producers’ goods, and this stimulate[d] a shift of investment from the ‘lower’ (near the consumer) to the ‘higher’ orders of production (furthest from the consumer) — from consumer goods to capital goods industries.”
This shift of investment from consumer to capital goods is a characteristic mark of the boom and explains, as opposed to other theories, why capital goods’ industries are affected first in the beginning of the depression. We can see on the next graph how those industries were affected in the Brazilian scenario. The green line represents the capital goods industries, and the slump that we see happened during the very early stages of the depression, in the end of 2013.
Figure 2. Index of Industrial Production and Key ComponentsIt is also worth noticing that this slump happened right after the government started to raise the interest rates again, which occurred after a period of an all-time low in the interest rates of the country. As we can see below the Brazilian government lowered the interest rates to an unprecedented low level, and when the government tried to raise interest rates to curb the inflation generated by its “easy money” policies, the boom came to an end.
Figure 3. Brazil’s Interest Rates Over Time (Source: Financial Times.)As Murray Rothbard observed (again from America’s Great Depression),
businessmen were misled by bank credit inflation to invest too much in higher-order capital goods, which could only be prosperously sustained through lower time preferences and greater savings and investment; as soon as the inflation permeates to the mass of the people, the old consumption — investment proportion is reestablished, and business investments in the higher orders are seen to have been wasteful. Businessmen were led to this error by the credit expansion and its tampering with the free-market rate of interest.
As observed by Mises in his essay “Middle-of-the-Road Policy Leads to Socialism,” we must pay attention to the fact that “the attempts to lower interest rates by credit expansion generate, it is true, a period of booming business,” which in Brazil’s case occurred mostly between 2006 and 2013. “But the prosperity thus created is only an artificial hot-house product and must inexorably lead to the slump and to the depression. People must pay heavily for the easy-money orgy of a few years of credit expansion and inflation.” The depression that is currently happening in the country is, therefore, not an evil that should be fought against with more and more government policies. The depression is the cure.
As we have seen, most of what the Austrian business cycle theory described can be well applied to Brazil. It is important to admit that other factors also played important roles, such as the price of the dollar relative to the real and the slowdown of China’s demand on Brazilian commodities, but most of them were usually, and to some extent, only a consequence of the policies that we have already analyzed. The bottom line is that the country went through a major credit and money supply expansion, together with years of low interest rates. It is crucial to note that, contrary to other explanations, “Mises’s theory of the trade cycle … meshes closely with a general theory of the economic system. The Mises theory is, in fact, the economic analysis of the necessary consequences of intervention in the free market by bank credit expansion.”
Consequently, we can see how Brazil’s current crisis is nothing but an outcome of government’s meddling with the market. The scenario of the country’s economy is indeed scary, but we have reason to believe that Brazil’s intellectual situation is going through a new and promising change. It may be true, as Lord Keynes said, that “in the long run we are all dead,” but if we are to get out of this terrible crisis, to prosper and to enjoy a constant improvement in our standard of living, “it is high time to transform the country’s state capitalism into a free market system.”
There are a handful of themes out there on recent market action that are either totally wrong or otherwise highly misleading. For instance, regarding the recent calamity in the capital markets, one especially apparent dichotomy has presented itself as offering two choices as to what, exactly, is causing the painful turbulence.
There are some who, in a complete echo of the news headlines, are quick to point the finger at both oil and China. And yet there are others who point the finger at the Fed for “raising rates too early.” Along with the second is the observation that “inflation is totally MIA” and therefore it was ludicrous that the Fed felt the need to “raise interest rates.” Both of these tend to express anguish over the “strong dollar.”
Both of these miss the entire point, and the cause of the current trouble. For one thing, it is ridiculous to blame oil for the falling markets when the falling oil is the very thing that needs to be explained. It is wholly unsatisfactory to explain something by describing it. It works well for headlines, and for shifting the blame away from where it really belongs, but one must learn to look deeper. One cannot expect to impress anyone by explaining that the plane is crashing to the ground because it is no longer flying. What is the cause of oil’s magnificent plummet toward the bottom? That is the true question.
Moreover, the problem with the “China thesis” is that it doesn’t explain anything either. It merely observes a correlation in the markets and therefore makes it highly convenient to put the blame on “the other guys.” Let me not be misunderstood here: the Chinese and US economies are certainly influenced by each other, especially in our age of fluctuating fiat currencies. But ultimately, both China and the US — indeed the entire world — are being dragged down by past actions of their respective central banks and more specifically the illusion of prosperity via monetary and credit expansion.
Which leads to the second theme: putting the blame on the Fed for “raising rates” too early. That is, there are a good many who argue that if the Fed had never announced in December that it was going to seek minuscule increases in the Federal Funds rate, none of the recent market drops would have happened. They will say things like “inflation was never a threat, so the Fed was irresponsible to raise rates.”
Money-Supply Inflation vs. Price “Inflation”This is confused. First, it must be constantly emphasized that the meaning of inflation, contrary to the mainstream’s application of it, is more appropriately defined an increase in the money supply, not “rising prices.” The reason why the Fed and proponents of central banking prefer the “rising prices” definition is because it obscures the chief source of our present economic condition. It rips the blame away from the Fed and toward all kinds of other “market forces” and therefore encourages the central bank to swoop in to the rescue rather than be the object of severe suspicion. Indeed, as Mises observed (page 420 of Human Action):
What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.
First of all there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name. …
The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practicalIy make things worse.
Rising prices can be a result of inflation, but it is not itself inflation. So then, inflation was actually very high in the last decade due to the Fed’s QE and other monetary policy schemes. Second, it should never be ignored that “rising prices” can easily be found in the capital markets themselves. It doesn’t take an investment guru to observe the staggering levels to which the various market indexes have reached. Digging only a little bit farther into the surface reveals the absurd prices for the so-called highest valued stock such as Facebook, Amazon, Apple, and so on.
Where All That Money WentMore importantly, however, is the fact that much of the newly created money has not even come close to creating “widespread [consumer price] inflation” due to the actual structure of the current, post-crises banking regime. In fact, Jeffrey Snider, among others, have argued that it is literally impossible for “price inflation” to take place as a direct result of QE due to the way that money currently enters the system as reserves. “Price inflation” would need to come from the actions of individual banks themselves who are at present cautious about their consumer lending practices. Therefore the Fed is not creating “price inflation,” but something far worse: capital misallocation.
The point here is simply that those who want the interest rates to be continually suppressed so that economic activity will be encouraged, don’t even realize that this is literally the cause of bubble creations, not productive economic activity.
It used to be, under the pre-crises fractional-reserve model, that there would be loads of malinvestment as a result of banks creating new loans (new economic activity would take place, and then collapse back down). But now, money is created, not by commercial banks, but mostly by the Fed itself. Which means that, in the phraseology of David Stockman, the new money is simply sloshing around the canyons of Wall Street and pushing up equity and bond prices, rather than reaching the “real economy.”
The Bubble Only Prolongs the ProblemThus, contrary to those blaming the Fed for causing stocks to fall by “raising rates” (which Joe Salerno reflects on here) we want to stress the fact that, in raising rates, the most that the Fed could do is unravel previously made mistakes. In other words, there is nothing praiseworthy in the first place about artificially propped up stock market levels. We have no interest in lauding the longevity of the bubble, because the bubble is the enemy of the healthy economy. The collapsing equity markets reveal where bubbles were formed and that our alleged prosperity is an illusion. And this is precisely what former Dallas Fed Chairman Richard Fisher stated in a conversation on CNBC last week when he confessed: “We frontloaded a tremendous market rally to create a wealth effect.”
And thus, the money expansion must inevitably cycle back down. Fisher himself admits: “… and an uncomfortable digestive period is likely now.” What was inflated up to the top, must deflate down to the floor. That is the only way for an economy to recover: bad credit needs to be liquidated. Unfortunately, it is painful indeed.
That is the true cause of the recent calamity. The dollar is “strengthening” by virtue of our credit system cracking at the seams. In other words, the so-called “strong dollar,” is merely one side of the pendulum swing of a volatile collapsing banking system. It shouldn’t be assumed that the dollar is becoming more sound; it is not. But if we might ever again have a sound currency, we first have to face the music.
And thus oil too, after years of being elevated up toward the heavens via the Fed’s monetary shenanigans, is experiencing its own inevitable bust. The illusion is being exposed.
Unfortunately, the Fed is a wild card, so we stay tuned to whether it will let the markets recover, or continue the perpetual cycle of money creation. My own advice for the Fed is neither to “raise rates” nor to lower them. But rather, to let go and let the market correct itself. For we have a lot of correction ahead of us.
Fear is in the air. Central bankers are warning of crisis, stock markets are falling, and even the media is realizing that the economy may not be as stable as our central planners would have us believe. Of course, while mainstream economists fear the falling prices that are on the horizon in our post-boom world, Austrians know that deflation and recessions are both inevitable and necessary when the economy is based on debt and fiat money.
Dr. Mark Thornton joined Jeff Deist on Mises Weekends to dive deeper on the current economic headlines. Why don’t central bankers understand deflation? A they really Keynesians or some variant thereof? What might a “crack-up boom” look like? And what does the Skyscraper Index tell us about the future of the global economy?
This is an episode you won’t want to miss.
