Global Economy: Recent Episodes
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Global Economy includes both contemporary and historical studies of the world economy as a whole and also of particular countries and regions other than the U.S.
On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop talk about the Chinese economy. While some of the left see China as a model for governing, those on the right often assume their rise relative to the US is inevitable. Ryan and Tho look at the recent challenges to the Chinese economy.
Recommended Reading"The Chinese Economy: Market Socialism with Chinese Characteristics" by Antonio Graceffo: Mises.org/RR_149_A
"China Enters the Doom Loop" by Peter St. Onge: Mises.org/RR_149_B
Download Anatomy of the State for free at Mises.org/Anatomy
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
New Radio Rothbard mugs are now available at the Mises Store. Get yours at Mises.org/RothMug
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Peter St. Onge joins Bob to discuss his latest piece at Mises.org on "China's Doom Loop." They cover a wide range of topics, including the contrast in leadership between Xi Jinping and Deng Xiaoping, the dollar as global reserve currency, the Belt and Road Initiative, and Jim Rogers' prediction that the 21st century would belong to the Chinese empire.
Peter's Article on China: Mises.org/HAP410a
Join us in Nashville on September 23rd for a no-holds-barred discussion against the regime. Use Code "HA23" for $45 off admission: Mises.org/Nashville23
On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop are joined by Mises Summer Fellow Manuel Garcia Gojon to discuss the recent strong performance by Argentinian libertarian presidential candidate Javier Milei. The three discuss the economic conditions of Argentina fueling the self-proclaimed anarcho-capitalist's political rise, what separates him from other populist figures, and some of his proposed policies - such as abolishing the country's central bank.
Recommended Reading "Will Argentina's Next President Be a Rothbardian?" by Manuel García Gojon: Mises.org/RR_147_A
"An Anarchist’s Pragmatic Plan of Government for Argentina" by Manuel García Gojon: Mises.org/RR_147_B
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
New Radio Rothbard mugs are now available at the Mises Store. Get yours at Mises.org/RothMug
PROMO CODE: RothPod for 20% off
On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop are joined by Econ Bro, the founder of Nigerian Liberty, which offers seminars in Austrian economics in Nigeria. The three discuss the inflation crisis in Nigeria, the cultural consequences of rising prices in the country, and the costs of the state capture of its petrol industry.
To learn more about Nigerian Liberty, visit NigerianLiberty.com.
View Econ Bro's Substack at econbro.substack.com.
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
New Radio Rothbard mugs are now available at the Mises Store. Get yours at Mises.org/RothMug
PROMO CODE: RothPod for 20% off
The fiat US dollar, while still the world's "reserve" currency, is being imperiled by reckless actions by monetary authorities. Other countries are taking notice—and action.
Original Article: "How US States Could Pave the Way for Currency Competition"
It's fitting that the G7 recently met in Hiroshima because the policies they are following are blowing up the world economy.
Original Article: "The G7 in Hiroshima: The Latest Attempt to Impose a Unipolar World"
Ryan and Zack look at how China, Iran, and Saudi Arabia are reshaping the Middle East into a region where the United States no longer dominates. This is a good thing for ordinary Americans.
Additional Resources "Thanks to Sanctions, the US Is Losing Its Grip on the Middle East" by Ryan McMaken: Mises.org/WES_11_A
"The Petrodollar-Saudi Axis Is Why Washington Hates Iran" by Gary Richied: Mises.org/WES_11_B
"Peace is Breaking Out in the Middle East… and Washington is Not Happy!" by Ron Paul: Mises.org/WES_11_C
"Why the End of the Petrodollar Spells Trouble for the US Regime" by Ryan McMaken: Mises.org/WES_11_D
"Washington Miffed as China Makes Peace" by Joseph Solis-Mullen: Mises.org/WES_11_E
Be sure to follow War, Economy, and State at Mises.org/WES.
While the US ratchets up efforts to isolate its many enemies, the Chinese, the Saudis, the Arab League, and OPEC all shrug and look to increasing international communication and trade.
Original Article: "Thanks to Sanctions, the US Is Losing Its Grip on the Middle East"
Every day, more and more Americans are awakening to the reality that the institutions in control of this nation are failing them. From violence in the streets, inflation in our stores, increasing tyranny and censorship, and absolute buffoonery on public display in halls of political power. The ruling class is getting richer while most of us suffer, and new generations are becoming increasingly warped by the dangerous ideologies of the left.
Recorded at The Depot Craft Brewery & Distillery in Reno, Nevada on May 20th, 2023.
As the US government debases the dollar, other nations take notice and possibilities increase that another currency based on sound principles might emerge.
Original Article: "Will a New BRICS Currency Change Anything? Maybe"
Even when currency is backed by gold, governments have many political reasons to pursue national, territorial currencies. Now there are hundreds of national currencies. It didn't have to be this way.
Original Article: "Why Do Most Countries Have Their Own Currency? Governments Wanted It That Way."
Understanding what turns an ordinary currency into a global reserve currency can help us understand how the dollar could go into decline and give way to competing currencies.
Original Article: "Why the Dollar Still Beats the Euro and the Yuan"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Professor Per Bylund joins Bob to debunk the worries over AI and to question whether the latest version of chatbots should even be called "intelligent."
Per on Robots Taking your Jobs: Mises.org/HAP392a
Progressives view all aspects of human life as a struggle against forces of oppression. Earlier this week on BBC, Professor Mariana Mazzucato suggested governments across the West should simply print money not only to help Ukraine, but also to finance other "wars" against climate change, inequality, and more. Should national treasuries essentially adopt a permanent wartime footing and print far more money, as Mazzucato and Warren Mosler recommend? Hint: Jeff and Bob say "No."
Jeff's article "A Permanent Wartime Economy": Mises.org/HAP386a
Bob's debate with Warren Mosler: Mises.org/HAP386b
Bob's article in The American Conservative on the Greenbacker movement: Mises.org/386c
With global worldwide debt now over $300 trillion and interest rates rising, the US dollar is once again a relative safe haven in a slowing economy. Currencies competing with the Dollar face a deadly race to stave off a sovereign debt crisis. Is the dollar now unbound, as the dominant political tool of the dominant nation?
The Dollar Milkshake Theory: Mises.org/HAP385a
Thorsten Polleit, The Global Currency Plot: Mises.org/HAP385b
Bob's book, Understanding Money Mechanics: Mises.org/Mechanics
On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop feel obligated to discuss the State of the Union address. Was anything of value learned? Tune in to find out.
Also, join the Mises Institute in Tampa this month for a special event featuring Per Bylund, Jeff Deist, Tho Bishop, and Brett Lindell, on February 25. Learn more at Mises.org/Tampa.
Recommended Reading"Raise the Social Security Age to (at Least) 75" by Ryan McMaken: Mises.org/RR_120_A
"Another Recession Sign: Part-Time Work Is Growing Faster than Full-Time Work" by Ryan McMaken: Mises.org/RR_120_B
"Yes, the US Government Has Defaulted Before" by Ryan McMaken: Mises.org/RR_120_C
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
A recession looks more likely every day, and the latest sign of this is slowing price growth in producer prices. After all, price inflation usually slows as the economy weakens and consumers run out of easy money.
Original Article: "Wholesale Price Inflation Is Slowing as Economy Worsens"
This Audio Mises Wire is generously sponsored by Christopher Condon.
On this episode of Radio Rothbard, Ryan McMaken and Tho Bishop discuss Jay Powell's exercise in Fed-speak this week. While political pressure mounts at home for the Fed to turn dovish, growing international challenges to the dollar's dominance mount. Ryan and Tho also examine the Saudi's willingness to question the petrodollar and recent rumblings down south of a South American monetary union.
Also, join the Mises Institute in Tampa this month for a special event featuring Per Bylund, Jeff Deist, Tho Bishop, and Brett Lindell, on February 25. Learn more at Mises.org/Tampa.
Recommended Reading"The Fed Is Already Flashing Signs It's Done Raising Rates" by Ryan McMaken: Mises.org/RR_119_A
"How FedGov Destroyed the Housing Market" (Human Action Podcast): Mises.org/RR_119_B
"Why the End of the Petrodollar Spells Trouble for the US Regime" by Ryan McMaken: Mises.org/RR_119_C
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
Jeff and Bob break down this week's Davos WEF conference and consider whether global elites really have the mechanisms to impose their plans.
Johnny Vedmore's analysis of Schwab's origins: Mises.org/HAP379a
Scott Greer says America's right-want needs to stop dwelling on Schwab: Mises.org/HAP379b
Schwab bragging about penetrating Cabinets: Mises.org/HAP379c
Unfortunately, when governments all over the world decided to “spend now and deal with the consequences later” in 2020, they also sowed the seeds of a 2008-style problem.
Original Article: "2023: You Wanted Endless Stimulus, You Got Stagflation."
This Audio Mises Wire is generously sponsored by Christopher Condon.
The woes of Britain's financial sector have been exacerbated by UK financial regulators' failures.
Original Article: "The Near Collapse of the UK Pension Sector Exposes Failures by Financial Regulators"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The standard line from progressives is that free markets usually fail in developing countries. The economic numbers tell a much different story.
Original Article: "Free Markets DO Work in Developing Countries"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Ryan McMaken and Tho Bishop talk with economic anthropologist Jovana Diković about how a focus on "solving" global warming endangers the food supply for much of the globe, especially in the developing world. Even rich nations face a world of less food at higher prices.
Use promo code ROTHPOD for a 20% discount on Ryan McMaken's new book Breaking Away: The Case for Secession, Radical Decentralization, and Smaller Polities: Mises.org/RR_108_Book
Recommended Reading "Environmental and Political Elites Are Destroying Food Production for Climate Goals" by Diković: Mises.org/RR_108_A
"Eat or Heat: Europeans Already Are Facing Previously Unthinkable Dilemmas" by Claudio Grass: Mises.org/RR_108_B
"Regime Pseudoscientists Enforce Climate Change Narrative" by Michael Rectenwald: Mises.org/RR_108_C
"Germany's (and Europe's) Self-Inflicted Upcoming Energy Crunch" by Weimin Chen: Mises.org/RR_108_D
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
Pakistan, like so many other countries, is seeing inflation close to spiraling out of control. As for finding causes, monetary authorities should look in the mirror.
Original Article: "Inflation in Pakistan: Follow the Money"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
Even with near-record inflation, the US dollar still has gained strength relative to other currencies. This does not mean that the Fed has been acting responsibly.
Original Article: "The Dollar's Global Wake of Destruction"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
The only lesson for the United Kingdom is to remember that if you follow Greece’s economic policies, you get Greek debt, unemployment, and growth.
Original Article: "The Bank of England Made Liz Truss a Scapegoat"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
Until the day comes that a majority of the population wants to abolish all states, it makes sense in the meantime to look to ways that will reduce the power of states, localize that power, and take at least some of it out of the hands of some of the most powerful ruling state elites. This episode of Radio Rothbard features Ryan McMaken's talk presented at the Mises Institute 40th Anniversary Supporters Summit in Phoenix, Arizona, on October 7, 2022.
Recommended Reading "On Secession and Small States" by Ryan McMaken: Mises.org/RR_102_A
"What We Mean by Decentralization" by Lew Rockwell: Mises.org/RR_102_B
"The European Miracle" by Ralph Raico: Mises.org/RR_102_C
"Nations by Consent" by Murray N. Rothbard: Mises.org/RR_102_D
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
Ryan and Tho talk with Mises.org author and German native Rosanna Weber about the energy crisis in Germany. German policymakers have greatly worsened the ongoing energy crisis in Germany by abandoning nuclear energy and taking a hard line on Russian natural gas. Now with the damage done to the Nord Stream pipeline, German consumers face even fewer options as winter approaches.
Rosanna Weber is a graduate student in Economic History at the London School of Economics and a freelance journalist.
Recommended Reading "Germany's Nuclear Choice: Russian Energy Crisis Forces a Reckoning" by Rosanna Weber: Mises.org/RR_101_A
"Eat or Heat: Europeans Already Are Facing Previously Unthinkable Dilemmas" by Claudio Grass: Mises.org/RR_101_B
"Europe Ditched Russian Energy. Now People Are Sitting in Line For Days to Buy Coal. Is Biden to Blame?" by Alice Salles: Mises.org/RR_101_C
"Germany's (and Europe's) Self-Inflicted Upcoming Energy Crunch" by Weimin Chen: Mises.org/RR_101_D
"The 'Stunning Success' of the Green Revolution Is Yet Another Progressive Myth" by Kristoffer Mousten Hansen: Mises.org/RR_101_E
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
At the urging of the United States, Germany and other European governments have levied sanctions against Russia. In reality, these governments have levied sanctions against themselves and their citizens.
Original Article: "Germany's (and Europe's) Self-Inflicted Upcoming Energy Crunch"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Winter is approaching and Europeans are facing homes without heat, thanks to the US-led sanctions against Russia. Who will carry the blame when people freeze to death?
Original Article: "Europe Ditched Russian Energy. Now People Are Sitting in Line for Days to Buy Coal. Is Biden to Blame?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
On this episode of Radio Rothbard, Ryan McMaken and Joseph Solis-Mullen take a look at brewing debt crises in emerging markets and how the dollar still looks good when compared to other global currencies.
Recommended Reading "How the Fed Helped Create Another Calamity: The Ongoing Emerging Market Debt Crisis" by Joseph Solis-Mullen: Mises.org/RR_99_A
"August's Price Inflation Soared, and That Means Earnings Fell Yet Again" by Ryan McMaken: Mises.org/RR_99_B
"Greenspan Would Be Proud: A Lesson in Fed Speak" by Joseph Solis-Mullen: Mises.org/RR_99_C
"It Just Might Be Time to Listen to the Austrians" by Joseph Solis-Mullen: Mises.org/RR_99_D
"Throwing the Fed's Machinery in Reverse: Fed Interest Rate Policies Continue to Damage the Economy" by Frank Shostak: Mises.org/RR_99_E
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
When the Soviet Union dominated Eastern Europe, people there looked to the West—and especially the USA—in hopes of freedom. Today, it is the West promoting culture wars and collectivism.
Original Article: "Trapped by Imperialist Leviathans: The Case for Freedom in Central and Eastern Europe"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Entrepreneurship is the key to real development, but cultural attitudes are often a significant barrier to entrepreneurship in the developing world.
Original Article: "Entrepreneurship in Developing Countries: Still a Work in Progress"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Typical discussions about the fate of our planet center around issues like war, climate change, and sovereignty. Peter Zelhan says "the halcyon days of 1980–2015 are over."
Original Article: "Can We See the End of the World from Here? Will We Still Feel Fine?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Germany's foray into green energy is turning out to be a disaster, but abandoning the green utopia is only the first stage for that country. It is time to put common sense and sound economics at the forefront of German policy making.
Original Article: "Germany Can Save Itself, and Possibly the World, by Abandoning Four Failed Policies"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Now that inflation is the highest it has been in four decades, the monetary authorities are trying one trick after another. Only ending artificially low interest rates will help.
Original Article: "Low Interest Rates and High Taxes Won't Help against Inflation: The Economy Needs Savings and Real Investment"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Fresh off destroying the agricultural economy of Sri Lanka, the Great Reset crowd now is urging people to eat insects in order to combat the food shortages that the self-appointed elites have caused.
Original Article: "The Great Reset at Work: The Dystopian Transformation of the Food Industry"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Is it all bad news? There is still entrepreneurship. There is still innovation.
Download the slides from this lecture at Mises.org/MU22_PPT_27.
Recorded at the Mises Institute in Auburn, Alabama, on 28 July 2022.
It's going to take more than a 0 percent policy interest rate and a newly invented name for QE to really address years of monetary inflation.
Original Article: "Like the Fed, the ECB Is Still a Long Way from "Normal" Monetary Policy"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In an attempt to stymie the spread of covid-19, the Chinese government has imposed reckless and harmful lockdown policies in several cities. This will not end well.
Original Article: "China's Draconian Lockdown Policies: Major Consequences to Follow"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The West Indies played a vital role in growing the British economy in the eighteenth century.
Original Article: "The Industrial Revolution and the West Indies: Did the Colonies Spark Progress in the Metropole?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Lots of Americans now openly discuss the idea of National Divorce, focusing on the political, cultural, and social divisions in America. But what about the economics? How would issues like debt, entitlements, and defense be addressed if the US split into two or more new political entities?
Mises.org senior editor and economist Ryan McMaken joins Jeff to discuss.
Listen to Hoppe on centralization and secession: Mises.org/HAP352-1
Keynesian economics is a scourge to any nation that tries it, and African countries are no exception.
Original Article: "Nine Ways Debt and Deficit Spending Severely Harm African Societies"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Groups targeted by class warriors in America will achieve more if they follow the Igbos’ path and ignore the politics of grievance.
Original Article: "Africa's Entrepreneurs: The Igbos of Nigeria"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Many think cancel culture is an odd particularity of the Anglosphere. Unfortunately, it raised its ugly head at this year's Austrian Economics Meeting Europe held in Lithuania.
Original Article: "The Austrian Economics Meeting Europe Got a Taste of Cancel Culture"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Anyone who doubts whether we are in a recession can stop doubting. The Fed's reverse repos show that we're headed for a crash.
Original Article: "The Great Crash of 2022"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Inflation in Argentina is far worse than neighboring countries. It has only one cause: an extractive and confiscatory monetary policy—printing pesos without control and without demand.
Original Article: "How Money Printing Destroyed Argentina and Can Destroy Others"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Conventional wisdom says a country should manage its debts, but what if debt has become uncontrollable?
Original Article: "In Defense of Defaulting on the National Debt"
This Audio Mises Wire is generously sponsored by Christopher Condon.
African economies aren't being strangled by capitalism but by statism, which has imposed inflation, debt, and high taxes.
Original Article: "A Triple-Barreled Gun Is Destroying African Economies: Inflation, Government Debt, and Taxes"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Ryan McMaken and Zachary Yost examine some reasons why early Americans hated the idea of a professional standing army, and some of the tactics used to decentralize military power in the US and Switzerland.
Recommended Reading "Why We Can't Ignore the Militia Clause of the Second Amendment" by Ryan McMaken: Mises.org/WES_02_A
"The Second Amendment's Authors Would Hate Today's Huge Federal Military" by Ryan McMaken: Mises.org/WES_02_B
"Opposing Standing Armies: A Great American Tradition" by Zachary Yost: Mises.org/WES_02_C
"When State Governors Tried To Take Back Control of the National Guard" by Ryan McMaken: Mises.org/WES_02_D
Be sure to follow War, Economy, and State at Mises.org/WES.
The so-called Great Reset is an attempt by wealthy elites and their allies to control people's lives. Their schemes need to be both exposed and resisted.
Original Article: "The Great Reset: Turning Back the Clock on Civilization"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The theory of real business cycles won a Nobel Prize, but it ultimately confuses cause with effect.
Original Article: "Are Technology Shocks Responsible for Business Cycles? In a Word, No."
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Davos crowd sold globalization as a way to bring nations together. Unfortunately, by insisting on political conformity, the globalists have set the world on fire.
Original Article: "Instead of Uniting the World, Globalization Has Set Nation against Nation"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In seeking membership in NATO, Finland and Sweden seem to believe they will have more military security. But they also are giving up their precious independence.
Original Article: "Finland and Sweden in NATO: Disregarding the Benefits of Neutrality"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Although Biden presented the formula shortage as caused by "forces" outside the USA, the shortage is homegrown. Bastiat could have explained why.
Original Article: "Bastiat Predicted the Baby Formula Crisis 170 Years before It Happened"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Vladimir Putin (not unlike President George W. Bush) has led his country into a destructive war, yet the Russian political leadership enjoys wide public support.
Original Article: "Why Russia's Authoritarian Regime Continues to Enjoy Public Support"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Once upon a time, the progressive hero was "socialist man." Today, we have "Davos man," who is ready to plan your life for you—your wishes notwithstanding.
Original Article: "Davos Man Is at It Again: The 2022 Annual Meeting of the World Economic Forum"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The African Continent Free Trade Area has the potential to serve Africans and bring about better living standards. However, it is threatened by government attempts to "manage" trade.
Original Article: "To Succeed, the AfCFTA Must Be about Actual Free Trade, Not Government-Managed 'Free Trade'"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Krugman’s recent NYT column on Russia features commentary on trade surpluses that is at best very misleading.
Original Article: "What Krugman Gets Right and Wrong on Trade Surpluses"
This Audio Mises Wire is generously sponsored by Christopher Condon.
While supporters of the Biden administration fault Putin for shortages, Austrian economists know the answer lies in Washington's monetary and economic mismanagement.
Original Article: "Austrian Economists Are Not Surprised by the Shortages"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The combination of covid lockdowns, money pumping, and attempts to force a new green economy are taking their toll. This is not going away any time soon.
Original Article: "It's Not Just the USA: The Economic Instability Is Global"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The presence of American companies in foreign nations was once seen as a sign of American superiority and an instrument of American cultural power. Not anymore.
Original Article: "McDonald's Closes All Stores in Russia as Woke Russophobes Rage"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Persistently loose monetary policies always have negative growth and distributional effects that impair political stability. In extreme cases, there are civil wars and armed conflicts between countries.
Original Article: "Inflation, War, and Oil: How Today's Crises Are Rehashing the 1970s"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In the first episode of this new podcast, Ryan McMaken and Zachary Yost discuss NATO, Turkey, Russia, and why the USA needs to leave it all behind.
Be sure to follow War, Economy, and State at Mises.org/WES.
The latest Keynesian money-printing and spending schemes are blowing up. It is time to hear what the Austrians have to say.
Original Article: "It Just Might Be Time to Listen to the Austrians"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Why did Barbados postslavery develop a more robust economy than Jamaica even though the people had similar ethnic backgrounds?
Original Article: "History and Institutions Matter: The Postslavery Development of Jamaica and Barbados"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Would you give up voting in exchange for no more taxes? Stephan Livera joins the show to discuss the curious distinction between economic freedom and personal or political freedoms, and how we weigh those freedoms.
The Fraser/Cato Human Freedom Index: Mises.org/HFI The Heritage Index of Economic Freedom: Mises.org/IEF
Propping up congressional deficit spending, juicing equity markets, and constantly recapitalizing commercial banks are the Fed’s true mandates.
Original Article: "Inflation, Quick and Dirty"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Politicians have become accustomed to conjuring whatever they want through the “miracle” of printing money. But in the real world, it’s still necessary to produce oil and gas through actual physical production.
Original Article: "To Fight Russia, Europe's Regimes Risk Impoverishment and Recession for Europe"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Michael Rectenwald takes on the progressive canard of "socialism for the rich, capitalism for the poor," in which the government protects the wealthy but throws everyone else to the tender mercies of rapacious capitalism.
Original Article: "The Great Reset VII: Capitalism for the Rich and Socialism for the Poor"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Bob critiques the economic views of Yuval Harari, who predicts “useless people” because of technological advances. Bob then showcases similar thinking from right-wingers. He ends by addressing a common critique of the Christian God.
Mentioned in the Episode and Other Links of Interest: Part 1, Part 2, Part 3, Part 4, and Part 5 of the BMS series on Klaus Schwab and the Great ResetBob’s book with Silas Barta on Understanding BitcoinSource for NWO compilationSource for World Government Summit panel on blockchainSource for Harari audioTim Pool episode featuring Michael Malice discussing NPCs (around 1:04:30)Schwab’s books The Fourth Industrial Revolution and Covid-19 and the Great Reset For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
The sanctions against Russia have the potential to spiral into something much larger. Indeed, many governments are using the current conflict as an opportunity to further push "green energy," rearmament, and other big-spending schemes.
Original Article: "Heavy Sanctions against Russia Could Usher in a Wider Economic War"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Bob completes his series on the elites who are literally trying to take over the world. He first explains Schwab’s connection to the Global Government Summit, and then finishes reading key excerpts from Schwab’s book on Covid-19 and the Great Reset.
Mentioned in the Episode and Other Links of Interest: Part 1, Part 2, and Part 3, and Part 4 of this seriesBob and Carlos Lara’s presentation, "How to Weather the Coming Economic Storms"Bob’s book Common Sense: The Case for an Independent TexasBob and Carlos’ book The Case for IBC and their book How Privatized Banking Really WorksThe WEF’s bio for its founder, Klaus SchwabSchwab’s books The Fourth Industrial Revolution and Covid-19 and the Great ResetSchwab’s address to Global Government SummitForbes’ article on Schwab the power broker. For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
Bob continues his series, this time focusing on the creepy worldview of WEF speaker Yuval Harari, and further reviews Schwab’s book on Covid-19 and the Great Reset.
Mentioned in the Episode and Other Links of Interest: Part 1 and Part 2, and Part 3 of this seriesThe WEF’s bio for its founder, Klaus SchwabSchwab’s books The Fourth Industrial Revolution and Covid-19 and the Great Reset“Awaken With JP”‘s episode on Schwab and HarariHarari’s talk on the future of humanity at the 2018 World Economic Forum conferenceBob’s article on the socialist calculation debate and Joe Salerno’s lecture on itForbes’ article on Schwab the power broker For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
In the months since Angela Merkel’s departure from the German chancellorship after sixteen years in power, the editorials praising her reign have been legion. This is not one of them.
Original Article: "The Legacy of Angela Merkel: Kicking the Can Down the Road"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In this episode of Radio Rothbard, Ryan McMaken and Tho Bishop talk about this year's Austrian Economics Research Conference and the value of interdisciplinary approach.
Watch AERC at Mises.org/LIVE
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
Zombie companies, which were already a problem in 2019, have not only not been killed off but have multiplied. The zombie apocalypse could be closer than we imagine.
Original Article: "The Covid Panic Brought Even More Economic Zombification"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In this episode of Radio Rothbard, Ryan McMaken and Tho Bishop look at the economic consequences of Russia's invasion of Ukraine. What has been the damage from America's weaponization of the dollar? Is Russia likely to return to the gold standard? What may be the fallout in Europe?
Recommended Reading "Can Government Successfully Counter Recessions Through Expansionary Policies? Don't Count on It" by Frank Shostak: Mises.org/RR_72_A
"Sanctions against Russia Are the Lockdowns of 2022" by Tho Bishop: Mises.org/RR_72_B
"The Steep Cost of Sanctions for Europe and Russia" by Daniel Lacalle: Mises.org/RR_72_C
"The Economy May Be Finally Peaking, and the Fed Won't Help Matters" by Brendan Brown: Mises.org/RR_72_D
"Why Sanctions Don't Work, and Why They Mostly Hurt Ordinary People" by Ryan McMaken: Mises.org/RR_72_E
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
Bob continues his series on Klaus Schwab and the Great Reset, highlighting an interesting remark in Biden's SOTU, Strobe Talbott's open support for global government, and the introduction to Schwab's book on Covid-19 and the Great Reset.
Mentioned in the Episode and Other Links of Interest: Part 1 and Part 2 of this seriesThe WEF’s bio for its founder, Klaus SchwabSchwab’s books The Fourth Industrial Revolution and Covid-19 and the Great ResetBob’s first co-hosted Human Action podcast with Jeff DeistForbes’ article on Schwab the power broker For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
The more the EU micromanages Polish internal affairs and punishes Poland for the simple act of exercising self-determination, more the benefits of leaving the bloc altogether will continue to increase.
Original Article: "Poland's Beef with the EU Shows the Dangers of Political Centralization"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
China faces a wide variety of demographic, geopolitical, and economic limits on the regime's power. And, socialism and Keynesianism don't work any better in China than in the USA. Moreover, contrary to the myth, China is not run by politicians who are brilliant geniuses who "play the long game."
Additional Reading "China’s Military Strength Has Been Greatly Exaggerated" by Ryan McMaken: Mises.org/RR_59_Article1
"China's Biggest Problem Isn't Trump, It's a Broken Banking System" by Tho Bishop: Mises.org/RR_59_Article2
"If the US Wants to Beat China, Why Is It Copying China's Socialism?" by Mihai Macovei: Mises.org/RR_59_Article3
"China’s Military Strength Has Been Greatly Exaggerated" by Ryan McMaken: Mises.org/RR_59_Article4
"China Won't Be Taking Over the World" by Joseph Solis-Mullen: Mises.org/RR_59_Article5
"The China Model Is Unsustainable" by Doug French: Mises.org/RR_59_Article6
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
Most Egyptians have lived their whole lives in a country where the government heavily subsidizes bread prices. But now the deeply indebted Egyptian state faces some tough choices, and Egypt's poor may suffer the most.
Original Article: "Egypt's Bread Subsidies May Bring Millions to the Brink of Starvation"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
We should be extremely concerned about the short and diminishing impact of monster stimulus plans.
Original Article: "Government "Stimulus" Keeps Having a Diminishing Effect"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Faced with countless demographic, economic, and strategic problems, China is more likely to collapse than take over the world.
Original Article: "China Won't Be Taking Over the World"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
US car owners are being preyed upon by thieves, because South African mine owners are being preyed upon by their government.
Original Article: "Why Are Thieves Stealing So Many Catalytic Converters?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The risk of government expropriation of private property remained low, and Botswana rejected antiwhite reformist politics which destroyed capital in many other countries in the region. Economic success has been a result.
Original Article: "How Botswana Became the World's Fastest-Growing Economy"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In Europe, there is no competitive market for electrical power. And since power is an important factor of production, it also means the overall marketplace is wasteful, inefficient, and sluggish.
Original Article: "Why Europe's Highly Regulated Power Market Is So Bad for Growth"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The "trickle down" effect is real in how capitalists are motivated to expand affordability of their products and services. Mobile phones and air travel were once just luxuries enjoyed by a select few, but are now widely affordable.
Original Article: "The Real Trickle-Down Effect: Making "Luxuries" Affordable to Regular People"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Social democrats love to denounce low-tax, probusiness regimes as "neoliberal" and as places with more poverty. But the reality is that parts of Europe that embraced markets most reduced poverty while making their citizens richer.
Original Article: "These European Countries Beat Poverty and Increased Wealth with Low Taxes and Low Regulation"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The destruction of the free market, competition, and innovation may seem appealing to some now, but the likely outcome of poor employment, negative real wage growth, and stagnation should be a real cause of concern.
Original Article: "A Jobless Recovery Is Coming to Europe"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
China and Russia are trying to build a Eurasian bloc that can break free of any American spheres of influence. The American regime obviously opposes this, but money printing and debt limits the American options.
Original Article: "The Biggest Threat to US Hegemony: China, Russia, or Debt?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Have you ever noticed that it's only the wealthy Nordic countries that are singled out as being "socialist"? Places like Greece and Italy, which are more socialistic than Scandinavia, never seem to warrant a mention on this topic.
Original Article: "If the Nordic Countries Are Socialist, So Are These Less Impressive Countries"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
If Europe wants to build wealth for its poorest members, it needs private entrepreneurship. But entrepreneurs need exactly the opposite of the Keynesian plan for building a European superstate.
Original Article: "Why Europe's Left Wants a European Financial Superstate"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The problem with the European Union is not that it seeks to integrate Europe's economies. The problem comes from attempts to integrate politics as well.
Original Article: "The EU's Woes Are a Political Problem, Not an Economic One"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Mainstream economists claim China needs more consumption and a bigger welfare state. They think China's high savings rate is a bad thing. These economists are wrong.
Original Article: "China Needs More Economic Freedom—Not a Bigger Welfare State"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Mises's firm anti-inflation view—and his recommendation for a return to sound money (that is, free market money)—rested on his awareness of the disastrous consequences of an inflationary policy.
Original Article: "Inflation Breeds Even More Inflation"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The aims of the WEF are not to plan every aspect of production and thus to direct all individual activity. Rather, the goal is to limit the possibilities for individual activity—by dint of squeezing out industries and producers within industries from the economy.
Original Article: "The Great Reset, Part II: Corporate Socialism"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Jeff Deist returns to the show to comment on allegations of voter fraud; the future of politics in a post-Trump America; the death of the old GOP; the push for a “great reset;” the crippling of the economy via shutdown and bailouts; and more.
Find more from David Gornoski on A Neighbor's Choice.
Trying to stay ahead of the government printing press is the modern citizen’s constant worry.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "Can the Stock Market Protect Wealth Better Than Gold and Silver?".
Since the trade balance has nothing to do as such with either the supply of money or the demand for money, we can conclude that trade balances do not determine the purchasing power of money of respective countries.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "What the Trade Balance Means for a Currency's Purchasing Power".
So far, the United States is leading Europe in employment improvement, but the full recovery is extremely far away.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Global Jobless Recovery"
President López Obrador of Mexico has surprisingly been a voice of fiscal sanity, refusing to embrace the sorts of enormous stimulus packages that are now so popular worldwide.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Mexico’s Unexpected Fiscal Sanity"
GDP is not a useful measure of the material prosperity of a nation, and the way GDP is measured tends to hide the benefits of free trade.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "GDP, Free Trade, and Prosperity".
Central bank policies that rely on ultralow interest rates have been shown to bring economic stagnation. Unfortunately, central bankers don't seem to have any other ideas.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Central Bankers Will Bring Us Economic Stagnation".
The massive bailout of indebted sectors that already had overcapacity and were in process of obsolescence may also drive the largest wave of malinvestment in decades. If the previous recoveries came with poor wage and capital expenditure growth and high debt, the next one will likely be even worse.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "An L-Shaped Recovery Is Not an Anomaly, It Is the Norm."
Jeff Deist and economist Daniel Lacalle present a special live seminar on the COVID-19 crisis and what it means for your economic future.
Is the world headed for another Great Depression, or will we enjoy a V-shaped recovery later this year as the virus fades and economies reopen? Are governments and central banks making the situation better or worse? Will stocks bounce back? Do we all face a less prosperous new normal, or will markets and human ingenuity overcome the economic tailwinds?
Mr. Lacalle and host Jeff Deist take an unflinching look at the economic reality.
Topics include:
Prospects for inflation vs. deflationFed and ECB responses to the crisisEffects of government "stimulus"Unemployment and small businessHousing and commercial real estateEquities and bondsOil and commoditiesGold and Bitcoin
While the Left has agitated for more government spying and harsher "lockdowns," Brazil's president—perhaps fearing economic implosion—has been reluctant to crack down. Narrated by Daniella Bassi.
Original Article: "Why Does Brazil’s Bolsonaro Refuse To Lock Down His Country's Economy?"
We continue our survey of Human Action by finishing up Part Six of the book, Mises's analysis of interventionism—or the so-called "third way" between capitalism and socialism.
Mises exposes how state intervention in the market economy makes us all poorer, even while it claims to act against poverty and inequality on behalf of social justice. That perverse "justice" takes the form of currency manipulation, confiscation of land and capital, protectionism for syndicates and unions, and civilization-destroying total wars. This is a solo episode with Jeff Deist, who enjoys Mises's demolition of the hampered market economy masquerading as laissez-faire capitalism.
Use the code HAPOD for a discount on Human Action from our bookstore: Mises.org/BuyHA.
Additional Resources Human Action: Mises.org/HumanAction
Bob Murphy's Study Guide to Human Action: Mises.org/Study
Debt-ridden countries such as Italy will come to rely more and more on Germans and other northern Europeans to finance their debt. This will require a more unified Europe. Or the whole thing may collapse.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "To Avoid a Collapse of the Eurozone, Europe Moves Closer to a European Megastate"
As the debt bombs in Italy and Spain and France get worse, it increasingly looks like the eurozone will have to bail out a huge portion of the European economy. Either that, or break up the EU, provoking a new crisis.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The COVID-19 Crisis Is Driving the EU to the Brink"
When governments and central banks announce massive stimulus packages at the very beginning of a crisis, they bet on a speedy recovery and a return to normal as if nothing had happened. This is far from the case.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Central Banks and the Next Crisis: From Deflation to Stagflation"
Although it may seem as if landlord simply collect money from tenants without working, nothing could be further from the truth. Landlords invest their stored labor—savings—at a risk and with the knowledge that they won't recoup their money for some time. In the creating or renovating rental properties, they aid those who can't store their labor yet—tenants and laborers.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "In Defense of Landlords"
Bureaucrats cannot conjure wealth from nothing. They only have what they extract from the private sector. Unfortunately, the bureaucrats are now starving the private sector of funding while making government budgets ever larger.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Bureaucrats Can't Fix This"
Even if the COVOID-19 virus turns out to be more severe than the skeptics give us reason to think it is, we can get through it. We cannot survive the end of the division of labor. It would be the finish of civilization as we know it.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The End of Civilization?"
The Italians could learn some lessons about healthcare from the South Koreans, who still maintain a robust private market in health insurance. Although the Koreans have relatively ample resources for COVID-19 patients, Italy's state-dominated system is quickly running out of options.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Markets vs. Socialism: Why South Korean Healthcare Is Outperforming Italy with COVID-19"
Taiwan's response to COVID-19 mostly means self-imposed quarantines and more transparency. It's basically the opposite of what Europe is doing.
Narrated by Millian Quinteros.
Original Article: "Why Taiwan Hasn't Shut Down Its Economy"
Bob Murphy tackles a common objection from atheist libertarians: Doesn’t Mises (in Human Action) refute the very notion of the Biblical God? Specifically, why wouldn’t an omnipotent, omniscient being remove all uneasiness with one action?
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Wojciech Kopczuk is a Columbia economics professor who co-authored (in 2004) one of the leading estimates of wealth concentration in the literature, along with current progressive darling Emmanuel Saez. But, ever since Thomas Piketty’s bestselling book on wealth inequality, Saez has published research with Gabriel Zucman showing dramatically different results. Kopczuk explains why economists can disagree on the basic facts of wealth concentration, and why there is controversy about Saez and Zucman’s latest claim that billionaires pay a lower income tax rate than the working class.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Negative interest rates are now entrenched reality in Europe, and not just for buyers of sovereign or corporate debt – even retail savings accounts are affected. What does this mean for real people trying to save for retirement? And more broadly, what does it mean for Europe culturally? Not to mention America, since Alan Greenspan tells us negative rates are coming here soon?
Our guest Rahim Taghizadegan from the independent Viennese Scholarium joins the show to discuss the anti-economics of negative rates. He is co-author of a new book titled The Zero Interest Trap. He is also a co-author of Austrian School for Investors.
Presented during the "Comparative Economics" session at the Libertarian Scholars Conference on 28 September 2019, at The King's College in New York City.