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Un-PC Lego Making Toys Girls Like by Ryan McMakenIn a Post-Boom World, Auto Prices Will Fall by Patrick BarronWhy We Need a Recession by Ronald-Peter StöferleThree Centuries of Boom-Bust in Spain by Daniel Fernández-Renau Atienza and David HowdenMises in Four Easy Pieces by Dan SanchezBorderland Homicides Show Mexico's Gun Control Has Failed by Ryan McMakenRon Paul's Pillars of Prosperity in ChineseTexas Adopts New York Values on Fantasy Football by Tho BishopPennies And Nickels: More Expensive To Mint Than To Use by Paul-Martin Foss"Stocks Are Not Overvalued": Supply Siders Drop the (Crystal) Ball Again by Joseph SalernoMedia Catches Up to Economic Reality by Tho BishopBarron's Is Talking Skyscraper Curse by Mark Thornton1916 and the Health of the State by T. Hunt TooleyPer Bylund on the Sharing Economy in EntrepreneurThree Reasons Oil Prices Can Still Go Lower by Troy VincentCentral Banker Warns of Coming Financial Collapse by Joseph SalernoBernie Sanders Says We Should be Spending Less on Health Care by Ryan McMakenRepent and Believe in the Data! by Jonathan Newman
One day in 1959, hundreds of students, educators, and grandees filled the enormous lecture hall of the University of Buenos Aires to capacity, overflowing into two neighboring rooms. Argentina was still reeling from the reign of populist president, Juan Perón, who had been ousted four years before. Perón’s economic policies were supposed to empower and uplift the people, but only created poverty and chaos. Perhaps the men and women in that auditorium were ready for a different message. They certainly got one.
A dignified old man stepped before them, and delivered a bold, bracing message: what truly empowers and uplifts the people is capitalism, the much-maligned economic system that emerges from private ownership of the means of production.
This man, Ludwig von Mises, had been the world’s leading champion of capitalism for half a century, so his message was finely honed. Not only a creative genius, but a superb educator, he boiled down capitalism to the essential features that he believed every citizen needed to know. As his wife Margit recollected, the effect on the crowd was invigorating. Having spent years in an intellectual atmosphere of stale, stagnant ideas: “The audience reacted as if a window had been opened and fresh air allowed to breeze through the rooms.”
This lecture was the first in a series, the transcriptions of which are collected in the book Economic Policy: Thoughts for Today and Tomorrow, edited by Margit.
Life (and Death) Before CapitalismTo demonstrate in his lecture how revolutionary the advent of capitalism was in world history, Mises contrasted it with what he called the feudalistic principles of production during Europe’s earlier ages.
The feudal system was characterized by productive rigidity. Power, law, and custom prohibited individuals from leaving their station in the economic system and from entering another. Peasant serfs were irrevocably tied to the land they tilled, which in turn was inalienably tied to their noble lords. Princes and urban guilds strictly limited entry into whole industries, and precluded the emergence of new ones. Almost every productive role in society was a caste. This productive rigidity translated into socio-economic rigidity, or “social immobility.” As Mises reminded his Argentine audience:
a man’s social status was fixed from the beginning to the end of his life; he inherited it from his ancestors, and it never changed. If he was born poor, he always remained poor, and if he was born rich — a lord or a duke — he kept his dukedom and the property that went with it for the rest of his life.Over 90 percent of the population was consigned to food production, so as to precariously eke out sustenance for their own families and contribute to the banquets of their domineering, parasitic suzerains. They also had to make their own clothing and other consumers’ goods at home. So, production was largely autarkic and nonspecialized. As Mises highlighted, the small amount of specialized manufacturing that existed in the towns was devoted largely to the production of luxury goods for the elite.
From the High Middle Ages onward, production in Western Europe was higher, and the average person much less likely to be a chattel slave, than during antiquity and the Dark Ages. But the economic system was still fixed and moribund; the common man had no hope of progressing beyond a life teetering between bare subsistence and starvation.
And in the eighteenth century, in the Netherlands and England, said Mises, multitudes were about to go over the ledge, because the population had grown beyond the land then available to employ and sustain them.
It was then and there that capitalism entered the scene, saving the lives of millions, and vastly improving the lives of millions more.
Four key distinguishing features of capitalism can be gleaned from Mises’s lecture. What follows is an exposition of those features, which can be thought of as, to paraphrase Richard Feynman, “Mises in four easy pieces.”
It is important to note that, as Mises fully noted elsewhere, what emerged in the eighteenth century and developed subsequently was never a purely free market. So, the following characteristics have never been universal. But these features did come into play far more extensively in this period than ever before.
One: Dynamic ProductionUnder what Mises called “capitalistic principles of production,” feudal productive rigidity is replaced by productive flexibility and free entry. There are no legal privileges protecting anyone’s place in the system of production. Lords and guilds cannot exclude new entrants and innovations. And an upstart enterpriser’s capital, products, and proceeds are secure from the cupidity of princes and the jealousy of incumbents.
Of course free entry amounts to very little without the corresponding right of free exit. With capitalism, peasants are free to leave their fields and former masters for opportunities in the towns. And proprietors are free to sell or hire out their plots of land and other resources to the highest bidder. (Although, during the transition between feudal and capitalist production, it really should have been the peasants doing the selling and hiring out, as they were owed restitution never delivered for their past serfdom and expropriation.)
Free entry/exit is the logical corollary of liberty: inviolate self-ownership and private property. It is the freedom of an individual to put his labor and earnings to whatever productive use he finds advantageous, irrespective of the pretenses to privilege of vested interests.
Under capitalism, no longer can nobles rely on a captive labor force and “customer” base, or enjoy the impossibility of having resources bid away by more efficient producers. No longer can these robber barons turned landed barons rest on such laurels of past armed conquest.
Mises identified resentment of this fact as a prime source of anti-capitalism, which thus originated, not with the proletariat, but with the landed aristocracy. He cited the consternation of the Prussian Junkers of Germany over the Landflucht or ”flight from the countryside” of their peasant underlings. And he related a colorful story of how Otto von Bismarck, that prince of Junkers who founded the welfare state (with the express purpose of co-opting the masses), grumbled about a worker who left Bismarck’s estate for the higher wages and pleasant Biergartens of Berlin.
Under capitalism, no longer can tradesmen idle in old methods and old markets. To do so is impossible in a world in which any man with savings and gumption is a potential underseller and overbidder. Industry incumbents also loathe the competition, so their special pleading is another major source of anti-capitalist rhetoric.
Free entry/exit imposes the stimulus and discipline of competition on producers, impelling them to strive to outdo each other in satisfying potential customers. As Mises announced in Buenos Aires: “The development of capitalism consists in everyone’s having the right to serve the customer better and/or more cheaply.”
Production, formerly adrift in the standing water of feudalistic stagnation, sets sail under capitalistic dynamism, driven by the bracing winds of competition.
Two: Consumer SovereigntyWhen producers vie with each other to better serve customers, they unavoidably act more and more like devoted servants of those customers. This is true of even the biggest and wealthiest producers. As Mises brilliantly expressed it:
In talking about modern captains of industry and leaders of big business … they call a man a “chocolate king” or a “cotton king” or an “automobile king.” Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all, he serves. He does not reign over conquered territory, independent of the market, independent of his customers. The chocolate king — or the steel king or the automobile king or any other king of modern industry — depends on the industry he operates and on the customers he serves. This “king” must stay in the good graces of his subjects, the consumers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.With capitalism, just as producers play the role of servant, customers play the role of master or sovereign: in a figurative sense, of course. It is their wishes that hold sway, as producers strive to grant them. And strive they must, if they want to succeed in business. For, just as a sovereign of the ancien régime was free to withhold favor from one courtier and bestow it upon another, the “sovereign” customer is free to take his business elsewhere.
This relation is even expressed in the language we use to describe commerce. Customers are patrons who patronize shops and other sellers. These sellers say, “thank you for your business” or patronage, and insist that, “the customer is always right.” The polite, respectful deference formerly given by the ancient Roman cliens (client) to his patronus (patron) is now instead given by the producer to his customer/patron, except generally in a much more self-respecting and less groveling manner.
If the customer is himself also a producer on the market, he must pay forward that same solicitousness and deference to his own customers, lest he lose their business to competitors. Thus, his desires for goods from his eagerly attentive suppliers are shaped by his own eagerness to fulfill the desires of his own customers. Therefore, the higher order producer, by striving to make his customer happy, indirectly strives to make his customer’s customers happy as well.
This series terminates with the customers who have no customers: namely, the consumers, who are therefore the “engine” of this “train” of final causation. Thus, with capitalism, it is the consumers who hold ultimate sway over all production. Mises referred to this fundamental characteristic of capitalism as, speaking figuratively, consumer sovereignty.
Again, this is constrained to the extent that state intervention hampers capitalism. “Leaders of big business” can and often do use the state to acquire powers and privileges that enable them to flout the wishes of consumers and acquire wealth through domination instead of service. In fact, one of the most clear recent instances of this involved a real life person actually nicknamed, as in Mises’s example, the “chocolate king”: a confectionary tycoon named Petro Poroshenko who parlayed his business success into a political career which recently culminated in his election as president of the US-sponsored junta now ruling Ukraine.
Three: Mass Production for the MassesIn the first lecture of his online course “Why Capitalism,” David Gordon drew from his limitless reservoir of scholarly anecdotes to relate that Maurice Dobb, a British economist and communist, replied to Mises’s point about consumer sovereignty by averring that this feature of capitalism hardly does the common man any good, since the most significant consumers are the wealthiest. Dobb’s mistake, of course, is to neglect the fact that the relative importance of single consumers is not the issue here. The combined purchasing power of the preponderance of typically wealthy consumers vastly outstrips that of the atypically wealthy.
Therefore, as Mises pointed out, the capitalist’s main route to becoming one of those few wealthy consumers of extraordinary means is through mass producing wares that cater to the masses of consumers of ordinary means. Even a small per-unit profit margin, if multiplied millions or billions of times, adds up to some serious dough. Boutique enterprises catering only to the elite, as feudal era manufacturers did, simply cannot compare. And that is why, as Mises informed the stunned Perónistas:
Big business, the target of the most fanatic attacks by the so-called leftists, produces almost exclusively to satisfy the wants of the masses. Enterprises producing luxury goods solely for the well-to-do can never attain the magnitude of big businesses.