It appears many Indians and Brazilians and Chinese are willing to risk the global warming for a chance at experiencing even a small piece of what wealthy first-world climate activists have been enjoying all their lives.Original Article: Greta Thunberg To Poor Countries: Drop Dead.
Ben Powell, head of the Free Market Institute at Texas Tech, discusses his newly-released book Socialism Sucks (co-authored with Robert Lawson). Powell and Lawson toured countries around the world to observe firsthand life under ACTUAL socialism—in places like North Korea and Venezuela—versus places that merely have large welfare states (like Sweden). They concluded that, well, socialism sucks.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Comedian Dave Smith's set at Mises U.
By far, the coolest thing I have ever done in my career... is coming here to the Mises University. Long live the Mises Institute!
Includes an introduction by Jeff Deist. Recorded at the Mises Institute in Auburn, Alabama, on 20 July 2019.
Both ideological anti-capitalism and economic factors contribute to the way Africa lags the rest of the world in the conquest of poverty. Original Article: "In Africa, Poverty Grows Because of the Elites' Anti-Capitalism"
Bitcoin is a shot across the bow at government’s monopoly control of money. While no one in the US appreciates the direction money is going, others are waking up.
Original Article: "Bitcoin, Gold, and the Battle for Sound Money".
Brexit and decentralization are good things, but the unfortuante truth is that harmful post-Brexit policies are equally likely to be imposed by the UK’s own government as by the European bureaucracy.
Original Article: "Brexit's Downsides Are Caused by Our Own Government".
Social Democracy fails for the same reasons communism did. It just fails more slowly.
Original Article: "Why Social Democracy is Failing Europe".
Venezuelans are defenseless against a government that runs roughshod over their civil liberties and economic livelihood.
Original Article: "How Gun Control Became an Instrument of Tyranny in Venezuela".
Government interventions in the marketplace crate side effects which distort markets and impoverish consumers. The government must then step in the "correct" the problems with even more intervention.
Original Article: "Freedom or Government Control — There Is No True 'Third Way'".
Even though security might be a necessary condition for development, it is not a sufficient one.
Original Article: "Dear Mr. President, Security Does not Create Development".
Pundits are hoping that instead of a crisis, we just get a "global economic slowdown." Given the damage done by central banks, a sustained slowdown would be a best-case scenario.
Original Article: "It's Not a Recession, It's a 'Global Economic Slowdown'".
Mises Fellow Vytautas Žukauskas discusses the experience of Lithuania transitioning to a market economy after independence from the USSR.
Recorded at the Auburn University Economics Club on March 21, 2019.
How Global Currencies Work: Past, Present, and FutureBarry Eichengreen, Arnaud Mehl, and Livia ChituPrinceton, N.J.: Princeton University Press, 2018, 250 pp.
Carmen Elena Dorobăț (c.dorobat@leedstrinity.ac.uk) is assistant professor of business and economics at Leeds Trinity University in the United Kingdom and a Fellow of the Mises Institute. Quarterly Journal of Austrian Economics 21, no. 2 (Summer 2018) full issue, click here. The present volume is an engaging and intriguing account of how global currencies, such as British sterling and the U.S. dollar, have risen to global dominance in the international monetary arena, and how currencies such as the Chinese renminbi, for example, could follow in their footsteps. Divided into twelve chapters, the work focuses primarily on the international monetary history of the 20th century, complemented by a comparatively brief account of the 19th and 21st centuries. The narrower focus of the discussion in these chapters—and most of the data supplied in each chapter’s appendices—concerns the composition of foreign reserves, i.e. the balance between holdings of pounds and dollars, and later of yen, euro, and renminbi.
From this, the authors propose to tease out a few new factual discoveries and some implications for the future of the international monetary system. More precisely, they disavow the traditional theoretical view which argues that international currency status resembles a natural monopoly that arises organically from the benefits of using the currency of the most economically (commercially and financially) powerful country in international economic transactions, i.e. a monopoly due to network returns (p. 4), and winner-takes-all and lock-in effects.
Because, argue the authors, this ‘old’ model is not supported by much of the data from the 20th century, they propose a ‘new’ view arguing that multiple currencies can be used concomitantly on an international scale, such as the pound sterling and the dollar during the 1920s. These currencies played “consequential international roles” (p. 11) demonstrating that inertia and persistence due to network effects in international transactions are not as strong as previously thought. Their updated theoretical framework is borrowed from the process of technological development, where new technologies are adopted gradually by users and grow exponentially, thus using an analogy between the workings of international currencies and those of computer operating systems.
Eichengreen, Mehl and Chitu’s discussion also seems to revolve around the interplay between the political sphere and national monetary policies on an international scale, but this insight remains latent throughout their analysis. The authors focus rather on the technical aspects of international currency status and deliberately treat political and monetary matters as separate—in parts dismissing political matters completely.
Chapters 2, 3, and 4 contain a factually rich historical narrative of the origin and development of the holding of foreign reserves, particularly before and after the First World War. Scattered throughout are little gems useful to any scholar of monetary theory, like the fact that “foreign exchange reserves had accounted for less than 10 percent of total reserves in 1880, [but] accounted for nearly 15 percent in 1913” (p. 17).
In Chapter 4 the authors provide evidence of the currency composition of foreign exchange reserves in the 1920s and 1930s that best underpin their ‘new’ view: they find that the dollar overtook sterling as the international reserve currency in the mid-1920s, and not in the 1930s to 1940s as previously thought by monetary scholars. This proves that the sterling and the dollar shared, at the same time, the status of international currency. Contrary to the traditional view, then, international currency status is not subject to a natural monopoly.
To further explain how this came about, the authors show in subsequent chapters the great intervention efforts of the U.S. Federal Reserve to ‘support the market between 1917 and 1937’ (p. 69). The Fed’s heavy-handed approach to trade credit (chapter 5) and international bond markets (chapter 6) propelled the dollar to international currency status over a short period before its collapse during the Great Depression. However—and again disproving the theoretical model—the dollar recovered its status around the time of the Second World War and completely surpassed the British sterling, showing that the status of international currency is, once lost, not lost forever. Rather, it can be regained through the coordinated efforts of a powerful central bank, which can heavily benefit from engineering this rise to global currency status. Moreover, the authors argue, other countries benefit as well from not relying on one global lender of last resort, but rather on a network of lenders. Chapters 9, 10, and 11 discuss along the very same lines the rise and fall of the yen and the euro (with the euro crisis), and the future prospects of the Chinese renminbi, respectively.
Despite the great amount of historical information contained in this book, and the ample new data available to the authors, the volume falls short of the promise in its title. The narrative does not actually show how global currencies work in a comprehensive manner, but only how the global ascension of a currency can be traced back to the behind-the-scenes machinations of a central bank. As such, the subject could have been—and was—satisfactorily treated in a half dozen journal articles published by the authors between 2009 and 2016 (p. xv).
Nevertheless, it is still interesting to note that the geopolitical history of the world can be read through the history of monetary policy, or perhaps, that the history of monetary policy is mirrored in the history of geopolitics. As the authors themselves explain, the dominance of one country’s currency in international exchanges can indicate the “singular leverage” (p. 3) of that country’s central bank over international financial relations and international politics. More importantly, the reverse is also true: the dominance of one country in international politics is a good indicator of the international status of its currency throughout history.
However, because the authors choose to separate the political causes and implications of monetary policies from their economic aspects, the book ultimately provides a rather hesitant and unassuming analysis that makes it feel lackluster. Two questions arise that remain unanswered: Why do central banks benefit from their currency becoming global, if not by preventing domestic inflation from reflecting in their exchange rate and foreign reserves? And why do other countries benefit from having multiple lenders of last resort (multiple reserve currencies), if not by accomplishing the same disguise? Without an answer to these questions, or even an acknowledgment of their existence, the book appears to be a collection of great insights whose potential remains unrealized.
Let me briefly illustrate this by contrasting Eichengreen, Mehl, and Chitu’s analysis of the momentous change in international monetary relations at the Genoa Conference in 1922 with the one put forward by Mises and Rothbard.
The authors discuss in chapter 3 (From Jekyll Island to Genoa) the leading countries’ efforts to restore the gold standard in the 1920s whilst avoiding the deflationary repercussions following the period of great inflation during the First World War. According to the report of the financial commission,
the Genoa resolutions called for negotiating a convention based on the gold-exchange standard with a view to “preventing undue fluctuations in the purchasing power of gold”… The idea was to create an environment in which ‘credit will be regulated… with a view to maintaining the currencies at par with one another (pp. 38–39).
Eichengreen, Mehl and Chitu view this solely as an open effort of Great Britain to recover the lost dominance of the pound sterling, and the otherwise innocent desire to renounce the golden fetters of the pre-WWI gold standard. While discussing monetary competition between London and New York, they fail to pinpoint the nature of this competition, and avoid answering the question whether the new reserve system was “badly designed or badly managed” (p. 41).
In the system’s design lurked a fateful goal: the continued inflation of money supplies. Coordination efforts among central monetary authorities in reaching this goal was a first step toward abandoning the commodity money system. While the authors only seem to skirt around the issue, Rothbard (2010, pp. 94–95) explicitly argued that Great Britain wanted to establish
a new international monetary order which would induce or coerce other governments into inflating or into going back to gold at overvalued pars for their own currencies, thus crippling their own exports and subsidizing imports from Britain. This is precisely what Britain did, as it led the way, at the Genoa Conference of 1922, in creating a new international monetary order, the gold-exchange standard.
Mises had explained this need for policy coordination in a similar way:
Various governments went off the gold standard because they were eager to make domestic prices and wages rise above the world market level, and because they wanted to stimulate exports and to hinder imports. Stability of foreign exchange rates was in their eyes a mischief, not a blessing (2010a, p. 252).
If the various governments and central banks do not all act in the same way, if some banks or governments go a little farther than the others… those who expand [the money supply] more are forced to return to the market rate of interest in order to preserve their solvency through liquidity; they want to prevent funds from being withdrawn from their country; they do not want to see their reserves in… foreign money dwindling (Mises, 2010b, p. 77).
The crucial issue here, therefore, is not the prominence of one currency or another, but that this prominence was engineered to speed up the renunciation of the gold standard, and greatly enlarge the freedom of all central banks to inflate money supplies. The Genoa Conference had thus paved the way for the next steps: the Bretton-Woods conference of 1944 and the “closing of the gold window” in 1971. This process did not unfold without problems, but it created the auspicious environment for inter-governmental monetary agreements, and allowed the U.S. and other powerful nations to employ a “policy of benign neglect toward the international monetary consequences of [their] actions” (Rothbard, 2010, p. 101). This further removed many obstacles to creating “the ideal condition for unlimited inflation” (Rothbard, 2009, p. 1018)—a system mimicking a global fiat currency as closely as possible.
In this light, the desire to engineer global currency status for one nation’s currency is open to another, more somber interpretation, which highlights the pressing dangers of international fiat money. According to Mises (2010b, p. 254):
Under a system of world inflation or world credit expansion every nation will be eager to belong to the class of gainers and not to that of the losers. It will ask for as much as possible of the additional quantity of paper money or credit for its own country.
It is not usual in a book review to criticize the authors for failing to achieve something they did not explicitly set out to accomplish. And yet, How Global Currencies Work: Past, Present, and Future is wanting in both its depth and breadth of analysis. Nonetheless, the abundance of data on the composition of foreign exchange reserves the authors make available is impressive, and their accomplishment in this regard must be commended. The book is easy to read, even though largely technical in nature and much too narrow in its focus.
I remain hopeful that this project will be followed by another, more extensive investigation into the workings of global currencies. An alternative analysis of this data, focused on the differences in kind between commodity and paper money, would provide a much deeper and richer illustration of how global fiat currencies are made to work to serve the political purposes of one powerful nation or another. This would indeed illuminate much of the dark history of monetary policy over the last three centuries.
What's the biggest and most dangerous financial bubble? Sovereign debt issued by profligate governments. And unlike stocks or corporate debt, government bond bubbles harm millions of ordinary people when they burst.
Economist Daniel Lacalle joins Jeff Deist to figure out the bizarro world of the bond bubble: negative interest rates, anemic rate spreads between government bonds and "high yield" bonds, and central banks as the unseemly buyers of last resort. They discuss the Fed's interest rate hikes, Jerome Powell's focus on data, the US housing market, and why all of us have a stake in seeing central bank balance sheets shrink.
Related article: Daniel Lacalle on the Bond Bubble
It turns out the best book on Bitcoin was written by someone who thinks the cryptocurrency is not a particularly good form of payment, not particularly anonymous, and not a good investment for most people. Saifedean Ammous, professor of economics at Lebanese American University, wrote The Bitcoin Standard to cut through the hype and examine crypto technology through a rigorous Austrian lens. The result is a phenomenal book: pro-gold, pro-Mises, and optimistic about the crypto revolution's goal of creating truly private money.
This is the guy you should listen to when it comes to Bitcoin. He sits down with Jeff Deist for a thorough and entertaining interview.
Daniel Lacalle joins Jeff Deist to discuss how and why central banks are trapped, stuck with ultra-low interest rates and expansionary policies that produce astonishingly little real growth. This is a hard-hitting and sober look at what rising interest rates will mean, why academics and bankers are so clueless about the monetary side of financial markets, and why Austrians need to offer real-world solutions instead of ideology.
Nomi Prins previews her talk at our event in Ft. Worth this weekend, based on her new book Collusion: How Central Bankers Rigged the World—a damning indictment of how the Federal Reserve bullied other central banks and bailed out Wall Street in the wake of the 2008 financial crisis.
Join us in Texas this Saturday to meet Ms. Prins and receive an autographed copy of Collusion!
The Ludwig von Mises Memorial Lecture, sponsored by Yousif Almoayyed. Presented at the Austrian Economics Research Conference at the Mises Institute in Auburn, Alabama, on 24 March 2018.
North Korea is not the poorest country on earth, but it is undoubtedly the most miserable. Michael Malice has been there, and joins Jeff Deist to discuss the bizarre economics of life in a country with virtually no outside trade. China and Russia provide critical imports, especially oil and grain, without which the DPRK would truly grind to a halt. But this is foreign aid disguised as trade for worthless North Korean "currency." Beyond that a depressing form of autarky reigns, whereby the Central People's Committee creates economic plans that produce nothing but starvation and crumbling concrete. This is a fascinating conversation about "prison camp economics," and how concepts of exchange and calculation scarcely apply where market goods, technology, and price information are almost nonexistent. North Korea is a stark reminder of where omnipotent government leads.
Photo of Michael Malice in video graphic is by Matt Wyzykowski.
As Joseph Stiglitz sees matters, the euro suffers from a fatal flaw. The euro is the currency of 19 European countries; and common money blocks efforts of nations that, according to Stiglitz, need to devalue their currencies. More generally, attempts to restrict government control of the economy arouse the wrath of this implacable enemy of the market.
As he explains, “When two countries (or 19 of them) join together in a single-currency union, each cedes control over their interest rate. Because they are using the same currency, there is no exchange rate, no way that by adjusting their exchange rate they can make their goods cheaper and more attractive. Since adjustment in interest rates and exchange rates are among the most important ways that economies adjust to maintain full employment, the formation of the euro took away two of the most important instruments for insuring that.”
This limitation on government policy is more than a theoretical possibility. The Troika (European Commission, European Central Bank, and International Monetary Fund), influenced by nefarious German bankers, insists on “sound” money, much to the distress of Greece and other countries in need of economic stimulus. Making matters worse, the Troika demands that these countries raise taxes and slash government services, in order to reduce their huge debts. If these demands are refused, the Troika threatens to cut off further loans to the ailing governments.
If the euro is not to Stiglitz’s liking, the gold standard is even worse: “America’s depression at the end of the 19th century was linked to the gold standard ... with no large discoveries of gold, its scarcity was leading to the fall of prices of ordinary goods in terms of gold — to what we today call deflation. ... And this was impoverishing America’s farmers, who found it difficult to pay back their debts. ... So too the gold standard is widely blamed for its role in deepening and prolonging the Great Depression.”
Stiglitz fails to note that many of the strongest defenders of the gold standard, e.g., Jacques Rueff, strongly condemned the gold exchange standard that prevailed in the 1920s. But never mind his historical mistake; let us concentrate on the most essential issue. Why does Stiglitz think that people cannot adjust to falling prices? Why must government control the money supply and, more generally, regulate the free market?
Here we arrive at the key to Stiglitz’s thought. He is a Nobel laureate, according to many the most important economic theorist of his generation, and he claims to have proved that an unregulated free market must almost inevitably fail. “There is an abstract theory (called the Arrow-Debreu competitive equilibrium theory) that explains when such a system of unrestrained competitive markets might work and lead to overall efficiency, it requires markets and information that are far more perfect than that which exists anywhere on this earth. ... The circumstances that they [Arrow and Debreu] identified where markets did not lead to efficiency were called market failures. Subsequently, Greenwald and Stiglitz showed that whenever information was imperfect and markets incomplete — essentially always — markets were not efficient.”
Stiglitz’s criticism of the market rests on a false assumption. General equilibrium theory describes an artificial situation irrelevant to the actual working of the market. (The conditions resemble what Austrian economists call the evenly rotating economy [ERE].) On the free market, the wish to earn a profit induces producers to meet consumers’ demands. We grasp how this process works through simple commonsense reasoning. As Mises explains, “This state of equilibrium is a purely imaginary construction. In a changing world it can never be realized. It differs from today’s state as well as from any other realizable state of affairs ... it was a serious mistake to believe that the state of equilibrium could be computed, by means of mathematical operations, on the basis of the knowledge of conditions in a nonequilibrium state. It was no less erroneous to believe that such a knowledge of the conditions under a hypothetical state of equilibrium could be of any use for acting man in his search for the best possible solution of the problems with which he is faced in his daily choices and activities” (Mises, Human Action).
Stiglitz would no doubt respond with derision. For him, mathematical models trump commonsense reasoning. As he remarks elsewhere, “The standard theorems that underlie the presumption that markets are efficient are no longer valid once we take into account the fact that information is costly and imperfect. To some, this has suggested a switch to the Austrian approach, most forcefully developed during the 1940s and later by Friedrich Hayek and his followers. They have not attempted to ‘defend’ markets by the use of theorems. Instead, they see markets as institutions that have evolved to solve information problems. According to Hayek, neoclassical economics got itself into trouble by assuming perfect information to begin with. A much better approach, wrote Hayek, is to assume the world we have, one in which everyone has only a little information. ... The new information economics substantiates Hayek’s contention that central planning faces problems because it requires an impossible agglomeration of information. It agrees with Hayek that the virtue of markets is that they make use of the dispersed information held by different participants in the market. But information economics does not agree with Hayek’s assertion that markets act efficiently. The fact that markets with imperfect information do not work perfectly provides a rationale for potential government actions” (econlib.org/library/Enc/Information.html). Stiglitz “gives it away” in his last two sentences. The free market is deemed faulty because it falls short of the artificial standard of general equilibrium “efficiency.” Where the free market is concerned, Stiglitz is a hanging judge.
Stiglitz has another argument to deploy against the free market, one that does not rely on the standard of competitive equilibrium. Keynes has shown that the free market needs to be propped up through government spending in order to maintain full employment. “An economy facing an economic slump has three primary mechanisms to restore full employment; lower interest rates, to stimulate consumption and investment; lower exchange rates, to stimulate exports; or use fiscal policy — increasing spending or decreasing taxes. ... I have just described the standard Keynesian theory on economic downturns.” It is significant that here Stiglitz does not require a mathematical model that proves Keynesian stimulus policies must work. What happens, for example, if people fail to spend the money they receive to stimulate consumption — in the manner Keynesian theory assumes?
But why might fiscal stimulus not work? Here Benjamin Anderson and Robert Higgs, among others, have a convincing response. Uncertainty about what the government might do leads investors to lack confidence. If so, Keynesian stimulus will fail. What is needed instead is a “business-friendly” policy from the government. Stiglitz’s objection to this line of reasoning should by now be obvious. No mathematical model supports it: “There is a persistent view that confidence can be restored if governments cut deficits (spending), and with the restoration of confidence, investment and the economy will grow. No standard econometric model confirmed these beliefs.” Stiglitz does not point out that there is substantial historical evidence, e.g., in a classic paper by Robert Higgs that uncertainty about government policy does indeed inhibit investment.
For Stiglitz, the principal enemies are the “market fundamentalists,” but he has odd views about what support for the free market entails. “Faith in markets by neoliberals not only meant that monetary policy was less needed to keep the economy at full employment; it also meant that financial regulations were less needed to prevent ‘excesses.’ To conservatives, the ideal was ‘free banking,’ the absence of all regulations.” But the free market ideal, as described by Mises and Rothbard, is very far from a system of unlimited private creation of fiat money. If the “excesses” Stiglitz mentions refer to speculative loans made possible by fractional reserve banking, the expansionist policies he supports lead to much greater instability than “market fundamentalism” tolerates. One wonders, further, why the Troika’s demands that governments raise taxes to pay off large debts incurred by these governments are regarded as expressions of “market fundamentalism.” It would seem more natural to regard these demands as one government program designed to remedy the defects of another.
Stiglitz does not consider Mises and Rothbard worthy of discussion. “Today, except among a lunatic fringe, the question is not whether there should be government intervention but how and where the government should act, taking account of market imperfections.” He almost without exception proposes interfering with the free market, without demonstrating that the free market does not work. He agrees with the Queen in Alice’s Adventures in Wonderland. “Sentence first — verdict afterwards.”
David Gordon is Senior Fellow at the Mises Institute, and editor of The Mises Review. Contact David Gordon
A World in Disarray: American Foreign Policy and the Crisis of the Old Orderby Richard HaassPenguin Press, 2017
Richard Haass is a foreign policy professional of great knowledge and experience. He has served as director of the Policy Planning Staff of the State Department; and for the past 14 years, he has been president of the Council on Foreign Relations. No one who reads this book can doubt the author’s thorough knowledge of foreign affairs, but unfortunately, he lacks a clear framework for analysis. As a result, he offers confused and contradictory advice. He cannot make up his mind and winds up dithering, overwhelmed by the sheer complexity of foreign policy. Given a choice between A and not-A, Haass all-too often wants to choose both.
Haass is well aware that aggressive actions often make matters worse. As I write, concern over North Korea’s nuclear missiles dominates the news, and calls abound for a preemptive strike against that country. Haass notes that the problem is one of long standing and points out the dangers of preemption that arose on an earlier occasion: there “was the strong possibility that such an attack could lead to a war on the peninsula, something very much opposed by the two U.S. allies that would bear the brunt of any North Korean military retaliation, namely, South Korea and Japan. Such a war would have required a costly U.S. military response given U.S. alliance commitments and North Korean military capabilities.”
Applying this needed note of caution to the present crisis, Haass makes a conclusive case against a preventive strike: “First, such an attack would necessarily be based upon incomplete and possibly inaccurate information; the case of Iraqi ‘WMD’s’ is a warning here. Second, it is impossible to assume that any preventive attack would in fact accomplish what it set out to do, as the systems are increasingly well hidden and protected. Third, a preventive attack would be an act of war, likely to trigger a retaliatory response.”
Is it irrational for North Korea to refuse to halt its nuclear program? Though he does not apply the point to the Korean crisis, Haass offers a suggestive parallel: “The ouster of Gadaffi also sent the unfortunate message that giving up nuclear weapons could be dangerous to your political health. In a matter of months the Libyan leader went from the poster child of responsibility in the proliferation realm to war criminal.”
So far, so good. Haass is fully aware of the risks of intervention. Nevertheless, he regrets that President Clinton in the 1990s chose to negotiate rather than to strike. “A moment for a preventive military strike that could have destroyed much of North Korea’s existing nuclear capacity was allowed to pass.” What about the costs of intervention, ably presented by Haass on the previous page? Why would the gains from intervention have then outweighed them? Haass leaves us in the dark.
The same pattern appears elsewhere. Speaking of the 2003 Iraq War, Haass says, “The motive that most captured the imagination of the upper reaches of the George W. Bush administration, though, was the belief that a post-Saddam Iraq would become democratic, setting an example and a precedent that the other Arab states and Iran would have great difficulty resisting. The road to a transformed Middle East, it was widely believed, ran through Baghdad.”
After informing us that he did not share this view, Haass remarks: “Contrary to what was hoped for, democracy was dealt a major setback throughout the region as the ideal of democracy had come to be associated in the eyes of many in the Arab world with chaos. ... Iran, long since recovered from its decade-long war with Iraq and no longer tied down, much less balanced by a strong hostile Arab regime, was in many ways the principal strategic beneficiary of the war, as it was freed up to promote the interests of the Iranian state and Shia populations. The 2003 Iraq War violated any number of strategic tenets, beginning with the Hippocratic oath: First do no harm.”
Do we not have here an excellent argument for the traditional American policy of nonintervention, so ably espoused by Ron Paul? The consequences of intervention virtually always fail to attain their goals; and by staying out of foreign quarrels, we at least avoid worsening the situation by ill-advised action.
Unfortunately, Haass does not rest content with such wisdom. He enthusiastically supports the 1990 Gulf War against Iraq, even though that eventually led to the disaster after 2003 he rightly condemns. More generally, he tells us, “The lesson to be derived is not that acting is always right — in the case of the 2003 Iraq War, to name just one example, it surely was not — but rather that not acting can be every bit as consequential as acting, and, as a result, needs to be examined with equal rigor.”
It is not clear how Haass could be in a position to know that his conclusion is true. If, as he says, “every action that is examined always entails drawbacks ... [and] the hope that imperfect options become less imperfect with the passage of time is almost always illusory,” why is he so confident that there is sometimes a case for costly intervention abroad?
The same pattern of selecting both of two conflicting alternatives is present at a more general level. Haass contrasts a Wilsonian approach to international affairs, of which he is rightly skeptical, with a realistic approach respectful of national sovereignty. The Wilsonian view, “often makes shaping the internal conditions or nature of other societies the principal objective of what this country should do in the world. The purpose can be to promote human rights or democracy or to prevent human suffering.”
Haass subjects to devastating criticism the notion that the United States ought to spread democracy throughout the world. “One problem, though, is that bringing democracy about elsewhere is easier said than done. ... Closely related to this argument is that outsiders are normally limited in what they can do to affect democratic prospects. ... As we have seen all too often of late in the Middle East, the alternative to a flawed political system can be an even more flawed political system ... incomplete or what Fareed Zakaria terms ‘illiberal’ democracies can be dangerous both to those living in the country and to others.”
Given this assault on Wilsonianism one would expect Haass to favor a healthy respect for national sovereignty: we ought to avoid interfering in other nations’ affairs. But as always, when the specter of nonintervention looms, Haass flees in panic. The “realistic” policy he supports cannot readily be distinguished from the Wilsonianism he rejects. Instead of traditional respect for national sovereignty, Haass writes, “I am suggesting something fundamentally different, the need to develop and gain support for a definition of legitimacy not just the rights but also the obligations of sovereign states vis-à-vis other governments and countries. The world is too small and too connected for borders to provide cover for activities that by definition can affect adversely those who live outside those borders. I call this concept ‘sovereign obligation.’”
Haass acknowledges that his approach is not fully in the realistic tradition but merely overlaps it; and it soon transpires that sovereign obligation allows almost unlimited intervention. We learn, e.g., that where “climate change” is concerned, “in extremis, penalties, including sanctions, might need to be introduced against governments acting irresponsibly.” Also, the United States must formulate its economic policies in consultation with other nations, taking their needs into account. Human rights and regulation of cyberspace might also require limits to sovereignty. And all of this is supposed to be the alternative to Wilsonianism!
Why does this experienced professional, so well aware of the problems of interventionism, prove unable to tear himself away from it? A hint at the answer lies in the title of his book. For Haass, the world is in “disarray.” During the Cold War, an international order prevailed, albeit one based on mutual nuclear deterrence between the United Sates and the Soviets; but now the world is chaotic. The United States should not strictly limit its objectives to defense against direct attack. Rather, our responsibility is to create a new inter-national system. It is hardly a surprise that the head of the Council on Foreign Relations, an organization founded in 1921 to propagandize against “isolationism,“ should adopt this view. Those of us who do not want to “busy giddy minds with foreign quarrels” will shun “sovereign obligation” and instead support nonintervention.
Our guest this week is Caitlin Long, president and chairman of the smart contracts platform company Symbiont. Caitlin is a twenty-year Wall Street veteran, and now she's turned her focus toward using blockchain technology to revolutionize the business world.
Caitlin and Jeff discuss how blockchain technology could vastly reduce the role of middlemen in all kinds of everyday transactions, obviating the need for a lot of regulation in the process. Who needs lawyers and endless contract negotiations when the element of distrust between parties can be mitigated? Will the blockchain eliminate the need for "trust agent" intermediaries in real estate and M&A transactions? What will true peer-to-peer exchange mean for banks and stock exchanges? And will we even recognize the financial services industry in 20 or 30 years?
When Alexis de Tocqueville set forth his observations on American democracy, he began his story with a description of township government. “It is man,” he said “who makes monarchies and establishes republics, but the township seems to come directly from the hand of God.” The oft-revered, sometimes maligned Frenchman’s instincts were sound on this point: American political institutions were harvested from the ground up, from local communities; all of American life, religious institutions, and social institutions were organized on a regional and — if one must use this unappealing term — populist basis. This made for a political culture that may not have appealed to the social prejudices of foreign observers more used to the corrupt glamour of heavily centralized states.
But the diverse American patchwork of regional, localized, and populist traditions cemented in place the blueprint of what would emerge as the uncanny nature of the American republic, one unlike history had ever seen: the parochial at the foundation of the imperial; the isolated town hall as the basis of the world’s mightiest and most far-flung state. In short, the industrious and free experimental country that was, in effect, preprogrammed to be “globalist” in scope and scale was by nature a country viscerally repulsed by the idea of the statist superstructure.
It is thus that the appeal of Donald Trump, in his graceless way, has tapped into this core of the American character. His electoral victory represents not so much a movement as it does a revival; a reawakening of the energetic ideal of local power, regional power, sovereign power against ghoulish One-World omnipotence.
What Is Globalism?To analyze what this “globalist” phenomenon is that Trump has made the centerpiece of his wrath, one must first define globalism as a phenomenon. In general, globalism stands for the stateless State; for centralized power without a center — without a pivotal figure of responsibility or moral authority — made up of floating and interchangeable parts everywhere and nowhere at once. It is a network of central banks, international political and monetary institutions like the United Nations, the IMF, the World Bank; of academic conformity, media conformity and cultural conformity spread thick and impenetrable.
Trump’s stance is therefore nothing short of revolutionary. While he wobbles on many of his most outspoken policy positions — whether NATO, Israel, or Russia — there are three positions the new president announced that, somewhat ironically, are the most significant to his anti-global agenda and yet which have received the least attention in the media. The first was his statement shortly after the election that the United States would no longer engage in “reckless interventionism.” The second was his repeated skepticism of the Federal Reserve and his being one of the few political leaders to speak out against the dangers of a “bubble” economy. Third, and most importantly, is his remark that the nation-state must return as a force in world affairs — a statement no less a philosophical than a political manifesto. Where these ideas have most caught on is where they are needed most: in Europe, where the mood is changing as a result of Trump’s and where his anti-globalist message has hit the hardest and will have the most lasting impact.
Trumpism in Europe“Fake elites create their own realities” — so said the billionaire businessman turned politician with a heartfelt streak of the populist and an occasional motor-mouth to get him into hot water. He transformed an entire political landscape while campaigning for the rights of the domestic worker versus global labor, against the EU, against international interventionism and for strongly vetted immigration as part of a maverick agenda to shake up and stay aloof of the post-war international system.
Yet this is not Trump, but rather his wealthier Swiss counterpart — Christoph Blocher —who anticipated the new American president by more than a decade. Blocher, who is now vice president of the Swiss People’s Party (SVP) and its former head through 2007, rose, Tillerson-like, from lowly student trainee to CEO of the Swiss plastics maker EMS Chemie. He is the best example of the anti-globalist, Trump spirit that is also spreading throughout Europe.
“People feel powerless against those who rule them, and for them, Trump is a release valve,” Blocher said in an interview after the November elections in the US. “The unexpected result ... should give pause to those who are in power around the world.”
This coming year, the Netherlands, France, and Germany — and possibly Italy — will hold elections in which debate is likely to be driven by populist parties over issues including immigration. In Switzerland, Blocher has presided over certain campaigns that invited EU wrath for their severity. These included the 2009 Swiss referendum against building of minarets on mosques, which captured 57.5 percent of the national vote; the initiative to expel foreign criminals, garnering 52.3 percent, and the Stop Mass Immigration Initiative, which passed at 50.3 percent.
Blocher is one among many anti-globalist Europeans who have taken the stage in the past several years, a spotlight that is joined by the likes of Marie Le Pen of France, Geert Wilders of the Netherlands, the rise of the ‘Alternative for Germany’ party; Viktor Orban of Hungary, not to mention the Brexit vote itself. Essentially, the EU experiment is over because it was never wished for in the first place and Trump is a kind of transatlantic spiritual horseman to hasten in the apocalypse.
It has been a long time coming: just over a decade ago, the French voted down the European Constitution Treaty, which was supposed to replace existing EU treaties and institute key changes such as the appointment of an EU foreign minister. This was followed by an even stronger “No” in the Netherlands three days later. These “No” votes succeeded where the Danish 1992 “No” to the Maastricht Treaty and the Irish 2000 “No” to the Treaty of Nice had failed, forcing EU leaders to come up with a new reform treaty, the Lisbon Treaty.
Europe never learned from those lessons, but Trump did: the Brexit referendum of last July emphasized a key reality of twenty-first-century politics, that the divide is not so much Left versus Right but one of globalists versus localists.
On the one hand are the global financial authorities, the EU, the banks and big business and many pro free-trade economists; on the other a strange combination of radical leftists opposed to austerity and ‘neoliberalism’ (however defined), as well as nationalists and conservatives. The difference these days is that the former also go in for utopian ideals, whether it’s the euro or immigration, because they ignore the social implications of trendy group-think and think only in terms of economics not history.
Part of the problem is that Europhiles often confuse the EU with the original post-war European project, which was based on the concepts of peace, harmony, and social justice. In the wake of World War II and the Holocaust, the European project set out to build a united continent. On the eve of the euro launch in January 1999, Germany’s finance minister Oskar Lafontaine poetically spoke of “the vision of a united Europe, to be reached through the gradual convergence of living standards, the deepening of democracy, and the flowering of a truly European culture.”
Instead, Europe has been transported light years from this utopian vision. After several years of austerity, the Eurozone crisis has escalated into a social catastrophe. The cost has been borne out in terms of jobs, wages, economic growth, and blighted lives. Currently, there are almost 21 million unemployed people in the EU. For its part, the Maastricht criteria were intended to facilitate the convergence toward the euro and, beyond this, to ever closer union among members. In order to qualify for the euro currency, both Greece and Italy turned to the likes of Goldman Sachs, JP Morgan, and other banks. The banks advised them to mask debts using derivatives. The rest, as they say, is history.
The End of an Era?As the London Spectator recently observed, Trump’s attitude to Europe is nothing short of revolutionary. With a few words in Trump Tower, he seems to have torn up decades of US State Department policy. “People want their own identity,” he says, “so if you ask me, others, I believe others will leave.” He believes, as has been mentioned, in nation-states, and he does not see the EU as representative of the continent. In fact, he says, it is “basicallya vehicle for Germany.”
It’s hard to overstate the effect of these words on the EU. The whole project of the European Union was always nurtured with American backing: since the Marshall Plan, US policy has been to consolidate Europe’s strength. America used trade and NATO to make the continent a bulwark against the East. Often, this meant putting off or sacrificing America’s short-term economic gains in the interests of security and world peace.
Trump has no time for that. He believes that the world has changed, and he wants better deals for America now, and Europe — a real set of allies — is paying attention.
Ryan McMaken interviewed by Daniel Brigman on The Power Hour radio show. Produced by www.gcnlive.com
Topics for this wide ranging interview include: booms and busts, private money, bitcoin, central banks, Brexit, protectionist policy under Trump, and trade barriers.
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?
Members of the European political and media establishment seemed to be sure that the 45th president of the United States would be Hillary Clinton, or at least they were desperately hoping so. The days after the election one could hear clamor of indignation from top journalists and politicians alike. It almost felt as if the European project had lost shoulder to shoulder with Clinton, now that America, Europe’s most powerful ally, would be ruled by an “inhuman right-wing populist,” an outspoken critic of the European Union, and a sympathizer of the UK Independence Party. And after all he says “America first.” For the European establishment, this is an outrageous position to hold for an American president.
General secretary of the ruling Socialist Party in France, Jean-Christophe Cambadélis, has compared Trump to the Front National’s top candidate Marine Le Pen and noted that the French Left knew full well about the challenges ahead. French prime minister Manuel Valls emphasized that Europe needs to close its ranks, take responsibility and respond to the events on the other side of the Atlantic Ocean, adding that he does not believe in “the triumph of simplicity and demagoguery.”
German minister of foreign affairs Frank-Walter Steinmeier who called Trump a “preacher of hate” during the election campaign stated shortly after the outcome was certain that “American foreign policy will now become less predictable,” but that Germany “should not sit mesmerized like the rabbits before the snake.” Germany “should remain self-confident and needs to preserve its culture of public and political discourse.” But who knows to what kind of cultivated discourse he was actually referring?
Indeed, Donald Trump was compared to Adolf Hitler in German television news at one point in his campaign when he had already far exceeded the expectations of most pundits. But, hardly anyone could imagine him becoming the next US president. On the very evening of November 9 when the unthinkable was taking shape, the consortium of public broadcasters in Germany (ARD) presented a survey according to which only 4 percent of the German electorate would have voted for Trump. One wonders whether this representative survey was conducted exclusively among the employees ofthe consortium.
When the Austrian presidential candidate and populist Norbert Hofer lost to Alexander Van der Bellen in early December, the EU establishment had its first moment of relief since the Brexit vote in the United Kingdom last June. “Hofer has hoped for the Trump effect in vain” ARD’s news anchor declared somewhat triumphantly at the evening of the election.
However, at the same time the Italian people voted against President Matteo Renzi’s proposal to change the Italian constitution, which led to his resignation and potentially a chance for the Eurosceptic Five Star Movement around comedian Beppe Grillo to form the new national government after early elections. This means that the three largest countries of the Eurozone and the EU (UK excluded), Germany, France and Italy, will hold national elections within the next year. The Italian daily La Stampa wrote that the referendum “tells the same story as Brexit and Trump.”
Hence, it is pretty obvious that almost all political events and ongoing developments in Europe are now interpreted in light of Trump’s victory. There is no question that Trump already has had an impact on European politics regarding strategy and rhetoric.
Looming Economic Realities in EuropeThe most important issues, after the currency and debt crisis has mysteriously vanished from the scene for a time, is immigration, the stabilization of the Middle East, and how to react to millions of people coming into Europe.
Trump has such a significance for the political regime of the EU, among other things, because he was elected while openly advocating positions not expected to be capable of winning a majority, either in the US, and most certainly not in Europe. It runs completely against the position that the US government under Bush and Obama has taken, that Clinton sought to continue, and that the political leadership of the EU still wholeheartedly advocates and that is embedded in a broader political program. It is a program that mainstream media is vigorously promoting by emphasizing the benefits of open borders, diversity and multiculturalism, the importance of humanitarian assistance, as well as an official responsibility of the West to improve living conditions in the developing nations of Africa and Asia. That the latter so regularly turns into the very opposite in the form of aggressive military interventions is deliberately hushed up. Trump’s anti-interventionist positions in foreign policy have, against all odds, successfully challenged the globalist line of approach.
After an initial period in which Trump and his supporters were arrogantly ridiculed, a good dose of European superiority complex, vis-à-vis the US, was breaking through, and the general tenor has changed. In an act of self-defense, European political and media elites have desperately tried to make a bogeyman out of Trump and the movement behind him as they saw the broader implications it might have.
Trump was admittedly courting some of the slogans used against him, but most of them are just hysterical exaggerations or allegations. And, while the European establishment claims a position on the moral high-ground, even the most promising aspect of Trump’s advocated isolationism from a humanitarian viewpoint — withdrawal from foreign military interventions — is turned against him. It is argued that Trump will abandon Europe and that European countries will have to substantially increase their own military budgets in the future.
The fact that the aggressive foreign policy of the West under the leadership of the US over the past decades has triggered the destabilization of the Middle East and Northern Africa in the first place, and hence reinforced the immigration crisis that Europe is facing right now, is not critically highlighted at all.
Trump Will Be an Excuse for More CentralizationThe EU establishment has obviously itself contributed to the problems it now tries to exploit in order to further centralize the political power structure of Europe. Trump will serve as a scapegoat that left Europe alone in the midst of an international conflict and humanitarian crisis. This narrative was spread before Trump had been in office for a single day, and it will be used as a justification for more intrusive EU policies if the peoples of Europe let it happen. However, chances are that the national governments all over Europe will face ever stronger opposition in the near future, if they are not directly replaced. Unfortunately, these opposition movements are not pushing in the right direction in every respect. But, all our problems will not be solved with next round of national elections anyway. They are much more fundamental and ideological. They are of a long-term nature.
Karl-Friedrich Israel is a lecturer at the University of Angers; a PhD candidate studying with Jörg Guido Hülsmann at the University of Angers; and a 2016 Mises Fellow.
Our guest this weekend is John Tamny, a writer and editor at Real Clear Markets and Forbes. Jeff Deist and John dissect Trump's economics, especially Trump's reflexive trade protectionism and fetish for exports over imports. They also talk about the policies Trump might get right, especially when it comes to the Fed.
John has a great Misesian take on everything the new administration might mean — pro and con — so don't miss this interview.
Justin Raimondo, editorial director of Antiwar.com, joins Jeff for a great discussion of what Trump's election really means for libertarians. Does 2016 mark the end of globalism's inevitability, or are Brexit and Trump mere speed bumps for progressive elites? Does Trump represent a real threat to the War Party, or will he succumb to neoconservative control over foreign policy? What are the best-case and worst-case scenarios for libertarians in the first year of a Trump administration, and will his cabinet picks contain any happy surprises?
Nobody is better suited to untangle the Trump uprising than the no-holds barred Mr. Raimondo. Stay tuned.
Click here to read Justin's article "How We Will Win" on Antiwar.com.
Our own Senior Fellow Dr. Mark Thornton recently appeared on Press TV to make the libertarian case for real free trade, as opposed to unholy negotiated trade deals like the Trans-Pacific Partnership. Brent Budowsky, a journalist for The Hill newspaper in Washington DC, also joined the show to present a pro-union, left-populist perspective. They both conclude that complex trade schemes, which often involve creating supra-national regulatory bodies, are bad for America and the economy — but for totally different reasons.
Our friend and former member of the European Parliament Godfrey Bloom rejoins us for a lively postmortem on the Brexit vote. It's been two months, and the sky hasn't fallen in the UK. In fact, markets are up—and new Prime Minister Theresa May promises that a withdrawal treaty will be negotiated in due time. Mr. Bloom dismisses this, pointing out that her new administration could act swiftly and unilaterally. He also point out that the Germans are unlikely to deny BMWs to British buyers, just as French wineries are unlikely to suspend shipments of champagne across the Channel. In other words, trade can be accomplished without bureaucratic help. All the common market needs is buyers and sellers, not complex treaties and byzantine regulations.
How did "Leave" forces, overwhelmingly represented in the British countryside, defeat the bureaucratic class in London? And what does Brexit mean for the march of globalism generally? Mr. Bloom is an engaging speaker and a thoroughly pro-trade Rothbardian.
Two of the Institute's Fellows—a Frenchman and a German—join Jeff Deist for a freewheeling discussion of the political and economic situation in Europe.
Can Austrian economics revive Europe's liberal tradition, or will statist impulses thwart any hope for liberation from Brussels? And, can the Mises Institute and its fellow travelers have an impact on academia on the continent? Sascha and Louis see hope for optimism, despite the bad news that seems to dominate European media.
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.
Ryan McMaken, editor of Mises.org, joins Jeff to figure out what the shocking Brexit vote really means. Are secession movements and political decentralization always good for liberty? Why do some libertarians disagree? Why does the Left love centralized state power, when in fact progressives could enact their entire agenda here and now—if only in certain states like California? Is a growing tide of anti-globalist sentiment necessarily bad for Hillary and good for Trump? And, will Brexit lead to much bigger implosions, such as an actual Eurozone nation leaving the EU and resurrecting its old currency?
For further reading see Murray Rothbard's journal article "Nations by Consent: Decomposing the Nation-State" and Ryan McMaken's book Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.
The UK is poised to vote on Brexit next week, deciding for the first time since 1975 whether to leave the European Union. The Brexit vote mirrors populist, nationalist, and anti-globalist trends around the world, and if successful it raises serious questions about the viability of the Euro itself. The whole world is watching, and markets are nervous: rarely is globalism so directly challenged.
Here to discuss Brexit is Godfrey Bloom, the great un-PC British politician who was a member of the European Parliament—where he sometimes quoted Rothbard to an uneasy audience of continental technocrats. Jeff Deist and Bloom discuss the odds of whether the "leave" campaign will be successful, whether the ECB's failure to prevent sovereign debt crises in Europe influences the vote, whether Brexit would cause actual Eurozone countries to follow suit, and what Mises had to say about theoretically taking self-determination and secession down to the individual level.
For further reading, see "The UK's EU referendum: All you need to know" by Brian Wheeler and Alex Hunt. Also, watch Godfrey Bloom cite Murray N. Rothbard in "The State is an Institution of Theft".
It seems like every other news story about the International Monetary Fund (IMF) reflects (at least in passing on the Fund's uneven treatment of developed and developing countries. Established at the Bretton Woods conference to oversee the system of fixed exchange rates prevailing in 1944, the Fund’s mission has gradually expanded to promoting economic growth, macro-economic stability, and poverty reduction.
Yet no one seems convinced anymore that the Fund can actually accomplish these goals. To the contrary, many now argue the IMF is a highly politicized organization, biased in its choice of whom to help, how, and how much. For instance, critics argue that Christine Lagarde (current managing director of the IMF) is keen on denying African countries agricultural subsidies as part of the IMF loans conditionality, even though she supports the same measures — labelled ”economic incentives”— when it comes to the EU Common Agricultural Policy and the French farmers.
While critics often perpetuate many economic fallacies themselves — such as “beneficial subsidies,” or the better-known “exploitation” of developing countries by their developed counterparts — they are not entirely mistaken in their misgivings about the Fund. There is something inherent in what the IMF does that perpetuates conflict among and within national economies. This has to do with the monetary-policy principles on which the Fund was established.
How the IMF Spreads the “Wealth”The IMF’s funds for loans are drawn from the expanded money supplies of its member countries on the basis of a contribution quota, and then redistributed to countries in need of financial or foreign exchange stabilization. The list of borrowers ranges from France in 1947 and Argentina (just before its 2001 crisis) to Ireland, Portugal, Ukraine, Colombia, Greece, and many others.
These loans promote an artificial and temporary type of global economic growth, because they do not have a neutral impact on the world economy. IMF loans endow some countries with additional purchasing power, thus allowing them to increase their command of resources and their wealth to the detriment of other countries. The latter’s resources and overall wealth are diminished by the depreciation of the monetary unit purported by every disbursement of the new money.
This global, inter-country redistribution of wealth is central to the conflicting relationships which arise around the allocation of IMF packages. Mises explained this to his students at FEE in the 1960s when he noted that the central problem is over who gets the money:
Everybody, every country, would say the same thing: “The quantity we got is too small for us.” The rich countries will say, “As the per head quota of money in our country is greater than it is in the poor countries, we must get a greater part.” The poor country will say, “No, on the contrary. Because they have already a greater part of money per head quota than we have, we must get the additional quantity of money.”
But, Mises observed, it’s impossible to distribute the money in a neutral way:
one can never increase the quantity … in such a way that it does not further the economic conditions of one group at the expense of other groups. This is, for instance, something that wasn’t realized in this great error — I don’t find a nice word to describe it — in starting the International Monetary Fund.
The IMF, Inequality, and Central BanksThese conflicts are underlined by an even less acknowledged conflict at the national level — also predicated on the redistribution of wealth — which arises from the inflationary policies of national central banks. National central banks often cooperate with each other to, as Jörg Guido Hülsmann summarized,
to coordinate central-bank policies, i.e. … to increase their note issues in concert, thus avoiding the embarrassment of the falling exchange rates that inevitably result from unilateral inflation.
However, when this coordination fails, IMF loans can be used to buy one’s currency off foreign exchange markets and temporarily halt its collapse. Here too, instead of macroeconomic stability, what IMF loans really accomplish is maintaining the inflationary monetary policies which have brought countries to this predicament in the first place. The primary social consequences of inflationary policies are the redistribution of wealth from the last receivers of the new money toward the first receivers. Thus, the perpetuation of this institutional framework is a fertile ground for growing economic inequality, a hot issue nowadays, often over-estimated, but always blamed on the free market.
Thirty-five years ago, Ron Paul and Lewis Lehrman published The Case for Gold, their minority report from Reagan's gold commission. Today, Jim Rickards has written The New Case for Gold, an uncompromising call for using gold as money and reestablishing a gold standard for central banks.
In this wide-ranging interview, Jeff Deist and Jim Rickards discuss gold in the context of current geopolitics and enduring myths about monetary growth. While the "anti-gold reflex" is strong among older generation monetary economists in the west, a new gold-friendly order is emerging in Asia. Jeff and Jim even discuss whether Hillary will be indicted, leading to a Joe Biden/Elizabeth Warren ticket. This is a fascinating interview that you won't want to miss.
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.
Recorded during the Authors Forum at the 2016 Austrian Economics Research Conference, Paul Cleveland (Birmingham-Southern College), discusses his recent book, The Great Utopian Delusion (Boundary Stone, 2015). Includes an introduction by Mark Thornton.
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.
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
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.
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.
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.
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
Global markets are showing they can't handle even a tiny bit of tightening by the Federal Reserve, and other central banks are doubling down on rock-bottom interest rates, writes David Haggith. After six years of "recovery" can we ever abandon endless easy money?
This audio Mises Daily is narrated by Ben Wiegold.
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!
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.
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.”
Our guest this weekend is Dr. Mark Thornton, a senior fellow here at the Mises Institute, and our topic is booms and busts. Falling stock prices are in the news lately, so Mark and Jeff talk about how and why central bankers don't understand deflation, whether they are really Keynesians or some variant thereof, what a "crack-up boom" might look like, and what the Skyscraper Index and other symptoms of irrational spending might tell us about the future of the global economy.
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.
Free Prices Now! begins by asking why the human race is still so poor. How can it be that billions still lack even enough to eat? It then provides the answer. A prosperous society is a cooperative society. Cooperation in turn depends on trust. And trust requires honesty.
The most reliable barometer of economic honesty is to be found in prices. Honest prices, neither manipulated nor controlled, provide both investors and consumers with reliable economic signals. They are the foundation for a successful economy.
A corrupt economic system does not want honest prices, honest information, or honest results. The truth may be unprofitable for powerful government leaders, private interests allied with them, or economic “experts” whose careers have been devoted to price manipulations and controls.
The US Federal Reserve and other central banks have created a system of “liar loans” and false prices. Other parts of government have contributed as well. In effect, the regulators on whom we depend have become dis-regulators.
Can it really be this simple, that economic prosperity and job growth depend on allowing economic prices to tell the truth, free from the self-dealing and self-interested theories of powerful special interests?
Yes.
Although Lewis takes us inside the complexities of the national economy and the Federal Reserve, his lively and transparently clear writing style makes it easy for anyone to follow him.
In The Real Crash, New York Times bestselling author Peter D. Schiff argues that America is enjoying a government-inflated bubble, one that reality will explode . . . with disastrous consequences for the economy and for each of us. Schiff demonstrates how the infusion of billions of dollars of stimulus money has only dug a deeper hole: the United States government simply spends too much and does not collect enough money to pay its debts, and in the end, Americans from all walks of life will face a crushing consequence.
We’re in hock to China, we can’t afford the homes we own, and the entire premise of our currency---backed by the full faith and credit of the United States---is false. Our system is broken, Schiff says, and there are only two paths forward. The one we’re on now leads to a currency and sovereign debt crisis that will utterly destroy our economy and impoverish the vast majority of our citizens.
However, if we change course, the road ahead will be a bit rockier at first, but the final destination will be far more appealing. If we want to avoid complete collapse, we must drastically reduce government spending---eliminate entire agencies, end costly foreign military escapades and focus only on national defense---and stop student loan or mortgage interest deductions, as well as drug wars and bank-and-business bailouts. We must also do what no politician or pundit has proposed: America should declare bankruptcy, restructure its debts, and reform our system from the ground up.
Persuasively argued and provocative, The Real Crash explains how we got into this mess, how we might get out of it, and what happens if we don’t. And, with wisdom born from having predicted the Crash of 2008, Peter Schiff explains how to protect yourself, your family, your money, and your country against what he predicts.
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.
You may have heard about the Swiss referendum to end fractional reserve lending by Swiss commercial banks. It's a fascinating development for Austrians and libertarians, and it's another example of how average Swiss people can use referenda to force both their central legislature and the twenty-six Swiss cantons to consider their proposals, merely by gathering 100,000 signatures within an 18-month period.
Here to help us understand this from a Swiss perspective is Claudio Grass, a good friend of the Mises Institute, a principal with the Swiss company Global Gold, and a Rothbardian with a great understanding of money and Banking issues.
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
Venezuela is currently going through its worst crisis in history, replete with an endless list of interesting problems. Foremost among these are severe shortages in even the most basic of necessities. Economists have used these shortages as textbook examples to illustrate the pernicious effects of price controls.
Few people, however, are aware that many of the country’s problems are caused by a complex monetary arrangement that makes use of four different exchange rates simultaneously. The result is that Venezuela can either be extremely cheap, or unbearably expensive, depending on the rate used.
Monetary chaos began in 2003 when the late President Hugo Chavez imposed currency controls to stem capital flight after an oil strike. At the time, one US dollar could fetch 1.6 Venezuelan bolivars. Today, barely ten years later, that same dollar can buy 172 bolivars, a devaluation of over 99 percent! Of course, that is in the official (i.e., government regulated) market. On the black market, the exchange rate is currently nearly 900 bolivars to the US dollar. That is, if you can find anyone selling dollars, or more importantly, looking to buy the badly tarnished Venezuelan currency.
This devaluation is in and of itself a large problem, both for consumers who must deal with high degrees of price inflation and for businesses that must undergo long-term capital planning decisions with a constantly moving monetary unit. However, it is the volatility of the exchange rate caused by the government’s continuous changes to currency restrictions and official rates that is proving the most cumbersome problem.
A Very Complex System of Exchange RatesCurrently there are four exchange rates: First is the official one, called CENCOEX, and which charges 6.30 bolivars to the dollar. It is only intended for the importation of food and medicine.
The next two exchange rates are SICAD I (12 bolivars per dollar) and SICAD 2 (50 bolivars per dollar); they assign dollars to enterprises that import all other types of goods. Because of the fact that US dollars are limited, coupons are auctioned only sporadically; usually weekly in the case of SICAD 1 and daily for SICAD 2. However, due to the economic crisis, no dollars have been allocated for these foreign exchange transactions and there hasn’t been an auction since August 18, 2015. As of November 2015, the Venezuelan government held only $16 billion in foreign exchange reserves, the lowest level in over ten years, and an amount that will dry up completely in four years time at the current rate of depletion.
The last and newest exchange rate is the SIMADI, currently at 200 bolivars per dollar. This rate is reserved for the purchase and sale of foreign currency to individuals and businesses.
There are many problems in Venezuela as a result of this complex system. The most obvious is the near impossibility to actually get assigned to these rates due to the complex bureaucratic process one must navigate to apply for them. In response to these difficulties, Venezuelans must rely on the black market to meet their demands for foreign currency. Therefore, people naturally rely on the black market rate, which although it is much less advantageous (at 900 vs. anywhere from 6.3 to 200 bolivars per dollar on the “official” market), at least offers the possibility to procure the much needed foreign exchange.
Regulation Paves the Way for CorruptionCorruption, which is a main characteristic of Venezuela’s political regime, is another problem derived from this complex monetary system. Officials within the government and those connected to it have taken advantage of their positions of power and influence to mismanage the money assigned for other, productive and necessary, institutions. Thus, well-connected individuals obtain US dollars through the legal channels and then sell them on the black market at a higher price. (This activity is one of the only ways to consistently earn high levels of profits in the beleaguered Venezuelan economy, and is only available to those privileged few who are connected to the proper government officials.)
This point is especially important when studying the vast array of shortages. The embezzlement of foreign currency intended for importing basic goods, e.g., foreign exchange reserved for the CENCOEX and SICAD exchange rates, leave legitimate businessmen with no options to obtain legally the necessary currencies to import goods. Owing to the rapidly depreciating bolivar, US dollars are hoarded as a means of savings, thus further exacerbating the foreign exchange shortage for importers. As a consequence, imports are unable to be paid for, leading to shortages on top of those already caused by extensive and damaging price controls.
The Poor Suffer the MostThese problems affect directly all citizens, but are especially pernicious to lower-income individuals. Many suppliers will only sell what few goods they have for US dollars, eschewing accepting bolivars in the payment of their wares. Black market currency sellers set up shop outside supermarkets to accommodate this phenomenon, but it must be noted that only the upper-middle and higher income earners are able to afford to pay the black market rate. The result is that the lower-income segment of Venezuelan society, those who price and currency controls are supposedly helping, are not able to obtain the currency necessary to buy simple goods and services (and the wealthy can only do so at a high price).
Although the business community demands to be paid in US dollars this harms lower-income individuals unduly and is a completely rational response. If businesses kept selling their scarce supply of goods at the official rate their shelves would deplete faster than they already do. Venezuelans earn income at the official rate of 6.30 bolivars to the US dollar while businesses must pay a much higher rate in order to import goods. This difference must be accounted for by stores asking for prices commensurate with what they must pay to stock their shelves.
The complex exchange rate system in Venezuela is not only a good example of unnecessary government meddling in the economy, but also explains why a corrupt political regime has been able to retain power for so long despite more than a decade of hardship imposed on the country. The use of several exchange rates has made it easy for the Chávez and Maduro governments and their followers to make enormous profits by embezzling the money assigned to the business community and individuals. By doing so, they have completely devalued the bolivar and impoverished what was once one of the richest countries in the world.
With more financing in place, the world’s tallest skyscraper is moving forward.
Recent media reports indicate that the final segment of financing has been obtained for the $1.2 billion Jeddah Tower project in Saudi Arabia. This is the financing that would be necessary to bring the project to record heights. Media reports also show that the structure has risen to more than seventy-five meters (246 feet) and construction is proceeding at an uninterrupted pace.
Above ground construction on the long delayed Jeddah Tower started in September 2014, but there was considerable doubt that the financing of the one kilometer (3,280.84 feet) tower could be obtained, given the shaky financial conditions in Saudi Arabia.
But the Jeddah Tower is only the latest phase in an enormous boom that began setting new records in 2014. As I reported nearly a year ago:
Super tall buildings, or skyscrapers, are being built at an astonishing rate. Ninety-seven buildings that exceed 200 meters (656 feet) high were constructed in 2014, setting a new record. The previous record was eighty-one buildings completed in 2011. The total number of skyscrapers in existence now is 935, a whopping 350 percent increase since the year 2000.
If completed as planned, the Jeddah Tower will be the tallest in the world. The International Business Times reports:
Saudi Arabia’s Kingdom Tower in Jeddah is slated to become the world’s highest skyscraper when it is erected in 2020, knocking Dubai’s Burj Khalifa tower from its perch as tallest building at 2,716 feet. The new tower will claim the title if it reaches its planned height of 3,280 feet. …The 200-floor Kingdom Tower will be part of a reported $8.4 billion project to construct Jeddah City. Construction of the skyscraper will entail 5.7 million square feet of concrete and 80,000 tons of steel …
Time for a Skyscraper Alert?In other words, the Tower is just part of an even more massive project, and it’s time for a new skyscraper alert.
A skyscraper alert is a market indicator suggesting a significant economic crisis in the near future. This alert could have been issued earlier because the alert is based on the ground breaking ceremonies of a world record setting skyscraper, not the initial announcement of the project which occurred in August of 2011.
The completion of record-setting skyscrapers has long seemed to indicate the beginning of economic crises.
The Singer Building (September 1906) and Metropolitan Life Insurance Building (1907) began construction before the Panic of 1907 and were later completed in 1908 and 1909, respectively.
Construction began on 40 Wall Street (now the Trump Building), Chrysler Building, and the Empire State Building all prior to the crash on Wall Street which began in the fall of 1929 only to have the record-setting buildings open in the beginning of the Great Depression in 1929, 1930, and 1931, respectively.
Construction of the World Trade Center towers began in August 1968 and January 1969 and opened in December 1970 and January 1972, respectively. The economy was then in a bad recession and the Bretton Woods Crisis at hand. The Sears Tower (now the Willis Tower) began construction in April of 1971 and opened in May of 1973 during the 1973–1974 stock market crash and the 1973 oil crisis.
Such alerts indicate looming danger in the economy of significance. However, the danger is not necessarily imminent. The next pivotal date is when the construction project reaches a point where it has broken the record. That date is difficult to estimate given the whims of construction. Media reports indicate that the Jeddah project will possibly be completed in 2020 without indicating whether that date is the record setting date, the completion date, or the opening ceremonies.
It is significant that the record being broken by the Jeddah Tower is the record set by the Burj Khalifa in Dubai. In some ways, the Burj Khalifa has become something of a symbol of the excesses of the last bubble.
Set to become the tallest building in the world, the Burj Khalifa in 2009 began to experience financial trouble and had to delay payment on its debt to finance construction. When the Burj Khalifa officially opened in January of 2010, the sovereign fund of the United Arab Emirates, which built the skyscraper, was broke and had to be bailed out by the sheikh of Abu Dhabi for $10 billion.
So, will this latest frenzy of new construction tip us off to the next bust? The skyscraper index is silent on the issue of timing so the dating of when the skyscraper curse is apparent is just guess work. It seems that the boom-bust cycle reaches its peak around the time the new record is set and is called a Skyscraper Signal, if imminent economic danger is looming. In most episodes, record breaking skyscrapers have their opening ceremonies when the economic crisis is readily apparent.
The important thing to remember is that skyscrapers do not cause economic crises. Rather they are just a very noticeable example of the distortions taking place throughout the economy when interest rates are kept artificially low by the central bank.
In addition to record breaking skyscrapers, there are many less perceptible changes taking place. Entrepreneurs are building bigger, longer term projects and production processes. Relative prices, i.e., interest, land, capital, and labor prices, are being distorted. Technology, nearly everywhere, is on the fast track. The economy is booming.
If the Skyscraper Curse is at work, then these distorted economic activities will soon be revealed to be malinvestments.
Merry Christmas and Happy Holidays from everyone here at the Mises Institute!
As an exciting year comes to a close, we want to thank all of our incredible members that allow us to do the work we do in advancing Austrian economics, freedom, and peace.
In honor of the season, John Denson joined Jeff Deist for a special episode of Mises Weekends to discuss the Christmas Truce. This incredible moment during World War I, often completely ignored by historians, is a wonderful celebration of the human spirit — even in the darkest of times. We hope you and yours will enjoy this extraordinary testament of the power of the Christmas season.
And in case you missed any of them, here are this week’s featured Mises Daily articles, some of our most popular articles at Mises Wire, and some holiday selections from the Mises archive:
Half of Britain Wants To Leave the EU by Ryan McMakenWhy Capitalists Are Repeatedly "Fooled" By Business Cycles by Frank ShostakGet More Bang for Your Buck by Jeff DeistThere's No Such Thing As a Neutral Government by David GordonPoland, Free Markets, and the Eurozone by Mateusz MachajA Will To Peace by John V. DensonIn Defense of Scrooge by Michael LevinA Capitalist Christmas by Dale SteinreichSimple Economic Truths for Entrepreneurs by Per Bylund
The Austrian: Why did you decide to apply for a Mises Institute fellowship?
Mateusz Machaj: The summer fellowship program is the best place on Earth to take the first steps in developing your career and learning how to do scientific research. The fellowship program and Mises University are of incredible value for young scholars, and it is impossible to overstate their importance. The online resources, books, and articles of the Mises Institute are definitely the building blocks of our knowledge, yet I found personal interaction with the Mises faculty to really be key in advancing my knowledge. Once we learn anything it is necessary to share our thoughts, insights, and discuss them with our teachers, mentors, and other students. The publications at the Institute are the bricks, but the summer programs are the necessary mortar.
TA: Why did you decide to obtain a PhD? What role, if any did the Mises Institute play in the direction of your academic studies?
MM: I decided to take the academic route, because I am passionate about economics as a discipline. The Mises Institute was the main factor in sparking that passion, first as a supplier of the online library, and then as a sponsor of my attendance at the summer programs. When I first came to Mises University I already knew almost all of the lectures (because I had watched them online in the previous years), but it was my personal interactions with students and scholars at the Institute that were a key stimulus for further studies. Then, I was fortunate enough to work as a summer fellow under the supportive guidance of Professor Salerno. Most of the work on my PhD thesis was done within the walls of the Mises Institute. The Institute is truly the “indispensable framework,” to borrow a phrase from Rothbard.
TA: What research topics are you working on right now?
MM: Currently I am working on monetary policy, which has become even more important to the global economy thanks to the rise of “special” monetary policy. Once upon a time, the debate was dominated by “conventional” monetary policy, which, according to the mainstream, should be performed in “normal” times, and applied according to certain guidelines such as the Taylor Rule. More and more, however, monetary policy consists of “special” monetary tools — which we might call “Bernanke Bazookas” — that are nearly turning the central banks into financial pawnshops ready to supply additional liquidity in exchange for almost anything.
The tools are special because with their usage, central banks are beginning to flirt with zero interest rate ideas and other monetary-crank proposals. In the light of recent rage against the money printing machines, both topics deserve a careful scrutiny. Especially because there is lots of demagoguery and amateurish criticism of monetary policy out there.
TA: What is the state of free-market thinking in Poland?
MM: Younger people are very interested in the pro-market ideas. We have two very unique programs at the Polish Mises Institute, for example. The first one is composed of the Austrian Economics Clubs which are at the main Polish universities that focus on economics, and they attract young and intelligent people.
We also prepare lesson plans and curricula for teaching economics at high schools. Currently, we are attempting to create a free-of-charge online elementary book for this subject, as well. Both of the programs are very successful, and younger people who are genuinely interested in economics are usually seduced by the Austrian approach. This can be seen in the demand for our Austrian books. We already publish a dozen of them, and we thank the Mises Institute for most of the content.
TA: Why did you decide to start Poland’s Mises Institute?
MM: Austrian economics is the best way to learn good economics. Moreover, I believe that even if one dislikes the ideologies of Mises, Rothbard, and Hayek, the works of those thinkers are the best place to start to learn economics.
This is especially true of Rothbard. Man, Economy, and State is the best introduction to pricing theory, bargaining theory, production theory, competition theory, monetary theory, etc. I think even the opponents of free markets would do well to start with reading Rothbard, because he is the Mozart of economics.
You may prefer to play Wagner, but Eine Kleine Nachtmusik is where you should start. Similarly the Austrians are the best way to study economics, even when one disagrees with some of their premises. They are so much better in explaining the basics of economics than the mainstream textbooks, and no one comes near the writing and lecturing skills of many Austrians.
TA: Some eastern European countries, such as Estonia and Slovakia, have a reputation for continuing to liberalize their economies long after the fall of communism. Does Poland have a similar reputation?
MM: In the case of Poland, the glass is one-third full and two-thirds empty. There are two ways of comparing transformation economies. You can compare Poland to Russia, Belarus, and Ukraine. In those comparisons, Poland’s transformation is a huge success. On the other hand, you can compare Poland to developed Western economies, and then we see huge deficiencies and unfinished reforms. And let us remember that Germany, the United Kingdom, and the United States are very far from any free market paradise.
In terms of broadly defined economic freedom, Poland is behind the Western countries. In comparison, what is particularly burdensome is higher regime uncertainty due to a less predictable (and relatively more oppressive) legal system.
TA: With all the news about the eurozone lately, I have to ask if Poland will be adopting the euro soon. Is there a lot of local support for this?
MM: There’s not really much local support for the euro right now. The recent economic crisis has effectively killed any quest for quick adoption of the euro in Poland. Even the supporters of the euro currency are saying that the eurozone first needs to fix itself, before Poland joins the zone. Let us all hope the euro fixes itself permanently and fully — to gold of course.
The holiday weekend gave way to a tumultuous week full of significant and somber headlines. Here are three stories we've been following closely:
On Monday, the IMF announced that they will include the Chinese yuan in the SDR's basket of currencies. When James Rickards appeared on Mises Weekends in September, he discussed the interest of financial elites in making the SDR the new reserve currency of the world. This week, he reminded us, “The decision to include the yuan in the SDR is a political decision, not an economic one.”
Meanwhile in Brazil, facing a collapsing economy and months of street protests, impeachment charges were announced against President Dilma Rousseff. While the serious challenges facing Brazil go far beyond a single politician, the work of Helio Beltrão and Mises Institute Brazil offers hope for a freer future.
Lastly, Wednesday's tragic shooting in San Bernardino is already being exploited by the Obama administration and others on the left for a renewed push for gun control. Of course it is government, not gun ownership, that makes Americans less safe. As Jeff Deist noted following the attacks in Paris, "when state intelligence and security agencies fail spectacularly, their budgets and personnel increase. Nobody gets fired, nobody apologizes."
Our Mises Weekends guest is Łukasz Dominiak, a professor at Nicolaus Copernicus University and a former Mises Fellow, he joins Jeff to discuss the recent elections in Poland. The media characterized those elections as a triumph for the right-wing, and dismissed large street protests as xenophobic nationalism. But the truth as Łukasz explains is quite different: it's a strange mix of both left and right politics in a country that is not afraid to embrace its Catholic roots and its cultural identity.
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 Problem With "Rules-Based" Monetary Policy by Tommy BehnkeCan the US Dollar Face Down the Chinese Yuan? by James RickardsHow Money Disappears in a Fractional-Reserve Money System by Frank ShostakWe Must Be "Opportunists" In Dismantling the State by Joseph SalernoWill Brazil Impeach Rousseff? by Bruno Gonçalves RosiBorders Closing Across Europe: Norway Joins In by Ryan McMakenHunger and War in WWI Germany: Remembering the Slaughter of Pigs by T. Hunt TooleyTranscript: Jim Rickards on Currency WarsBrazil: Big Government, Small Wages by Ryan McMakenA Behind the Scenes Look at the November Jobs Report by Jonathan NewmanRothbard on Libertarian Populism by Jeff DeistHow Governments Can Manipulate Murder Rates by Excluding "Terrorist" Killings by Ryan McMakenIncentives, Ideology, and Climate Change by Peter G. KleinExtreme Poverty Worldwide Has Plummeted as Market Economics Has Spread by Ryan McMakenIn the 19th Century, Non-Citizens in the US Could Vote in 22 States and Territories by Ryan McMakenRobert Wenzel on the Cato Monetary Conference by David GordonThe November-December Issue of 'The Austrian' Is Now Online
A few years ago, in 2009, The Economist magazine published an issue with its front cover showing a picture of the statue of Christ the Redeemer, one of the main symbols of Brazil, taking off like a rocket. This symbolized the country’s growing economy. The title of the article read “Brazil takes off.” However, in 2013, the same magazine published another issue with its front cover showing a picture of the statue going down like a misfired rocket. The title of the main article asked “Has Brazil blown it?” Yes. It blew it. An even more recent issue, from 2015, states that the country is in a quagmire.
With President Dilma Rousseff now facing impeachment, doubts may arise about the future of Brazil. How likely is this impeachment to remove her from office? And what changes will occur in case it does happen? To answer, I’m going to briefly analyze the last twenty years of Brazilian politics.
Along with Latin America and Eastern Europe, Brazil went through a series of reforms during the 1990s, especially in the government of Fernando Henrique Cardoso (also known as FHC) from 1995 to 2002. FHC actually started the reforms when he was finance minister in the government of his predecessor, Itamar Franco (1992–1994). During the administration of FHC’s successor Lula da Silva (2003–2006), the reforms seemed to continue, paving the way for the prosperity observed in 2009. But things just appeared that way.
FHC and Lula are the better known former presidents in Brazil since 1985, when the country resumed governmental democracy after twenty years of military presidencies. And the two were also heads of the country’s two major political parties, respectively PSDB (Brazilian Social Democracy Party, or Partido da Social Democracia Brasileira) and PT (Worker’s Party, or Partido dos Trabalhadores).
PSDB and PT have similarities and differences. Both parties define themselves as center-left in the single-axis political spectrum. Both parties came into existence in the late 1970s or early 1980s, coming from a prior condition of bipartisanship forced by the military. Both parties include social democracy as part of their political ideology.
But the similarities end there. PT came into existence from three main segments: first, the basic ecclesial communities linked to the Liberation Theology in Latin America, especially in the ABC Region, an industrial region in Greater São Paulo. In the 1970s these communities tried to combine Marxism and Catholicism, turning Jesus into a first century Palestine social revolutionary. Second, PT has its origins in the labor movement of the same region in Sao Paulo — that’s where Lula came from. And finally, the party’s founders were die-hard radical socialists that participated in guerrilla activity against the military government — financed and trained mainly by Cuba — that’s where Rousseff came from.
A more detailed analysis might show that the party had more pragmatic, power-seeking wing — represented by Lula — and a more ideological one.
Among PSDB’s founders were well-established politicians from the PMDB (the opposition party to the military government). Like the founders of the PT, the PMDB opposed the dictatorship, but without the backing of outside communist regimes.
Instead, the PMDB used the legal institutional means available at the time. Although “social democracy” is in its name, PSDB was a much more pragmatic party from its inception, leaning toward a radical centrism, in the sense of calling for fundamental reform of institutions and believing that “genuine solutions require realism and pragmatism, not just idealism and emotion.”
Over time the party was much more willing to support market-based solutions to social problems than its counterpart. The party — and specially FHC — can also be identified with the Third Way, much like Bill Clinton and Tony Blair.
For other countries, the Third Way may be “the fastest route to the Third World.” But in Brazil’s case, coming from a situation of extreme statism since the 1930s, the reforms undertaken by FHC during the nineties were a major relief by comparison. But because of them, the president was accused of being neoliberal, meaning, a follower of Ronald Reagan and Margaret Thatcher (or even worse — from the left-wing point of view — a follower of F.A. Hayek or Milton Friedman).
Lula came to power in 2003 promising to leave behind the more radical positions of his party and to adopt a more pragmatic approach, not much different from that of FHC. That seemed to be the case for a while, and that’s when The Economist committed the mistake of believing Brazil was taking off. But for the more attentive observer it was clear that this could not be the case. Lula slowly but certainly abandoned the more market-oriented policies, a gesture consolidated by his successor, Dilma Rousseff. Instead of deepening the reforms started by FHC, PT was satisfied with keeping them in place for a while, and then abandoning them altogether.
I could go further in the past to explain how Brazil had an anti-liberal mentality from its beginning. But here it’s sufficient to say that, although being a multi-party country, Brazil has two major political forces: the PT and the PSDB. Neither of them is essentially market-friendly. But that’s not to say there are no differences between them. Even a pragmatist like Lula has to please his followers. With its socialist DNA, there’s no hope that PT will do what Brazil needs. And while they stay in power, Brazil’s economy is not resurging any time soon.
In 1992, then-President Fernando Collor was impeached, and what followed were the liberal reforms of FHC. But Collor didn’t have one thing Dilma has: a strong party.
The PT may throw Dilma to the lions in order to appease opposition and the population, but it won’t abandon its skepticism of liberalism, and there are no market-friendly political forces to fill any political vacuum that may result from Rousseff’s removal. With or without Dilma, this is still not time for optimism. Maybe a more pragmatic hope will do.