That is why, as Mises never tired of saying, capitalism is a system of mass production for the masses. It is overwhelmingly the masses of “regular folk” who are the sovereign consumers whose wishes are the guiding stars of capitalist production.
Capitalism flipped feudalism on its head. With feudalism, it was the elite (the landed aristocracy) whose will dominated the masses (the enserfed peasants). With capitalism, it is the wishes of the masses (ordinary consumers) that hold sway over the productive activity of the entrepreneurial elite, from retail giants to dot-com millionaires.
As Mises’s address implied, the yearned-for “people power” always promised by demagogues like Perón, but which invariably turns to ashes in the mouths of the masses, as it did with the Argentines, is the natural result of capitalism, a system so often derided as “economic royalism.”
Imagine his audience’s surprise!
But the full truth that Mises was imparting was even more surprising than that. Not only does capitalism fulfill the broken promises of economic populism, but, as Gordon brilliantly remarked in his lecture, it also follows through on the more specific promise offered by syndicalists and Marxian socialists: worker control over the means of production. That is because, as Mises stressed in his lecture, the vast majority of the masses of ordinary “sovereign” consumers are also workers.
With capitalism, the working people really do hold ultimate sway over the means of production. They just don’t do it in their role as workers, but in their role as consumers. They exert their sway in checkout aisles and website shopping carts, and not in the halls of labor unions, syndicates, soviets (revolutionary councils of workers), or a “dictatorship of the proletariat” that reigns in their name while it rides on their backs.
Capitalism has the charming arrangement of empowering the working person, while still preserving economic sanity by placing means (factors of production, like labor) at the service of ends (consumer demand), instead of the insanity of doing the opposite, as the labor fetish of syndicalism does.
Four: Prosperity for the PeopleCapitalism not only empowers the working person, but uplifts him.
Capitalism, as its name implies, is characterized by capital investment, which was the solution to the crisis of how the marginal millions of eighteenth-century England and the Netherlands were to integrate into the economy and survive.
Labor alone cannot produce; it needs to be applied to complementary material resources. If, with given production techniques, there is not enough land in the economy to employ all hands, then those hands must be placed upon capital goods, if the connected mouths are to eat. During the Industrial Revolution, such capital goods were lifelines that the owners of new factories threw to countless economic castaways and that pulled them from the abyss and back into the division of labor that kept their lives afloat.
Knowing this truth of the matter, Mises was rightly appalled at the anti-capitalist agitators who “falsified history” (Gordon identified Thomas Carlyle and Friedrich Engels as among the worst offenders) to spread the now dominant myth that capitalism was a bane to the working poor. He set the issue right with passion:
Of course, from our viewpoint, the workers’ standard of living was extremely low; conditions under early capitalism were absolutely shocking, but not because the newly developed capitalistic industries had harmed the workers. The people hired to work in factories had already been existing at a virtually subhuman level.The famous old story, repeated hundreds of times, that the factories employed women and children and that these women and children, before they were working in factories, had lived under satisfactory conditions, is one of the greatest falsehoods of history. The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into factories because they had no kitchens, and if they had a kitchen they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying. And all the talk about the so-called unspeakable horror of early capitalism can be refuted by a single statistic: precisely in these years in which British capitalism developed, precisely in the age called the Industrial Revolution in England, in the years from 1760 to 1830, precisely in those years the population of England doubled, which means that hundreds or thousands of children — who would have died in preceding times — survived and grew to become men and women.
And as Mises further explained, capitalism not only saves lives, but it vastly improves them. That is because capitalism is also characterized by capital accumulation (which is why Mises embraced the term, in spite of it originating from its enemies as an epithet), which is the result of cumulative saving and perpetual reinvestment being unleashed by greater security of property from meddlesome laws as well as grasping princes and parliaments. Capital accumulation means ever growing labor productivity, which in turn means ever rising real wages for the worker.
These higher wages are the conduits through which workers acquire the purchasing power that crowns them with consumer sovereignty. And they are no petty sovereigns either. Thanks to his capital-enhanced high productivity, a modern worker’s wage-powered consumer demand guides the deployment of a globe-spanning, dizzying plethora of sophisticated machines, factories, vehicles, raw materials, and other resources, as well as the voluntary labor of the other workers who use them, all of which conspire to churn out a cornucopia of quality household staples, marvelous devices, amazing experiences, and other consumers’ goods and services for the worker to choose from for his delectation. Purchasing such goods with his higher wages is how the worker claims his portion of the greater abundance, which approximates to his own capital-enhanced contribution to it.
And higher wages are not the only way that the average working person can enrich himself through capitalism. Especially since the advent of investment funds, he can supplement, and upon retirement, even replace his wage income with interest and profit by putting his high-wage-fed savings to work and partaking in capital investment himself.
Because of these characteristics, as Mises proclaimed to those assembled: “[Capitalism] has, within a comparatively short time, transformed the whole world. It has made possible an unprecedented increase in world population.”
He returned to the subject of England for one of the more paradigmatic examples of this:
In 18th-century England, the land could support only 6 million people at a very low standard of living. Today more than 50 million people enjoy a much higher standard of living than even the rich enjoyed during the 18th-century. And today’s standard of living in England would probably be still higher, had not a great deal of the energy of the British been wasted in what were, from various points of view, avoidable political and military “adventures.”In one of those wonderful flashes of dry wit that would illuminate his discourse from time to time, Mises urged his auditors that, should they ever meet an anti-capitalist hailing from England, they should ask him: “… how do you know that you are the one out of ten who would have lived in the absence of capitalism? The mere fact that you are living today is proof that capitalism has succeeded, whether or not you consider your own life very valuable.”
Mises furthermore cited the more general and clearly evident fact that: “There is no Western, capitalistic country in which the conditions of the masses have not improved in an unprecedented way.”
And in the decades following his speech, the conditions of the masses improved incredibly in non-Western countries (like China) who partially opened up to capitalism as well.
Mises concluded his talk by urging his Argentine fellows to seize the day and strive for the economic liberation that would unleash the wonderworks of capitalism, and not to sit and wait for an economic miracle:
But you have to remember that, in economic policies, there are no miracles. You have read in many newspapers and speeches, about the so-called German economic miracle — the recovery of Germany after its defeat and destruction in the Second World War. But this was no miracle. It was the application of the principles of the free market economy, of the methods of capitalism, even though they were not applied completely in all respects. Every country can experience the same “miracle” of economic recovery, although I must insist that economic recovery does not come from a miracle; it comes from the adoption of — and is the result of — sound economic policies.ConclusionIf the subsequent policies adopted in Argentina, South America, and the world are any indication, Mises’s message, as lucid and affecting as it was, did not propagate far beyond the auditorium walls that day. Perhaps in the age of camera phones, YouTube, and social media, it would have. But his brilliant encapsulation of the beneficence and beauty of capitalism did not dissipate vainly into the Argentine air. Thanks to his Margit and to his institutional namesake, his message was preserved for the ages, and is now only a mouse click away for billions.
Ludwig von Mises can still save the world by posthumously teaching its people the unknown truth about the inherently populist nature of capitalism in a way which speaks to their hopes and longings: that private property means dynamic production, which means a competitive, consumer-steered economy, which means a production system geared toward improving the lives of the masses, which first means widespread succor and ultimately ever-rising prosperity for the people of the world.
For Spain, 1492 was a transcendent year. The discovery of the New World and the vast hordes of gold and new riches was a springboard vaulting Spain from a barely-known kingdom in medieval Europe, to the most influential global power of the day.
However, this process was not immediate. Despite the vast gold inflows that Spain received, the discovery was a mixed blessing. During this prosperous time, the Spanish Crown declared itself bankrupt nine times: 1557, 1575, 1596, 1607, 1627, 1647, 1652, 1662, and 1666. Spanish finances did not improve significantly until after the War of the Spanish Succession (1701–14) when the Bourbons succeeded the Habsburgs to the Spanish throne.
War and Inflation under the HabsburgsThe seeds of modern Spain were sown when Queen Isabella and King Ferdinand unified the Kingdoms of Castile and Aragon in the fifteenth century. Their eldest daughter, Juana, was crowned upon their deaths. Since Juana’s husband, Philip, was Austrian, this also meant that the Habsburgs became the royal house of the newly unified Spain.
It was during the reigns of Philip and Juana’s son Charles I (1500–58) — and, in turn, his son Philip II (1527–98) — that Spain achieved its pinnacle of international power and influence. Rich with gold from the New World, the later Spanish Habsburgs poured great amounts of money into the military and pursued a religious crusade against the growing Protestant secessionist movement in Northern Europe.
The result of this flow of gold from Spain to Northern Europe has been well-studied. Richard Cantillon described the pernicious effects of monetary expansion with what is now called the Cantillon effect. Inflation caused high prices to spread like a wave across Europe, mostly following the path of the Spanish troops as they marched to the drum.
It is important to note, however, that the average Spaniard’s income did not increase over this period as only a few directly benefited from trade with the Americas or were involved in the new wartime economy. Spaniards as a whole were becoming poorer since the discovery of the Americas.
During the reign of Philip III (1578–1621) the crown declared its fourth bankruptcy. As a mercantilist economy, new policies were implemented in a vain effort to escape the crown’s financial problems. The government issued a new copper coinage aimed at paying off its creditors without resorting to direct taxation. Much to the crown’s dismay, the new “vellón” was not well received because it was not made of gold, and it never attained widespread acceptance.
Monopoly, Mercantilism, and More WarDuring the reign of his successor, Philip IV (1605–1665), Spanish wars continued throughout Europe. Meanwhile, in Spain, farmers struggled with frequent droughts which made food expensive and scarce, while government-backed privileges to the elites continued mismanagement of much of the land. Chief among these privileges was the “Mesta” (an association of sheep ranchers) who enjoyed the right to graze their animals freely anywhere in the kingdom. Making the situation worse, the Black Death made a brief reappearance.