[Editor's note: Yesterday the International Monetary Fund designated the Chinese yuan as one of the global currencies used to calculate the value of Special Drawing Rights. This event may portend a significant reordering of the world's monetary system, and serve as a recognition that the US dollar's ongoing status as the world's reserve currency is not guaranteed. Jim Rickards terms this a "political decision" by the IMF, and discusses what it means both for China and the US.]
Membership in the exclusive SDR currency club has changed only once in the past thirty years.
That change took place in 1999, and was purely technical due to the fact that the German mark and French franc were being replaced by the euro.
Leaving aside this technical change, the SDR has been dominated by the “Big Four” (US, UK, Japan, and Europe) since the IMF abandoned the gold SDR in 1973. This is why inclusion of the Chinese yuan is so momentous.
Including the yuan is a “seal of approval” by the world’s major financial powers, led by the United States. It means China is a financial superpower and deserves a seat at the table when the international monetary system is reset.
You can think of this as a four-person poker game where a fifth player just sat down at the table with a large pile of chips. The poker game will now take on a new dynamic.
China does not strictly meet all the IMF criteria for inclusion in the SDR club. But use of the Chinese yuan in global trade does satisfy the test.
The yuan’s share of global payments has been steadily rising, from less than 1 percent in 2013 to about 2 percent in 2014. Yuan use is currently approaching 3 percent as shown in the charts below.
Use of Chinese yuan surpassed Australian, Canadian, Singapore, and Hong Kong dollars, as well as Swiss francs, by 2014. It also recently passed the Japanese yen. This makes the yuan the fourth most used currency in the world after US dollars, euros, and sterling.
Where the Chinese yuan doesn’t meet IMF standards is in having an open capital account. China has also not always been transparent in their reporting of reserve positions.
Market confusion and turmoil have been caused lately by China’s efforts to move in the direction required by the IMF.
For two years prior to August 2015, China informally pegged the yuan to the US dollar at a rate of about 6.2-to-1.
Maintaining the peg requires continuous market interven-tion by the People’s Bank of China, or PBOC (the central bank). Market forces tried to drive the yuan lower. This forced the PBOC to sell dollars and buy yuan to maintain the peg.
This operation drained about $500 billion from China’s $4 trillion in reserve assets in a matter of months. It is inconsistent with an open capital account in which market forces, not PBOC intervention, determine the value of the yuan.
But suddenly, in August 2015, China devalued the yuan in two steps, to a level of about 6.4-to-1. This was a shot heard round the world.
The devaluation led directly to meltdowns in US equity markets as the resulting strong dollar threatened to hurt US exports and jobs. A stronger dollar also hurts earnings of US companies with overseas operations. This damage has since become apparent in third-quarter corporate earnings reports.
From China’s perspective, the devaluation was a step in the direction of an open capital account. But from the world’s perspective, it was a continuation of the currency wars. Investors saw more devaluations coming and more damage to US corporate earnings.
China has also improved the transparency of its reserve reporting, especially with regard to gold. From 2009–2015, China reported no increases in its gold reserves. Yet the evidence (from mining statistics and Hong Kong imports) was conclusive that China was, in fact, acquiring thousands of tonnes of gold.
In mid-2015, China suddenly announced that its gold reserves had increased by 604 tonnes. The total rose from 1,054 tonnes to 1,658 tonnes. Since then, China has up-dated its gold reserve position monthly (in keeping with IMF criteria).
All of these figures are misleading because China keeps several thousand tonnes of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE). Small amounts are transferred from SAFE to PBOC monthly, and that becomes the basis for the official reserve reports.
China’s case for admission into the SDR club is a mixed bag. The yuan meets the use criteria and is close on the reserve criteria. China does not meet the criteria for an open capital account and transparent reporting. Still, they are moving in the right direction.
In fact, none of this matters. The decision to include the yuan in the SDR is a political decision, not an economic one. The green light to proceed has already been given by the IMF Executive Board.
Elections took place across the country this past Tuesday with some interesting results. Voters in Ohio decided they hated monopolies more than they liked marijuana, while residents in Houston voted down the left’s latest egalitarian menace. While there is never a reason to trust the empty promises of pandering politicians, elections can occasionally offer insight into who is winning the battle for ideas. So there may be reason for optimism when you see Hawaiians’ discussing secession or the fact that there is global momentum in the fight against prohibition. While central planners struggle — both in the US and abroad — to maintain the status quo, bad government will never be able to repeal good economics.
The question then turns to how to we advance the cause of Austrian economics, peace, and freedom? That is the topic of this weekends’ Mises Circle in Phoenix, Arizona. One of our speakers, Dr. William Boyes, joined Jeff Deist this week to offer a preview of his talk. The founder of Arizona State University’s Center for Economic Liberty and a successful author of economics textbooks, Dr. Boyes discusses how to advance liberty and capitalism in the face of a statist educational system. One option — our new Online Mises Boot Camp!
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:
Activists Seek to Impoverish Thai Villagers to Save Monkeys from "Slavery" by David AdamsFor WHO, Red Meat Is a Red Herring by Yuri N. MaltsevThe Fed Desperately Tries to Maintain the Status Quo by Ronald-Peter StöferleHow Beijing and the West Work Together to Manipulate the Global Currency War by Brendan BrownWhy We Need Private Property to Deal with Scarce Resources by Patrick Barron"Social Expenditures" In the US Are Higher Than All Other OECD Countries, Except France by Ryan McMakenZwolinski and Woods on the Basic Income Guarantee by David GordonPot Battle in Ohio by Mark ThorntonPoverty Does Not Cause Obesity by Ryan McMakenWill Regulation Destroy a Revolution in Physics? by Matt McCaffreyMy Irish Eyes Are Smiling by Mark ThorntonA Practical Guide to Hawaiian Secession by Ryan McMakenMexico, Canada, and Ten American States Look Toward Marijuana Legalization by Ryan McMakenYellen on Negative Interest Rates by Jonathan Newman
Leave it to NPR to add guilt to your pleasure. That bon-bon hidden behind your two-year-old bottle of Scotch just took on a whole new layer of sin. With child slavery in the production of chocolate and animal cruelty in the harvesting of coconuts, the conflict confection is born.
According to an animal rights group featured in a recent edition of NPR’s The Salt, abused monkeys are a key ingredient in your Panang curry. While the Thai/Malay practice of using monkeys to harvest coconuts dates back hundreds of years, landing in the crosshairs of activist vegans and SJWs (Social Justice Warriors) is a new phenomenon. Anthropologist Leslie Sponsel, quoted briefly in the NPR article, offered a defense of simian symbiosis. I caught up with Dr. Sponsel at his Hawaii home in hopes of learning more about his fieldwork. “Debate on the morality of enslaving monkeys to get a job done is a Western dilemma, not a Thai one,” Sponsel explained.
A lifelong environmentalist and author of Spiritual Ecology: A Quiet Revolution, Sponsel had reservations about watching primate pickers at work. Instead of calling for a nationwide boycott of coconut products as some have done, Sponsel did what every anthropologist worth his salt is trained to do: take pause and observe. He noted that neither his wife — a Thai Buddhist — nor a fellow Thai professor from a local university framed the practice in moral terms. Add a complete lack of compunction from the local Muslim population and Sponsel concluded that monkeys on task are not a cause, but a part of the “isness” of peninsula living.
The British explorer Robert Shelford observed in his 1916 book: A Naturalist in Borneo:
The modus operandi is as follows: — A cord is fastened round the monkey’s waist, and it is led to a coconut palm which it rapidly climbs, it then lays hold of a nut, and if the owner judges the nut to be ripe for plucking he shouts to the monkey, which then twists the nut round and round till the stalk is broken and lets it fall to the ground; if the monkey catches hold of an unripe nut, the owner tugs the cord and the monkey tries another. ... [At times] the use of the cord was dispensed with altogether, the monkey being guided by the tones and inflections of his master’s voice.
According to Sponsel, “Working macaques are the difference between a livelihood and abject poverty for many South Thailand farmers. Snake bites, stinging ants, and life-ending falls face whoever or whatever goes up those trees.”
Given the best monkeys harvest coconuts at over twenty times the speed of the most skilled man, the incentive to continue a centuries-old partnership is clear. During his fieldwork, Sponsel never observed or heard of monkey abuse by their handlers. He noted that many were treated similar to the way a Westerner treats a family pet. “For some households,” he observed, “they may even rise even to the level of being a family member.”
For a country that sees its stray dog population driven in crates to Vietnam every Tet New Year to become a side dish, the Thai macaques could have it worse. According to Sponsel, “Young ones are trained and kept on a rope or chain tethered to the handler or to a shelter when not working.” It is this practice that has earned the ire of some activists. Sponsel counters that in our society it is a matter of civility to keep a pet on a leash. And who hasn’t seen the mother who ties a string to her own children on a walk through a busy mall! According to Sponsel, the monkeys he observed were well-fed, groomed and cared for. Indeed, he often saw macaques being pushed in carts by their handlers on the way to the plantation.
“This debate is not new,” Sponsel explained. “Back in 1952, Jean Marcel Brulle’s The Murder of the Missing Link tackled our moral obligation to primates.” In an account of science fiction, a man impregnates a female monkey and then kills the newborn to force a jury to deliberate whether murder extends beyond humankind. Be it a hairy chest, or his way with the ladies (simians included), Burt Reynolds played the lead in Skullduggery — a 1970’s take on Brulle’s dilemma.
As some ramp up calls for a boycott, Sponsel cautions the bandwagon. “They should seriously consider how their campaign may negatively impact the livelihood of poor farmers. Some activists appear to be more worried about non-human animals more so than humans; even though the latter are also animals and have rights too.”
In a perfect world, Thai farmers would have machines and monkeys would have unspoiled wilderness. But, for the world we have — one in which habitat destruction wipes out entire populations — coconuts and farmers in need may be all that keeps the macaques in the trees and off the dinner tables.
From reading the commentaries you might have imagined that the process of a currency winning international reserve status depends on getting the IMF seal of approval. At least that seems to be the story with China.
So, strange to tell, the great international monies of the past evolved either before the IMF was created or without its help. Think of the Deutsche mark and Swiss franc — the two upstarts of the 1970s and 1980s — or briefly the Japanese yen when it enjoyed great popularity. Their emergence was due to the path of monetary stability chosen by their issuing authorities together with complete freedom from restrictions.
So why is the world of currency diplomacy now playing along with the nonsense of the IMF examining whether the Chinese yuan has met the criterion to become a reserve currency?
Incidentally, the last time that Washington body bestowed “reserve currency status” it was with respect to the Australian dollar and Canadian dollar, on the eve of the bust for the respective commodity and carry trade bubbles which sent them to their respective skies.
Beijing and DC Pick the Winners and LosersThe question as to why the Western world is playing along with the official Chinese currency charade is part of a more general point. Why do Western governments pursue non-market trade diplomacy so enthusiastically with Beijing?
Think of the repeated times that Chinese communist party dictators traveled to a particular Western capital to hand out their list of chosen beneficiaries of Chinese corporate (mostly state) spending. These dictators were welcomed by fawning officials and bureaucrats who assured us that they also brought up, with muted whispers and inaudible comments, the problem of human rights to their guest.
And, by the same token, why are there high profile visits of Western leaders to China, presenting their own list of chosen industrialists selected to pick up the new business deals? This is not the way free markets, and global free trade, in particular, is meant to work.
If it smells like a rat it probably is a rat, and so it is with respect to these deals by collusion between China and Western governments, and their chosen corporate protégés, whether on currency or trade or investment matters. This is all an exercise in some combination of crony capitalism (with cronies on both sides!) and diplomacy by stealth. The gains and gainers are deliberately kept opaque. The losers are much less evident than the gainers, on whichever side of the fence, but principle and practice tells us that the total losses are much larger than the gains.
The Cronies’ Currency WarIn particular, how much more prosperous would China be today under a regime of currency freedom and well-functioning markets, than under the cozy order of restrictions and preferred access (to capital and trade) put together by Beijing and foreign governments in cahoots? And how much are Western priority systems for getting Chinese capital and orders to favored domestic destinations distorting the signals which guide the invisible hands? And how far is the secret — or not so secret — G-20 currency diplomacy, related to China, abetting the most serious episode of currency warfare since the 1930s?
Think about the new currency offensive launched by Europe last month when ECB Chief Draghi’s calibrated remarks about further QE drove the euro down by 3–4 percent against the US dollar in 24 hours, which was double the extent of any Chinese currency maneuvers earlier in the summer. And in the bigger picture, China’s mini currency devaluation hardly smacks of currency warfare compared to moves ten or even twenty times greater by Europe and Japan in the past three years.
So why did Beijing agree to the mild censoring which occurred at the last G-20 meeting (in Lima) of its own mini-devaluation when it could have called on Europe and Japan to halt their currency warfare?
A plausible answer is that Beijing has no interest in facilitating the emergence of a free market in its currency together with full convertibility. If silence is required on currency warfare as the price of getting its coveted currency reserve status, then so be it.
Yes, a fully convertible Chinese currency might well find a substantially lower level than today’s official rate. Much would depend on what steps accompany the road to convertibility. Would there be broad-based liberalization in the Chinese economy and markets such as to make assets there more attractive to both domestic and international investors in the context of improved prospects of economic prosperity? Or would the road to convertibility simply facilitate a flight of capital out of the country with little foreign appetite to engage in the opposite direction?
There is little indication that the Chinese leadership would take the market reform route, which incidentally might seriously undermine the basis of the rents enjoyed by themselves and their connected state enterprises. In effect, there is an unholy alliance between the West and Beijing on only limited reforms and the currency status quo as blessed by the IMF. Meanwhile, currency wars remain a protected activity of the large powers outside China.
Official game plans do not always work out as hoped. It remains to be seen whether the continued and accelerated path of monetary easing by Beijing is consistent with only a mini-devaluation of the Chinese currency. There is anecdotal evidence of Chinese retail investors now engaging themselves in a new bout of yield-search frenzy in the local high-yield bond markets. That may not endure in the face of a rising tide of default. And the massive yuan carry trade which built up in the past few years could contract much more forcefully in coming months in the context of shrunken yield gaps and credit market cool-down.
On Wednesday, the Federal Reserve once again reaffirmed its zero-interest rate policy. Amusingly, this commitment to the monetary status quo is being seen by some as “hawkish” which, as Ryan McMaken points out, “shows just how much the goal posts have been moved in recent years.” Unfortunately all the spin and promises of future rate hikes doesn’t change the fact that we are nearing the seven year anniversary of ZIRP with an economy Janet Yellen doesn’t think is strong enough to survive the reversal of the Fed’s monetary morphine. Hopefully our central bankers will one day realize their war on deflation is leaving us poorer, but in the meantime — at least we can laugh about it.
In this edition of the Mises Weekends, we have the third in our series on the current state of healthcare. Our first episode featured Charles Hugh Smith who discussed the consequences of a healthcare market taken over by government regulators and insurance lobbyists. Our second featured Dr. Michel Accad giving his perspective as a practicing doctor in a post-Obamacare world. This week, Robert Murphy discusses his new book, The Primal Prescription, which he co-wrote with Dr. Doug McGuff. Murphy not only applies his understanding of Austrian economics to highlight the problems plaguing us today, but offers advice on how to navigate through the current state of American healthcare.
In case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular posts at Mises Wire:
The Fed Can’t Raise Rates, But Must Pretend It Will by Thorsten PolleitRobert Shiller Imagines What Consumers Should Want, While Ignoring What They Do Want by G.P. ManishThe War on Cars Is a War on Workers and the Poor by Gary GallesToday's War Against Deflation Will Make Us Poorer by Frank ShostakThe World Bank Threatens Free Markets in Peru by Simon WilsonIf Sweden and Germany Became US States, They Would be Among the Poorest States by Ryan McMakenThere’s More to Money than Hyperinflation by Matt McCaffreyPew: Homicide Rates Cut in Half Over Past 20 Years (While New Gun Ownership Soared) by Ryan McMakenSpectre by Matt McCaffreySunday of the Blind, or the Failed Revolution by Carmen Elena DorobățUS Soldiers Are Paid Significantly More than Civilians with Similar Skills and Education by Ryan McMakenWith Interest Rates, "There Are Two, Opposite Causal Chains at Work" Murray RothbardFOMC: We'll Raise Rates Some Day; We're "Hawkish" Now by Ryan McMakenUnderwear Prices to Remain Near Zero by Peter KleinTextbook Definitions of Economics: An Informal Survey by Jonathan NewmanPoliticians Pander to an Anti-Fed Public by Tho BishopIn Sweden Cash Is Becoming Radioactive by Joseph SalernoFirst they came for the cash, then they came for the microwaves by David Howden
Peruvians were pleasantly surprised, if a little bewildered, by the news that on the 8th of October they were to receive an extended weekend holiday. The reason for the impromptu vacation was the arrival of the “international community” in Lima for the IMF and World Bank’s annual board of governors meeting. Peru’s president, Ollanta Humala (enjoying a brief respite from an ongoing scandal involving his wife’s embezzlement of state funds), encouraged Peruvians to take pride in the fact that the leaders of international finance would deign to choose Peru as the venue for their conference and suggested that it “demonstrates to the whole world, the excellent stewardship of the Peruvian economy and the secure climate in which investment can be made” under his auspices.
These comments are interesting because Peru is indeed an undeniable economic success story. If you want a casebook example of markets lifting people out of poverty, look no further than Peru. However, what Humala skipped over is the fact this transformation took place long before his presidency and also that its causes are rooted not so much in wise statecraft, but rather Peru’s long and venerable tradition of state incompetency which has left it up to individuals to provide for themselves.
Fifteen years ago, the economist Hernando de Soto in his provocative book The Mystery of Capital wrote at length about the byzantine workings of Peruvian bureaucracy where registering titles to property or incorporating a business involved jumping through expensive administrative hoops and waiting not months but years for the right approvals. De Soto lamented the fact that this lack of legal recognition prevented the poor collateralizing and leveraging what were in reality quite considerable assets. However, his analysis overlooked the important question of whether, in the presence of an efficient Western-style regulatory state, ordinary Peruvians would have been able to accumulate the wealth to leverage in the first place.
It still remains — as every Peruvian and occasionally horrified western visitor knows — that Peru is a place where if you want to do something no-one, especially not the government, is going to stop you.
If you want a house, you can go to the outskirts of a city as millions of other Peruvians have done, take a piece of land and build one. If you want a business just start trading, on the street. If you want a garment factory just start one, in your house. Ditto if you want to set up a restaurant or even a school. It may be the case, as de Soto pointed out, that on paper it takes twenty-six months to officially recognize a bus route, but that did not stop enterprising individuals setting their vans or converted school buses on the road, marking out the beginnings of what are now the surprisingly efficient (if crowded) bus routes that carry passengers to almost every imaginable nook of Peru’s sprawling capital, for a fraction of a dollar. The successful bus and van enterprise is a remarkable display of spontaneous order in action.
In Peru there is no need to pay a consultation fee to a gatekeeper to authorize a medical procedure: blood analyses, endoscopies, and radiograms can be purchased on the spot from an array of sole proprietor clinics. All kinds of generic drugs can be bought under the counter. If in need of some entertainment, on nearly every street you can purchase a hi-resolution pirated DVD of the latest Hollywood blockbuster.
It’s not like Peruvians have never heard of regulatory permits, taxes, professional licensing, zoning laws, patent protections and so forth; they exist in a statute book somewhere, but they are largely abstract concepts, which, for most of the time can be safely ignored. Everything is for sale and barriers to entry are virtually non-existent.
The result of this serendipitous meeting of the cavalier Latin spirit with an apathetic state apparatus is a resilient civil society where low-cost privately provided health and education are available to all and people enjoy nutritional- and life-expectancy levels that sit high on the World Bank’s own development indices.
However, this achievement is only inadequately recorded in GDP statistics and is certainly not being celebrated by Peru’s president or the dignitaries at the World Bank. Indeed, rather than recognize informal and small enterprises as the true instantiation of free market principles, and the quintessence of liberty, the Bank quite openly decries its existence.
For the World Bank, absence of regulation automatically equates to underdevelopment. For the Bank, “development” is the attainment of specified metrics in consumption and social spending, years of state education, and implementation of legal provisions like minimum wage entitlements. The problem is that realization of these development indicators rather conveniently entails a populace in wage-labor, working for regulated businesses (corporations), where they can be taxed at the source. These taxes then are used to fund an array of social programs manned by "poverty professionals" who dedicate their efforts to finding out why everyone is strangely depressed once no-one is allowed to make a living that’s not mediated by state institutions or their corporate vassals.
This unimaginative development model also does nothing to detract attention from the questionable manner in which the Bank — and more specifically its private lending arm — the International Financial Corporation (IFC), work to bring people out of poverty. Peruvians are now quite aware of just how sincere the IFC’s motto of “creating opportunity where it’s needed most” really is.
For instance, one flagship project to provide access to high-quality health care saw the IFC provide a $120 million loan for the construction of the palatial Clínica Delgado now sitting in the middle of Lima’s exclusive Miraflores district. Lima’s residents can now enjoy consultations there for around $150.
Another needy Peruvian the IFC was happy to help was Peru’s richest man, Carlos Rodriguez Pastor, whose Intercorp group received $164 million dollars to expand its financial services divisions. Not to be outdone was Grupo Romero (owned by Peru’s wealthiest banking family) which received $180 million to renovate two vegetable oil processing plants, and Grupo Gloria which received a $25 million loan to build a factory that would solidify their total monopoly on dairy processing in Peru.
The IFC has also extended its influence into Peru’s tourist industry which attracts millions each year and provides a sizeable income to small companies, local tour operators, and indigenous communities that run it. Despite this success story, the IFC evidently thinks that there are still some Peruvians who could use a helping hand, like the plucky “Peru Holding de Turismo” group and its partner the “Orient Express” hotel chain who own and manage some of Peru’s most lucrative real estate. They received a $40 million loan to refurbish a number of luxury hotels in the Cusco region, catering to precisely the kind of jet-setting international elite sitting on the board of the IFC. One can only assume that the planners at the World Bank would like Cusco to become the Latin American Davos, all part of a poverty reduction strategy to assure Peruvians bright futures in hospitality, catering, and adult entertainment.
The examples go on and on as indeed does the story which can be retold from any other country in the “developing” world. The only thing that changes are the names of the domestic elites and some of the western corporations in receipt of this lucrative form of international state patronage.
The thousands of Peruvians who turned out to protest the conference are probably right to be suspicious of the motives of the bureaucrats and directors of the international institutions whose plans (like the Trans Pacific Partnership Agreement signed at the conference) and economic models would, if realized, remove real competition, deaden entrepreneurship, and curtail their freedoms.
As the conference came to a close, the sun came out and some of the informal street vendors, who had been rounded up and pushed outside the conference area before it commenced, began making their way back. If they looked hard enough they might have recognized Christine Lagarde, Jim Yong Kim, et al., speeding away in their blacked-out government cars. One had to wonder, whether this taxpayer-funded financial elite would recognize a free-market, even if were staring them in the face.
On Friday, a desperate China announced another round of interest rate cuts — its sixth such announcement in the past year. Cheered on by Nobel Prize winning economists, and pundits who dream of socialists utopias, governments continue to cling to the follies of central planning, easy money and growing debt.
Of course, not even science fiction can change the hard realities of economics.
Luckily, the resulting chaos that inevitably leads from these disastrous policies creates opportunities for the truth to prevail. Examples can be seen when panicked regulators taking a second look at the benefits of 100 percent reserve banking or the emergence of healthcare providers have broken the shackles of the government-distorted insurance model.
One doctor that has taken that stand is Dr. Michel Accad. A frequent Mises Daily contributor, Dr. Accad joined Jeff Deist this week on Mises Weekends to discuss his experiences as a practicing cardiologist in the Age of Obamacare. If you feel like just a number at the doctor’s office, you’re right: the entire visit culminates in a particular code being entered into the insurer’s database. That code determines how much your doctor gets paid, and it’s all part of a system of bureaucratic overhead and perverse incentives.
If you’re interested in learning about the true state of medicine in a post-Obamacare world, this interview is a must listen.
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:
Reflections on Venezuela’s "Economic Miracle" by Andrew SyriosBeavis and Butt-Head Take Over Silicon Valley by Paul CantorStar Trek Is Wrong: There Will Always Be Scarcity by Jonathan NewmanRobert Shiller Is Shilling for Socialism by Peter St. OngeNew Berlin-Based Master's Degree Program in Austrian Economics by Ryan McMakenHappy Birthday, Ralph! by David GordonThe Fed Says No to Pot Money, Unless it's the Government's Pot Money by Jonathan NewmanHow Currency Exchange Rates Are Determined by Frank ShostakDesperate Financial Regulators Turn to ... 100% Reserves by Joseph SalernoThe Complexity of Violent Crime and the Role of State-Sanctioned Killing by Ryan McMakenCanadians (Sort of) Vote for Less Interventionism and More Freedom by Ryan McMakenA Tax I Can Support by Per BylundMy Day at the Fed by Mark ThorntonFantasy Sports and the State of Nevada Go Head-to-Head by Jonathan Newman
Back in 2013, Salon took a quick break from criticizing a caricature of libertarianism to let David Sirota write an embarrassing article praising socialism in what turns out to be a fantastic case study in both the dangers of socialist economics and of course, speaking too soon.
The article was titled “Hugo Chavez’s Economic Miracle” and it was certainly not the only one of its kind to come out at the time. It may seem like twenty-twenty hindsight to criticize such foolishness, but it might be instructive as well. However, looking at Venezuela now as compared to the country Sirota saw in 2013 and thought provided an economic alternative to American capitalism (a truly free market was never discussed) serves as a good example of what Nicolás Cachanosky calls “the bait-and-switch behind economic populism.” Or namely, that government policies focused highly on consumption and lowly on investment will show good economic signs at the beginning, only to be followed by an inevitable decline and likely disaster.
Sirota’s article at least begins by lamenting Chavez’s rather poor record on civil rights (like shutting down a TV station that was critical of him) and noting “a boom in violent crime.” This may somehow be an understatement as Venezuela ranks second in the world in murders per capita at a terrifying rate of 53.7 per 100,000 citizens annually! (So much for socialism alleviating crime.) He finally does arrive at his case for this “economic miracle” that Venezuela was experiencing under Chavez (which, I should note, makes up only one paragraph of his entire article),
…according to data compiled by the UK Guardian, Chavez’s first decade in office saw Venezuelan GDP more than double and both infant mortality and unemployment almost halved. Then there is a remarkable graph from the World Bank that shows that under Chavez’s brand of socialism, poverty in Venezuela plummeted (the same Guardian data reports that its “extreme poverty” rate fell from 23.4 percent in 1999 to 8.5 percent just a decade later). In all, that left the country with the third lowest poverty rate in Latin America.
How much of this was due to Venezuela being an oil-rich nation is debatable. But it’s also very much worth observing that these positive (and underreported) trends existed throughout Latin America, including in countries such as Colombia that have moved in the opposite direction economically. According to the World Bank, Between 2005 and 2013, Colombia’s poverty rate (as opposed to extreme poverty) fell from 45 percent to 30.6 percent, Peru’s fell from 55.6 percent to 23.9 percent, Uruguay’s from 32.5 percent to 11.5 percent, Paraguay’s from 38.6 percent to 23.9 percent, and Ecuador’s from 42.2 percent to 25.6 percent. Venezuela, for its part, fell 43.7 percent to 25.4 percent, which seems to be about average. The same could be said for GDP and Venezuela’s infant mortality rate also only ranks in the middle of the pack.
And of course, all of this was prior to Venezuela’s recent economic crisis.
The fall in the price of oil has certainly harmed Venezuela, but then again, the rise in oil prices during the last decade certainly contributed to its “economic miracle.” However, Venezuela’s problems were starting to become apparent before the drop in oil prices. Back in October of 2014, just before the price of oil sank, Venezuela ran a 17 percent budget deficit and was dealing with a variety of shortages. Furthermore, while every major oil exporter has been hurt by the low oil prices, they have all weathered the storm much better than Venezuela.
It appears that the drop in gas prices simply exacerbated, and more accurately, exposed the problems caused by Chavez’s (and his successor Nicolás Maduro’s) extreme populist policies. As Nicolás Cachanosky notes in his review of Rudiger Dornbusch and Sebastián Edwards work on Latin American populism, regimes that follow such policies go through four economic phases. In stage I,
The populist diagnosis of what is wrong with an economy is confirmed during the first years of the new government. Macroeconomic policy shows good results like growing GDP, a reduction in unemployment, increase in real wages, etc. Because of output gaps, imports paid with central bank reserves, and regulations (maximum prices coupled with subsidies to the firms), inflation is mostly under control.
This is the stage Venezuela was in when Salon saw fit to publish Sirota’s article in 2013.
But then comes Stage II when “bottleneck effects start to appear” and “the underground economy starts to increase as the fiscal deficit worsens …” In Stage III, “Shortage problems become significant, inflation accelerates, and because the nominal exchange rate did not keep pace with inflation, there is an outflow of capital (reserves).”
This is exactly what’s happening in Venezuela today. Venezuela’s projected inflation for 2015 is a whopping 64 percent! The country with the second highest rate in South America is Argentina at 10.9 percent. The CIA Factbook lists Venezuela’s budget deficit at 29.4 percent and Moody’s downgraded Venezuela’s credit rating to the lowest rating possible for a country not in default. And there is serious talk of that coming to pass as well.
The government has instituted price controls to fight inflation and predictably, massive shortages have forced Venezuelans to turn to the black market for ordinary daily goods such as milk and toilet paper.
Venezuela’s unemployment rate shot up from 5.5 to 7.9 percent in January of 2015 and is likely to rise further. Even as it stands now, it is the third highest rate on the South American continent (excluding Central America). And as one would expect, poverty has started to rise again as well.
After Stage III comes Stage IV, which Cachanosky describes as follows,
A new government is swept into office and is forced to engage in “orthodox” adjustments, possibly under the supervision of the IMF or an international organization that provides the funds required to go through policy reforms. Because capital has been consumed and destroyed, real wages fall to levels even lower than those that existed at the beginning of the populist government’s election. The “orthodox” government is then responsible for picking up the pieces and covering the costs of failed policies left from the previous populist regime.
Whether it comes to that is still yet to be seen. But what this economic crisis does highlight is that short-term success should never be taken as proof of a long-term solution. And this is particularly true when it comes to quasi-socialist and extreme populist governments. In the long-run, countries that follow these policies have a consistent track record, which is basically the same as what we’re witnessing now in Venezuela.
We’ll have to see if Salon writes a follow up.
On Tuesday, Vermont Senator Bernie Sanders stood up on the stage of a Democratic Party presidential debate and proudly proclaimed himself a “democratic socialist” to an adoring crowd. Spurred on by myths about the success of socialism in countries like Sweden and Norway, the horrors of a centrally planned economy have never been more popular in American politics. As Mises President Jeff Deist highlighted in Thursday’s Mises Daily:
These ideas, and the people who hold them, are not outliers in America. There are millions … who believe exactly as Bernie believes. They may prefer to vote for Hillary Clinton purely as a tactical matter because they are unsure the country is “ready” for full socialism … but average progressives and Democrats agree with Bernie Sanders across the board …
Ninety-five years after Ludwig von Mises published his indispensable essay Economic Calculation in the Socialist Commonwealth, it is as critical to stand up to the tyranny of statism — on any scale — now as ever before.
The devastating consequences of government intervention into healthcare markets is the topic of this week’s episode of Mises Weekends. Charles Hugh Smith joins Jeff to discuss how Washington’s desire to eliminate markets from medicine has led to the industry being captured both by incompetent government regulators and insurance lobbyists.
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:
Charles Murray's Tepid Radicalism by David GordonWhat "Progressive" Corporate Welfare Looks Like by Andrew SyriosThe Dirty Business of Government Trash Collection by Allen MendenhallSanders and His Followers Are Not Outliers by Jeff DeistHow Modern Sweden Profits from the Success of Its Free-Market History by Yonathan AmselemGeorge Akerlof, Meet Oliver Williamson by Peter KleinAngus Deaton and Modern Economics by Peter KleinThe Mistake of Only Comparing US Murder Rates to "Developed" Countries by Ryan McMakenThe Fed’s Quadral Mandate and Impossible Balancing Act by Jonathan NewmanRothbard on Economic Ignorance by Matt McCaffreyTrue Money Supply: August Money Supply Growth Remains Way Down from 2012 Levels by Ryan McMakenDonald's Remarks on the Bubble and the Fed Are on the Money by Joseph SalernoNo way, Norway! by Carmen Elena Dorobăț
The Nobel Prize just gets cheaper and cheaper. Recent laureate Bob Shiller graces the New York Times with his latest rant that free-markets stink, bolstering his argument by making stuff up.
For starters, Shiller writes that America’s wealth “can be attributed” to regulation. Well, sure, it “can be attributed” to Zeus. Or sunspots. In the real world, America became the richest country long before the regulation age, and that position has been eroding ever since. Maddison (2007) estimates that by 1913 — before the New Deal regulatory explosion — the US was at $5,300 per person PPP (purchasing power parity), against $3,500 in Western Europe, $1,500 in Latin America, and $700 in the rest of Asia and Africa.
A similar pattern occurred in Europe, where the richest countries of the pre-modern age, Britain and Holland, used relatively free markets regulated by tort, while the rest of Europe mired hobbling markets with regulation and diktat. So, the story isn’t that regulation made the West. It’s that low-regulation economies soared ahead of the rest of humanity until socialists clipped their wings.
Indeed, Shiller doesn’t even seem to believe his own fantasy, writing, “The Thatcher-Reagan revolution a third of a century ago was a turning point away from market regulation, with mixed results.“
Here, the phrase “mixed results” is a red flag that the data doesn’t support his argument. Because Shiller would be kind enough to share the data if it did; it’s not very hard to look up GDP figures. And what do GDP figures tell us? That in Reagan’s eight years per capita GDP adjusted for inflation rose 3.5 percent per year. Compared to 0.7 percent in the previous eight years and 1.5 percent in the following eight years.
So, no, this is not a “mixed result.” This is a clear contradiction of Shiller’s claim that socialism makes America rich. Not to be too hard on Shiller, but he is the one who brought up Reagan.
By the way, if the US economy had kept up that Reagan 3.5 percent growth today, we’d have a per-capita GDP of $70,000. Twenty percent higher than Switzerland, and 50 percent above where we are today. Take your salary, top up by 50 percent, and that’s how rich you’d be if characters like Shiller would get out of the way.
Shiller’s next section is even heavier on the wishful thinking. He writes, “In fact, the real success of economies that embody free markets has much to do with the heroic efforts of campaigners for better values, both among private organizations and advocates of government regulation.”
I’m sure many economists are impressed that Shiller managed to mathematically quantify “real success” or “better values” to arrive at this particular “fact” of his. He is writing in The New York Times, not an academic journal, so we can forgive some looseness. Still, an economist writing about economics should take care in labeling opinions as facts, lest they be thought of abusing public trust in our field.
It helps to know where Shiller’s coming from. For a few years now, Bob Shiller’s been hawking institutionalized bail-outs. He wants to extend bail-outs into brave new corners of our lives. Career insurance for those who major in gender studies, housing insurance for house-flippers, even GDP insurance so countries that wreck their economies can get bailed-out by the prudent. The idea of making you pay for others’ screw-ups is one hustle socialists are always selling, simply because people vote for politicians who bail them out.
And this brings us to why Shiller’s telling tales about capitalism. Shiller thinks people are stupid so companies manipulate them, so Bob Shiller and his friends in government should run peoples’ lives. His vehicle here is Irving Fisher’s line that people don’t maximize utility — happiness — rather, in Fisher’s phrasing, “something that could better be described as ‘wantability’ rather than utility, for they are subject to temptation and mistakes.”
Shiller is dredging a strawman here; no economist thinks humans are perfect and error-free. What economists do debate is whether people should have overlords. Because the problem here is that somebody must decide whether you buy an iPhone, eat salad or bacon, or drive an SUV or a compact. If individuals don’t get to choose, who does? Alas, we know who: Bob Shiller and his buddies in government.
While overlords are antithetical to any lover of freedom, let’s humor Shiller and ask whether overlords can make “better” decisions than people. Here the key is what Hayek called the local knowledge problem: preferences aren’t automatically known by the overlords. Indeed, as Shiller complains, people often don’t even know their own preferences. Why would we think bureaucrats would know our preferences better than we ourselves do?
Does Bob Shiller really know you better than you do? Do his bureaucrats in the Department of What to Have for Lunch, or the Department of Choosing Vacation Destinations? Worse, to use real-world socialist examples, the Department of Dating and Marriage, or the Department of Choosing a Career? Unless Shiller has stumbled across a secret stash of all-knowing Angels, his overlords are only human. And their mistakes are magnified by their power.
Worse, putting overlords in charge brings a dark new problem — overlords want things, too. Maybe they love power, maybe they want to purify the earth and usher in a thousand-year Reich. Or maybe they just accept campaign donations. This means Shiller’s big-brained overlords may not even be trying to estimate what you want. They may not care. Because they want things, too.
You might think this problem — in Roman poet Juvenal’s phrase, “who watches the watchers” — would merit some thought after a century of blood and poverty from socialism’s failures. Alas, we’re subjected to a non-stop stream of Nobel laureates oblivious to what Mises’s Human Action told us a generation ago: “Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.”
International trade grabbed headlines this week with Monday’s announcement that twelve governments have reached agreement on the Trans-Pacific Partnership. While it should be of no surprise to see the news celebrated in the editorial pages of the Wall Street Journal or the Council of Foreign Relations blog, it is unfortunate even libertarian organizations are praising the agreement.
Of course, this is not the first time alleged defenders of lassiez-faire have endorsed intergovernmental agreements that enhance the power of the state. Ferghane Azihari and Louis Rouanet put TPP in historical context in Wednesday’s Mises Daily:
Murray Rothbard opposed NAFTA and showed that what the Orwellians were calling a “free trade” agreement was in reality a means to cartelize and increase government control over the economy. Several clues lead us to the conclusion that protectionist policies often hide behind free trade agreements, for as Rothbard said, “genuine free trade doesn’t require a treaty.”
Dr. Ed Stringham takes on the notion that government is necessary at all for markets and trade to thrive in his new book Private Governance. He joined Jeff Deist to discuss his work on the latest episode of Mises Weekends. Listen as Jeff and Ed destroy the argument that markets rely on government to protect property rights, mediate contracts, and numerous other excuses interventionists make in defense of the state.