With a decreasing population and active war fronts in Europe, the king needed a solution that would expand Spain’s military forces. The king’s prime minister, the Count-Duke of Olivares, came up with the “Union of Arms,” a new law that would increase military cooperation between the kingdoms ruled by Philip IV (Castile, Aragon, Portugal, Naples, Sicily, Milan, and Spanish Netherlands).
Before this, it was Castile and its people — plus the Americas — which bore all military expenses. The Union of Arms distributed the cost of war across all the kingdoms, and thus diffused the full cost away from the King’s native Castile. But, by the end of Philip’s reign, gold coming from the Americas was still being spent on an increasingly inefficient military that was losing wars. These defeats led to independence movements in both Portugal and the United Provinces (the Netherlands).
The Empire Enters Its Final DecadesThe last Habsburg monarch of Spain, Charles II (1661–1700) did not father an heir. After his death, the pretenders to the Spanish throne were his great-nephews Charles (Austria) and the future Philip V (France). The War of the Spanish Succession began with France and Spain united against Austria. The war ended in 1713 with the Treaty of Utrecht in which Spain lost its European territories to Austria.
As a broken nation with a newly established French dynasty under the Bourbons, Spain faced many challenges. The Spanish economy had foundered under Carlos II, particularly in Castile. The country’s population decreased by nearly two million people during the seventeenth century, partially due to plagues and wartime causalities, but more so due to emigration to the New World as Spaniards sought a better life.
The first Bourbon monarchs of Spain were Philip V and his sons: Louis I, Ferdinand VI, and Charles III. The country’s structures were still medieval with each region having its own laws and privileges as opposed to the centralist mentality of the Bourbons, who firmly believed in uniformity.
Small Steps toward LiberalizationCharles III (1716–1788) is referred to as either an enlightened despot or a liberal reformer as his reforms responded to the deficiencies of the previous mercantilist period. Charles adopted a relatively peaceful attitude toward foreign affairs. Having cut wartime expenditures, he explored new possibilities for filling the state’s coffers.
His first measure was building new shipyards to improve Spanish shipping and speed up the arrival of gold from the Americas. Charles could be considered an early liberal in the sense that his reforms were oriented to opening trade relations and removing special privileges that certain groups held. (Of course, not all his policies were beneficial: in order to stimulate Spanish industries he placed levies on foreign products, though at least he had the prescience to remove internal barriers in the Iberian Peninsula so that goods could be traded freely throughout the territory.)
Charles also sought to improve Spanish competitiveness when trading with the colonies by opening commerce with the Americas to eight new ports in Spain in 1765. Previous to the liberalization, Cadiz held a monopoly.
With these reforms, the Spanish economy started its revive. Charles planned further reforms in the agricultural sector, and he reduced the privileges of the sheep ranchers and expropriated the communal lands of the Spanish countryside to sell them to private individuals, thus ending centuries of neglect created by what can today be seen as a tragedy of the commons.
This period of liberalization and relative prosperity lasted until 1808 when Napoleon invaded Spain.
Lessons from Three Centuries of Booms and BustsThe Napoleonic Wars marked the end of a three-centuries long “boom-bust-boom” cycle in Spain that started with the discovery of the New World in 1492, and was marked by inflation, war, mercantilism, and a variety of government monopolies and interventions.
Although the country seemed wealthy at many times during this period, the average Spaniard lived in continued poverty, and it was only with the reforms brought by the early Bourbon monarchs that many Spaniards began to enjoy the benefits of trade and liberalization that many Europeans elsewhere had long since discovered.
According to the National Bureau of Economic Research (NBER), a recession is defined as a “significant decline in economic activity spread across the economy, lasting more than a few months.” Often, this is understood as two consecutive quarters of negative economic growth as measured by a country’s GDP.
Public opinion is generally quite simple in regard to recession: upswings are generally welcomed, recessions are to be avoided. The “Austrians” are however at odds with this general consensus — we regard recessions as healthy and necessary. Economic downturns only correct the aberrations and excesses of a boom. The benefits of recessions include:
Sclerotic structures in the labor market are broken up and labor costs decline.Productivity and competitiveness increase.Misallocations are corrected and unprofitable investments abandoned, written off, or liquidated.Government mismanagement of the economy is exposed.Investors and entrepreneurs who were taking too great risks suffer losses and prices adjust to reflect consumer preferences.Recessions also allow a restructuring of production processes.At the end of the corrective process, the foundation for a renewed upswing is more stable and healthy. We thus see deflationary corrections as a precondition for growth in prosperity that is sustainable in the long term. Ludwig von Mises understood this when he observed:
The return to monetary stability does not generate a crisis. It only brings to light the malinvestments and other mistakes that were made under the hallucination of the illusory prosperity created by the easy money.
Can the Government Save Face?However, in addition to leading to true temporary hardship for the malinvestment-affected areas of the economy, an economic recession in the near future would represent a harsh loss of face for central bankers. Their controversial monetary policy measures were justified as an appropriate means to nurse the economy back to health. That is, their efforts to end or avoid helpful recessions were claimed to contribute to the eagerly awaited self-sustaining recovery.
But the attempt to combat a crisis that was triggered by too loose monetary policy by the very same means will not lead to sustainable prosperity. It will only delay the crucial adjustment processes of a deflationary phase. The longer they are delayed and the more the central bankers and politicians attempt to keep them at bay, the more uncomfortable this adjustment will become.
Politics Trumps EconomicsIn general, there is the tendency in every democratic system to prevent too-painful adjustment processes as its nature of short-term bitterness and long-term benefits conflicts with the result scheme politicians are reelected for. No democratic government that is presented with the bill for the obvious successes and failures of its administration at the next election, will voluntarily allow a deep recession to occur — even if it were to agree that the adjustment was necessary.
Hence, inflationary policy is always a welcome method of impoverishing the population by decree and thereby pushing through a real adjustment of prices by force. The debasement of money as a rule always hits a society’s most underprivileged the hardest, as rich people can more easily avoid a devaluation of their wealth.
Concern from Outside the Austrian CampNonetheless, representatives of the Austrian school are no longer alone in warning about the fatal long-term consequences of the zero interest rate policy. Even the Bank for International Settlements, often referred to as the “central bank of central banks,” understands that endless attempts at avoiding recessions can have truly negative effects.
The BIS’s 2014 report warns of overly euphoric financial markets which, according to The Financial Times are “out of step with reality.”
The BIS explains:
Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on.
New debt serves primarily to keep the fragile edifice of debt from collapsing; it doesn’t lead to new investment activity. In this respect, the BIS sees parallels between Western industrialized nations today and Japan in the 1990s. These policies, the BIS contends “destabilises the banking sector directly but also acts as a drag on the supply of credit and leads to its misallocation.”
This year, the ECB, which as the successor of the German Bundesbank has long kept the flag of inflation reservation flying, finally capitulated and began betting on increased monetary stimulus — in keeping with the motto: “It isn’t working, so let’s do more of it!”
Nevertheless, according to F.A. Hayek, these united global crisis defense mechanisms only postpone the crisis which will take place at any rate, only later and much more severely:
To combat a depression by a forced credit expansion, is akin to the attempt to fight an evil by its own causes; because we suffer from a misdirection of production, we want even more misdirection — an approach that necessarily leads to an even more serious crisis once the credit expansion comes to an end.
The global economy continues to wrestle with deflation, with oil reaching its lowest price in over a decade. The economic winds continue to look ominous, with even mainstream outlets questioning whether 2016 could be worse than 2008. Of course much of the week headliners was dominated by political theater, first with the annual absurdity of the President’s State of the Union address and then Thursday’s Republican so-called debate. While it’s nice to see politicians quote Ludwig von Mises, this political season has as much of a chance of resulting in economic sanity as Joe Biden does curing cancer.
The newest episode of Mises Weekends continues the theme of political theater, taking a look at the visceral reaction to Ted Cruz’s earlier debate comments about gold and monetary policy. Dr. Joseph Salerno joins Jeff to discuss why gold — or currency competition in general — is so offensive to the central planners of both parties. They dive deeper into the fundamental question of a gold standard itself: would it really need to be “imposed” on a country? And how do the Fed's interest rate targeting and open market operations obscure what is really going on with our money?
And in case you were fortunate enough to gain some monetary value on your Powerball ticket, we hope you will consider becoming a Member of the Mises Institute — or join us at our upcoming Houston Mises Circle on January 30!
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Is the Auto Loan Bubble Ready to Pop? by Tommy BehnkeAustrian Economics Is More than Free-Market Economics by Matt McCaffreyWill Immigration Force a Change in Sweden’s Labor Laws? by Per BylundIs Eating a Cinnamon Roll Irrational? by Tyler KubikDo Video-Game Worlds Need Government Regulation? by Giuliano MillanThe Big Short by Mark ThorntonThe Real Value of a Powerball Ticket by Matt McCaffreyThe Swiss Consider a National Referendum on Fractional Reserve Banking by Jeff DeistRand Paul Quotes Mises in Time by Tho BishopDavid Bowie, RIP by Joseph T. SalernoOil Price at 11-Year Low as Economy Falls, Dollar Rises by Ryan McMakenRepublican AGs Declare Colorado a "Drug Cartel," Demand Federal Intervention by Ryan McMakenThe Times They Are A Changin' by Carmen Elena DorobățCalling All Mises AlumniHow Price Controls Leads to Socialism by Ludwig von MisesWhy We Need Markets To Know Who Should Own Western Lands by Ryan McMaken
It seems that each new bubble brings forth claims that, although the bubble may be the result of artificially created demand, prices of this or that product will not fall and may even continue to rise. How many so-called real estate and financial planning “experts” claimed that the surest path to financial security was in buying the largest house possible with the least amount of one’s own money?
The Boom: McMansions and Luxury CarsSince home prices never go down — we were told — the gain from using OPM (other people’s money) resulted in huge multiples of gain for the little invested of one’s own money. Thus, in the first decade of the new century, Americans were buying so-called McMansions: huge homes with every imaginable feature. When the bubble burst, the leverage effect worked in reverse. Mortgage balances far exceeded the lower market price, creating the so-called “underwater mortgage.” Lower prices had wiped out not only the little equity contributed by the buyer, but created a negative equity balance. Buyers abandoned their heavy mortgages and sought smaller, lower priced homes. It turned out that home prices did not grow to the sky, as the pundits had predicted.
The same is true of automobiles, and especially those bought with auto loans. Easy credit has enticed car buyers into ever more luxurious and amenity-laden vehicles. It is nearly impossible today to buy a new car that is not loaded with luxury entertainment, navigation, and safety features that were unknown only a few years ago.
Many of these features would never have been sold in such quantities without the benefit of easy credit. As a frequent car rental customer, I have been exposed to these features and have found them difficult to use at best and completely unnecessary and distracting at the worst. On a recent business trip my modest sized four door Buick sedan’s speedometer was projected onto the windscreen and the lane proximity warnings beeped at me constantly. I never did figure out how to turn off these annoying devices, which, I admit, may be desired by a marginal few drivers. But we Austrians know that all economic choice is based on a hierarchy of preferences. The cost of each preference is measured in the alternative preferences one sacrifices. Make some preferences cheaper and they move up our personal scale. Easy auto credit meant that buyers did not have to sacrifice as many alternative uses for their money.
Last week, Tommy Behnke in Mises Daily predicted that auto prices will fall as the bubble bursts from the artificially created demand generated from excessive credit creation. Behnke pointed out that car production has increased a whopping 100 percent since 2009, but that apologists for government’s monetary stimulus programs see this fact as proof of the success of their Keynesian, aggregate demand hypothesis.
Behnke, on the other hand, took the Austrian perspective that the government has simply substituted a bubble in subprime auto loans for the bubble in subprime home loans. As defaults rise and automobile loan credit tightens, the result will be the same. Namely, a flood of used cars, and falling prices. The same happened with homes following the burst of the last bubble: a flood of “used” houses, and falling prices.
Surprisingly, the article attracted a number of reader comments predicting that used car prices would not fall, allegedly due to increases in complexity of cars or increases in the difficulty of repairing them. Another suggestion was that large dealers will dominate the used car market and simply raise prices at will.
While it’s certainly true that government interference — such as Cash for Clunkers — can raise the prices of cars, it is not true that private dealers (or any other private party) can simply raise the price. More complex and difficult-to-fix cars will not keep prices from falling in an environment in which the inventory of used cars is increasing.
Used Car Dealer or Used Car Collector?There is one thing that we can know a priori: that an increase in the supply of some good or a drop in its demand will cause its price to be lower than that which it otherwise would be. There is no other way to clear the market.
Mises explained that, eventually, even a monopolist would prefer any price to zero price. Maintaining a price above the market clearing price produces zero revenue. In a flooded used-car market, car dealers must reduce their prices in order to avoid bankruptcy. Otherwise, the used car dealer ceases to be a dealer and becomes a collector. The laws of supply and demand have not been rescinded, even in a world with very expensive-to-build and complex cars. As the automobile bubble bursts, quality used cars will flood the market, creating a buying opportunity for those with cash.
As with houses, it doesn’t matter how big or luxurious or complex you make new cars. When the credit bubble bursts, auto prices will not “always go up.”
Lego — the company that makes stackable toy bricks — has become a toy powerhouse in recent years, even surpassing Mattel in toy sales during 2014. Lego has become so popular, in fact, that the company has problems avoiding “brick shortages.”
Lego’s success as a fun and educational toy has been helped along by the fact that — finally — Lego has managed to find success with girls.
With the launch of the Lego Friends line, Lego has tapped into 50 percent of the child population:
according to research firm NPD Group, the market for girls’ construction toys in the U.S. and the main European countries tripled to $900 million in 2014 from $300 million in 2011, largely on the back of the Lego Friends sets. And Lego says the share of girls among Lego players, which stood below 10% in the U.S. before the launch of Lego Friends, has increased sharply.
The Feminist ControversyPerhaps predictably, Lego has been condemned by feminists and culture warriors for making Lego too “girly.” Those familiar with the Friends line already know how, instead of red and blue bricks for making fire stations, the new line designed for girls features purple and pink blocks (among other colors) for constructing yachts, homes, and restaurants.
The Wall Street Journal recently examined the controversy, noting:
After five years of work, [Lego] was enthusiastic about launching Lego Friends. The new sets, however, immediately unleashed a torrent of criticism from feminist groups. A U.S. activist organization, the Spark Movement, gathered 50,000 signatures with an online petition in 2012 and requested a meeting with Lego executives. Another group, Feminist Frequency, also complained.
“We were so disappointed,” said Dana Edell, executive director of the Spark Movement. “Lego was sending a message that girls get to play with hair dryers while boys get to build airplanes and skyscrapers.”
Ms. Edell, however, should probably aim her disappointment and disdain at seven-year-old girls rather than at Lego. After all, Lego’s success, or lack thereof, in marketing these products depends on the decisions of little girls.
Profit Seekers: Make Toys Girls LikeThat is, Lego can only make money from the girl demographic if it makes toys little girls decide they want to play with. Following years of focus groups and surveys, Lego has produced toys that it thinks will attract their attention and demand.
Lego has said exactly this in interviews:
Our methods are simple; meet children’s needs by testing prototypes on them and getting their opinion. We have realized that girls like building too, so LEGO gave them the chance to customise their world, until then their needs were not met. We also realised that girls wanted to be able to identify with the figures and we therefore had to develop figures closer to their expectations: more feminine, less “square” than our standard mini-figurines. Since friendship is a core value for little girls, we created a universe which centred around a story of friendship between our 5 heroines.
Anyone who has daughters — and listens to what they say — can see this is a plausible scenario.
The Lego Friends line, which is just as rigorous in terms of construction difficulty as any other line, was designed to appeal to girls in ways that Legos did not before.
Lego wanted girls to buy their products, so it designed products that appealed to them, based on market research.
How Lego Became a Boy BrandIf Lego ignored what girls really wanted, and marketed something else, they would not make as much money. Or no money at all.
This explains how Lego became a “boy’s brand” in the first place.
After marketing its toys for years in a unisex manner, Lego found by the 1980s that all its best-selling sets were “boy” sets featuring pirates and knights and spacemen.
The company then began to market more aggressively to boys, since like most companies, it ended up focusing on the most profitable sector of its customer base.
Lego Finally Figures Out What Girls WantLego still attempted to market to girls, but failed, perhaps even due to genuine sexism. Thinking that girls did not want the same level of rigor in construction as boys, Lego in the 1970s and afterward marketed a variety of “simplified” types of Legos that failed. These included Lego jewelry sets known as “Scala” and easy-to-build sets based on mimicking doll houses.
If Lego was being sexist, it was punished by the market for it. Lego simply failed to cater to the wants and needs of girls. And it endured foregone profits because of it.
With Lego Friends, Lego finally found a line that girls actually like, and the market is rewarding them accordingly. Meanwhile, feminists attack Lego for making toys that children want to buy, but which feminists think girls should not want to buy.
The real problem the anti-Lego feminists have then, is not with Lego but with the fact that girls like to play with the sort of toys found in the Friends line. The blame for this lies with the girls themselves.
After all, Lego did not raise these girls or tell them what to like. Lego simply wants to make toys that they will buy based on their existing preferences.
Indeed, any competent toy executive will be agnostic as to the question of what girls should like. They must focus instead on what girls do like. Toy companies make money by selling toys that will be popular with as little effort (for the company) as possible. And, it turns out, much to the annoyance of some activists, girls like a Lego experience that includes pink and purple bricks.
Producers Don’t Dictate to ConsumersNow, the source of the misunderstanding here is apparent. The activists think that Lego is responsible for deciding what girls should want because — like many people who don’t understand how markets work — they think that producers dictate to consumers what to buy.
The idea at work here is that girls will buy and like whatever it is that Lego Corp. wants to market to them. Thus, by extension, it is Lego’s job to fight culture wars and tell girls what the “correct” play experience is.
But it doesn’t work that way. Companies make money by selling what people want. At the same time, companies that make products few people like will ultimately fail, no matter how many commercials they put on the television.
Consumers Decide What Is ProducedAfter all, if people will buy whatever they’re told to buy, then why not just spend nearly 100 percent of the toy company’s budget on marketing and advertising? The rest can go to making a low-quality product. If it breaks easily or turns out to be no fun, then that’s all the better because then they’ll just buy another one because an ad told them to.
If a slick ad campaign is all that is necessary to make someone like a product, just make a slick ad showing the sub-par product in a good light. People will just keep on buying it because the advertisements say so.
Everyone instinctively knows this is not true, though. McDonald’s can run TV commercials all day long, but that, apparently, isn’t enough to keep people buying Mickey D’s food at the price the company prefers. Subway can repeat the “eat fresh” mantra, but that won’t keep sales from slipping, as they have been doing for several years.
And if we’ll buy whatever toy makers tell us to buy, why aren’t children playing with the same toys they were playing with thirty years ago? It costs money to develop new toy lines and design new sets. Why go through the trouble of creating new toys, when it’s possible to make customers like your products by just running ads for existing ones?
The reason for this, as Murray Rothbard observed long ago, is that every consumer has the ability to simply refuse to purchase what she’s asked to buy for whatever reason or whim she deems important. Ludwig von Mises called this “consumer sovereignty.”
Even more frustrating to producers is the fact that consumer preferences change constantly due to a variety of — often inscrutable — factors far beyond the control of marketers and producers. Producers thus have a choice: adapt to changing customer preferences, or die.