In case you missed any of them, here are articles from this past week’s Mises Daily and Mises Wire:
The TPP and the Trade Rhetoric by Carmen Elena DorobățTPP: The Latest Assault on Free Trade by Ryan McMakenRothbard: Gun Regulation Explained by Murray RothbardIn Policy Debates, Can Economics Trump Ethics? by Matt McCaffreyThe Future Is Decentralized by Patrick ByrneNo More "Free Trade" Treaties: It's Time for Genuine Free Trade by Ferghane Azihari and Louis RouanetThe Menace of Egalitarianism by Lew RockwellFashionable Prohibition for Modern Lawmakers by Ryan McMakenIn Brazil, Free-Market Ideas Rise as the Economy Falls by Antony P. MuellerMissed last Saturday’s Mises Circle? Watch Jeff Deist, Tom DiLorenzo, Tom Woods and Lew Rockwell tackle the threat of political correctness.
It is erroneous to believe that free traders have been historically in favor of free trade agreements between governments. Paradoxically, the opposite is true. Curiously, many laissez-faire advocates fall into the government-made trap by supporting “free-trade” treaties. However, as Vilfredo Pareto stated in the article “Traités de commerce of the Nouveau Dictionnaire d’Economie Politique” (1901):
If we accept free trade, treaties of commerce have no reason to exist as a goal. There is no need to have them since what they are meant to fix does not exist anymore, each nation letting come and go freely any commodity at its borders. This was the doctrine of J.B. Say and of all the French economic school until Michel Chevalier. It is the exact model Léon Say recently adopted. It was also the doctrine of the English economic school until Cobden. Cobden, by taking the responsibility of the 1860 treaty between France and England, moved closer to the revival of the odious policy of the treaties of reciprocity, and came close to forgetting the doctrine of political economy for which he had been, in the first part of his life, the intransigent advocate.The original French version follows:Si l’on admet le libre-échange, les traités de commerce n’ont aucune raison d’exister comme but. Il n’y en a pas besoin, puisque la matière qu’ils devraient régler n’existe plus, chaque peuple laissant librement, à ses frontières, entrer et sortir toute marchandise. C’est la doctrine de J.B. Say et de toute l’école économique Française jusqu’à Michel Chevalier; c’est celle qu’a reprise récemment M. Léon Say. C’était également la doctrine de l’école économique anglaise jusqu’à Cobden. Cobden, en prenant la responsabilité du traité de 1860 entre la France et l’Angleterre, s’est rapproché de faire revivre la détestable politique des traités de réciprocité et d’oublier les doctrines de l’économie politiques dont il avait été dans la première partie de sa vie le défenseur intransigeant. In Léon Say, ed., “Nouveau Dictionnaire d’économie politique” (Guillaumin: Paris, 1900): 1047.
In 1859, the French liberal economist Michel Chevalier went to see Richard Cobden to propose a free trade treaty between France and England. For sure, this treaty, enacted in 1860, was a temporary success for free traders. What is less known however, is that at first, Cobden, in accordance with the free trade doctrine, refused to negotiate or sign any “free trade” treaty. His argument was that free trade should be unilateral, that it consists not in treaties but in complete freedom in international trade, regardless of where products come from.
Chevalier eventually succeeded in obtaining Cobden’s support. But Cobden was puzzled by the complete secrecy surrounding the negotiations and, in a letter to Lord Palmerston, he attributed this secrecy to the “lack of courage” of the French government.Gustave de Molinari, “Michel Chevalier, ‘Sa Vie et Ces Travaux,’” Journal des Economistes 4, no. 25 (1880): 30–39. Similarly, today, the lack of transparency concerning free-trade negotiations is problematic and it is often hard to know what the content of a treaty will be.
Today, while some of these treaties are currently being negotiated, there are already examples of similar agreements enforced. One could refer to the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) or more regional agreements like the North American Free Trade Agreement (NAFTA) or the European Economic Area (EEA).
But why would protectionist governments who spend their time hampering markets by giving monopolies and other kinds of privileges at national level, open markets at the international level? The very fact that governments are negotiating in the name of free trade should be suspicious for any libertarian or true advocate of free trade.
Intergovernmental Agreements Enhance Government PowerMurray Rothbard opposed NAFTA and showed that what the Orwellians were calling a “free trade” agreement was in reality a means to cartelize and increase government control over the economy. Several clues lead us to the conclusion that protectionist policies often hide behind free trade agreements, for as Rothbard said, “genuine free trade doesn’t require a treaty.”
The first clue is the intergovernmental and top down approach. Intergovernmentalism is nothing more than a process governments use to mutualize their respective sovereignties in order to complete tasks they are not able to accomplish alone. Nation-states are entities which rarely give up power. When they finalize agreements, it is to strengthen their power, not to weaken it. On the contrary, free trade requires a decline of governments’ regulatory power.
Also, free trade does not require interstate cooperation. On the contrary, free trade can be and has to be done unilaterally. As freedom of speech does not need international cooperation, freedom to trade with foreigners does not need governments and treaties. Similarly, our government should not rob their population with corporatist and protectionist policies just because others do. Anyone who believes in free trade does not fear unilateralism. The simple fact that bureaucrats and politicians do not conceive of the international economy outside of a legal frame settled by intergovernmental agreements is sufficient to show the mistrust they express toward individual freedom. This reinforces the conviction that these agreements are driven by mercantilist preoccupations rather than genuine free trade goals.
Extending Regulatory Control Beyond Your Own BordersThe second clue concerns the intense conflicts between governments on these agreements characterized by a high degree of technicality. History shows that multilateralism leads toward deadlock. The failure of the Doha Round is the cause of the proliferation of bilateral and regional initiatives. The contentious relations between governments come from the will of some states to dictate their norms to other countries’ producers through an international harmonization process. But this is the exact opposite of free trade. As economic theory shows us, exchange and the division of labor is not based on equality and harmonization but rather on differences and inequality. Furthermore, the technicality and secrecy surrounding free-trade agreements favor mercantilism and protectionism to the extent that technical regulations are used to favor producers who are politically well connected.
The Trans Pacific Partnership (TPP) is a good illustration of this balance of power. It was at first an agreement between four countries (Brunei, New-Zealand, Singapore, and Chile.) which tried to resist some neighbors’ commercial influence, especially China. Then the United States came and convinced more countries (Australia, Malaysia, Peru, Vietnam, Canada, Mexico, and Japan) to join the negotiations. Let’s also notice that most of the countries invited are already bound by regional or bilateral agreements with the United States. China remains excluded from the process. This governmental drive toward regulatory hegemony is obviously the complete opposite of free trade. Indeed, free trade supposes letting consumers peacefully choose what products they want to promote rather than determining what is available through bureaucratic coercion.
Consolidation of MonopoliesThe third clue concerns the vigor with which governments have tried over several decades to impose at the international level a more constraining legal framework for so-called “intellectual property.” The first initiatives appear in 1883 and 1886 with the Paris Convention for the Protection of Industrial Property and the Bern Convention for the Protection of Literary and Artistic Works. Amended several times during the twentieth century, the initiatives embrace, respectively, 176 and 168 states. These conventions are placed under the auspices of the World Intellectual Property Organization (WIPO), an international bureaucracy which joined the United Nations system in 1974. A turning point came in 1994 with the signature of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) administrated by the World Trade Organization (WTO). It is now incorporated as an essential part of the administration of international commerce and benefits from the WTO’s sanction mechanisms.
In 2012 we endured a fresh attempt by our governments to reduce our freedom to create and share intellectual works with the Anti-Counterfeiting Trade Agreement (ACTA). And, if we look at the negotiations mandates of these trade agreements, we can see they all include a chapter on the reinforcement of “intellectual property” rights. Intellectual property has become a key concept of the international economy. But this must not hide its illegitimacy.
As Vilfredo Pareto remarked, “From the point of view of the protectionist, treaties of commerce are … what is most important for a country’s economic future.” Each time a new “free trade” treaty is enacted, what is seen is the attenuation of tariff barriers, but what is not seen is the sneaky proliferation and harmonization of non-tariff barriers impeding free enterprise and creating monopolies at an international scale at the expense of the consumer. It’s time for genuine free trade.
Rod Martin, a co-founder of PayPal and world renown philosopher-capitalist, joins Jeff for a wide-ranging interview covering such topics as the refugee situation in Europe, unrest in the Middle East, and why some cultures are more prosperous than others. Martin contrasts the difficulties world governments have in confronting global macro-crises with the hope and resilience of technological innovation and entrepreneurship.
Being a government means never having to say you’re sorry. And it also means you get to blame everyone else for all the problems you’ve caused.
This week at mises.org, we explored how deeply indebted governments blame the ones who lend them money, while government prosecutors blame entrepreneurs, businesses, and “white collar crime” for other problems in the economy. And surges in drug prices, we’re told, have nothing to do with government control of the drug market.
Lackluster new jobs data and continued surges in home price inflation confirm that the distortions of the Fed-induced boom continue to add up.
But even with all the bad news, the miracles of the market place point toward a brighter future. This week on Mises Weekends, Rod Martin, a co-founder of PayPal and world renown philosopher-capitalist, joins Jeff for a wide-ranging interview covering such topics as the refugee situation in Europe, unrest in the Middle East, and why some cultures are more prosperous than others. Martin contrasts the difficulties world governments have in confronting global macro-crises with the hope and resilience of technological innovation and entrepreneurship.
Indeed, Ludwig von Mises would have easily understood how market innovations outpace government innovations, since Mises, whose birthday we celebrated this week, pioneered our understanding of how government intervention cannot achieve the goals it tries to achieve. Be sure to see this never-before-published essay by Bettina Bien Greaves, and this newly-discovered recording of a Mises lecture from 1962.
In case you missed any of this week’s Mises Daily and Mises Wire articles, take a second look:
The Reality Behind the Numbers in China's Boom-Bust Economy by Yonathan AmselemDrug Shortages, Price Gouging, and Our Broken Health Care System by Michel AccadThe Coming Corporate "Crime Wave" by William L. AndersonLuwig von Mises, Genius? by Bettina Bien GreavesGovernments Turn to the UN to Avoid Paying Their Debts by Nicolás CachanoskyThe Military Gravy Train: Full Speed Ahead by Andrew SyriosThe Silent, Slow, Stubborn Revolution Carmen Elena DorobățCollege Athletics: Public Institutions Are the Real Sham By Jonathan NewmanThe Real Estate Crisis in North Dakota's Man Camps by Mark Thornton
The Mises Institute spoke with Associated Scholar Antony Mueller last week about recent economic and ideological trends in Brazil. Prof. Mueller teaches economics at Federal University of Sergipe (UFS) in Brazil.
Mises Institute: For those of us not in Brazil, it is hard to interpret the commentary on Brazil’s economy right now. Brazil’s debt was recently reduced to junk status, and we can see that Brazil’s economy is not doing well. But how severe is the crisis?
Antony Mueller: Part of the explanation is that for a large part of the population and for the government itself, the crisis came as a shock. At first, the Brazilian government ignored the coming of the crisis and when it arrived, the government ignored its existence.
Imagine Brazil like a family with a lot of inherited wealth that spends as if there were no tomorrow. Yet someday this family wakes up to the fact that its wealth has been squandered and its financial accounts are in the red. The government did not recognize that the boom would be temporary. The Brazilian economy began to sputter as commodity prices fell and the demand from China decreased. Yet in order to adapt to the new situation and cut expenditures, the Brazilian government spent even more.
Incumbent President Dilma Rousseff from the Workers Party, which has been in power since 2003, won a second term in 2014 with a campaign that deceived the population about the true state of the economy. The government implemented a series of cheap financial tricks such as delaying the rise of the prices for fuel and electricity and of other items in the large list of administered prices.
After the election, hell broke loose and the true state of the economy became visible for the broad public. The popularity of the president began to fall to single-digit approval ratings. The crisis is serious in itself, yet its psychological impact becomes more severe because of the shock of disillusion. In part, this shock also applies to foreign observers and investors who bought into government propaganda or based their outlook on the projections of the International Monetary Fund whose prognosis in 2013 said that Brazil would maintain economic growth rates of at least over 4 percent for each of the years to come up to 2018.
MI: Ambrose Evans-Pritchard is writing off Brazil as if it’s a total disaster area, and he quotes one observer who says “things will get much worse before they get better.” Is this true, and if so, what are the obstacles to improvement?
AM: Evans-Pritchard’s remarks reflect the consensus among foreign observers and there is indeed little doubt that the crisis will deteriorate before it gets better. Even worse, the recuperation could take much longer than is generally assumed. The reason for a pessimistic outlook comes from the fact that the crisis is not only economic, but also political in character. Not only members of the present government, but also figures of the opposition parties are under investigation about massive corruption linked to the major Brazilian oil company Petrobras. There is much frustration in the country because there is no promising alternative in sight.
MI: Assuming we are looking at real declines in standards of living, how long will it take the country to get back to where it was at the height of the boom?
AM: This is a difficult question for a specific answer. So let me answer in a more fundamental way. Brazil’s economic development has been on a roller coaster ride for centuries. Phases of extraordinary booms were followed by long periods of busts and stagnation.
In the second half of the twentieth century, the boom of the 1950s, with the promise that Brazil would achieve growth and development of “fifty years in five years” ended in economic disaster and the military dictatorship that lasted from 1964 to 1985, which in turn ended with Brazil’s catastrophic foreign debt crisis. It took a “lost decade” for the country to recuperate.
The 1990s saw a series of reforms that put the country back on the track. In 2003, when the newly elected president, Luiz Inácio “Lula” da Silva from the Workers Party took over the government, the economy was already on a growth path. Then came the commodity boom with a seemingly insatiable appetite for Brazilian natural and agricultural products. Yet, instead of using the good times that filled the coffers of the Brazilian treasury to carry out highly necessary reforms, the Labor government pursued a populist policy of generous social spending, particularly for the poor parts of the population.
Now, these achievements of reducing poverty and inequality have come under threat because of the lack of financial funds. This means that Brazil must face not only an economic and a political crisis, but also a social crisis. The confluence of such a triple crisis increases the risks that any one of them gets worse because each individual crisis affects negatively the other crises. The consequential chain from the economic to the political and from there to the social crisis then goes into reverse and the social crisis worsens the outlook to get out of the political and the economic crisis.
MI: Brazil was a big part of the BRICS effort to create a group of up-and-coming economies that could rival the big economies like the US and Germany. Is that idea totally dead, or is the demise of BRICS overstated?
AM: The BRICS never managed to operate as a coherent group. Now, that not only Brazil is in crisis, but also Russia, and that China is in troubled waters, the outlook for the BRICS as a group of playing a major role in global affairs has diminished even more.
It is similar with MERCOSUL, the common market project in South America. Instead of achieving free exchange, trade conflicts are on the rise and not a single supranational institution has become effective. From my observations of Latin America and of Brazil in particular, I conclude that there are still vast mental and ideological barriers in place that work against sustained prosperity. The ideological dominance of statism, socialism, and interventionism is present in every layer of the Brazilian society — not only in politics or academia, but also in the business community itself.
Bureaucracy is a nightmare without end. Taxation is high and brings little return. The public educational system is in shambles. The legal system is unable to cope with an enormous backlog of unresolved cases, while at the same time, judges and other legal authorities enjoy grandiose privileges. Salaries in the judiciary are astronomical compared to what the average person or the poorer parts of the Brazilian society earn.
The public sector in general is extremely inefficient and is an El Dorado of rent-seekers. I do not expect that any of these obstacles will be resolved in the coming years. I fear that it is not much different in some other BRICS countries. They are all stuck in the “middle income trap,” as they are apparently unable to change from a statist to a free market system. There are many vested interests in place, in both politics and in established business, preventing change from state capitalism to an entrepreneurial capitalism. Only based on a fundamental change of ideology in favor of markets and individual and entrepreneurial liberty, will countries like Brazil gain long-term prosperity. I would also say that the same holds for China and the other members of the BRICS and emerging markets in general.
MI: Ideologically, is there any hope of a shift in Brazilian ideology? Some in the US media have featured libertarian free market groups in Brazil and suggested there is a change going on. Do you see any of that?
AM: Well, there is hope, yet it is a long way down the road. The Brazilian libertarian movement is gaining strength, particularly among students and young people in general. In fact, the spread of libertarian ideas among young Brazilians is amazing. The Brazilian Mises Institute is overwhelmed by visits to its site and the Institute’s events are grandiose. There is much good will, high hopes, a lot of serious dedication and extreme diligence at work in the libertarian movement of Brazil. If this trend continues, the walls that surround the established ideology will finally crumble. Anybody with an alert mind must see that statism has failed; that the ideas of socialism and interventionism are sterile and that they produce mainly frustration, stagnation, and crises. The libertarian movement in Brazil is the new avant-garde; its members are the true “progressives.”
The modern electronic media help to accelerate their ascendancy to influence and recognition. The current crisis will be a further wake-up call for young people to recognize that it is their future which is at stake if Brazil should continue in its old ways. With ever more young people joining the libertarian movement, I am sure that sometime in the future a critical mass will be reached and things will change.
The Mises Institute recently spoke with Nicolás Cachanosky, an Argentina-born economist, now at the Metropolitan State University of Denver, who is familiar with sovereign debt issues. We asked him about a recent UN resolution that seeks to make it easier for governments to default on their debts.
Mises Institute: Paying back government debt is not the simple matter it is often assumed to be, and repudiation of government debt has its benefits. Murray Rothbard, for example, in his article “Repudiating the National Debt,” outlined the case for why taxpayers should support the idea of the US government defaulting on its massive debt. And in a recent Mises Daily column, Simon Wilson further explained how government debt is not like private debt.
But Austrians aren’t under the impression that default has no downside, either. Naturally, the creditors — many of whom are ordinary middle-income people — who lent the money in the first place, stand to lose a lot in cases of default. Those individuals won’t be helped by the fact that, in the long run, this risk would be reflected in interest rates which would rise to compensate for the risk of default.
However, it seems that concern for creditors was hardly on the minds of many of the world’s governments earlier this month when the general assembly of the United Nations approved a new resolution that portrays debtor governments as victims of unscrupulous private-sector creditors.
Can you tell us more about what the UN is trying to do with this resolution?
Nicolás Cachanosky: The UN resolution it is not a binding or detailed document. It is, as it were, a recommendation about debt restructuring. But, there is no specification about what this restructuring should look like. The resolution sounds more political than technical. And by this I mean it is a political statement used by policymakers in their home countries for political ends.
The resolution ignores many fundamental economic and legal realities. In a well-ordered economy, when a debtor owes money, default triggers a required negotiation between the debtor and the creditors.
It is not up to just one party to decide what the outcome should be. A resolution requires an agreement between both debtors and creditors. If an agreement is not reached, then things must go to the courts. A judge or arbitrator then studies the debt contract and comes to a decision. In order for an economy to be predictable and functional, though, debt contracts should be binding and therefore creditors should not be forced to give up their rights to the initial terms of the agreement if they don’t want to.
Admittedly, in some cases, a complete payment might not be realistic, but that doesn’t mean it is up to the debtor to unilaterally decide what should the creditor give up. It is the debtor, not the creditor, who is at fault.
The debtor governments are not the victims, and some of the creditors are, for instance, retirees living on their pension funds. Why should they be expected to subsidize debtor governments via loan forgiveness? Why is it unjust for these retirees, for example, to expect repayment, as the UN document suggests?
Let’s look at it another way: a default is a transfer of wealth from the creditor to the debtor. If you default on what you owe me, your wealth goes up by the amount of the debt and my wealth goes down by that amount. The debt becomes worthless in the marketplace. Naturally, governments are easily tempted by this simple way of increasing their own wealth through default.
Moreover, if creditors cannot enforce the contract as it is written, then policymakers have fewer incentives to pay their foreign debts and remain fiscally sound. Were the UN resolution to become binding, though, lenders would demand higher interest rates for the increased risk of never being paid back. The cost of credit will rise to reflect the extra risk. But, of course, governments don’t want that either.
MI: What can you tell us about the UN vote? What countries supported the resolution most strongly?
NC: Thirty-one countries voted in favor of the resolution (66 percent), eleven voted against (23 percent), and five abstained (11 percent). But if one looks closer at the votes some interesting issues become apparent.
First, given that this is an economic topic, instead of applying equal weight to each vote, it would make more sense if votes were weighted by the GDP of each country. If each vote were weighted by the country’s contribution to world GDP, then 53 percent of the votes would have been against the resolution, and 41 percent in favor. In such a case, the vote would reflect the fact that the largest contributors to GDP were against the UN plan.
Also, if we look at the economic freedom of the voting nations as reported by Fraser’s Economic Freedom of the World (2015), then the GDP-weighted freedom score for the group voting in favor is lower than the group voting against the resolution. The more economically free countries opposed the effort to make default easier.
MI: Argentina has a special interest in this topic. Why is that?
NC: Argentina is still in conflict with a group of bondholders that refused to accept the debt swap it offered in 2005 and 2010 after it defaulted in 2001. This group of bondholders is called the “holdouts.” Argentina lost its bid to unilaterally change the terms of the debt agreement, and Argentina is now required to pay the outstanding debt and continue with the payments of the original bonds. Argentina refuses to observe the ruling and has still made no payment. In fact, Argentina has been declared in contempt of court.
(A more detailed discussion of the Argentine case can be found here and here.)
Argentina’s government put itself in this position, and the problem here is not the absence of an international regulatory body that can force creditors to accept debt restructuring. The problem lies with a government that spends freely and has no respect for its creditors. Furthermore, it does not help your case as a debtor government if, by law, you forbid any new negotiations with creditors, and you erase their debts from the official records, as Argentina has done.
MI: One UN spokesman recently referred to “vulture” creditors as a problem. Are creditors behaving like vultures?
NC: It is very unfortunate that a document like a UN resolution uses the word “vulture” not once, but twice. This is a word with a clear pejorative connotation that is not appropriate for a UN document. It seems that the UN officials had no interest in listening to what these so-called vulture funds have to say about their position.
What is usually referred to as a vulture fund is a fund that buys defaulted bonds and maintains that they can legally ensure the debt contract will be upheld, and that they will receive 100 percent of the bond payment.
If we think that respecting contracts is an important part of a developed and free society, then “vulture” funds are only asking the debtor governments to stick to the repayment plan they had already agreed to. Why are these investors then labeled as vultures while governments are portrayed only as victims? It would seem that the term “vulture” is quite applicable to governments themselves in these cases since, by refusing to pay their debts, governments are taking money out of the pockets of the creditors.
This type of investment can be expensive for the creditors beyond the cost of acquiring the bonds. To make money in this fashion requires years of costly litigation enforcing a contract that both creditor and debtor freely entered into. They’re not getting something for nothing. One is free to dislike these “vulture” funds, but that is not an argument for ignoring basic contracts and property rights.
Bill Bonner, founder of Agora Financial, joins the show to discuss the hysteria preceding Janet Yellen's announcement last week that the Fed would not raise interest rates. We also consider various ugly endgames for the US dollar, and whether federal debt will all come crashing down with a bang or a whimper.
Our guest this week is Patrick Barron, a professor of economics and a student of global currency markets. Patrick and I dissect the Fed's big announcement this past week not to raise interest rates, and consider whether Janet Yellen and other central bankers really believe in what they're doing.
Is it all just to save themselves from the judgment of history, by kicking the can down the road? Have they read, or even considered, Austrian arguments on money and banking? Or are they simply so wedded to Keynesian orthodoxy that they literally don't know what else to do? And what type of precipitating events might spell the end of US dollar imperialism?
Our guest this weekend is Professor Per Bylund, whose article on immigration elicited plenty of discussion on mises.org and social media earlier this week. Dr. Bylund argues that property rights, not government immigration policies, should serve as the natural regulator of immigration and human movement. Since the state is never legitimate, "open borders" is conceptually irrelevant. Our focus as libertarians should be on property, freedom of association, and the equally important freedom of dissociation. Migrants do not enjoy unbridled freedom of movement when such movement becomes a matter of trespass.
We discuss several arguments made by Hans Hermann Hoppe regarding externalities caused by forced integration and "public lands." As usual, the problem lies with states themselves: disruptive wars and bad economic policies cause tremendous human dislocations, while welfare state incentives encourage immigration for the wrong reasons.
If you're interested in the divisive topic of immigration from a libertarian perspective, stay tuned.
The image of a dead three-year-old Syrian refugee washed up on a Greek shore sparked renewed international focus on the waves of Middle Eastern and North African immigrants fleeing their war torn homelands. The issue has been presented by politicians and the media almost exclusively through a statist lens: a choice between government-imposed integration as proposed by open borders advocates, or government-enforced exclusion advocated by nationalists who wish to wall off their nation from foreigners. But we must never lose sight of fundamental issues, namely property rights and the freedom of voluntary association.
For this reason, we felt it was important to bring back an article written in 2005 by Dr. Per Bylund addressing the complexity of the immigration issue. Dr. Bylund reminds us:
With the state as it is today, should we as libertarians champion open borders or enforced property rights (with citizens’ claims on “state property”)? Both views are equally troublesome when applied within the framework of the state, but they do not contradict each other; they are not opposites.
To dive deeper in this important topic, Dr. Bylund joined Jeff Deist for this week’s episode of Mises Weekends.
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:
Real Wealth Weaker than GDP Stats Show by Frank ShostakAn Unhappy Union: Marriage and the State by Andrew SyriosWhy the Greeks Should Repudiate Their Government’s Debt by Simon WilsonAfter the Greek Crisis, Euro Elites Dream of a Unified Euro State by Ryan McMaken"Mathiness" vs. the Logic of Action by Jonathan NewmanWithout Government, Who Would Force a Men's Barbershop to Cut Women's Hair? by Ryan McMakenNext WeekAll eyes will be on the Federal Reserve as the FOMC meets to consider raising interest rates for the first time since 2006.
Jeff Deist and James Rickards discussed what the Fed will do on this episode of Mises Weekends.
Monday, September 14th, is the 66th anniversary of the first edition of Human Action.
On August 27, 2015, seventy-one refugees were discovered suffocated in an abandoned, locked transport truck in Austria just across the border with Hungary. These individuals, reported as refugees fleeing from the civil war in Syria, made a trek of over 1,000 miles. This is just a long string in the growing refugee and migration crisis hitting Europe over the past few years, with 2,500 estimated deaths from capsizing ships in the Mediterranean alone, of the nearly half million people crossing into Europe over the course of 2014–2015.
The problem is not unique to Europe. Many of these same migrants find their way to Brazil then die through the various jungle crossings attempting to reach the United States. This was true for five migrants from Ghana, an African nation, found dead in the jungles along the Panama-Colombia border This is a terrible loss of life and while most agree that “something” must be done, we have to question first what the underlying cause of this migration is and what that “something” should be.
Underlying Cause of the MigrationMuch has already been written by the degree of instability caused by foreign war policy and the distorting effects of foreign aid that usually props up corrupt military dictatorships. The more interesting observation of the latest migration crisis is not that it is happening, but where the migrants are headed.
In the past, refugees usually trekked the minimal distance necessary to escape fighting with a few politically popular groups receiving airfare to further distant nations, like the Somali refugees relocated to Minneapolis, Minnesota. The rest find their way to the closest safety zone away from the fighting. However, this latest wave of refugees and migrants are passing through numerous safe nations, purchasing airfare across oceans and braving a travel path that is far more dangerous than remaining at home. For example, the aforementioned seventy-one Syrians found dead in Austria chose to bypass and ignore nearly a dozen other safe countries and make their way into Austria and, presumably, further on. It is odd that a Nepalese refugee will purchase airfare to Sao Palo, Brazil then travel by roads through the Amazon jungle and cross the US-Mexico border if it was just war or natural disaster that they were fleeing.
Public Benefits Create the IncentivesA major driver creating the incentives to make this dangerous, life threatening journey can be summed up with a single photo:
Above is a photo of a reference card created by human smugglers obtained by Frontex, the European Union’s border control agency. Smugglers throughout the Middle East, Turkey, and North Africa produce such cards and hand them to potential clients. In effect, refugees have ceased seeking the nearest safest refuge and are now shopping the best nations to flee to. This has created the issue that people are no longer fleeing from conflict or poverty, but fleeing toward the most lucrative benefit package. The above cards do warp the legal systems by implying that showing up is sufficient cause for asylum and the benefits are permanent and for life. However, the presence of such benefit packages does exist and is a major incentive for migrants. This explains why people fleeing Libya are crossing the Mediterranean in rickety, overcrowded boats and people are passing through four or five perfectly secure nations to reach the EU. Part of this large humanitarian crisis is generated by dangling the incentives that anyone who arrives will be given a host of benefits that are, relatively speaking to the recipient, opulent.
The United States provides similar resettlement benefits and even includes the possibility of full family unification. With the United States, further issues exasperate with the treatment of Unaccompanied Minors, who are advertised as given an almost full ride by showing up. This accounts for the surge of fifteen-to-eighteen-year-old males crossing the US border under dangerous conditions.
Lots of Government PaperworkAnother driver of this behavior is how states handle migration and border control. Legitimately crossing into the nations of the EU and North America is a bureaucratic nightmare. Migrants following the rules have to obtain identity documents that are not readily available in their home nations. For example, with the United States, the petition time tends to be lengthy, requires travel to inconvenient USCIS locations in the home nation and is limited to people who have existing families or job offers because of qualified skills. If one looks at the Green Card FAQ there is little recourse for a low-skilled worker seeking a better life apart from a narrow and difficult asylum process. The entry process into the EU is similarly difficult.
I can speak from personal experience traveling to Switzerland for my MBA that even as a US Citizen seeking a one year visa in the Schengen area is a complex, difficult task. It is hard to even comprehend what someone from Syria or Ghana has to go through to obtain legitimate entry. Even the $1,010 application fee, which provides no guarantee of acceptance, while not unreasonable by Western wealth standards, represents multiple years of earnings for some migrants. Even with legitimate refugees, the process is difficult and, with existing quotas, it would take nearly a decade to process just those displaced by the Syrian conflict.
By making legitimate entry points all but inaccessible to most desirable migrants, the migrants are funneled through non-standard routes such as the dangerous Panama-Colombia crossing or under razor-wire fences at the Hungarian border or associate with criminal cartels that will just as readily enslave, rob, or murder the migrants as assist them across borders. These routes are selected over safe alternatives because the safe alternatives have been made unavailable by government policy.
The Perfect StormEither of the above policies creates problems, but together, we get the perfect storm. By dangling a rich benefits package in front of potential refugees and migrants, governments are creating incentives for individuals to make the journey. But by making those said benefits impossible without running a dangerous gauntlet, we end up driving more people through quite literal meat grinders. This combination is almost cruel in a sense — great benefits, but near impossible to get to them.
The SolutionThe key solution to this problem is two-pronged. First, guaranteed public welfare subsidies for refugees needs to be curtailed or outright eliminated. By removing the incentives, people enticed to migrate for public benefits will disappear, greatly reducing the apparent reward for undertaking the trip. The cost of the dangerous trip remains, but the reward has just vanished. Those who are truly desperate will no longer have the incentives to travel beyond the nearest safe location.
Second, the Byzantine, lengthy and costly system of legal migration needs to be scrapped. This is not entering the debate on open borders, but whether one supports open borders or not, it is difficult to argue that the current system of migration is costly and difficult for all but the best educated and most well connected. Those who seek to migrate and contribute to the host society are by and large cut off from legal avenues, leaving only the very dangerous routes available.
While influential voices like the Pope are correct that this is a travesty, the policies promoted by him and other government officials will only make this worse. Offering assistance to migrants by rescuing them when they become troubled or allowing migrants to remain without changing the underlying bureaucratic issue will only create greater incentives for more and more people to take the same dangerous routes. Risk compensation has to be considered — the greater the safety mechanisms in place, the more risky the behavior will become. Unfortunately, the current solutions presented by officials will likely result in boats even more overloaded with people and even greater numbers traversing dangerous jungle passes.
Following the July 5 “no” vote in Greece against the terms of the negotiated bailout, European elites swore they would no longer negotiate:
[E]urozone officials shot down any prospect of a quick resumption of talks, even though finance ministers were planning to meet during the week to discuss the fallout from the vote. German Chancellor Angela Merkel and French President Francois Hollande immediately scheduled a bilateral meeting.
“Tsipras and his government are leading the Greek people on a path of bitter abandonment and hopelessness,” Germany’s Economy Minister Sigmar Gabriel told the Tagesspiegel daily. He said negotiations with Athens now were “barely conceivable.”
And yet, by mid-July, everyone was back at the negotiating table, and a deal had been struck. The new deal contained plenty of what the Greek voters said they didn’t want. Namely, austerity. On the other hand, the voters also expressed a desire to stay within the eurozone.
Both goals cannot be realistically achieved at once, so, faced with this ambiguous and contradictory message from the voters, the Greek negotiators went right back to what they had been doing before.
But, given that the European Central Bank had Greece over a barrel, there wasn’t much else the Greeks could do, short of withdrawing from the eurozone. As a means of squeezing the Greek politicians, the ECB had restricted emergency euro funds to the Greek banking system during the Greek crisis, so in order to stay in the eurozone, the Greek politicians were faced with two choices: close the banks or endure a full-blown run on the banks. They opted for bail-ins and bank closures, with predictable results on the standards of living for the Greeks.
In other words, as Martin Sandbu observed in The Financial Times, “the ECB forced a shutdown of the Greek banking system and made clear it would only let it function again once a deal on sovereign finances had been struck. … This has established beyond any doubt that the independence of the eurozone’s central bank from politicians is nothing of the sort. Far from being independent, the ECB does governments’ bidding.”
European Elites Got What They WantedIn this case, in the end, the European elites got what they wanted. They used the ECB to bring the Greeks to heel, and all the negotiators simply ignored the obvious political implications of the Greek referendum by adopting a deal that looked a whole lot like the rejected one. Indeed, some European politicians were explicit about their disdain for elections, as was Jyrki Kitainen of the European Commission when he declared “We don’t change policies depending on elections.”
Understandably, then, the Greeks have become cynical about their own elections, and realized that once you’ve committed your economy to the playground of European elites known as the eurozone, your local elections don’t mean much anymore. In reference to the upcoming polls, one Greek remarked “It’s just a pointless election.” Indeed it is, and countries with small and poor economies in Europe should get used to it. As a net receiver of EU funds, Greece handed over national economic policy and local control to a Europe-wide bureaucracy in exchange for freebies from the EU. So now their bargaining position isn’t exactly a strong one.
Recent Crisis Undermines Calls for a Politically Unified Europe (for Now)Ironically, the victory for the European creditors in the Greek crisis, and the demonstration of ECB power over a local political system, has undermined the efforts by advocates for political unity in Europe. The recent deal has demonstrated that the negotiation process can work.
For much of 2014 and early 2015, the media in Europe and the West in general had been calling for fiscal and political unity in Europe. In other words, they were calling for a strong central government in Europe that can simply force terms on misbehaving countries like Greece in order to avoid the need for tiresome negotiations.
For example, as the Greek crisis intensified, Timothy Garton Ash in the Los Angeles Times contended that monetary union without political union is “tearing Europe apart.” Eduardo Porter opined in The New York Times in February that “local politics” are undermining European unity.
There is general agreement among media pundits in the West that Europe needs a way to mandate participation from local politicians in Europe-wide fiscal and economic schemes. The real goal, Ash contends in The Guardian, should be “a proper federal union such as the United States” when the central government can take money from some states and hand it over to other states. At the same time, debtors can be directly compelled to pay up.
Ash recognizes that this scheme is directly opposed to professed European ideals of liberalism and democracy, so Ash is sure to include a disclaimer in which he notes “given the choice between democracy and a paternalistic, top-down, Euro-Leninis[m],” he’ll choose democracy. As pleasing as it is to see that Leninism is off the table, one is left wondering just how close to the Leninist line Europe ought to get in Ash’s mind.
And Ash’s disclaimer tells us a lot. The call for European integration is fundamentally about coercion and transferring power away from local populations to the machinery of a central state where, as the IMF notes, it can create a system that no longer requires this cumbersome system of sovereign debt, negotiations, and repayment plans. Why do that when you can simply execute wealth transfer schemes with the touch of a button?
Until it seizes that power, however, the European elites will have to rely on decentralized decision-making. As is so often the case, though, this sort of thing is denounced in the press and by politicians as a type of chaos. It’s the age-old call of the political centralizers: unity is strength, and decentralization is chaos.
The fact that the Greeks and their creditors were able to come to an agreement undermines this argument. Clearly, what economic chaos in Europe exists cannot be blamed on too much independence for the Greeks who were easily brought under control by threats from European-wide institutions and by the machinations of the ECB. Apparently, European elites already have many tools at their disposal for forcing the hand of European-member states. Perhaps the need for political unity is really not so dire after all. There’s already a whole lot of it.
The Big, Rich Member States Present the Real RiskBut Greece is just a small country with a small economy. Were it to leave the euro, it would hardly spell the end of the eurozone.
So, the real threat to European unity comes not from a Greek or Portuguese exit, but from a wealthy, net-payer state. Imagine, for example, that Mississippi seceded from the United States. As a net tax-receiver state, such a secession would hardly be noticed in the national economy or at the US Treasury. But imagine if New York, with it’s huge financial sector and immense income-tax revenues wished to secede. Obviously, that would be viewed by the national government as a grave economic threat.
And so it is for Europe. Greece could be lost without much economic threat to the whole. The exit of a country like the United Kingdom or Germany, on the other hand, would be another matter entirely.
And it’s this possibility of exit for these larger countries that has the IMF and other advocates for centralization most worried. The centralizers want the ability to easily compel transfer payments from wealthy countries to poorer countries. But, they know that this would generate opposition in the richer countries. The solution to this, of course, is to make sure and already have in place the coercive machinery that would prevent secession or resistance from the richer countries should they ever want out.
Without the means of directly coercing member states in this new unified Europe, the central government will have to engage in the slow, tiring business of negotiations and give-and-take among members. That is, the central government would have to actually care about what voters and taxpayers in the member states think. But once they get their “proper federal union” (likely to include a prohibition on secession), the power of individual member states will be eviscerated, and the goal of a politically unified Europe — complete with a strong central government and weak member-state governments — will be at hand.