Ever since the first computer game was introduced in 1962, video games have had an ever-expanding role and impact on society. In 2004, video games started earning more than Hollywood’s domestic box offices. With this expansion of the industry new kinds of games have started to emerge.
Recently, massively multiplayer online games or MMOs have seen increased popularity. In many of these MMOs, players are allowed to define their own goals and play in any way they desire. In addition, games such as EVE Online allow players to produce goods which can then be traded in the game world for the game world’s currency and goods. This means that the game takes place in and around a real and functioning virtual economy.
With the increasing popularity of virtual economies, however, scholars and academics have argued that the economies of virtual worlds are not as separate from the real world as they may appear at first glance. The argument goes that virtual currencies can be seen as just a continuation of money in the real world. This interpretation of virtual currencies can be seen when real world currencies are exchanged for virtual world currencies through sites such as Ebay. Increasingly, there has been a call for governments to regulate and implement policies into these virtual economies.
According to Clare Chambers in her article “How Virtual Are Virtual Economies?”:
the legal situation is vastly ambiguous and at best unclear. There is a lack of clear governance, jurisdiction and rule of law. Within this lack of governance and control there is a lack of real world regulation such as price control, taxable assets and income control which would have a benefit for the real world and causes disadvantages to the virtual world.
The argument used for implementing regulatory measures states that if virtual world currencies are a continuation of real world currencies, they must be subjected to real world laws and regulations. It has been stated by the same scholars who call for government regulation that the way in which regulation should be imposed is unclear; however, the notion that government oversight should be implemented in some way should be questioned before it becomes more widely accepted as the norm. Proponents of implementing real world regulations will point to scandals and crises in the virtual world to justify the need for regulation in virtual worlds, but this ignores some basic arguments against regulating.
Aside from the unsupportable claim that price controls, income controls, and taxes would help an economy, why should we trust real world governments and regulations to protect us from virtual world scandals and crises? Real world scandals and crises not only occur just as they do in the virtual world, often times they are caused, aided, and prolonged by the governments whose task it was to stop them. Another point that should be brought up is the existence of choice in a virtual world as opposed to the real world. For instance,
participation in these in-game economies is ultimately a choice, more akin to playing the stock market than to buying groceries. While players exchange their time or money for in-game goods and services, they can just as easily invest their time and money in activities of other sorts, effectively going “off the grid” in a way rarely possible in real life. Unlike participation in the economy of the real world, the choice to participate in a virtual world is entirely voluntary.
Unlike real world economies in which people are unable to totally opt-out, virtual economies are entirely optional. People are free to participate in virtual economies to any extent they desire. This allows game developers to create rules that support the design of the game. In certain games such as EVE Online, part of the appeal is the intentional lack of laws in the world which allows individuals to become pirates, bounty hunters, miners, and more. In Second Life, developers have granted intellectual property rights to players who make items for the game.
Choice in a virtual world presents some very interesting opportunities. Because developers create their own governments and regulations, analysis of which virtual governments’ people choose to live under would be an interesting venture. They can also be used to demonstrate economic laws. For example, the game Diablo 3 can help us understand the causes of hyperinflation. Unfortunately, many of these possibilities for analyzing human action may be limited or eliminated depending on how and whether government regulation is implemented.
Aside from virtual economies being completely optional, another difficulty that arises when attempting to regulate virtual economies is exactly who should be allowed to regulate these economies? Up until now the regulating agencies within virtual economies have been the developers of the games. Unlike the real world which has physical borders that government jurisdiction may be limited to, virtual worlds contain players from many parts of the real world. It’s an international and global marketplace. In addition, why should we assume that a third-party regulator would have better outcomes than the developers of the game itself?
As virtual economies grow larger and their popularity increases, the issue of regulating virtual worlds continues to be a topic of discussion among scholars, while providing a unique opportunity to analyze human action in a unique and interesting way.
The literature on market imperfection and market failure is voluminous, ever-growing, and filled with Nobel laureates. Identify a new source or instance of market “failure,” and you’re likely to win a Nobel Prize, or so it seems.
Phishing for Phools: The Economics of Manipulation and Deception, by Nobel Laureates George A. Akerlof and Robert J. Shiller, presents the thesis that we are overly confident in unregulated markets and that entrepreneurs accrue profit by preying on hapless consumers, exploiting “our weakness in knowing what we really want” through the market’s tendency “to spawn manipulation and deception.” Mavens of manipulation themselves, Akerlof and Shiller claim many, if not most people — especially the poor — are irrationally exuberant and are induced into buying things they really do not want. How do they know what the consumer really wants, one might ask? The answer is that anything the authors would not do themselves is ipso facto not in the best interest of the consumer. In fact, it is something that “no one could possibly want.”
We’ll Decide What’s Best For YouTheir opening chapter is an exercise in convoluted methodology. In it, Akerlof and Shiller obliterate any distinction between adroit entrepreneurship/marketing and deception/fraud. The most fundamental problem, however, is that Akerlof and Shiller think that what people really want is what is (objectively) good for them. They refuse to recognize that even if consumers were aware of the costs of eating Cinnabon — their bête noire in the opening chapter — and consuming a high calorie meal devoid of nutrients, they still might choose to eat Cinnabon. In their paternalist fervor, they cannot fathom that some people, in some places, at some times, might be willing to make such a trade off.
Rejecting Mises’s economic tautology that business owners stay afloat by satisfying consumer preferences through voluntary exchange, they believe that, instead, business owners compete for who can best deceive their customers. They call Cinnabon’s efforts to attract customers by making their product more desirable and available in convenient locations “phishing.”
Is the alternative, then, to mandate that businesses instead locate their stores in inconvenient locations, where they are less likely to sell their products to increase market efficiency? No answer is forthcoming. Also never answered by the duo is, if advertising is so effective at deceiving consumers, why do firms not spend nearly all of their budgets on advertising? Wildly exaggerating the problem they present, Akerlof and Shiller even think that the cumulative effect of “phishing” that companies like Cinnabon do through luring people in with the aroma of their cinnamon rolls may be as significant as the financial crash of 2008.
“Information Asymmetry” or Just Division of Labor?They also maintain that the incompetence of the average person prevents them from wisely investing their funds. What they do not show is that a disinterested bureaucrat spending someone else’s money has an incentive to invest carefully, which they simply assume. No matter that an individual has knowledge of his time, place, and preferences that a bureaucrat cannot have, regardless of whether or not consumers make systematic cognitive errors. What they call informational asymmetries, i.e., the different levels of knowledge among consumers and producers, should properly be called the division of labor and knowledge in society, which underpins all markets and gives us a basis to make exchanges in the first place. It is for the very reason, namely that producers of goods know more about the goods they produce, that we purchase from them. Hence, in criticizing information asymmetry in markets, they are criticizing all exchange. Akerlof and Shiller habitually succumb to this Nirvana fallacy, holding up the utopian ideal of perfect information as their (unreachable) model, and then when markets fail to reach this ideal, assume that this justifies government intervention, never giving us a reason why these systemic cognitive biases and information asymmetries can be avoided by bureaucrats more than they can by the average consumer.
Variety and Convenience Are Bad Things?Fundamentally, they mistake the beauty of the market and its convenience with manipulation. When they see a wide variety of products to choose from within arm’s reach, such as in a supermarket, they view it as a scheme to induce consumerist depravity and indulgence, rather than as a wonder to behold. They critique overpaying for health plans at the same time they critique obesity. We also see them succumbing to extraordinarily misleading explanations of history. For instance, in chapter six, they repeated the canard that Upton Sinclair’s The Jungle exposed the meatpacking industry’s unsanitary practices, when in fact his book was a complete fabrication, making no mention of this.
In general, Akerlof and Shiller appear oblivious to the roles consumer reporting institutions, competition, reputation, repeated dealings, and quality assurance play in doing just what they claim markets fail to do. If they desired to write a complete, and balanced look at the phenomenon they studied, rather than forward their agenda — what is in reality a jobs program for economists — they had ample material with which to work. The “heroes” of the story, instead, are primarily government regulators, and others who “step back from the profit incentive.” The profit incentive, for them, is essentially a one-way trip down Deceit Drive toward Manipulation Station. This single chapter focuses on the ways these problems are overcome, but they present nothing but impotency regarding the ability of businesses to do anything other than manipulate and deceive. The market, apparently, cannot provide solutions to or protect against this predatory behavior they attribute to these businesses, evidence to the contrary notwithstanding. We are left with the impression that these phishing problems are real, devastating, pervasive, and unresolved, as well as the impression that the solution is government regulation and bureaucratic administration. Nothing could be further from the truth.
In every instance, Akerlof and Shiller showcase their own “irrational exuberance” and monomania for decrying consumer choices, rather than market failures arising from information asymmetries. What else can we conclude from the foregoing but that there are informational asymmetries abounding about the true value of the information in Phishing for Phools — and that it is, objectively, something that “No One Could Possibly Want” to buy? If there is anything that could shake one’s faith in unregulated markets, it’s that anyone could be duped by Phishing for Phools.
Austrian economists are known for supporting free markets and criticizing government intervention. In fact, many people mistakenly think of Austrian economics as nothing more than a radical defense of free markets, though it’s really a framework for studying human action and its social implications.A similar error is to describe critics of free markets as “Keynesians.”
Still, you can usually spot free market conclusions lurking in the background of Austrian work, and this raises important questions about how policy implications influence the development of theory. For example, is it possible that the need to justify free market policies distorts Austrian research? This is the argument made in a new collection of essays edited by Guinevere Nell, titled Austrian Theory & Economic Organization: Reaching Beyond Free Market Boundaries.
Nell claims that contemporary Austrian economists focus on doing research that they know will arrive at “mandatory free market conclusions.” Thus, according to Nell, their work is more about ideology than methodology, and any research questioning free market orthodoxy is shunned and dismissed.