In apportioning blame for the Greek government debt crisis, it would be difficult not to lay the major share on Greece itself. With government jobs paying three times the private sector average, a national rail service with a wage bill four times its annual revenue, a public pension system that would pay out generous benefits at fifty for anyone classified as working in “arduous” professions like hairdressing, there is no shortage of taxpayer-funded largesse running rampant through Greek society.
At this point however, dissecting the Greek’s failure to live within their means is not only nugatory — beyond proving the time-tested observation that people like something for nothing — but also obfuscates the true moral contours of the crisis. Moreover, it blurs our understanding of a fundamental truth crucial not just to the future of Greeks but all peoples: Government debt is not like private debt. In fact, government debt is fundamentally illegitimate and one might even be justified in claiming that anyone seeking to profit from it is aiding and abetting criminal activity.
Private Debt vs. Government DebtAs Murray Rothbard argued in his seminal essay, “Repudiating the National Debt,” public debt is a wholly different beast than private debt contracted between ordinary individuals. In the latter case, a creditor lends to a debtor a specified amount of their own funds in exchange for a specified payment from the debtor in the future. By making this contractual exchange from which both parties benefit (otherwise they wouldn’t enter into it) the creditor becomes the true owner of the future moneys pledged by the debtor. Consequently, if the debtor fails to make good on the future payment the debtor is really and objectively robbing the creditor of his property. In a just society, the creditor would rightfully be permitted to recover his property unjustly expropriated.
Government debt is different. When a government issues debt on the bond market, it is not pledging to make good on it out of its own resources because, as Rothbard points out, it owns no such resources:
For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation.”
What a government pledges to its creditors is payment of the future wealth of its subjects, the taxpayers. This is wealth obtained through violent coercion and pledged without its owner’s consent. Any moral claim the creditors who buy such debt have to repayment from the victims is thus non-existent. Indeed as Rothbard avers,
[P]ublic creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future.
By Rothbard’s lights, the only moral response to the Greek crisis is for Greece to repudiate entirely its public debt and let its creditors suffer the consequences. The Greek government, like all governments, acted in a manner akin to a perspicacious school bully who instead of punching people for lunch money, simply took out a credit card in the name of his victims. The fact that the victims might have enjoyed some of trinkets thrown back at them is morally irrelevant. They cannot be held responsible for the debt incurred.
Rothbard’s rationale for repudiation is notably different from that gaining the most traction amongst those campaigning for writing down Greek debt. Many would argue that the buyers of Greek debt “deserve” to get burned because they bought it as a calculated risk with a coupon or rate of interest reflecting the probability of default. However, this view — where reneging on debt, (i.e., theft) is not seen as an inherent wrong but is rather something that can be traded off against higher interest rates — is devoid of the moral substance and precision of Rothbard’s argument.
Who is to say: how much of the creditor’s loan “deserves” writing down? The part of interest which exceeds the rate charged on a risk free-asset like a T-Bill (whatever that means in this world of distorted asset prices)? Why then shouldn’t everyone simply refuse to pay interest on any loan exceeding some arbitrary risk-free rate, knowing that such behavior should be expected by the creditor who already priced it into the originally demanded rate of interest?
Rothbard’s argument does away with such ambiguities: those who buy Greek debt or indeed the debt of any sovereign nation debt deserve to get burned, not in degree but entirely, because their actions empower the state and enable it in its abuses against its subjects.
It’s Not German vs. Greek: It’s Taxpayers vs. the StateSo just who are the unscrupulous “profiteers” of human misery protracting Greece's conundrum? Well, most agree that it is industrious German taxpayers, who now must pick up the tab for years of Greek profligacy. However, this characterization conveniently ignores how German taxpayers were put on the hook in the first place.
At the beginning of the crisis it was the major European banks holding most of Greece’s debt. Now the vast majority is held by the international bailout fund put together by the European Commission, European Central Bank (ECB), and IMF (i.e., the “Troika”). Of this, the major share, some €56 billion, is held by Germany. The Troika’s purchase of Greek debt was presented as an almost humanitarian gesture intended to save Greece from economic implosion. The reality is that they allowed the banks to offload toxic Greek assets from their balance sheets keeping them solvent and able to extend the fraudulent fractional reserve practices that caused the financial crisis in the first place.
Nothing in the Greek crisis makes sense unless it is understood in terms of the ultimate end of bailing out the European financial system and its major banks.
Now European taxpayers are being forced to bail out the bailout and the German people are bearing the brunt, but this is hardly cause for a simplistic narrative pitting German against Greek. It is eminently clear that both peoples are victims of their own governments.
What right does the German parliament have to hand over more of the wealth of its own people so that the Greek government can use it to pay off the convoluted ECB/EU/IMF bailout funds which are in turn funded by debt instruments bought up by and made liquid by the world’s biggest banks? It has about as much right as the Greek government had to take out loans in the name of its people in the first place.
It would be a welcome gesture for an incoming government to declare the actions of previous governments to be against the interests of the taxpayers and repudiate the national debt.
This would not only relieve the taxpayers of a present burden but would also mean that any future government would find it hard to borrow from international creditors forcing them to bear the negative effects of their fiscal and monetary policies much earlier and with greater severity.
Unfortunately Greece’s “anti-bailout” government’s decision to ignore a plebiscite opposing a new bailout deal and the German parliament’s recent approval of said deal (going against the will of the majority of Germans) proves that any concept of democratic legitimacy — through which government is viewed as acting on behalf of the people in a principle-agent manner — is not only logically flawed but will always be discredited in practice.
Our guest this weekend is Jim Rickards, the author of the New York Times bestseller The Death of Money and a well-known expert in geopolitics and global capital.
Jim and Jeff discuss the unfolding drama at the Fed, which can't decide when—if ever—QE will come to an end. They also discuss possible endgame scenarios for liquidating unprecedented amounts of sovereign, commercial, and household debt; whether coming monetary shocks will present the IMF with an opportunity to demand a global currency reset, and who wins and loses when the game of musical chairs stops. This is a must-hear interview for anyone interested in currency wars, central banks, and the unholy politics behind it all.
See Jim Rickards' Strategic Intelligence newsletter.
See the transcript of this interview.
Last Monday's mini-crash in equity markets reminded many people of the dark days following the Crash of 2008. The 400 richest people in the world collectively lost $124 billion—at least on paper—in a single day. And the average investor may get tired of seeing his or her net worth take a nosedive every 7 or 8 years.
Here to make sense of market crashes is our own Dr. Joe Salerno. Why does the financial press fail to see monetary inflation as the cause of stock bubbles? Why is deflation portrayed as an enemy to be defeated, rather than a sign of a more productive economy? Why do even seasoned financial experts fail at timing the market? And are deflationary crashes actually the cure for a sick economy?
Over time, the claim that there is increasing income inequality globally has looked increasingly like a fairy tale. The assertions of inequality consist of the popular notion that the spread of capitalism leads to an immense increase in income inequality. The differences between rich and poor, we are told, are rising so fast that the situation is no longer sustainable. The narrative further asserts that there is an intrinsic tendency in capitalism toward inequality. This story is so often repeated that nobody questions it.
Is this picture accurate? The “naked” data seems to agree with the Marxist version of the market process, in which a small number of capitalists get richer as the people overall become more impoverished over time. Indeed, it seems that inequality since the Industrial Revolution has exploded. We can see how global inequality exploded since 1820 in both commonly-used indicators of inequality: Gini and Theil indices (figure 1).
Figure 1
Data source: Milanovic (2009)A closer look at the available data, however, suggests something else.
First, we notice that the world’s income inequality has been decreasing since 1980. This decrease is mainly because of the introduction of market reforms in China that caused huge increases in productivity and remarkable high rates of growth that get out of poverty millions of people. In other words, 1.3 billion people are converging toward the world’s average income.
Nonetheless the differences between the richer and poorer increased substantially between 1850 and 1980. So the question remains unanswered: is capitalism the cause?
Within-Border Inequality vs. Cross-Border InequalityIn the early nineteenth century, the Gini coefficient was 43 while in the early twenty-first century was near 70 (the number changes between 65 and 70 depending the on source of the data).
But are these numbers comparable? For this task we have to separate the components of the Gini coefficient into income differences within borders, and differences across borders.
During the early nineteenth century, 35 percent of the global inequality found by the Gini index was due to differences across national borders. At the same time, 65 percent of the inequality was generated by differences in incomes within each country. But by the early twenty-first century, 85 to 90 percent of the inequality was due to differences across national borders, while only 10 to 15 percent of inequality was due to income differences within each country.
In other words, the main source of inequality in the world has changed from the within-border inequality to cross-border inequality.
This is clearly an indicator that inequality does not come from capitalism, but comes from the spread of industrialism and market institutions to different places at a different pace. If half of the world embraces markets and the other half doesn’t, it is clear that the development of the first group makes the world more unequal, but this fact doesn’t tell us anything about the inequality in the areas adopting market institutions. Indeed, the available data supports precisely this hypothesis: inequality across countries has risen from 15 Gini points to 60–63 Gini points, while within-border inequality has fallen from 28 points to 7–11 points (figure 2 and 3):
Figure 2
Data source: Milanovic (2009)Figure 3
Data source: Milanovic (2009)In both Gini and Theil indicators, the trend shows that cross-border inequality rises while the within-border inequality diminishes until 1980. The last observation changes the trend, as we pointed out, partly because of the recent incorporation of China and its labor force into the international economy.
Inequality is Unavoidable in Poor SocietiesWe can use another approach to the inequality measurement if we take subsistence levels into account. In preindustrial societies, the average income was very close to the subsistence level, but as populations move away from subsistence living, the Gini index value may increase if low-level income growth does not match growth at the high level.
In other words, the higher the top income goes, the greater the inequality. The income level of subsistence is set at $300:
Figure 4
Data source: Milanovic (2009) Figure 5
Data source: Milanovic (2009)In 1820, the average global income was only twice the subsistence level. But by 1980, the average income was around fifteen times the subsistence level. All the while, however, inequality, as measured by both the Gini and Theil indices, was increasing.
Branko Milanovic takes this a step further. From here we can compare the “maximum feasible inequality” with the measurement of this equality and we obtain what is called the “extraction ratio.”
“Extraction ratio” is a vague term, and gives the impression that wealth is extracted instead of created, but the logic behind the metric is solid: given the maximum amount of inequality possible, how far is this maximum point from the actual measurement of it?
Figure 6
Data source: Milanovic (2009)When this gap is measured, we see two different trends depending on the indicator that we choose. The Gini indicator shows us that inequality has slightly decreased since the Industrial Revolution, but the level of inequality remains more or less constant. The Theil indicator, in contrast, shows us a huge decrease in inequality since the Industrial Revolution takes place.
ConclusionAs we attempt to measure inequality, we see that, in the first place, it is caused by the irregular adoption of market institutions over the world. If we disaggregate the data we see that inequality within countries has plummeted, suggesting that market institutions tend to make the society more equal.
In the second case, we see that preindustrial societies are equal because of their low income. Disparity of incomes can only be achievable in rich societies. Once we seriously consider subsistence levels, we find that inequality slightly decreases in the last 200 years measured by the Gini index, or strongly decreases when measured with the Theil index.
The claim that markets are the cause of increasing an “unsustainable” inequality is now less convincing than ever.
Earlier this month, the Chinese government decided to depreciate its currency on three consecutive occasions. On August 13, the price of the US dollar was trading at 6.413 — an increase of 3.3 percent against July. The key factor behind the central bank’s lowering of the yuan is a sharp decline in the growth momentum of exports with the yearly rate of growth falling to minus 8.3 percent in July from 2.8 percent in June.
It is held that by means of currency depreciation that it is possible to strengthen the export of goods and services, thereby strengthening the gross domestic product (GDP), which currently displays a visible weakening. The yearly rate of growth of real GDP stood at 7 percent in Q2 against 7.5 percent in Q2 last year and 8.6 percent in Q1 2012.
According to popular thinking, the key to economic growth is demand for goods and services. It is held that increases or decreases in demand for goods and services are behind rises and declines in the economy’s production of goods. Hence in order to keep the economy going economic policies must pay close attention to overall demand.
Why Governments Devalue Currencies to Boost ExportsNow, part of the demand for domestic products emanates from overseas. The accommodation of this demand is labeled “exports.” Likewise, local residents exercise demand for goods and services produced overseas, which are labeled “imports.” Observe that while an increase in exports implies an increase in the demand for domestic output, an increase in imports weakens demand. Hence exports, according to this way of thinking, are a factor that contributes to economic growth while imports are a factor that detracts from the growth of the economy.
From this way of thinking it follows that since overseas demand for a country’s goods and services is an important ingredient in setting the pace of economic growth, it makes a lot of sense to make locally produced goods and services attractive to foreigners. One of the ways to boost foreigners’ demand for domestically produced goods is by making the prices of these goods more attractive.
One of the ways of boosting their competitiveness is for the Chinese to depreciate the yuan against the US dollar. Based on this one can reach the conclusion that as a result of currency depreciation, all other things being equal, the overall demand for domestically produced goods is likely to increase while also lowering Chinese demand for American goods. This in turn will give rise to a better balance of payments and in turn to a stronger economic growth in terms of GDP. What we have here, as far as the Chinese is concerned, is more exports and less imports, which according to mainstream thinking is great news for economic growth.
Why an Exports Boost Fueled by Depreciation Can’t Grow the EconomyWhen a central bank announces a loosening in its monetary stance this leads to a quick response by participants in the foreign exchange market through selling the domestic currency in favor of other currencies, thereby leading to domestic currency depreciation. In response to this, various producers now find it more attractive to boost their exports. In order to fund the increase in production, producers approach commercial banks which — on account of a rise in central bank monetary pumping — are happy to expand their credit at lower interest rates.
By means of new credit, producers can now secure resources required to expand their production of goods in order to accommodate overseas demand. In other words, by means of newly created credit, producers divert real resources from other activities. As long as domestic prices remain intact, exporters record an increase in profits. (For a given amount of foreign money earned they now get more in terms of domestic money.) The so-called improved competitiveness on account of currency depreciation in fact amounts to economic impoverishment. The improved competitiveness means that the citizens of a country are now getting fewer real imports for a given amount of real exports. While the country is getting rich in terms of foreign currency it is getting poor in terms of real wealth (i.e., in terms of the goods and services required for maintaining people’s life and well being).
As time goes by, the effects of loose monetary policy filters through a broad spectrum of prices of goods and services and ultimately undermines exporters’ profits. A rise in prices puts an end to the illusory attempt to create economic prosperity out of thin air. According to Ludwig von Mises,
The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation's welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.
Contrast the policy of currency depreciation with a conservative policy where money is not expanding. Under these conditions, when the pool of real wealth is expanding, the purchasing power of money will follow suit. This, all other things being equal, leads to currency appreciation. With the expansion in the production of goods and services and consequently falling prices and declining production costs, local producers can improve their profitability and their competitiveness in overseas markets while the currency is actually appreciating.
The economic slowdown in China was set in motion a long time ago when the yearly rate of growth of the money supply fell from 39.3 percent in January 2010 to 1.8 percent by April 2012. The effect of this massive decline in the growth momentum of money puts severe pressure on bubble activities and in turn on various key economic activity data. Any tampering with the currency rate of exchange can only make things much worse as far as the allocation of scarce resources is concerned.
Brazil is in a meltdown: its stock markets are crashing, inflation is over 10%, and huge numbers of people are marching in the street to demand the impeachment of President Dilma Rouseff. And while collectivism runs deep in Brazilian politics and academia, the tide may be turning—some protesters now carry signs demanding “Less Marx, More Mises.”
Our friend Helio Beltrão, President of Mises Institute Brazil, is here to explain what’s going on. Will Brazil continue to unravel, even as it prepares to host the world for the 2016 Summer Olympics? Or is there a path forward, led by a growing movement eager to shrug off the old guard of Marxist cronies?
Economics is dead, and economists killed it.
What we have seen over the course of the last eighty years is a systematic dismantling of the contribution of economics to our understanding of the social world. Whatever the cause, modern economics is now not much more than formal modeling using mathematics dressed up in economics-sounding lingo. In this sense, economics is dead as a science, assuming it was ever alive. Economics in mathematical form cannot fulfill its promises and neither the scientific literature nor advanced education in the subject provide insights that are applicable to or useful in everyday life, business, or policy.
But apparently what is dead can be killed again. This, at least, appears to be the goal of the present tide of leftist critics who demand that economics be restructured from the bottom up. Why? The real reason is unlikely to be anything but the common leftist fear of what the science of economics reveals about the economy and the world. As often claimed by ideologues on the left, the science of economics “is ideology.” This is evident, we are supposed to believe, when we consult “scientific Marxism.”
The stated reason in the contemporary discussion is different, however. We need to restructure (if not do away with) economics because, we are told, it has failed. Why? Because economics could not predict the financial crisis of 2008.
These critics of economics will never let a crisis go to waste, and not only do they believe that the most recent crisis should be used to prove the Marxist dogma about the inherent contradictions in the market, but it can also be used as an ostensible reason to rethink the whole science of economics. Indeed, it is general knowledge that economists didn’t foresee the crisis, and their prescriptions to solve it quite obviously haven’t worked, either.
You have to applaud the anti-economics left for this rhetorical masterpiece. They have struggled for decades to sink the ship of economics, the generally acclaimed science that has firmly stood in the way of their anti-market and egalitarian policies, hindered the growth of big government, and raised obstacles to enact everything else that is beautiful to the anti-economics left. The financial crisis is exactly the excuse the Left has been waiting for. It is a slam dunk: government grows, Keynesianism is revived, and economics is made the culprit for all our troubles.
We see this now in education, as students demand to be taught (and professors demand permission to teach) a more “relevant” economics. Relevance, apparently, is achieved by diluting economics with a lot of the worst kinds of sociology, post modernism, and carefully structured discourse aimed to liberate us from our neoliberal bias. And, it turns out, we must also teach Keynesian ideas about how government must save the market economy.
We see this same agenda at academic research conferences, where it is now rather common to hear voices (or, as is my own experience, keynote talks) claiming that “it is time” for another paradigm: post-economics. The reason is always that economics “has failed.”
If this weren’t so serious, it would be amusing that the failure of Keynesian macro-economics (whether it is formally Keynes’s theory or post-Keynesian, new Keynesian, neo-Keynesian, monetarist, etc.) is taken as an excuse to do away with sound micro-economic theory to be replaced with Keynesian and other anti-market ideas. But it is not amusing. If most of the discussions heard are to be believed, the failures of central planning is a reason for central planning, just like socialism is a reason for socialism. The success of the market, on the other hand, is not a reason for the market.
It should not be a surprise that economics has finally become irrelevant after decades of uncalled-for mathematizing and formal modeling based on outrageous assumptions. This perverse kind of pseudo-economic analysis had it coming, really. One cannot calculate maxima for the social world; it is, as Mises showed almost a century ago, impossible. If mathematical economics is finally dead, then that is above all else an improvement.
But the death of mathematical economics should not mean economics is to be rejected. It should mean a return to proper and sound economic analysis — the state of the science prior to the “contributions” of Keynes, Samuelson, and that bunch. Mathematical economics is a failure, but economics proper is still the queen of the social sciences. And for good reason: she relies on irrefutable axioms about the real world, from which logically stringent and rigorous conclusions are derived. The object of study is the messy and sometimes ambiguous social world, but this does not require that the science is also messy and ambiguous. On the contrary, economics is unparalleled in its ability to provide proper and illuminating understanding of how the economy works. It is neither messy nor ambiguous. It brings clarity to the processes that make out the market.
This is the reason why the Left hates all that is economics. Because it points out that creating a better world through central planning, money-printing, and political manipulation is indeed impossible. The market is neither perfect nor efficient, but it is better than any available alternative. In fact, the unhampered market is the only positive-sum means available for human society. The market is indeed the only way of progress; all else is a step backward.
But the market is also uncontrollable and seems, at least to the non-economist, both unpredictable and unintuitive. This is why the Left hates it — and why the Right despises it.
The Left knows full well that they cannot beat proper economics; their ideology will always fail when put up against economic science. But they can beat mathematical economics, since it follows in the tradition of Lange-Lerner market socialism and is fundamentally flawed. They finally have. And they are using this as an excuse to kill economics again. Let’s hope for the sake of humanity that they will fail in their undertaking.
Too much of the commentary about the Greek crisis has focused on whether or not Greece should drop the euro and not enough on the structural problems arising out of decades of socialism. Meanwhile, the Greek government has borrowed more money than the Greek people can possibly repay, and debased money will not make this fact disappear. On the contrary, more easy money will cause even more harm.
The best thing that Europe and Greece can do for itself right now is to confront some of the economic fallacies that have long driven the debate over Greece, the euro, austerity, and debt. Here are four fallacies that are among the most damaging:
- The Euro Is Too Strong a Currency for GreeceThis statement usually is accompanied by a reference to Greek productivity being lower than that of the northern tier EU countries. The logic, such as it is, states that the euro is not a suitable currency for countries with vastly different levels of productivity. This is followed by a recommendation that Greece leave the European Monetary Union and reinstate the drachma. The National Bank of Greece then would set a very low exchange rate between the drachma and the euro, making Greek products more competitive.
Well, there is a semester’s worth of economic fallacies embedded in this chain of logic. A currency is an indirect medium of exchange. Two countries with different levels of productivity can use the same medium of exchange just as two individuals can. You may pay the kid next door to mow your lawn with dollars that you earned in a highly skilled and highly compensated profession. Yet you both use dollars. There is no reason that the Greeks and the Germans cannot use the same currency. In the age of the gold standard, national currencies were defined by their exchange rates to gold and were redeemable in specie; therefore, in effect, all countries were using the same currency — gold.
- Debasing the Currency Will Help the Greeks Export Their Way to RecoveryCorrelated to the above fallacy is the notion that debasing the currency will aid the Greek economy by the stimulative effects of an increase in exports. The idea is that the Greeks can give more drachma for the currency of its trading partners, making Greek exports cheaper in terms of the foreign currency. Increased exports will stimulate the entire economy. But currency debasement merely causes a transfer of wealth within the monopolized currency zone.
However, the Cantillon Effect tells us that the early receivers of the newly printed money benefit by their ability to purchase resources at existing prices. The losers are those furthest removed from the initial increase in spending, such as pensioners. They will find that their money doesn’t buy as much, due to price increases that are an inevitable consequence of an increase in money spending. Eventually, the exporters find that the cost of their resources has risen, at which point they demand another round of money debasement in order to prop up foreign sales and avoid business losses. They will be forced to pay more for their factors of production and must raise prices in local currency terms. In order to avoid losing sales they need their foreign buyers to receive more local currency so that their goods do not increase in price in foreign currency terms. This policy masks real structural problems. It is not a currency problem.
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Instituting One's Own Currency Will Enable Government To Avoid Unpopular Spending CutsIn other words, debasing the currency is a way to avoid the dreaded austerity monster. Governments would have the people believe that there are sufficient real resources to redistribute from the wealthy to alleviate all poverty. It is assumed that the wealthy have nefariously confiscated the people’s wealth, and redistributing it along socialist lines will result in plenty for all. The socialist “plenty for all” slogan has been around a long time and has yet to prove its worth in alleviating poverty.
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A Currency Must Be Backed by a Political Power with Taxing AuthorityMilton Friedman has been quoted as saying years ago, in reference to the formation of the European Monetary System, that a monetary union needed a fiscal union. Italy’s finance minister, Pier Carlo Padoan, was quoted in the Financial Times of London on July 27, 2015, as saying that the only way to defend the euro was to move “straight towards political union.”
Of course, both men refer to fiat money (i.e., money imposed by the state and backed by nothing except the legal tender laws of a monopolized currency zone). Real money — sound money — is a commodity that has been found by the market as the most useful intermediate means of exchange. Sound money arises out of the market process and is part and parcel of the market itself. Sound money is discovered by the market and is used willingly by cooperating parties. No one is forced to use sound money. Parties using sound money enjoy the protection of the rule of law. Counterfeiters are prosecuted. Bankers who fail to deliver specie upon presentment of money substitutes, such as money certificates, and bank drafts are prosecuted, too. The best monetary systems are private, because they must operate under the rule of law. The worst monetary systems are run by governments, because governments exempt themselves from the rule of law.
The Greeks (and Europe) Need Monetary FreedomDropping the euro will not solve Greece’s problems, nor would such a move remove the many structural problems underlying the European monetary union. An adherence to these economic fallacies has encouraged a belief that a few adjustments can fix the Greek-euro situation.
But, it is telling that in poll after poll, the Greeks themselves show that, although they do not desire austerity, they also do not wish to abandon the euro. They know that such a move will allow the government to destroy what little wealth remains in the country. The Greeks see the euro, with all its flaws, to be superior to a reinstated drachma. In fact, the best alternative for Greece right now is to allow free competition in currencies which would allow the Greek people to trade in whatever currencies they deem most desirable. At the same time, Greece should welcome and protect, via the rule of law, the establishment of private monies.
But the fundamental problem of the euro remains, and we must remember that the Greek government itself responded rationally to the structure of the European Union and the European Monetary Union. It borrowed heavily at low rates of interest from willing lenders. It accepted all the newly printed euros so eagerly offered by these flawed organizations’ various funds. It is not the only country to do so, merely the first in which the adverse consequences of the EU’s flawed structure became apparent. There will be others and the adverse consequences will be greater.
[This article is adapted from a July 17 Mises Weekends interview, available here in Mp3 format.]
Jeff Deist: You have studied at length, conceptually, central banks around the world. Before we get into that further, I’d like to ask you as a German especially, what your opinion is of the ongoing crisis in Greece.
Karl-Friedrich Israel: One of the leading German economists has recently compared the Greece situation to the so-called Dutch disease.
Back in 1960 when the Netherlands discovered huge supplies of natural gas, they could exploit those resources and live off exploiting those resources and they became fairly wealthy and it allowed them to increase wages and prices within the economy faster than the actual productivity grew. And when the production of gas diminished after some time, the economy was pushed into a recession. They had to go through a painful adjustment process in which wages had to fall and prices had to fall, but after all, today they are a stable economy in Europe. To some extent, the situation is similar in Greece, but of course Greece has not been exploiting a natural research, but rather an unnatural resource, namely the euro, which is a central-bank controlled fiat money.
After the introduction of the euro, huge amounts of liquidity in the form of credit flowed into the Greek economy, which allowed them to increase wages and prices and welfare spending above their productivity level. And so that’s why today, they are not competitive in the international markets and that’s why they have problems.
JD: But it’s interesting, apart from just the mechanics of the debt that’s owed by Greece, there’s also the political angle of all this. I’m reading today in the Washington Post about this image of the cruel German returning. In effect, the ECB has become a political project of sorts, has it not? It’s actually serving now to inflame some of those old postwar tensions that existed between the north and the south in Europe.
KFI: Yes, that’s true. There are some interesting facts and this is not surprising that the Germans are discontent with the situation in Greece and Greeks are discontent with what is happening in Germany. The Greeks don’t like the German conditions that come with bailout money.
So for example, as I’ve mentioned, the wages are inflated in Greece. Let me give you some examples. In manufacturing, the average hourly wage is twice as high as in Poland and Poland is of course, not part of the eurozone, but there are other examples. Pension payments in Greece are on average higher than in Germany. It’s not surprising that Germans, when they hear those empirical facts, they cannot understand it. Why do Greeks get higher pensions than we do in Germany, and why do we have to give them all these loans? So in fact, the big project of European integration, in some respects turns out to be counterproductive.
JD: Well it reinforces nationalist impulses in some senses.
KFI: That’s true.
JD: Now if we go back to the founding of the euro itself and the ECB within the eurozone, at the time, was it really recognized that it was crazy to have a single currency among these nations which still allow them to produce their own central sovereign debt through their own central banks.
KFI: It is not crazy to have the single currency, but it is crazy to have a single currency which can be exploited by sovereign national banks. This is what Greece has done, for example, through the Emergency Liquidity Assistance (ELA) mechanism. So, Greece was essentially able to grant itself credit from this ELA mechanism because, in order to stop Greece, a two-third majority would have been necessary within the ECB Council. Back then in 2012, the six crisis-stricken countries, Ireland, Italy, Spain, Portugal, Cypress, and Greece, had more than a third of the votes. So it was very hard to stop them from granting themselves more credit. This has changed now because Latvia and Lithuania entered the eurozone in 2014 and 2015, so now it has become easier to stop this.
JD: But this makes Philipp Bagus’s point that the euro operates more as a political project than a real currency.
KFI: That’s true, absolutely true.
JD: As a German, I’d like your thoughts. Do you think the average hardworking German or Dutchman or Belgian feels aggrieved under the eurozone? In other words, do they feel as though they are subsidizing countries that are economically less productive, like the PIGS, Portugal, Ireland, Greece, Spain?
KFI: Yes, I think they do. In fact, there never has been a majority for the euro, at least in Germany. So there always has been quite some skepticism toward the eurozone and toward the integration of Europe through these monetary measures in Germany. And now, as I mentioned earlier, seeing that welfare spending is at least partly higher in Greece than in Germany, just reinforces this feeling of some Germans that we are effectively subsidizing the Greeks. We have to give them liquidity and they don’t seem to be willing to lower their standard of living, which of course, nobody wants to lower their standard of living, but this is what needs to be done.
JD: So, part of your work here this summer at the Mises Institute is discussing, confronting some of the prevailing arguments in support of central banks and central banking. Could you sort of lay out for us, as a devil’s advocate, what are some of those arguments and how do you refute them in your work?
KFI: I think one of the most important arguments at the beginning, was the argument of price stability. It is the idea that we need a flexible money supply that can be expanded in accordance to real economic growth, so that we have stable prices or a stable price level. This argument still today seems to be very important because when the ECB started to buy government bonds directly, there was opposition in Germany, and lawsuits against the ECB have been brought to the European Court of Justice.
They argued that those purchases of government bonds are against European law because direct government financing is prohibited, but of course, the European Court of Justice, which is based in Luxembourg, decided in favor of the ECB measures. They argued that no, this is within the legal boundaries of the ECB because it belongs to the category of monetary policy and they do that in order to stabilize the ruro, in order to stabilize the purchasing power of the euro. So we have this argument still today. What I would argue is that what is today called price stability is not stability at all. This can be seen by the very definition of price stability that the ECB proposed. Price stability for them means, an inflation rate close to 2 percent.
JD: Same as in the US. Our Fed’s target is 2 percent.
KFI: Exactly, which means that in thirty-five years, on average, the currency will have lost half its value.
JD: Right and what’s so interesting is this inflation is an expressed policy of the government we pay for, in effect.
KFI: Right.
JD: This isn’t just a symptom of mismanagement, it’s an expressed policy.
KFI: Right.
JD: From your perspective, in the shorter history of the ECB versus our Fed, have they succeeded in creating price stability within the eurozone?
KFI: No, they haven’t. Since the establishment of the Federal Reserve in the US, the US dollar has lost, according to official statistics, 98 percent of its purchasing power. And the developments are similar in other countries. This is the same in the eurozone today and it has been the same under the deutsche mark as well. The deutsche mark seemed to be stable just because it was relatively less inflationary than for example, the French franc or the Italian lira, but it still was inflationist and a big part of the purchasing power has been lost under the policies of the Bundesbank.
JD: Does the ECB have an employment mandate like the Fed?
KFI: There’s a difference here. The Federal Reserve operates under a so-called dual mandate, so they try to maintain price stability and economic growth and employment on equal footing.
So, they are to some extent inherently more inflationist than the ECB because the ECB has a hierarchical mandate which says, first of all, comes price stability and after that, real economic targets, employment and growth.
JD: When we look at the euro in terms of its endgame, some people talked about the Greek exit as the straw that would break the camel’s back and will begin the end of the euro. Do you think that’s true or do you think the euro has real staying power in the coming decades?
KFI: It seems as if the leading nations within the eurozone want to preserve the currency union. They don’t want to let Greece exit the euro. Angela Merkel right now is lobbying for more rescue credits for Greece in order to keep Greece within the union. A leading German economist has proposed that it would be better if Greece left the eurozone, introduced the drachma again, and then devalued the drachma against the euro so that they remain competitive. I’m not sure whether this is the best solution, but it is pretty clear that what needs to be done is price adjustment and wage adjustment. In which way, I don’t know, but prices and wages in Greece as compared to other countries, have to fall.
JD: Well, a lot of people including Nigel Farage, have suggested going back to the drachma, but diluting the drachma doesn’t create any wealth, it just transfers wealth from savers to, say, Greek exporters. So in and of itself, allowing the currency to float to its natural level in devaluing it would not make Greek people more prosperous, but I would suggest that it might give them more sovereignty and more say over their future.
KFI: That’s true. They might have more sovereignty and they might have an independent central bank that can inflate their own currency as they please, but I don’t know whether this is the best solution. The Greek government seems to be inspired by Keynesian policy and prescriptions. I don’t know whether the Greek people or the country would be better off if they had an independent central bank and their own currency.
JD: So, can you elaborate on your thesis, your findings, in terms of your study of central banks? If you could make one point to someone who was talking to you about the folly of central banking, what would that point be?
KFI: I’m studying central banking especially in terms of fiat money because fiat money is subject to political will. It can be extended at virtually zero cost. And I would argue that this is the very danger of fiat money. You provide central banks with a very powerful tool which seems, according to historical experience, to corrupt people.
JD: And this is the point made by your mentor, Guido Hülsmann in his book about the ethics of money production, that there’s not just economic consequences to fiat currencies, but there’s deep seated cultural consequences to fiat currencies. For example, people act more upon high time preferences and they don’t save for the future as much.
KFI: I think it’s not only economics that is important here to understand, but the dynamics of central banking and the fiat money. In my research, I focus more on the economic arguments, but I see that there are a a lot of other arguments from other areas of the social sciences and ethics. I oftentimes ask myself what is the more powerful argument against or for central banks? Is it an economic one or is it an ethical one? And at times, I think the ethical argument might even be more powerful with which to persuade people.
Greece is a hot topic at the moment, mostly with the continued negotiations over bailouts from the European Union and, through institutions like the IMF, the world at large. Much of the discussion paints the image that Greece is only a debt-restructuring away from a stable economic situation. However, without understanding how Greece got into this problem in the first place and identifying the root cause of an over-indebted society, any plan or solution has a high probability of failure. To crack into this root cause, I had to develop an entirely new metric called “implied public reliance.”
Employment Data Doesn’t Tell the Whole StoryThe main puzzle behind Greece is simple from a praxeological standpoint — you get more of what you subsidize and less of what you tax. Greece, being a nation with a high tax rate on production and a high subsidy rate on public assistance, will generate a population that finds greater preference toward public assistance and away from productive labor.
The problem with this is that the data doesn’t, on the surface, support the statement. Calculating the average annual hours worked, Greece actually ranks far ahead of nations with lower public sector subsidies and lower taxes:
If it were true that higher taxes dissuaded labor, then Greece shouldn’t report higher worker hours than much lower tax burden nations like the United States and Canada. This indicator would also identify Germany as the European Union’s economic basket case, not its economic powerhouse. Even nations like Spain and Portugal, which have a negative stereotype for sloth, both come ahead of Germany, but are suffering economically.
The problem is these numbers only applied to those who were actively employed and did not provide us a picture of the overall employment situation. Even other indicators, like workforce participation rates, don’t fully paint the picture. What is needed is a new metric that effectively identifies the core of a nation’s potential growth and prosperity.
Someone Has to Pay for All the “Free” StuffThis is where a look at “implied public reliance” comes in. Ultimately, in a modern nation, all citizenry is provided with the necessities of life in some form or another. Mass starvation, homelessness and sickness is not generally present in modern nations, so virtually every citizen receives food, medicine, and housing from somewhere.
So, we must look to find the source of those resources, and it is, by and large, the active employees of any given nation that are tapped to provide the resources for all other individuals not engaged in overt economically productive activities. In every modern country, these resources are primarily delivered through the public bureaucracy and funded with taxation on existing workers.
How to Find Who’s PayingFirst, we must identify a nation’s currently employed population. Next, all public sector employees are removed to obtain an adjusted productive workforce. It may be objectionable that certain professions, like teaching, nurses in single payer systems and fire fighters, are classified as an unproductive workforce, but as our system is currently designed, the salaries of these individuals are not covered by the immediate beneficiaries like any other business but are paid through dispersed taxation methods.
Finally, this productive population is divided into the nation’s total population to identify the total number of individuals a worker is expected to support in his country. To remove bias toward non-working spouses and children, the average household size is subtracted from this result to get the final number of individuals that an individual must support that are not part of their own voluntary household. In other words, how many total strangers is this individual providing for?
The Implied Public Reliance metric does a far better job of predicting economic performance:
Greece, the nation with the debt problem, is currently expecting each employed person to support 6.1 other people above and beyond their own families. This explains much of the pressure to work long hours and also explains the unstable debt loads. Since a single Greek worker can’t possibly hope to support what amounts to a complete baseball team on a single salary, the difference is covered by Greek public debt, debt that the underlying social system cannot hope to repay as the incentives are to maintain the current system of subsidies. To demonstrate how difficult it is to change these systems within a democratic society, we just have to look at the percentage of the population that is reliant on public subsidy.
The numbers imply that 67 percent of the population of Greece is wholly reliant on the Greek government to provide their incomes. With such a commanding supermajority, changing this system with the democratic process is impossible as the 67 percent have strong incentives to continue to vote for the other 33 percent — and also foreign entities — to cover their living expenses.
How does this equate to GDP growth? While GDP is not a perfect metric, it is still the best available to identify economic health. Each nation that has breached the 50 percent barrier in public reliance is also showing poor growth with numerous nations coming dangerously close to the majority in some form of reliance on redistribution for earnings.
What does this tell us? A nation that allows its citizenry to remain idle and expect the support of a productive worker will eventually undermine its ability to maintain the economy that those recipients of public funds rely on. Nations that do not have a structure to dissuade usage of public assistance or hire too many public sector workers will find their economic growth impeded and, if it becomes too large, recessive.
However, public institutions are not capable of creating these safeguards to ensure as few people as possible engage in safety net programs. Government institutions are, in fact, designed to grow public sector employment rolls. So as long as this social structure is in place, the odds that a Greek default and restructuring will lead to a sustained Greek recovery are very low.
Anti-market and pro-socialist rhetoric is surging in headlines (see also here, here, and here) and popping up more and more on social media feeds. Much of the time, these opponents of markets can’t tell the difference between state-sponsored organizations like the International Monetary Fund and actual markets. But, that doesn’t matter because the articles and memes are often populist and vaguely worded — intentionally framed in such a way to easily deflect uninformed attacks and honest descriptions of what they are actually saying. In the end, they can all be boiled down to one message: socialism works and is better than capitalism.
While most of it comes from the Left, the Right is not innocent, since the Right appears to be primarily concerned with promoting its own version of populism, which apparently does not involve a defense of markets. “Build bigger walls at the border,” for example, is not a sufficient response to “All profits are evil!”
Instead of stooping to this level or simply resorting to “Read Mises!” (a more fitting response), we must show, yet again, that socialism — even under well-meaning political leaders — is impossible and leads to disastrous consequences.
The Necessity of Profits, Prices, and EntrepreneursSocialism is the collective ownership (i.e., a state monopoly) of the means of production. It calls for the abolition of private ownership of factors of production. Wages and profits are two parts of the same pie, and socialism says the profit slice should be zero.
The inherent theoretical problems of socialism all emanate from its definition, and not the particulars of its application. However, the supporters of socialism define “collective,” as no exchange of the factors of production. And without exchange, there can be no prices, and without prices there is no way to measure the costs of production.
In an unhampered market economy, the prices of the factors of production are determined by their aid in producing things that consumers want. They tend to earn their marginal product, and because every laborer has some comparative advantage, there is a slice of pie for everybody.
If technological changes make certain factors more productive, or if education and training makes a laborer more productive, their prices or wages may be bid up to their new, higher marginal product. An entrepreneur would not like to hire or buy any factor at a price that exceeds its marginal product because the entrepreneur would then incur losses.
Entrepreneurial losses are more important than many realize. They aren’t just hits to the entrepreneur’s bottom line. Losses show that on the market, the resources used to produce something were more highly valued than what they were producing. Losses show that wealth has been destroyed.
Profits give the opposite signal. They represent economic growth and wealth creation. A profitable line of production is one in which the stuff that goes into producing some consumer good costs less than what consumers are willing to pay for the consumer good.
As such, profits and losses are more than just important incentives, or cover in a conspiratorial capitalist class system; they are the only way to know that wealth is being created instead of destroyed in any line of production.
Under socialism, there is a single owner that does not bid factors away from some lines of production and toward others. Nobody is able to say, with any shred of certainty, that a particular tool or machine or factory could be used to produce something else in a more effective way. Nobody knows what to produce or how much to produce. It’s economic chaos.
Without Markets, We Can’t Know What or How to ProduceProfits and losses guide and correct entrepreneurs in the process of producing things they expect consumers will demand. Without this information, including the costs of production specifically, entrepreneurs cannot engage in economic calculation, the estimation of the difference between future revenues and the costs of production necessary to gain those future revenues.
Laborers are put to work in areas where they don’t have a comparative advantage. Farmers are sent to factories, and tailors are sent to the mines. Workers are in the wrong lines of production and have the wrong tools. Every morning, the economy looks like Robert Murphy’s capital rearranging gnomes just ransacked it.
The Polish film Brunet Will Call lampooned situations like this throughout the movie, with consumer and capital goods in the most unlikely places. A butcher pulls an automobile’s clutch cable out of his freezer, and gives it to the main character, who pays for it with information on the whereabouts of a double buggy for someone’s newborn twins (at the flower shop, obviously).
So the failure of socialism is not conditional on the culture, time, or place of the victims. Socialism is flawed at its core: the “collective” ownership of the means of production. As such, there is no way to enact a functioning, growth-inducing version of socialism anywhere. In practice, however, the theoretical problems of socialism give way to civil unrest, which is met with state force and results in a death toll higher than any official war ever fought.
Without profit motives to produce, quotas must be put in place. With quotas, even in the cases where workers don’t lie about their production, chaos still reigns. For example, if a nail production quota is based on the number of nails, workers produce a lot of tiny, unusable nails. A nail quota based on weight would encourage workers to produce massive, but still unusable nails — a situation lampooned by this cartoon in Krokodil during the 1960s.
Endless queues stretched across the USSR, filled with people looking for shoes even though shoe production in the USSR exceeded that of the US. The problem was all the shoes were too small, because shoe production was measured by number, with no regard for the sizes or designs consumers demand.
The Wake of SocialismSome cases are funny; others are not. About seven million people died of starvation in the USSR just in 1932–33 (middle-of-the-road estimate based on manipulated data). The authors of The Black Book of Communism (1999) estimate the deaths of close to 100 million people are attributable to communist and socialist regimes. That’s more than 200 times the number of US deaths in WWII (and a case could be made that their deaths are attributable to socialism, too).
Even today, in Cuba, the average wage is about $20 a month. In North Korea civilians are routinely rounded up by the dozens for public execution for the crime of watching South Korean TV smuggled into the country.
When people are hungry and unhappy, the state cannot survive if the people know others are better off. The state uses propaganda, misinformation, and censorship to make an already captive citizenry even more confused and submissive.
So count me surprised to hear fresh calls for socialism in 2015 — if the strong economic calculation argument and astronomical death toll haven’t turned the Left off of socialism, I don’t know what will. The idea is both bankrupt and deadly in both theory and practice.
THE AUSTRIAN: How did you first become familiar with the Mises Institute?
Back in 2009, in my second year of undergraduate studies, I took an elective course in comparative economic policies. It happened to be taught by Vlad Topan, the president of the Ludwig von Mises Institute Romania, and a senior lecturer at my university. The syllabus contained readings from Mises and Rothbard, such as Economic Policy: Thoughts for Today and Tomorrow, and What Has Government Done to Our Money?, and a long list of links to the Mises Institute website. Until that day, I had seriously doubted my choice of major, but this fortunate encounter changed everything. I began to read the website regularly, and listen to the lectures, and economics finally started to make sense. Later that year, Vlad gave me my first copy of Human Action. That’s how it all started.
MI: Why did you decide to pursue an academic career?
CED: A career in education was on the radar from the beginning of my undergraduate courses. I had been influenced by my father, who had tried to leave Romania as a young man and study philosophy abroad, but was not able to because of the communist regime. And after I read Mises and Rothbard, who have repeatedly stressed the importance of ideas and economic education, I really wanted to make my own contribution to this goal, just like Vlad had done for me with that class. Now I believe I have made the right decision. I greatly enjoy teaching, and interacting with students is perhaps the most exciting part of the job. But I have also been fortunate to meet outstanding professors who have shown me how rewarding research can be.
MI: What convinced you to apply to become a Mises Fellow?
CED: The fellowship was a tremendous opportunity to work for a few months at the Mises Institute, and to read economic literature that was otherwise unavailable. Most importantly, it was a great chance to do research under the supervision of professors Joseph Salerno and Mark Thornton, as well as meet the rest of the Mises Institute’s faculty during the Rothbard Graduate Seminar and Mises University. So I did not have to think twice before applying, I knew that it was too good an opportunity to miss. Even so, when I arrived here for the first time in 2011, I was overwhelmed by the warmth and care of the staff, and by how quickly we all became good friends. Each year I have been a Fellow has been one of the most important and formative experiences, both professionally and socially.
MI: What was your favorite part of being a Fellow?
CED: The benefits of the fact that Professor Salerno’s office is just down the hall, and that his door is always open for the fellows cannot be stressed enough. He has this great capacity to understand your ideas even before they have become clear to you, and he can guide your research with just the right reading recommendations. We also had weekly research seminars where all the Fellows would present their ongoing work, and bounce around ideas, and we were fortunate enough to read and discuss Professor Salerno’s working papers. By the end of the summer, we could tell that our research process had become more structured, more focused, and even that we had new energy for new projects. No other academic experience has had this kind of impact on my development.
MI: What topics do you now focus on in your academic work?
CED: So far, I have done most of my research in international trade, both on theory and policy. And through the collaboration with Professor Guido Hülsmann (at the University of Angers, France), whom I met at the Mises Institute during my fellowship and who became my PhD adviser, my work has gradually expanded to incorporate monetary theory and international finance. For example, my PhD thesis analyzes the Cantillon effects of inflation in a global context, looking into the impact of monetary policies on trade, finance, and the distribution of wealth. I also currently work as a lecturer in international business at Coventry University in the UK, where I teach my students about international trade, globalization, and the challenges of operating in global markets. But in general, wherever my particular research interests take me, I always return to Mises’s works in search for the grounding framework.
MI: How have your experiences with the Mises Institute affected your plans for the future and future academic work?
CED: Through the summer fellowships, and the mentorship of Professors Salerno and Hülsmann, the Mises Institute has become my intellectual alma mater. The support network of peers and faculty that the Institute makes available every year, through its resident fellowships and conferences, was crucial to my academic efforts as a student, and now as a teacher. I learned what good research is, and how to strive to achieve it. I learned what a good teacher should be, and I can only hope to be half as good as my teachers. I am humbled and grateful by every renewed opportunity to be part of this wonderful community of scholars.
Karl and Jeff discuss the current situation in Greece from Karl's perspective as a German. Old hostilities between the north and south in Europe are being inflamed, which calls into question the entire purpose of the Eurozone.
Would Greece be better off simply leaving the Euro and resurrecting the drachma? Would the less profligate Eurozone nations cheer this? And has the ECB failed as miserably as the US Fed in creating price stability?
The Greek government continues to negotiate with international creditors following its recent default on its 1.6 billion euro loan repayment to the International Monetary Fund (IMF).
Consequently, Greece runs the risk of losing access to a 1.8 billion euro loan tranche and 10.0 billion euros for recapitalizing banks.
Commentators are of the view that the key factor behind the troubles in Greece is high government debt, which as a percentage of GDP stood at over 177 percent in 2014 against 79.6 percent in 1990.
But it is not debt as such that is behind the current crisis in Greece. Large government outlays and strong increases in the money supply are being ignored in most analyzes of the Greek crisis.
Since early 2000, the underlying trend in the growth momentum of government outlays was heading up with the yearly rate of growth closing at 45.5 percent in March 2009. Since then, the trend in the growth momentum has been declining.
Year on year the rate of growth of Greece’s monetary measure AMS stood at 20 percent in July 2004. It stood at a lofty 18 percent in August 2009 before sliding to minus 13.8 percent in April this year.
Loose fiscal and monetary policies have been instrumental in the generation of various non-productive activities that have been squandering wealth.
Easy Money Weakens the Wealth-Generation ProcessA fall in the growth momentum of both government outlays and the money supply is good for the wealth generation process.
In other words, a decline in the growth momentum of government outlays and money supply (see charts) has arrested the diversion of wealth to non-productive activities from wealth generating activities.
The current crisis is centered around non-productive activities that can no longer divert wealth from wealth generating activities on account of a fall in both government spending and the rate of growth in the money supply.
From this perspective this is good news for the Greek economy, and what is now needed is a tight grip on government outlays and to allow the plunge in the money supply to continue.
Greece’s wealth generating process has been badly damaged as a result of past loose fiscal and monetary policies. Thus, reverting back to loose fiscal and monetary policies, as suggested by various famous economists such as a Nobel Prize Laureate in economics Joseph Stiglitz, is going to make things much worse.
Remember, neither more government outlays nor more monetary pumping can generate real wealth. Only the strengthening of the wealth generating private sector can do that.
The Damage That Has Been DoneNow, since currently non-productive activities are likely to comprise a large portion of total activities, the effect that is generated from their demise appears to be very severe.
After closing at 122 in April 2008, the industrial production index plunged to 91 by March this year — a fall of 25.3 percent. The unemployment rate climbed from 7.3 percent in May 2008 to 25.6 percent in March this year.
Any threat to the financial systems of other European economies is not due to the Greek default, but instead is a result of loose fiscal and monetary policies that have damaged the savings bases of various European countries.
Rather than continuing to support wealth-squandering activities and thereby making things much worse, a better way is to allow wealth generators to step in and let them restart the wealth generating process. This means that all the loopholes of money creation should be sealed and government outlays should be cut to the bone. Obviously such measures will be painful for various individuals employed in non-wealth generating activities. Failing to reduce non-productive activities however will only prolong the agony — it is not possible to create real wealth out of nothing.
It’s considered politically incorrect to criticize culture these days, but whether using euros or drachmas, in or out of the European Union, Greece really has to, somehow, sort out its cultural dysfunction. I’m not talking about its customs, traditions, architecture or music, and I’m definitely not talking about its food. I’m talking about its cultural anti-capitalism. The negotiations, deals, counter-deals, referenda, protests and everything in between all mean very little if Greeks, by and large, don’t ditch their statist zeitgeist and rediscover Greek capitalistic exceptionalism.
A perfect example is Argentina. A default and sovereign crisis is supposed to chasten a nation into a sensible, market-oriented direction as the folly of debt-addicted big state crony socialism gets utterly discredited. It’s a nice theory. But Argentina, thirteen years after its 2002 default, and after years of soaring inflation, dollar shortages, and economic malaise, clings to its completely clueless, hyper-interventionist, socialist overlords who continue to run the economy into the ground. The reason is the core culture never changed. When your culture is toxic, up is down, black is white, socialist failure is capitalist failure.
In The Anti-Capitalistic Mentality Ludwig von Mises described this cultural anti-capitalism:
As John Doe sees it, all those new industries that are supplying him with amenities unknown to his father came into being by some mythical agency called progress. Capital accumulation, entrepreneurship and technological ingenuity did not contribute anything to the spontaneous generation of prosperity. If any man has to be credited with what John Doe considers as the rise in the productivity of labor, then it is the man on the assembly line. ...
The authors of this description of capitalistic industry are praised at universities as the greatest philosophers and benefactors of mankind and their teachings are accepted with reverential awe by the millions whose homes, besides other gadgets, are equipped with radio and television sets.
The biggest risk to Greece is not austerity or fauxsterity or default or the euro or the drachma. And it’s certainly not the bogeyman of being frozen out of sovereign credit markets — it’s that Greek culture remains antagonistic to free, unfettered markets and is chronically state-dependent.
Take another Latin American country: Venezuela. After suffering crippling inflation rates throughout the 1980s and 90s, the electorate went on in 1998 to vote in another central planning inflationist in Hugo Chavez. They re-elected him in 2000, 2006 and 2012, and his successor Nicolás Maduro in 2013, even while the country was in a hyperinflationary death spiral and heading toward outright economic collapse. Venezuela’s problem ultimately is not fiscal mismanagement — it’s an anti-capitalist culture.
And so it is with Greece. After already securing debt relief and effectively being allowed to default by restructuring its debts over the next fifty years at subsidized interest rates — and after actually achieving economic growth in 2014 by cutting taxes and slashing the size of its sclerotic, bloated government — this toxic Greek culture prevailed once more and elected a team of socialist die-hards to drag it back into the mire. Of course it doesn’t help that on the other side of the negotiating table is another bunch of central planners in the EU, IMF, and ECB. Nevertheless, Greece sits stuck between two central planning negotiation parties because its people have been too busy demanding goodies instead of freedom.
Most Countries Get Into Trouble — But Some Bounce Back Better Than OthersAny sovereign nation can overspend and get into financial trouble, and most have. It wasn’t that long ago that Britain was forced to go cap in hand to the IMF in 1976 and cede its fiscal sovereignty to that institution. By the latter half of the 70s, Britain was a downright mess. America stealth-defaulted on its international obligations in 1971 and suffered a rolling inflationary economic crisis for the rest of the 1970s. Both these countries bounced back. As did Chile, Uruguay, and the Philippines after their fiscal and financial turmoil of the 70s and 80s.
But some don’t bounce back, and I believe this happens when the national culture is, or has become, fundamentally anti-capitalist and resigned itself pathetically to cradle-to-grave state-dependency. In addition to Argentina and Venezuela, we’ve seen prolonged economic and financial malaise following painful crises in the likes of Zimbabwe, Ghana, Bolivia, Nigeria, Russia, Turkey, and now southern Europe. These countries don’t seem to learn from their mistakes because they don’t seem to want to or can’t locate the lesson amid the intellectual haze of their cultural zeitgeist.
But really the lesson is clear. An economic crisis can jolt a fundamentally pro-capitalist (or mostly pro-capitalist) nation that had lost its way back onto the straight and narrow. But there is no guarantee of recovery when the culture has descended into infantile anti-capitalism, dysfunctional statism, and an antagonism toward entrepreneurial dynamism and self-reliance. For these a crisis may not herald recovery but instead a longer, deeper national decline. Only a culture shift resulting from the spread of sound ideas can make Greece (and other countries) a fertile ground to accept real solutions. The need to spread the good news of liberty and free markets is clearly as urgent as ever.
Greece cannot pay its debts ... ever. Nor can several other members of the European Union. That’s why Europe’s elite are loath to place Greece in default. If Greece is allowed to abrogate its debts, why should any of the other debtor members of the EU pay up? The financial consequences of massive default by most of the EU members is hard to predict, but it won't be pretty. Europe has built a financial house of cards, and the slightest loss of confidence will bring it crashing down.
The tragedy of Europe has socialism at its core. Europe has flirted with socialism since the late nineteenth century. Nineteenth century Bismarckian socialism produced two world wars. Leninist socialism slaughtered and enslaved hundreds of millions until it collapsed, mercifully without a third world war. Yet, not to be deterred, in the ashes of World War II, Europe’s socialists embarked on a new socialist dream. If socialism fails in one country, perhaps it will succeed if all of Europe joined a supra-national socialist organization. Oh, they don't call what has evolved from this dream “socialism,” but it is socialism nonetheless.
Socialism will not work, whether in one country, a multi-state region such as Europe, or the entire world. Ludwig von Mises explained that socialism is not an alternative economic system. It is a program for consumption. It tells us nothing about economic production. Since each man's production must be distributed to all of mankind, there is no economic incentive to produce anything, although there may be the incentive of coercion and threats of violence. Conversely, free market capitalism is an economic system of production, whereby each man owns the product of his own labors and, therefore, has great economic incentives to produce both for himself, his family, and has surplus goods to trade for the surplus product of others. Even under life and death threats neither the socialist worker nor his overseer would know what to produce, how to produce it, or in what quantities and qualities. These economic cues are the product of free market capitalism and money prices.
Under capitalism, man specializes to produce trade goods for the product of others. This is just one way of stating Say’s Law; i.e., that production precedes consumption and that production itself creates demand. For example, a farmer may grow some corn for his family to consume or to feed to his own livestock, but he sells most of his corn on the market in exchange for money with which to buy all the many other necessities and luxuries of life. His corn crop is his demand and money is simply the indirect medium of exchange.
Keynes attempted to deny Say’s Law, claiming that demand itself — created artificially by central bank money printing — would spur production. He attempted, illogically and unsuccessfully, to place consumption ahead of production. To this day Keynes is very popular with spendthrift politicians, to whom he bestowed a moral imperative to spend money that they did not have.
We see the result of 150 years of European socialism playing out in grand style in Greece today. The producing countries are beginning to realize that they have been robbed by the EU’s socialist guarantee that no nation will be allowed to default on its bonds. Greece merely accepted this guarantee at face value and spent itself into national bankruptcy. Other EU nations are not far behind. It’s time to give free market capitalism and sound money a chance: it’s worked every time it’s been tried.
Greece has defaulted on its debt to the International Monetary Fund, the first “developed” country to do so. But is Greece merely a casualty of a flawed eurozone or a canary in the coal mine?
After hobbling along on “emergency” loans for five years, a $1.73 billion payment due Tuesday night went unpaid — the largest missed payment in the international finance organization’s seventy-one-year history. The IMF tellingly refused to call the missed payment what it was: a default, opting instead for “in arrears” (which, for the uninitiated, is a complex, highly-technical financial term that means default). Greece now shares company in this respect with the likes of Sudan, Zimbabwe, Afghanistan, Haiti, Yugoslavia, and Somalia.
For Greece, the pain has been a long time coming, since it began relying on emergency loans five years ago. And now default — while sending shocks of volatility through global financial markets — has been almost anticlimactic. But the jagged lines on a financial chart tell little of the carnage happening on the ground, or of what is to come.
The problems Greece and the world face now are manifold. For Greeks, capital controls and bank closures have left people without access to the funds in their accounts. ATMs have lines stringing away from them at all hours, even though daily withdrawals are limited to €60. The next weapon in the financial warfare: deposit seizures. While it may be easy to dismiss these afflictions as the result of socialist policy, but that wouldn’t be an accurate characterization of what’s transpired.
No, when Greece resorted to emergency funding, the Troika (the collective pejorative for the European Commission, European Central Bank, and IMF) authorized €110 billion in assistance, in exchange for vague, unquantified promises of “austerity.” The more recent loans were actually diversion of interest payments on Greek debt owed to other eurozone countries, lent back to Greece. Even now, after default, there is little doubt in the financial world what the “solution” to the debt crisis will be — more debt.
Of course, it’s easy to dismiss these presumptions as the misguided naïveté of Keynesian central planners, but doing so ignores the more pervasive threat of sovereign debt. As Greeks are learning, the IMF (like many of the world’s central banks) will not accept default; it never has, and never will. Calling Greece “in arrears” didn’t do it any favors. The message is clear: you will pay. So although for a time Greece was comfortable, living beyond its means, it’s soon time to pay the piper.
Government Debt Isn’t Like Private DebtSovereign debt isn’t like a credit card, family budget, or a mortgage, no matter how many folksy analogies politicians make. No, government debt is something altogether more sinister. When a state borrows money, repayment is on the heads of its citizenry, without expiration. At one point in the Hellenic drama Germany’s war reparations were at issue. An infinitesimally small minority of the population could recall the war, and an even smaller subset — if any — was even remotely accountable. But the point is illustrated clearly: public debt is interminable.
This trait alone is toothless without its necessary complement: enforcement. Since government revenues are generated through taxes, and government debts are future revenues spent now, then debts are simply future taxes. While this is well-covered ground, most people seem to forget that taxes are one of the only debts for which nonpayment results in prison time.
To make sovereign debt even worse, the citizenry doesn’t have the ordinary contractual protections of say, reviewing the terms, choosing how much to borrow, deciding on what to spend the money, or even agreeing to repayment schedules. Apparently, all of these choices are made at the “ballet-box.” But I’d wager that if you asked 100 people how to spend just $100, you’d get at least ninety-nine different answers. The problem gets worse, not better, when you have 300 million people and $1 trillion in debt on the table. In the end, there’s an incentive to pass the buck; the next generation can figure it out, we’re getting ours. But who will ultimately be forced to pay the bill? That demographic is unfortunate indeed, since they will be forced to pay exorbitant taxes without trappings of social welfare, just to make the interest payments on the largesse.
For them, “figuring it out” means a life spent working to service another’s debts, backed by the callous indifference of law. There’s a word for that, isn’t there? Oh, yeah: slavery.
Patrick and Jeff discuss European integration, which pits creditor nations like Germany against hapless debtors like Greece under the yoke of the Eurozone. With the Euro operating as a political project rather than a real currency, spendthrifts like Greece chronically find themselves unable to service debt. Greece, says Patrick, represents an example of Say's Law in action and a clear refutation of Keynes's belief that creating artificial demand via cheap credit stimulates production.
Think Greece can't happen here? Look no further than California, with its public pension crisis and huge debts.
If you're looking for a sober and hard-hitting analysis of what's really at issue in Greece, stay tuned for a great discussion with Patrick Barron.
To the surprise of many, Bolivia is now Latin America’s fastest growing economy. At a 5 percent growth rate it now outstrips once dominant but now stagnating regional competitors like Brazil and Peru. Furthermore Bolivia boasts some very impressive macrofundametals: its level of international reserves are the highest in all of Latin America, it has slashed its government debt, and its inflation rate stands at a respectable 5 percent. This accompanies a 307 percent increase in average income and a 25 percent reduction in the poverty rate since 2001.
For those who have watched the demise of Venezuela and Argentina — the paragons of Latin American “21st century socialism” — Bolivia’s undeniable economic improvement appears to confound the expectation that socialism inevitably leads a country to ruin. Indeed the socialist policies of Evo Morales, Bolivia’s president since 2006, are based on exerting state control over natural resources and increased welfare spending. But, he’s credited with bringing about the turnaround.
Has the “Third Way” Worked in Bolivia?Should the naysayers therefore reexamine their beliefs, and accede to the possibility of a “third way,” where a managed economy run by nice guys like Evo can bring about a positive outcome in people’s lives? Is Evo’s system superior to that which might prevail in an unregulated market?
Well, there may not be any great mystery to Bolivia’s success, if we take into account the fact that it is actually riding high on the wave of a commodity boom, particularly in natural gas, which alone constitutes around 45 percent of Bolivia’s exports. Such is the reliance of Bolivia on this commodity that when the price falls, as has begun to happen this year, a rehash of the classic plot line of a Latin American government’s gravy train coming to a crunching stop would not be surprising.
Government bureaucrats will be laid off, social programs will be shut down, and civil unrest will ensue. The only question is whether it will play out as a short drama or a long telenovela of the Venezuelan variety, with the government first running down its international reserves and then resorting to creating currency out of thin air ushering in the grand finale of hyperinflation.
For some however, the very fact that Bolivia hasn’t played out like that in Venezuela and doesn’t seem likely to in the near future, would suggest that socialism is viable if it is well managed and trimmed of its more radical excesses.
In fact, Evo’s tenure has undoubtedly been one of pragmatism. It is true that since 2005 he has expropriated just over twenty companies, but the level of expropriations in no way compares to that taking place in the culture of government impunity rife in Venezuela where 1,168 foreign and domestic companies were expropriated between 2002 and 2012. The infamous nationalization of foreign oil and gas fields is not one of complete state control, but is rather about gaining a controlling share of the profits made by foreign companies which can then be diverted into various social programs.
All this would suggest, as the mainstream business press gleefully point out, that Evo is no old-style Latin American socialist. Instead, they claim, what he’s doing in Bolivia is really run-of-the-mill Nordic-style social democracy in a Latin American setting.
The business press narrative however, ignores the genuinely significant and even transformative things that have occurred under Evo’s presidency, which despite the rhetoric they are couched in, have nothing to do with socialism and everything to do with advancing true freedom and enterprise.
Rejecting US Control, the IMF, and the World BankFirst among these is Morales’s rejection of the international financial system and its pillars, the IMF and World Bank. In left-wing lore, this position is consistent with the continent-wide popular struggle against neoliberalism and “free-market fundamentalism” that brought Evo to power. But in reality, the IMF and World Bank interventions are about building an infrastructure of financial control and corporate patronage that is the complete antithesis of the free market.
The modus operandi of these institutions is to go to a developing country already struggling under a mountain of debt and, colluding with its domestic elites, sign it up for a loan, usually to fund a transport or utilities development. This strategy is a win for the lenders, the western corporations given the development contracts, and anyone else who can benefit from this web of state-backed international corporatism. It is a loss for the recipient country (i.e., the taxpayers) who must service the crushing interest payments and make “structural adjustments” to their economy which are stated conditions for providing the loan.
This is precisely what happened in Bolivia when by the early 80s its corrupt elites racked up around $3 billion in debt to foreign banks. The IMF stepped in offering a series of loans to cover the balance of payment crisis and “modernize” its infrastructure. Defenders of the free market might approve the fact that as a condition of the loans, over the next few decades, state enterprises were sold off to foreign corporations and government spending was restricted.
Though we can always expect efficiency benefits from a state-run industry being run as a private concern, morally speaking, the state has no right to sell its stolen property to third parties, especially when they are corporations with state enforced privileges inaccessible to private citizens like limited liability and even guaranteed rates of profit. There is also nothing free market about the way taxes were increased on the poor to meet the demands for deficit reduction, or the way the whole emphasis of the IMF’s plan in Bolivia was to develop it as a commodity exporting country. This meant recommending measures like currency devaluation and creating an artificial export infrastructure dominated by western corporations.
Morales’s Benign Neglect of the Informal EconomyWithout the IMF, Bolivia now has the chance to develop on its own terms instead of under the rule of technocrats. Of course, government control of the commanding heights of the economy is hardly conducive to organic growth. However, we should keep in perspective the fact that there is a division between this higher productivity part of the Bolivian economy and an informal and semi-informal sector that provides the vast majority of economic activity and employment. These latter sectors are also made up of mostly indigenous Indians, and it is in these areas where the true significance of Evo’s presidency can be felt.
As Bolivia’s first indigenous leader, Evo Morales’s presidency has given the marginalized and poor a new found sense of pride. Refusal to cooperate in the US war on drugs and a decidedly laissez-faire attitude to informal and small-to-medium enterprise means that the state’s presence as an antagonistic force in the lives of ordinary people is at a historical low. This, in combination with a banking system flush with savings and low debt has been key to the bursting on to the scene of small enterprises run by indigenous entrepreneurs who have successfully leveraged their culture and trading channels to climb their way into the burgeoning middle class.
In Bolivia, like neighboring Peru, even the poorest of the poor have the means to turn a stall into a small business and a small business into something larger. Where once his ancestors were turfed off their land and forced to work it for their colonial masters, an indigenous Indian can now open a textile factory and attain a level of wealth that surpasses that of the descendants of those who expropriated his forefathers.
All over cities like La Paz, colorful mansions known as cholets (a term combining “cholo” the discriminatory term for someone of Indian descent, with the word chalet) are springing up, constructed in Andean style architecture, often five stories high, with the lower levels turned into businesses: living and breathing monuments to entrepreneurialism that have transformed the urban landscape.
The reaction of the eurocentric elite is one of barely concealed horror: seeing their positions of managers and administrators of an economy based on resource extraction and patronage of western corporations become vulnerable, they instinctively oppose Evo, and collate around a conservative opposition that favors clamping down on the “informal” economy, resumption of the drug war, and alignment with US foreign policy objectives.
Though it is right to oppose nationalization, it is hard to take seriously the argument that were Evo not in power, and Bolivia left in the hands of the “business friendly” opposition, the country would be necessarily better or conducive to genuine free enterprise. A great levelling of the playing field has occurred under Evo, not through forceful redistribution of wealth, but rather through standing back and letting freedom and entrepreneurialism of the people run unchecked. It is this that has made Bolivia a tangibly different country to what it was ten years ago, and it is the hope of all those who care about freedom, that this will be the enduring legacy of the Morales years, long after the commodity boom ends.
The Greek drama continues to unfold with the risk of “grexit” becoming increasingly likely. Yet, a large majority of the Greek people want to keep the euro. This, however, would require the Greek government to live within its means — something it has not been able to do for decades. With anti-austerity parties gaining strength continent wide, Greece may be the first, but not the last, to leave.
For many years, it has been fashionable among some economists to blame the euro for all of Europe’s problems. Yet, the problem in Europe is not that it has a common currency, but that it has excessive government regulations, spending, and taxation. Economists who suggest that breaking up the euro will solve the region’s economic problems are like people selling gimmicks promising massive weight loss without either exercise or dieting. They want the gains without the pain.
What they really want is just more flexibility to inflate fiat monies. For them, it’s much better to reduce government debt by simply inflating it away — thus sticking it to creditors — than having to take on the painful adjustment of limiting government size to what can be justified only with direct taxation.
Money Manipulation Allows for More Government InterventionSuppose you have two regions under a single monetary system — Los Angeles and Las Vegas — with an inflationary economic boom in Las Vegas and increasing unemployment in Los Angeles. Salaries would slump in Los Angeles and surge in Las Vegas. Under such conditions, labor would normally move from Los Angeles to Las Vegas to find jobs, and capital would move from Las Vegas to Los Angeles to find cheaper labor.
If capital will not or cannot move from Las Vegas to Los Angeles, and if labor cannot or will not move from Los Angeles to Las Vegas, then Los Angeles will just be stuck with falling wages, while Las Vegas capitalists will be stuck with expensive labor.
A free market solution to this problem is to allow free movement of labor and capital to where labor and capital are demanded, and to allow for greater freedom in the use of labor and capital.
However, governments can avoid having to allow such freedom in markets if they each have a central bank. If Los Angeles and Las Vegas are under two different monetary systems, monetary policy could be tailored to deal with each region’s economic problems. Los Angeles could turn to its own inflationary policy to match Las Vegas’s existing inflationary boom. This would improve Los Angeles’s export situation — by depreciating the currency — and prop up employment in the short term. Thus we find that governments will tend to turn to easy money instead of deregulation.
On the other hand, if Los Angeles and Las Vegas are under a single monetary policy (and L.A. can’t simply inflate its currency at will), then Los Angeles can only address the ills in its economy by making its economy more attractive through tax cuts and deregulation.
We find this sort of thinking prevalent in Europe today. The Europeans know that control over monetary policy can be used to cover up the shortcomings of irresponsible fiscal and regulatory policy. So, it’s no surprise that many of the most fiscally disastrous governments in Europe are now talking about getting rid of the euro. Each government wants its own money supply so it can kick the austerity can down the road, and inflate instead.
In our example, we find that the governments of L.A. and Las Vegas are actually restricted in what they can do by a common currency, and naturally, Austrian economists would view such constraints as a very good thing — under a regime of sound money.
A Sound Common Currency Is a Good ThingThe benefits of a common currency can be massive. Transparency is improved and uncertainty and risks are reduced.
Anyone who has traveled to a foreign country knows the hassles of dealing with a foreign currency. You first have to pay a fee to convert your cash, and then you have to make sure you spend it all before you leave the country, otherwise you will be left with useless coins and bills at the bottom of your sock drawer.
But not all currencies are equal, of course. The problem with the euro is not that it is a common currency but that it is a fiat currency which ultimately returns to its intrinsic value of zero.
Indeed, the European Central Bank is now purchasing sixty billion euros per month of government bonds inducing governments to borrow even more.
Why the Southern Block of Europe Wants Out of the EUAdvocates of breaking up the euro never talk about the southern bloc’s labor costs relative to those in China or India. They focus instead on German labor, which is more cost-effective. The Italians don’t like that they have to compete with Germany — in the making of automobiles, for example — under a single monetary system. If the Italians had their own monetary system, they could manipulate the money supply to favor their own automobile industry.
With their own central bank, the Italians can put off having to ask themselves why their auto industry is so uncompetitive in the first place (hint: it has to do with Italian regulations and subsidies). Advocates of a breakup expect to gain competitiveness through devaluation, but a devaluation will only create a temporary gain, if at all, by benefiting exporters at the expense of the rest of society.
A Solution for GermanyA stable unit of account and exchange is a great idea, but it needs governments willing to accept the discipline it imposes (or a population that demands it).
Indeed, if anyone should dump the euro it should be Germany. Its current strategy to protect the euro is to use debt to solve a debt problem: to send good money chasing after bad. Germany would be wise to join like-minded countries on monetary policy and create a northern euro backed by gold. Meanwhile, southern eurozone countries are looking increasingly like a lost cause. People are not in the streets rioting for less government, but for more government. Let them have what they want: a worthless currency!
Pope Francis’s new encyclical “On Care for Our Common Home” has been released to much acclaim from the mainstream media. One German news source declares “Papal encyclical could break climate change deadlock.” “Pope Francis' views on climate change present a moral challenge to many 2016 GOP contenders,” declares US News and World Report. Not in many decades has a papal document been so easily used as a tool for political and electoral ax-grinding.
Indeed, we would not normally cover a papal document at mises.org at all. Benedict’s “Caritas in Veritate,” for example, was published without any mention in free-market circles.
On the other hand, this pope is far more political than most modern popes. This new encyclical, combined with his first one, “Evangelii Gaudium,” contains numerous assertions about public policy that stem from a particular historical and political worldview.
And what is the worldview of this pope? Well, it is a vision that is relentlessly pessimistic. According to Francis, the world is very nearly falling down around us. The poor are getting poorer, he claims. The inequalities between rich and poor are worse than ever, he says. Pollution is making us sicker than ever, he implies. And the basic requirements for sustaining human life are becoming more inaccessible than ever. These claims serve a purpose: to illustrate that the rise of industrialization and market economies (a modern phenomenon) are the cause of these social and environmental ills.
Francis’s Worldview Does Not Fit the FactsIn painting a picture of a world that Francis says resembles "an immense pile of filth," Francis is ignoring a wealth of empirical data through which his assertions can be shown to be simply and factually wrong.
For example, when Francis released “Evangelii Gaudium,” many discovered that the document relied on a view of the world in which the standard of living worldwide was relentlessly declining, when the empirical data, in fact, suggests the opposite. Marian Tupy at The Atlantic wrote at the time:
But here’s the problem: The dystopian world that Francis describes, without citing a single statistic, is at odds with reality. In appealing to our fears and pessimism, the pope fails to acknowledge the scope and rapidity of human accomplishment — whether measured through declining global inequality and violence, or growing prosperity and life expectancy.
Tupy then quotes this line from Francis:
We have to remember ... that the majority of our contemporaries are barely living from day to day, with dire consequences. A number of diseases are spreading. The hearts of many people are gripped by fear and desperation, even in the so-called rich countries. The joy of living frequently fades, lack of respect for others and violence are on the rise, and inequality is increasingly evident. It is a struggle to live and, often, to live with precious little dignity.
Unfortunately, this paragraph — a rather maudlin one, to be sure — could be true for any time in human history, and yet it is less true now than it was in the past. Francis appears to not understand this. It's one thing to note — as any Christian clergyman should — that the plight of the poor requires our attention and charitable action. It's something else entirely to make unsupportable claims that the situation is getting worse.
Similarly, with his new encyclical, Francis turns to environmental problems, and proceeds through a long laundry list of risks to human life and welfare — many of which he implies are modern and something new —and that things are also accelerating in a negative direction. This view especially comes through when he says:
It is possible that we do not grasp the gravity of the challenges now before us. “The risk is growing day by day that man will not use his power as he should” ... we stand naked and exposed in the face of our ever-increasing power, lacking the wherewithal to control it.
Human health is more and more ravaged by pollution every day, Francis suggests. And yet, one familiar with the real state of worldwide economic development doubts these assertions.