According to Nell, the Austrian status quo must give way to a more unbiased “post-Austrian” approach to economics, especially in organization theory (the focus of this collection). Of course, not all of this book’s contributors share her views. However, most of the chapters are consistent with her goal of developing Austrian ideas without concern for making them fit free market conclusions.
In practice, this boils down to making several claims Austrians are likely to find controversial. There are variations on the core themes, but the basic ideas are as follows:
free markets produce extensive social and economic problems,government (e.g., market socialism) can be a valuable form of spontaneous order, andgovernment can improve on market outcomes, especially with regard to social justice.I’m not convinced the book succeeds in defending any of these propositions. Before explaining this assessment, however, I’d like to emphasize that this is only a short summary of some issues I noticed while reading the book. For a fuller discussion of its merits and failings, my full-length review (with additional references) is here.
To begin, the book’s core premise strikes me as flawed, because it’s not obvious to me that the eponymous free market boundaries exist, and if they do, how Austrian research has suffered from them. Now, I don’t object to posing questions about this kind of bias, because complacency and prejudice are real and constant threats to academic research. However, I do think it’s reasonable to expect that any claims of bias be supported with specific evidence, and furthermore, that critics be able to clearly explain, in detail, how bias hinders the development of current research.
Unfortunately, contributors to this volume offer precious few examples of free market bias undermining research, and when examples do appear, they’re usually mistaken. For instance, one author claims Mises and Rothbard were unable to discuss utility and welfare economics, while another suggests that cooperatives and other horizontal forms of organization can’t be explained by an Austrian approach. A basic literature review shows these claims are unfounded.
This brings me to another major theme of the collection: alternative forms of economic organization. Several chapters criticize traditional corporations, and propose replacing them with cooperatives and other “democratic” organizations. I actually agree these are topics worth exploring, as it’s clear that in a free society the role of the corporate form would be, at the very least, greatly reduced. If the authors limited themselves to discussing such problems, I would have few objections. Unfortunately, some of them try to push further by arguing that alternative forms of organization represent solutions to free market problems that Austrian economists can’t or won’t acknowledge.
In particular, several chapters seem to suggest that Austrian economics consists of little else but singing the praises of traditional, hierarchical, profit-maximizing business. I find this claim simply baffling, and unsurprisingly, the authors don’t support it with serious evidence. Even worse, most chapters ignore the most valuable Austrian contribution to organization theory: Mises’s writing on economic calculation. Mises not only provided the definitive critique of central planning; his work is also vital for showing whether any form of production — from market anarchy to totalitarian socialism — will work in practice. These forms include cooperatives, social enterprises, and many others.
Sadly, errors of omission and commission are scattered throughout the book. Unsupported assertions and missing evidence are common, as is blaming the market for public policy failures. There are even tired allusions to Hayek and the Grand Neoliberal Conspiracy™. Such comments make it clear that the chapters most critical of Austrian economics are actually the ones least familiar with it.
Happily, several chapters — in my view, the most successful ones — actually support the views Nell criticizes. These essays are presented as a kind of benchmark against which to measure the more controversial chapters, but they do a good job of showing why there isn’t much reason to fear that Austrian economics is hopelessly biased by free market ideology.
For instance, Randall Holcombe’s chapter offers a nice overview of the concept of spontaneous order, and explains why top-down methods to improve these orders are doomed to failure. Likewise, Per Bylund provides a searching essay on the necessity of hierarchy in market firms. Last, Ed Stringham and Caleb Miles review historical and anthropological evidence on the origin of states. They show convincingly that, contrary to popular belief, states did not emerge as the result of a social contract, but through a combination of force and persuasion.
Yet, each of these papers cuts against the general motivation of the book as well as its most ambitious contributions; if anything, they highlight the value and necessity of the Austrian tradition, and the persistent relevance of economists like Mises.
Sweden might be heading toward reform of its very rigid labor laws, which include labor union control of wages and “last in — first out” hiring and firing rules. This means the previously most-untouchable tenet of the Swedish welfare state is finally being discussed as a problem, not a value. And the reason for this change of tone is the immigration crisis.
The Swedish State Prevents IntegrationThat Sweden struggles with immigration has become common knowledge. What is little known, however, is that the problem is not the immigration volume per se. There is plenty of room in Sweden but the country, given the welfare state, is in desperate need of young people to enter the labor force as the baby boomers en masse enter retirement.
The main problem is integration of those who immigrate: they are prohibited to work until their asylum or petition for residency has been approved. In other words, they are a cost in the state’s budget and a burden for taxpayers — often for many years — while bureaucrats process their application. Another effect of this is that immigrants aren’t integrated into Swedish society, since they’re effectively kept out of interacting with “ethnic Swedes” through the normal meeting places: school, the workplace, the commute, and so on.
A major force against allowing immigrants to get integrated into Swedish society is the powerful labor unions. Not only do they control the level of what is not formally — but is effectively — a minimum wage in most occupations, but they also have veto power in approving permanent residency status. Recent examples of the absurdity of this system include the long-time owner of a small business who (on paper) made the equivalent of 50 cents per day below the average salary of union members in this industry. This was deemed to be “too little,” and therefore doesn't meet the formal requirements to make a living. Consequently, and on the labor union’s recommendation, he was deported along with his family after many years living in Sweden.
The Role of Labor UnionsThe labor unions are routinely invited to comment on the salaries earned by immigrants who have already made it through most of the hoops (that is, who have been permitted to work). Unless they earn a sufficiently high salary, which is based on what others make in the same line of business, they are deemed unable to care for themselves and therefore deported. The labor unions, when asked, respond not with their required “minimum” wage but with the “average” wage earned by their members. In other words, unless immigrants in a certain line of work make at least as much as the average of those already employed, they might face deportation.
This type of protection measure is part of the very rigid Swedish labor laws, which also mandate employers to fire in the opposite order they hire: “last in — first out.” Needless to say, this means employers refrain from hiring unless absolutely necessary. It also means they will need to fire (without the possibility of rehiring) productive workers hired after a “bad apple” employee. This type of “protection” of course only leads to a static labor market, where very few workers change jobs as they will then face greater odds of unemployment regardless of their qualities or value to the employer.
Salaries are also set by the labor unions who in centralized negotiations with employers’ alliances decide on changes in wages for the whole country. While this is referred to as “negotiation,” the labor unions have always been negotiating with the threat of legal action: the social democrats, who ruled the country for most of the twentieth century, would legally mandate wage increases unless the parties to the labor market could agree “voluntarily.”
The Consensus Is FailingThis centralized model has always been a core part of the Swedish welfare state, and it has been beyond any type of scrutiny. Indeed, the “Swedish model” is based on this rule by the social democratic labor unions through “negotiation” with employers’ alliances under the threat of legal action by the other wing of the social democratic movement: the party.
But due to the recent increase in migration and millions of refugees seeking shelter, the failing integration of migrants was soon in the public eye — and with it the realization among the public of a major downside to the rigid labor market. This has led to a situation where there is an emergent discussion on the inability of the Swedish model to include new workers — whether they are ethnic Swedes graduating college or migrants from other countries — and possible solutions.
Who knows? Maybe this core of the Swedish welfare state will soon crumble. And as a result, both Swedes and immigrants will be better off.
The first full week of 2016 has been an eventful start to the year.
In Oregon, the Federal government’s control over most of the American west continues to cause issues with ranchers — even though they themselves enjoy benefits from the arrangement. On Tuesday, President Obama continued the bipartisan assault on gun rights with an argument reliant on inflated statistics. Meanwhile, Rand Paul finds Mises, Bernie Sanders still hasn’t learned that price controls are bad, and Americans are voting with their feet for lower taxes.
On the global stage, China’s unsustainable economy continues to show signs of weakness, while new data shows Krugman is still very wrong about Europe, and socialism has done funny things to Venezuelan exchange rates.
We also took a moment to consider the legacy of Murray Rothbard twenty-one years after his passing. Luckily the ideas of Rothbard, Mises, and the rest of the Austrian school have never been more widely spread, in large part due to the work of a new generation of scholars that have come through the Mises Fellowship program.
Our latest Mises Weekends focuses on the Switzerland referendum on 100 percent reserve banking. Our friend Claudio Grass, managing director of Global Gold in Switzerland, joins Jeff Deist to give his thoughts. Who’s behind the referendum? How have the Swiss public reacted? Does it have a chance?
Jeff and Claudio offer comprehensive analysis you won’t get anywhere else.
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Why Austrians Are Not Neoliberals by Philipp BagusAre We Headed for Another Bust? by Frank Shostak"Paradise for an Austrian Researcher" by David Sanz BasVenezuela's Bizarre System of Exchange Rates by Emiliana Disilvestro and David HowdenEnd Injustices Now, Not Later by Gary GallesOn Gun Control, Obama Looks like Reagan and Bush by Ryan McMakenRand Paul Echoes Mises on Money by Tho BishopOregon and the Problem of Federal Lands by Ryan McMakenRemembering the First World War: the Centennial of the 1916 Slaughters by T. Hunt TooleyGuns Don't Cause Suicide by Ryan McMakenThe Basic Lessons of Keynesian Economics by Joseph SalernoPolice Departments Overflowing with Extra Time, Money by Ryan McMakenWould President Sanders Repeal Dodd-Frank? by Tho BishopCensus Data Shows People Are Fleeing High-Tax States by Ryan McMakenMost Market Criticism is Simply Poor Science by Per BylundMurray Rothbard by David GordonA Call to Activism from the Late Margit von Mises by Jeff DeistRothbard's Legacy, 21 Years Later by Ryan McMakenCultural Marxism Explained in 7 Minutes by Joseph SalernoPaul Krugman is Still Wrong on Europe by Louis RouanetHow The Feds Got All That Western Land (and Why It's a Problem) by Ryan McMaken
On Tuesday, it was announced that over seventeen million new vehicles were sold in 2015, the highest it’s ever been in United States history.
While the media claims that this record has been reached because of drastic improvements to the US economy, they are once again failing to account for the central factor: credit expansion.
When interest rates are kept artificially low, individuals are misled into spending more than they otherwise would. In hindsight, they discover that their judgment errors wreaked havoc on their financial well-being.
This is a lesson that the country should have learned from the Subprime Crisis of 2008. Excessive credit creation led too many individuals to buy homes, build homes, and invest in the housing industry. This surge in artificial demand temporarily spiked prices, resulting in over four million foreclosed homes and the killing of over nine million US jobs.
Instead of learning from the mistakes that sent shock waves throughout most of the planet, the Federal Reserve has continued with its expansionist policies. Since 2009, the money supply has increased by four trillion, while the federal funds rate has remained at or near zero percent. Consequently, the housing bubble has been replaced with several other bubbles, including one in the automotive industry.
Automotive companies have taken advantage of the cheap borrowing costs, increasing vehicle production by over 100 percent since 2009:
Source: OICAIn order to generate more vehicle purchases, these companies have incentivized consumers with hot, hard-to-resist offers, similar to the infamous “liar loans” and “no-money down” loans of the 2008 recession. Dealerships have increased spending on sales incentives by 14 percent since last year alone, and the banners in their shops now proudly proclaim their acceptance of any and all loan applications — “No Credit. Bad Credit. All Credit. 100 Percent Approval.” As a result, auto loans have increased by nearly $80 billion since 2009, many of which have been given to individuals with far-from-stellar credit scores. Today, almost 20 percent of all auto loans are given to individuals with credit scores below 620:
Source: New York FedNot only are more auto loans being originated, but they are also increasing in duration. The average loan term is now sixty-seven months (that’s 5.58 years) for new cars and sixty-two (that’s 5.16 years) months for used cars. Both are record numbers.
Average transaction prices for new and used cars are also at their record highs. Used car prices have increased by nearly 25 percent since 2009, while new car prices have increased by over 15 percent. Part of this has to do with the increasing demand for cars generated by the upsurge in auto loans. The main reason, however, is that consumers — taking advantage of the accessibility of cheap credit — are purchasing more expensive body styles. This follows the housing bubble trend, when the median size of a newly built single-family home rose to 2,272 square feet at the start of 2007.
We all know the end result of the Great Recession — prices soared, millions of houses were foreclosed, and unemployment surged. Demand for homes then plummeted, and home prices ultimately dropped by 20 percent each month.
The auto bubble has yet to burst, but its negative effects are already starting to gradually appear. For one, delinquencies on car loans have increased by nearly 120 percent, from just over 1 percent in 2010 to 2.62 percent in 2014. Since cars rapidly depreciate in value, this number is projected to spike. By the time these six, seven, and eight year no-money down loans are due to be paid in full, many of these vehicles won’t be worth paying off anymore — maintenance and loan costs will start exceeding the value of the cars.
According to the Center for Responsible Lending, one in every six title-loan borrowers is already facing repossession fees. If defaults sharply increase in the coming years as projected, the market will become flooded with used cars, and their prices will, with near certainty, fall to a significant degree.
Other pieces of economic data indicate that the automotive bubble may already be starting to pop. Non-revolving credit — fixed-payment plan credit — rose by just $8.3 billion in November, the smallest monthly increase since February 2012. This is a far cry from the $15.5 billion increase in October and $22 billion rise in September.
Although 2015 was a record-setting year for the automobile industry, individuals have been purchasing fewer and fewer cars each month. Seasonally-adjusted sales have declined by nearly 1 million since October. As a result, auto sales are now sitting at a 6 month low. ZeroHedge has reported that fewer Americans are expecting to purchase automobiles now than at any time since January 2013 — an alarming statistic given that the motor vehicle inventory-to-sales ratio is now at its highest point since August 2008.
At a time when labor force participation is at its lowest level since 1977 — at a time when real wages are rising less than they have since at least the 1980s — it is imperative that the Federal Reserve stop misleading individuals into making irrational investments. The economy is simply too frail to continue weathering these endless business cycles. Economists, politicians, and the general populace need to start learning from their economic history so they can begin recognizing that favoring debt over thrift isn’t beneficial to the country’s financial well-being. Failure to do so will simply lead to more bubbles, more malinvestment, and more economic headaches in the years to come.
Happy New Year from everyone at the Mises Institute. After an exciting 2015 filled with important research, exciting global growth, and widespread recognition for our success in spreading the cause of Austrian economics, freedom, and peace, we look forward to what 2016 will bring.
We hope you will make a resolution to join us at one of our events this year and thank you again for your continued support.
Mises Weekends this week features Fox News Senior Judicial Analyst and Distinguished Scholar in Law and Jurisprudence at the Mises Institute, Judge Andrew P. Napolitano. Judge Napolitano discusses the difference between natural and legislative law. You won't want to miss this talk with one of the most prominent advocates of liberty in America today.
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
PC Is About Control, Not Etiquette by Jeff DeistMises: An Audacious Champion of Freedom by Lew RockwellThe Formlessness of Progressivism by Yonathan AmselemEntrepreneur, Economy, and State by Greg MoranWill 2016 Be the End of the Current Skyscraper Boom? by Mark ThorntonSwitzerland to Vote on 100% Reserve Banking by Mark Thornton2015: The Year in Austrian Economic Research by Matt McCaffreyThe Big Short's Michael Burry on the Crash by Hunter LewisWhat Populism Is And Isn't by Hunter Lewis
Tim Carney recently highlighted how Iowa’s important early role in the Republican primaries has produced “a gravitational pull to pander” on the Renewable Fuel Standard. Its ethanol mandate is “an indefensible subsidy” to Iowans from others’ transportation and grocery budgets for, at best, highly questionable environmental benefits.
Carney cited examples of cognitive dissonance, such as between Chris Christie’s “I want the free enterprise system,” and “we should enforce the Renewable Fuel Standard,” and similarly between Carly Fiorina’s criticism that “government favors … the big, the powerful and the well connected,” and “I support the Renewable Fuel Standard as it currently stands.”
How do candidates try to square the circle on such contradictions? Fiorina would let RFS expire in 2022 when the current law sunsets. Jeb Bush’s “We need to phase that out over the long haul” echoes her position. Marco Rubio said he would not have voted for RFS, “but it is now existing law and I think it would be unfair to simply yank it away from people that have made investments based on its existence.” In each case, they claim principled opposition without requiring them to actually do anything about it, even if elected. The ethanol profiteers attacks on Ted Cruz, for promising to end RFS during his first term, and the warmth they felt for Donald Trump’s “I love it. I’m for it” reveals why.
Injustices Should be Removed Immediately, Not GraduallyBut how convincing is the “I’m not really pandering because it’s unfair to change RFS midstream” defense for candidates professing inert opposition? In “other things equal” circumstances, there is clearly an argument for following through on commitments. But other things are not equal with the ethanol mandate. It involves continuing to impose harm on those forced to pick up the tab, an ongoing assault that eliminating RFS would stop. Justifying continuing it on the basis of unfairness would require that maintaining the status quo was more important than stopping government from imposing harm on those its most basic duty is to protect. Carney characterized it as, “We’ve been robbing from Peter to pay Paul, and Paul’s taken out a mortgage based on income from the theft. You don’t want Paul to lose his house, do you?”
If an injustice has been done, should it be maintained or eliminated? The well-worn adage that “justice delayed is justice denied” would seem to make the answer clear. For politicians to endorse free markets, while the government they are part of abuses its own citizens to benefit buyers of political favoritism, then drag their feet forever against rectifying the abuse, fails the hypocrisy test.
Leonard Read, founder of the Foundation for Economic Education, long ago considered government’s eagerness to violate rather than enforce citizens’ property rights, but then treat the benefits it transferred to others as inviolable property rights. We could profit from his insights in “Causes of Authoritarianism,” from his 1958 Why Not Try Freedom? In it he addressed what he called the fallacy that “Authoritarianism Should Be Removed Gradually.”
If an act is morally wrong or economically unsound, the quicker it is abolished the better.
Many people seem to hold the view that the beneficiary of special privilege acquires a vested interest in his unique position and should not be deprived of it abruptly. They give little thought to the many persons from whom the plunder has been taken.
[One] privileged … [another] deprived of the fruits of his own labor. Yet, when it comes to the matter of restoring justice, most people will think of the disadvantages suddenly falling upon [the first] rather than the accrued damage done to [the second].
Imagine an habitual and successful thief. For years he has been robbing everybody in the community without their knowledge. … Upon discovering his fraud, should his robbery be diminished gradually or should justice be restored to the community at once? The answer appears too obvious to deserve further comment.
People, when contemplating the removal of authoritarianism, seem to fear that a sudden restoration of justice would too severely disrupt the economy. The fear is groundless.
The fallacy of the theory of gradualism can be illustrated thus: A big, burly ruffian has me on my back, holding me down. My friends, observing my sad plight, agree that the ruffian must be removed. But, believing in the theory of gradualism, they contend that the ruffian must be removed gradually. They fail to see that the only result of the ruffian’s removal would be my going to work suddenly!
There is nothing to fear by any nation of people in the removal of restrictions to creative and productive effort except the release of creative and productive effort. And why should they fear that which they so ardently desire?
Government frequently acts as an agent of theft through the policies it imposes, then treats the prospect of restoring justice as unjust. But this rhetorical inversion of justice as injustice only works if we similarly invert the meanings of logic and illogic. It cannot advance Americans’ shared interests. As Leonard Read argued, every policy reflecting that flawed approach, such as RFS, should be ended as soon as possible. And no one who ducks the issue, disguising their unwillingness to act by supporting phase-outs that are never going to happen, is worthy of Americans’ trust to represent them rather than special interests.