In an editorial at the Catholic Herald, Philip Booth writes:
Firstly, as is often the case with Pope Francis, his analysis of the economic state of the world is unduly pessimistic. It is correct to say that pollution leads to premature deaths. Indeed, many would argue that climate change will do so and some that it already does so. But, there are trade-offs. And the underlying picture is one of huge increases in life expectation and health because of the economic development that is taking place. Indeed, in many parts of the world, the environment is improving dramatically.
Let’s review the actual facts:
As Booth notes, air pollution leads to real health problems. But to find this at work, one should not look to wealthy countries, but to countries that have long shunned the market economy. China, for instance — which is on nobody’s list of most-free countries — is a pioneer in dumping pollutants into the water and air. Similarly, during most of the twentieth century, one found the most unfortunate pollution in the communist world which continued with its belching smoke stacks long after the capitalist world had cleaned up its own air. In other words, there is a solution to these problems, and it is the more market-oriented parts of the world that have found it.
Meanwhile, the World Bank reports “remarkable declines in world poverty,” and the UN reports “world poverty is shrinking rapidly.” The American Association for the Advancement of Science reports that life expectancy around the world has increased steadily for nearly 200 years. The Institute for Health Metrics and Evaluation reports that life expectancy has been increasing while the death toll from diseases continues to fall. That population bomb we were warned about never went off.
Moreover, if we use the economic data to make real comparisons between those countries that are more market-oriented versus those that are less so, we find that it is the market economies that provide better and cleaner conditions for the poor. To illustrate this, we need only ask the question: “would you rather be a poor person in the United States or in India? Would you rather be poor in Sweden or in Bolivia?” In spite of its reputation as a socialist paradise, the fact is that Sweden is far more capitalist and market-oriented than the less-capitalist countries that Francis seems to think are closer to the ideal. And the US, for all its faults, is a country where the poor have televisions and air conditioning.
Unfortunately, it is necessary for Francis to stick to his pessimism in order to forward his main and central thesis: the advancement of the market economy worldwide has made the world a worse place.
Industrialization and Market Economies Have Brought Wealth and Longer LivesBut, just as life expectancy for humans worldwide has been climbing for the past 200 years, so has industrialization, free trade, and a turn to markets instead of command economies, and autarky.
This is an inconvenient truth for Francis and the Left, but one doesn’t need to split hairs in the data to see that more people live longer lives with more access to food and health care than ever before. The “green revolution” exported by rich countries has fed the world, and health care provided by the rich countries has cured the world of many diseases.
Meanwhile, the world is in the midst of enormous migration from rural areas to cities, not because cities are so awful and dirty, but because industrialization (contrasted with crippling and laborious work on a rice paddy) offers a chance for more pay, more reliable income, and the chance to enjoy a surplus for the first time in their lives.
Francis looks around the world and still sees many people in grinding poverty and subject to the tenuousness of life that has marked life for all of humanity for most of its existence. No serious person denies these things exist. What Francis proposes now, however, is a plan to hobble the institutions that provide the remedy.
And, ultimately, Francis’s pessimism leads him to his turn toward politics and government. If you believe we are in the midst of an unprecedented crisis, then it makes more sense to hit the panic button and turn the world over to “experts” who will turn things around. Thus, we find in Francis’s work a call for governments, through coercion, to rid the world of pollution, to make the poor rich, and the weak strong.
Religion vs. PoliticsBut what a contrast this presents to Francis’s predecessor John Paul II (who was known for his optimism). Francis turns to human institutions, and new human programs, new human experts, and new human initiatives to solve the world’s problems. John Paul II, however, took a much different position, writing in a 2000 document:
"What must we do?"
We put the question with trusting optimism, but without underestimating the problems we face. We are certainly not seduced by the naïve expectation that, faced with the great challenges of our time, we shall find some magic formula. No, we shall not be saved by a formula but by a Person ... [i.e., Jesus].
It is not therefore a matter of inventing a "new programme." The programme already exists: it is the plan found in the Gospel and in the living Tradition, it is the same as ever.
Note the prevalence of religious language; one need not be a Christian to see the contrast here. John Paul II, as a religious leader, encourages his audience (in a recurring theme in his writings) to turn to personal virtue as the solution to the ills of the world. Francis, on the other hand, looks to political institutions in both of his major writings.
Francis is following a specific secular narrative in which so-called “neoliberalism” has robbed the world of its supposed natural abundance and mildness. In his misguided pessimistic nostalgia, he then turns to undoing the material gains of recent centuries through government action. It’s an unfortunate position, and one that does not suit a religious leader well.
[Editor’s Note: This article is adapted from David Stockman’s May 1 Interview on Mises Weekends.]
Jeff Deist: The Fed recently announced just this past week that it would not use specific dates for targeting higher Fed funds rate this year and you almost get the sense that poor Janet Yellen is at the end of this Greenspan-Bernanke experiment and there’s not much left for her to do. I mean, what’s our sense of Yellen and her position?
David Stockman: Yeah, I agree with that. I think in some ways they’re petrified as to where they ended up or they should be. After all, we’re in an experiment of monumental proportions.
Let’s just assess where we are. If they don’t raise the interest rate in June — and I think all the signals now are pretty clear they’re going to find another reason to delay — that will mean seventy-eight straight months of zero rates in the money market. As I always say, the money-market price, that is the Federal Funds Rate or Overnight Money or a short term treasury bill, is the most important price in all of capitalism because that determines the cost of carry, the cost of speculation and gambling.
When you conduct a monetary policy that says to the speculators, to the gamblers, “come and get it,” you are guaranteed free money to carry your positions, whether you’re buying German Bonds or you’re buying the S&P 500 Stock Index or the whole array of yielding or price gaining assets that are available in the financial market. This monetary policy also sends the message that you can leverage and carry those positions for free and roll it day after day without worry because the central bank has pegged your cost and production, and in a sense has pledged on its solemn honor that it will not change without many months of warning. And that’s what this whole thing is about — changing the language and so forth. I think you have created a massive distortion in the very heart of capitalism in the financial system.
Second, I think even though they stopped actually adding to their balance sheet in October — when QE supposedly ended in a technical sense — the Fed has put $3.5 trillion worth of basic financial fraud into the world financial system and economy. After all, when they bought all of that treasury debt and all of those GSE securities, what did they use to pay for it with? It was digital money conjured out of thin air and they certainly haven’t destroyed or repealed the law of supply and demand.
So, if you put three-and-a-half trillion of demand into the fixed income market at points along the yield curve all the way from two years to thirty years, that is an enormous fat sum on the scale. That is an enormous distortion of pricing because you can’t have that much demand without affecting the price. Now, with the ECB at full throttle, and with Japan being almost a lunatic in its mimicking of QE, you are creating the greatest distortion of fixed income pricing or bond market pricing in the history of the world, and the bond market is the monster of the midway.
The distortion is tens of trillions of dollars big, and meanwhile, the central banks are in some kind of quasi-coordinated unison in levitating the prices enormously. They’ve brought the yields right down almost to the zero line — to the zero bound, as they call it, and therefore have set up the world’s financial system for a huge day of reckoning somewhere down the road and perhaps not that far away.
After all, only two weeks ago I believe, they had the German ten-year Bund yielding five basis points. That is crazy in any kind of world that makes economic sense or that’s sustainable. Already, some of the more aggressive bond traders in the world are jumping on that, calling it the short of a generation. We’ll see about that, but the point is, five basis points of yield even on the mighty German Bund for ten year money is just a major measure of the lunacy that has been injected into the financial system.
Jeff Deist: David, when you talk about the injections, when you talk about the thumb on the scale, as you discussed in Contra Corner recently, it’s not working, right? The commerce department just announced anemic first quarter GDP growth. I mean is there any honest growth in the US economy at this point?
David Stockman: No, and this is one of the things that I’ve been harping on. Sometimes we get so caught up in the monthly so-called incoming data and the short-term releases — that are seasonally maladjusted anyway and get revised four times over — that we really lose track of where we are. So, the other day I said let’s just look at two extended periods of time that occurred in different economic and policy environments and do an assessment of where we are.
I took 1953 to 1971, that representing the end of the Korean War and the beginning of the Great Prosperity in the middle century, ending in the August 1971 fatal mistake that Nixon made when he closed down Bretton Woods and the rest. I call that the Golden Era of Prosperity. During that period, the economy grew and I use real final sales to measure the growth because that takes out the inventory fluctuations and distortions that are in the GDP number per se. But, if you take real final sales for that eighteen-year period, it was 3.6 percent a year compounded during a time in which the Fed was run by William McChesney Martin, a survivor — or veteran, you might say — of the 1929 crash and the trauma of the 1930s. He was a man who wasn’t necessarily, in the classic sense, a hard-money gold-standard advocate, but he certainly was a wise financial hedge who understood the dangers of speculation in the financial markets and of too much heavy-handed intervention in the financial system.
During that eighteen-year period from 1953 to 1971, the balance sheet of the Federal Reserve expanded by only $42 billion over eighteen years. (Now during QE, that was about two weeks worth of expansion at the peak.) More importantly, if you look at it in real terms — in inflation-adjusted terms — the balance sheet of the Fed in that period grew about 3 percent a year, and the economy grew at nearly 4 percent. Therefore, the Fed was engaged in a very modest light-touch policy allowing the mechanism of capitalism, including the financial markets at the heart of it, to function. The balance sheet of the Fed grew by 0.8 percent of the growth in the GDP.
Now, let’s take the last fourteen years, we’re in a totally different world. Greenspan has changed the whole notion of the role of the central bank, followed by Bernanke and Yellen. During that period, GDP growth of the economy has down shifted sharply to 1.8 percent a year over the last fourteen years, half of what occurred during the golden era. By contrast, the balance sheet of the Fed grew from $500 billion to four and a half trillion. But look at it in the same annual terms: 17 percent a year growth in the balance sheet, and 15 percent after adjusting for inflation.
That means that the Fed’s balance sheet grew eight times more rapidly than the economy during the last fourteen years. That’s just the inverse of the relationship that occurred back in the Golden Era.
So, I think if you need any proof at all of this massive intrusion into the financial system isn’t working; the huge amount of money printing and balance sheet expansion; the unremitting financial repression and pegging of interest rates; look at the fundamental comparison that I just made. It’s not working in the real economy. That is, it’s not generating expansion and giving standard gains on Main Street.
The only thing it’s really doing is simply inflating the serial bubble that ultimately reach unsustainable peaks and collapse. We’ve had two of them this century already from that policy and we’re now overwhelmingly — if you really look at the evidence — in a third great bubble that is in some ways more fantastic than the earlier two. It’s only a matter of time before it bursts and implodes and we’ll then be back to square one.
Hopefully on the third strike, the people who gave us these bubbles will be out. I think that might be a fair metaphor or proposition to make. Hopefully, when this next big bust comes — and surely it will when you look at the degree of speculation of the stock market in the high yield market or many other sectors that we can talk about — there will be a great day of reckoning in the country in terms of demanding a fundamental change in monetary policy and we’ll see the resignation of all the people who are sitting on the Fed today that have led us right into this gargantuan financial trap.
Earlier this year, Lithuania reinstituted the military draft, which the Lithuanian state claimed was in response to threats from Russia. Ukraine has also recently reinstituted the draft, with mixed political results, and for similarly stated reasons.
Regardless of how one gauges the magnitude of Russian aggression, the problem faced by small states like Lithuania is an important one.
How can a small state with a small population — and thus a small military — ever hope to defend itself against a much larger state?
This is an important question for libertarians especially, since, as Hans-Hermann Hoppe has noted, if we must have states, a system of small, independent states (i.e., Monaco, Lichtenstein, Luxembourg, and arguably Switzerland) is much more ideal than a system of medium-sized or large states.
As illustrated here and here, we find that small states are less able to impose strong coercive state monopolies since small states face greater competition from surrounding states, and the more abusive states (if small) are at greater risk of losing their most productive citizens to emigration. Thus, small states have an incentive to pursue more laissez-faire policies.
The natural implication of this is that libertarians and other proponents of laissez-faire should seek a world of small states through secession, or through radical decentralization which leads to de facto local autonomy.
In response to this, opponents of secession and decentralization claim that only large and strong states can provide adequate military defense in the face of illiberal and large foreign regimes. “We can reduce the Americas and Europe to regions of small, weak states,” they may say, “but that would leave them defenseless against domination by some future equivalent of China, or Russia, or the United States.”
But are small states really defenseless?
Wealth — Not Size — Buys DefenseWar-making is an expensive and capital-intensive endeavor. Ironically, some of the most warlike states often have their genesis in relatively laissez-faire economies (e.g., those of the American and Imperial British economies) because those economies are able to provide more tax revenue.
The other side of coin, however, is the fact that wealthier societies have a greater ability to defend themselves from aggressors. Wealthier societies can afford important and expensive armaments such as anti-aircraft defenses and related defensive technologies. They can afford to pay for specialized highly-trained troops instead of resorting to a 100-percent conscription tax on people with no particular skill for soldiering. Wealthier societies can also more easily obtain nuclear weapons technology which has clearly been shown to deter war-making by large aggressive states.
Also, wealthier societies can buy defense from neighbors in a variety of other ways. They can employ foreign mercenaries, and they can simply bribe unfriendly foreign regimes. Potential foreign aggressors will also be reluctant to bomb wealthy foreign cities that are sources of lucrative trade and investment.
And finally, in a wealthier society, residents at an individual and small organizational level, are more capable — if the state permits it — of arming themselves, which has the effect of adding another layer of resistance to foreign aggression.
The Advantages of DecentralizationThis latter advantage of economic wealth brings us to the tactical advantages of political and military decentralization. Hoppe writes:
As a monopolist of ultimate decision-making, the state decides for everyone bindingly whether to resist or not; if to resist, whether in the form of civil disobedience, armed resistance or some combination thereof; and if armed resistance, of what form. If it decides to put up no resistance, this may be a well-meaning decision or it may be the result of bribes or personal threats by the invading state — but in any case, it will certainly be contrary to the preferences of many people who would have liked to put up some resistance and who are thus put in double jeopardy because as resisters they disobey now their own state as well as the invader.
On the other hand, if the state decides to resist, this again may be a well-meaning decision or it may be the result of pride or fear — but in any case, it too will be contrary to the preferences of many citizens who would have liked to put up no resistance or to resist by different means and who are entangled now as accomplices in the state’s schemes and subjected to the same collateral fallout and victor’s-justice as everyone else.
The reaction of a free territory is distinctly different. There is no government which makes one decision. Instead, there are numerous institutions and individuals who choose their own defense strategy, either independent of or in cooperation with others, each in accordance with one’s own risk assessment. Consequently, the aggressor has far more difficulties gathering information and conquering the territory. It is no longer sufficient to “know” the government, to win one decisive battle or to gain control of government headquarters from where to transmit orders to the native population. Even if one opponent is “known,” one battle is won or one defense agency defeated, this has no bearing on others.
Moreover, the multitude of command structures and strategies as well as the contractual character of a free society affect the conduct of both armed and unarmed resistance. As for the former, in state-territories the civilian population is typically unarmed and heavy reliance exists on regular, tax-and-draft-funded armies and conventional warfare. Hence, the defense forces create enemies even among its own citizenry, which the aggressor state can use to its own advantage, and in any case there is little to fear for the aggressor once the regular army is defeated. In contrast, the population of free territories is likely heavily armed and the fighting done by irregular militias led by defense professionals and in the form of guerilla or partisan warfare. All fighters are volunteers and all of their support: food, shelter, logistical help, etc. is voluntary. Hence, guerrillas must be extremely friendly to their own population. But precisely this: their entirely defensive character and near-unanimous support in public opinion can render them nearly invincible, even by numerically far superior invading armies. History provides numerous examples: Napoleon’s defeat in Spain, France’s defeat in Algeria, the U.S. defeat in Vietnam, Israel’s defeat in South Lebanon.
Collective Defense, Guerilla Warfare, and Private ArmsRothbard explored these same themes in his work on the American Revolution, in which he noted the essential role of guerilla warfare in that conflict. Simultaneously during the war, the “United States” functioned as a group of independent states that had come together for the purposes of collective defense. The coalition was successful against the most powerful state of the era, and the Americans states remained de facto independent small entities, even if they functioned internationally under a single diplomatic banner.
Consequently, we find that effective military defense does not necessitate a centralized state or political unity. There is no compelling reason to believe that had there been twenty or thirty colonies instead of thirteen, that the outcome or conduct of the war on the side of the Americans would have been any different.
These facts remain relevant even today since other regions of the world could take advantage of the same dynamics, were they able to overcome their commitments to nationalism and authoritarianism. For example, if Lithuania were serious about military defense, it might look to the fact that the former states of the Soviet Bloc, from Estonia to Bulgaria (not including the former SSRs, such as Ukraine), have a combined population of over 100 million people and populations spread out over a large area. In other words, the region has the potential to mount a credible and effective military defense to foreign invaders through decentralized, collective defense.
Defensive military capability would also be greatly enhanced by a commitment to economic growth through deregulation and laissez-faire. Not surprisingly, though, most of the states of the region are unwilling to free their economies from government intervention. At the same time, those same states are committed to disarming the local populations and centralizing military capability while palming off their defense costs on the American taxpayer via NATO. That is, they remain committed to old models of state defense that have failed them spectacularly in the past.
The region (like most of the world) remains mired in the idea that a centralized state and a defenseless private sector are the best option for defense. The number of privately owned-firearms in Bulgaria, for example, is six guns per 100 people. In Poland, the number is 1.3 private guns per 100 people. There are even fewer private guns in Lithuania (0.7 per 100), which has decided that enslaving young men via conscription is better than letting citizens have guns. When we compare these numbers to gun ownership in Switzerland, which has a rate of forty-five guns per 100 people (the rate is eighty-eight per 100 in the United States), it becomes abundantly clear that the regimes of eastern Europe are not serious about any type of military defense that does not prioritize protecting the state’s monopoly of coercion over its own citizens.
Ideology MattersEconomics, size, and the quality of war materiel all matter, but none of these factors can overcome the power of ideology. Hoppe writes:
[H]ow is one to explain, for instance, that France has not long ago conquered Monaco, or Germany Luxemburg, or Switzerland Liechtenstein, or Italy Vatican City, or the U.S. Costa Rica? Or how is one to explain that the U.S. does not “finish the job” in Iraq by simply killing all Iraqis. Surely, in terms of population, technology and geography such are manageable tasks.
The reason for these omissions is not that French, German, Swiss, Italian or U.S. state rulers have principled moral scruples against conquest, occupation, expropriation, confiscation, enslavement and the imprisonment or killing of innocents — they do these things on a daily basis to their “own” population. ... [W]hat constrains the conduct of state rulers and explains their reluctance to do things that appear feasible from a “technical” point of view is public opinion, domestically, but also abroad.
As La Boétie, Hume, Mises, Rothbard have explained, government power ultimately rests on opinion, not brute force. Bush does not himself kill or put a gun to the head of those he orders to kill. Generals and soldiers follow his orders on their own. Nor can Bush “force” anyone to continue providing him with the funds needed for his aggression. The citizenry must do so on its own, because it believes that, by and large, it is the right thing to do. On the other hand, if the majority of generals, soldiers and citizens stop believing in the legitimacy of Bush’s commands, his commands turn into nothing more than hot air.
Ultimately, no governmental structure can prevent war if the prevailing ideology is one that prefers violence to peace and nationalism to international laissez-faire. Likewise, Sweden and Norway (for example) no longer come to blows, not because peace is imposed on them by NATO or the US, but because the people of the region view war as an untenable option. There is peace (for now) throughout most of the West because few of the productive taxpaying citizens of the West are inclined to make war on other citizens of the West. This is an ideological triumph, not a military one.
The IRS reports that more people renounced their US citizenship during the first quarter of 2015 than during any other quarter in history. Notably, a sizable portion of those renouncing their citizenship are doing so to escape heavy taxation. The United States one of only a handful of OECD nations that imposes a "worldwide" tax on its citizens and residents-- and is the only country other than the military dictatorship of Eritrea that taxes its citizens living abroad on literally all forms of income.
Interestingly, it is the wealthy (i.e., generally the most economically productive members of society) who are leaving permanently, and the fact that the US is driving out its wealthiest members is not a good sign for the long-term prospects for the country. It is also the opposite of what happens in a country with a healthy respect for private property and basic human freedoms.
Overcoming Barriers to ExitSpecifically, the IRS reports that 1,335 American citizens gave up their citizenship forever during the first quarter. During 2014, more than 3,400 did the same. This is only a tiny portion of the total population of American citizens, although this does not count the much larger group of expatriates who remain citizens. Three million of them leave the country per year. Nor do the numbers include long-term residents who give up residency.
The overall numbers giving up citizenship, remain small, but it’s actually startling that the number is as large as it is. Giving up citizenship costs more now than ever before. CNN reports that “the government increased the renunciation fee to $2,350, more than four times what it used to cost. ... On top of that, some U.S. citizens are slapped with a giant ‘exit tax’ bill — sometimes millions of dollars — when they renounce. ... The tax pain can last for years, with some former Americans on the hook for additional payments decades after they renounce.”
And, once renunciation is complete, US law enables the US Attorney General to bar former citizens from ever re-entering the country again if the government decides that the former citizen left to avoid paying taxes. The experience of Eduardo Saverin illustrates the many barriers and pitfalls related to renouncing citizenship.
So, renouncing citizenship may not only bring large monetary expenses, but may mean one can no longer visit friends and family in the United States ever again.
Clearly, the US government isn’t exactly trying to cut the cost for emigrants. And why would any state ever want to ease the process of emigrating for those with money and valuable skills? It is to the state’s advantage to capture as much as it can in terms of capital and human resources as possible.
The Option of EscapeIn fact, it has been the relative ease-of-exit that has served as a check on government power throughout much of history, and the relative ease with which the most productive members of society could escape more oppressive regimes was an important factor in the economic and political development of Europe.
Ralph Raico, in his essay “The Theory of Economic Development and the European Miracle,” examined how the small size of states, and the lack of significant barriers to relocation for merchants and other taxpayers, was central to the rise of economic prosperity and ideologies of liberty and private property. When a prince proposed to raise taxes, Raico observed, the most productive members of society would move their wealth and themselves to neighboring jurisdictions where princely expropriation was lighter. Raico writes:
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.
Within this system, it was highly imprudent for any prince to attempt to infringe property rights in the manner customary elsewhere in the world. In constant rivalry with one another, princes found that outright expropriations, confiscatory taxation, and the blocking of trade did not go unpunished. The punishment was to be compelled to witness the relative economic progress of one’s rivals, often through the movement of capital, and capitalists, to neighboring realms. The possibility of “exit,” facilitated by geographical compactness and, especially, by cultural affinity, acted to transform the state into a “constrained predator.”
Decentralization of power also came to mark the domestic arrangements of the various European polities. Here feudalism — which produced a nobility rooted in feudal right rather than in state-service — is thought by a number of scholars to have played an essential role. ... Through the struggle for power within the realms, representative bodies came into being, and princes often found their hands tied by the charters of rights (Magna Carta, for instance) which they were forced to grant their subjects. In the end, even within the relatively small states of Europe, power was dispersed among estates, orders, chartered towns, religious communities, corps, universities, etc. ...
In other words, a system of a large number of small jurisdictions — compounded by decentralization within the jurisdictions themselves — led to an inability on the parts of rulers to easily control the movement of persons and capital.
Unfortunately, however, we see little in common between the modern United States and the Europe described by Raico.
In addition to direct legal costs imposed by the US government itself, the American state also benefits from informal barriers imposed by demographics and geography. For example, nearly 80 percent of native English speakers live within the United States, and this imposes a practical barrier to exit since exit is likely to require that the emigrant learn a new language. Furthermore, the sheer size of the United States ensures that emigration requires that the emigrant move hundreds, if not thousands, of miles away from friends and family. The fact that the US borders only two countries further ensures a lack of choice when seeking “nearby” regimes that may be more favorable to the emigrant's likes. Differences in climate (Canada is cold and very dark in winter) and the fact that one may not be welcomed by foreigners add further to the incentives against relocation.
For the potential emigrant, then, the repercussions of relocation are enormous and daunting, and quite unlike the European merchant of the middle ages, described by Raico, who can escape the edicts of one prince by taking up residence among others — who speak the same language and practice the same religion — fifty miles down the river.
Love it or Leave It?During the Vietnam War, supporters of the war invented the slogan “Love It or Leave It” as an epithet against those who opposed the war or other perceived injustices perpetrated by the American state. The assumption is that if one doesn’t like the US government, one should just go to some other country. A similar slogan (in Portuguese) was also employed by the military dictatorship in Brazil.
Undoubtedly, many who do not “love it” would “leave it” if leaving did not involve such an enormous life change.
To illustrate this, let’s indulge in a thought experiment in which a secession movement splits the United States into two independent pieces, with the boundary at the Mississippi River. In such a scenario, citizens of the two countries would suddenly find themselves with two countries from which to choose, with both choices offering similar climates, cultural amenities, and languages. Relocation from one to the other would also place emigrants no further away than a short plane ride or automobile trip. The populations of cities along the border, such as St. Louis and Minneapolis would boom as residents attempted to pick and choose among opportunities offered on both sides of the border.
Obviously, if secession then continued to other jurisdictions, and the old US is broken up into several or even dozens of new jurisdictions, the choices among regimes available to residents would multiply. Emigration would become a much less daunting affair (especially for those with money and assets who would be welcomed by other jurisdictions) and one would be far more likely to make the plunge based on economic considerations.
Naturally, states are well aware of these realities too, which is why the federal government works tirelessly to supersede the variety offered by state laws with uniform federal law on everything from banking to gay marriage. In spite of all of this, people still “vote with their feet” by moving from high tax states, cities, and counties to low-tax states, cities, and counties. The feds tolerate this because they have the all-important income tax, capital gains taxes, and more. Try to escape those taxes, and you’ll find you won’t “love it.”
The positivist ideas dominant among economists led them to agree that, as stated by the motto of the Econometrics Society, “Science is prediction.” We are surrounded by forecasts about numerous economic indicators. “Experts” reveal the rate of growth with .1 percent precision as if they were reading the oracle or seeing the future in chicken entrails.
In the nineteenth century, people used to believe everything which was written in the newspapers. With time, they became more skeptical and began to question what has been considered as a reliable source of information. After that came television. Images have real power over the minds, but after a while, people began to mistrust the news and exercise their critical judgment. Oddly however, government statistics and economic predictions are held as truths since they exist and people only too rarely question the figures.
But if we can’t trust the government to produce safer rail travel or more affordable health care, why should we trust it to produce better economic predictions? Why would things be different for statistics and predictions?
Let’s Be Optimistic!The case of France is instructive on these matters. Indeed, the French Ministry of Finance‘s growth rate predictions, published each year, have a very poor record. These predictions are important since they are used to estimate government revenue for the following year. If the numbers are made up, then how can the parliament vote on the budget wisely? The government has steadfastly predicted the French GDP every year since 1999 and has recorded an average error of 1.03 percentage points — a meaningful gap when dealing with GDP.
In the last fifteen years, the French government has been overly optimistic thirteen times. This is not surprising when the predictions are subject to constant manipulation by politicians. Some highly ranked officials in the Ministry of Finance still remember the tragicomic episode when, during the summer or 2010, the then Minister of Finance Francois Baroin, had to meet with President Nicolas Sarkozy at Fort Brégançon, the French Camp David. Baroin submitted the 2011 growth rate forecast which was 1.2 percent. “We cannot announce 1.2%, it’s too low, let's say 1.5%” declared the minister to his team just before meeting with Sarkozy. President Sarkozy unsatisfied with the numbers as well, and with the stroke of a pen said: “we will do 2%!” Lucky for them, the growth rate that year was 1.7 percent. But even when it significantly misses the mark, the government always wins by manipulating the numbers. Who will remember the fake predictions in six months?
Private organizations and the European Commission, which are less susceptible to direct political pressure, perform only slightly better in predicting the French GDP figures. For example, the “Centre de Prévision de l’Expansion” has committed an average error of 0.75 percentage points for the 1999-2014 period.
The Problem with Mathematical ModelsAlthough some private sector forecasters have more of a talent for guesswork than their public sector counterparts, the very assumption that we can compute predictions through “complex mathematical models” is flawed. Why, first of all, is the margin of error never published? Indeed, rather than giving a point estimate, would it not be more coherent to use a range? Second, to make forecasts, you need to make assumptions about how the economy works. If your assumptions are wrong, “sophisticated mathematical models” won’t fix that.
As Mark Thornton put it, “The dominance of positivism in economic methodology encourages economists to worry less about the logical consistency of their models and to concentrate more on the development of models that exploit historical data in making predictions.” Moreover, Austrian economists remind us that the future is always uncertain. If we could know the future with certainty, there would be no place for human action. Austrians are therefore skeptical about predictions. Ludwig von Mises claimed that economic theory can help us to make only qualitative predictions but cannot be used to produce quantitative predictions:
Economics can predict the effects to be expected from resorting to definite measures of economic policies. It can answer the question whether a definite policy is able to attain the ends aimed at and, if the answer is in the negative, what its real effects will be. But, of course, this prediction can be only “qualitative.” It cannot be “quantitative” as there are no constant relations between the factors and effects concerned. The practical value of economics is to be seen in this neatly circumscribed power of predicting the outcome of definite measures.
And Hazlitt wrote in his November 22, 1948, column in Newsweek:
The economic future, like the political future, will be determined by future human behavior and decisions. That is why it is uncertain. And in spite of the enormous and constantly growing literature on business cycles, business forecasting will never, any more than opinion polls, become an exact science.
There’s Nothing Wrong with Predictions, ThoughOnly good economic theory can enable us to analyze the facts and help us make valid predictions. Richard Cantillon made correct predictions about John Law’s Mississippi Bubble system based on sound economic theory, and he made a fortune as a result. But good economics does not need complex mathematical models. Often, economists who were critical about the use of math in economic science were nonetheless excellent forecasters. For example, Yves Guyot, the great classical French economist was strongly opposed to the mathematization of economic science and criticized Léon Walras on this ground. However, he was the best in making economic predictions. Even Schumpeter, in History of Economic Analysis, was forced to admit that:
as businessman or politician, I should have consulted Guyot — who was a wizard at practical diagnosis — rather than Pareto in order to be enlightened on, say, the prospects of employment or of metal prices in the next six months.
Of course, Schumpeter denigrated the so-called “lack of scientific inspiration” of the French Classical school of economics — the close relative of the Austrian school of economics. It is however ironic that the “good economists” Schumpeter is speaking about — i.e., Pareto and Léon Walras — are those economists who developed very elegant mathematical models which are completely unable to give us any practical knowledge about what happens in the real world. Equations won’t tell us anything about how individuals act and therefore about how the economy works. If one wants to make good predictions, one has to master the basic laws of human action. Only then does it become possible to interpret correctly numbers and empirical facts.
The International Monetary Fund (IMF), once the conductor of a global dollar exchange standard based partially on gold convertibility, has mutated into the official platform for the 2 percent inflation standard launched surreptitiously by the Greenspan Fed in July 1996. The Federal Open Market Committee (FOMC) then approved a position paper by Professor Yellen that price stability should mean 2 percent inflation forever. Europe joined the standard in 1998, and Japan became the newest member in January 2013.
Earthquakes and Economic StagnationThe IMF warns in its just published “Article IV Assessment,” that the Bank of Japan must stand ready to implement even more radical monetary steps including enhanced Quantitative Easing and cutting short-term rates below 0.1 percent (IMF-speak for negative rates) as it is likely to “take longer than envisaged” to reach its 2 percent inflation target. Will Tokyo repudiate such advice and instead decide that the last-in member of the 2 percent inflation standard should also be the first out? For Japan’s sake, one would hope that this would occur before a financial earthquake occurs in the late dangerous phase of global asset price inflation originating in the present Federal Reserve’s Great Monetary Experiment.
This decision would require Japanese Prime Minister Shinzo Abe to retreat from a position key to his political victory in December 2012 and which has been central to his government’s economic policy ever since. While still the opposition leader with the Liberal Democratic Party (LDP), Abe had galvanized popular support in the context of a widely perceived incompetence and bungling by the Democratic Party of Japan (DPJ) government to the national emergencies related to the Fukushima nuclear disaster.
Abe declared war on deflation and the “deflation mind set” even though Japan was not in deflation according to any reputable monetary concept. In fact, changes in economic performance were more likely due to Japan’s shrinking number of working-age persons which had seriously outpaced the US during the previous decade (a point underscored in the latest quarterly report from the Bank for International Settlements).
Nevertheless, Abe’s anti-deflation campaign played directly into the widespread economic fears rampant amidst the dislocation of a financial quake and the concurrent currency war offensive by the Obama-Bernanke Fed.
The DPJ had been the fulcrum of hard money principle in Japan, with advisers such as Eisuke Sakakibara who rejected “inflationism and devaluation,” but by 2012 the party was in no position to launch an effective defense of a hard yen policy. The then professorial head of the Bank of Japan Masaaki Shirakawa, who had largely (not totally) resisted the tide of modern monetary populism, became an easy target of ridicule.
Will Japan Quit the 2 Percent Experiment?If Japan is to change its monetary path it would have to be due to Prime Minister Abe demonstrating great statesmanship. He would need to speak to his fellow citizens about the looming danger of the financial quake as the global asset price inflation created by the Federal Reserve approaches its impossible-to-time end phase. He would need to persuade them that Japan should restore a hard currency as the accompaniment of profound economic liberalization. The post-financial earthquake emergency and US currency offensive which had once justified his unorthodox monetary policy would now be over. He would appoint a new central bank chief consummate at communicating these ideas as well as being rock solid on principle.
By all accounts, though, PM Abe takes pride in the booming stock market. The loyal members of Bank of Japan chief Haruhiko Kuroda’s team stress how attacking deflation psychology has buoyed the appetite for risk assets, fundamental to Japan’s promised renaissance. They point in addition to the government’s direct measures to stimulate risk-bearing, for example, getting the public sector pension funds to add to their holdings of domestic and foreign equities.
How Hard(er) Money Would Have Helped the JapaneseThe problem here is that these policies are stimulating Japanese capital to flow into high-risk assets globally just at a time when these are already seriously inflated by Federal Reserve policy and when the yen is historically cheap in real terms. Japanese investors may yet rue the day PM Abe drove them into such irrational behavior. Surely they would have done better if Japan had stuck to monetary orthodoxy, long-term interest rates had been free of manipulation, and the yen had gained great international custom as the hard currency of the global system, parallel to the hard Deutschemark of the 1970s.
Yes investors would have made some foreign asset acquisitions — but at 80–90 to the dollar these would have had been better value than at 120–130. Japanese investors would not have been incentivized to pursue fleeting and hard-to-catch profit in the carry trade (risky arbitrage into high-yield credits, high-interest rate currencies, and long-maturity government bonds). And the yen would not become subject to whiplash in the form of sudden appreciation from the collapse of that trade as the quake spread terror.
In a long-run scenario with harder money, Japanese investors would have amassed gradually over the long-run foreign assets which in aggregate were financed by inflows into the yen prized for its hard money characteristics. They would have bought, though, a much bigger amount after the asset price inflation disease had finished rather than in its present phase of high speculative temperature. And meanwhile, substantially positive interest rates in Japan would have acted as a discipline on the Japanese government which is now totally lacking.
Many suspect that the ultimate objective of the “political establishment,” however, is to cure the public finances via a huge dose of inflation. Once most of the government debt has been converted into bonds at puny long-term rates or into floating rate bills, then monetary depreciation can do its job of confiscatory taxation. The timing of that break-out into high inflation is inherently uncertain — it depends on the neutral rate rising well above market rates driven there by a range of possible circumstances (e.g., wider budget deficits, increased investment opportunity, and fears of accelerated depreciation). It could far postdate the next global financial quake.
Naturally, Japan could not have avoided all danger of economic disaster even if it had been pursuing a hard money path in defiance of the IMF and global central bankers club. But vigorous progress on liberalizing Japan’s financial system, internationalizing a hard yen, and effecting big reductions in government spending would have put Japan in better stead. And it is even plausible that by this stage the Japanese economy would have been more dynamic as individual decision makers, whether business or household, benefited from less exposure to asset price deflation shock and subsequent monetary chaos. Business spending and entrepreneurship could have been in full bloom. Instead, the Abe-Kuroda monetary experiment has taken the Japanese economy into an Indian summer from the viewpoint of investors in Tokyo stocks. Many business decision makers though have no illusion about the likely winter ahead. The failure of the Obama-Bernanke-Yellen Great Monetary Experiment culminating in a global financial earthquake would necessarily mean the failure of the Abe-Kuroda monetary experiment. This makes them understandably cautious. What comes next though may be very different in Japan than in the US.
It is a mainstream scenario that the political pendulum in the US could swing against future experimentation and toward monetary orthodoxy. In Japan, by contrast, the pendulum under presently visible political circumstances would more likely swing toward intensified monetary experimentation.
Brendan Nyhan at The New York Times seems to be under the impression that the Trans Pacific Partnership (TPP) has something to do with free trade. Nyhan writes that the TPP
is the latest step in a decades-long trend toward liberalizing trade — a somewhat mysterious development given that many Americans are skeptical of freer trade.
But Americans with higher incomes are not so skeptical. They — along with businesses and interest groups that tend to be affiliated with them — are much more likely to support trade liberalization.
Nyhan is probably correct that much of the population — especially the part that’s never studied economics — is against the lowering of trade barriers. After all, much of the population is wed to ancient ideas of mercantilism which views trade with foreign countries as a zero-sum game in which anything that benefits foreigners must be harmful to “us.” As Henry Hazlitt wrote with exasperation in Economics in One Lesson, “popular thought ... in everything connected to international relations, [has] not yet caught up with Adam Smith ...”
Nyhan is apparently deeply confused, however, since he equates the Trans Pacific Partnership with “trade liberalization.” In fact, the TPP is not about any type of liberalization, but is about centralizing political power. The TPP will further transfer the negotiation and implementation of trade policy into the hands of a small number of global regulators and bureaucrats, while further reducing the prerogatives of Congress and state legislators in the US. Indeed, citizens of all twelve member nations of the TPP will see trade policy become more remote and unknowable thanks to the TPP. And, since trade is but one small part of the agreement, we can expect a further shift toward opaque and authoritarian global decision making on everything from environmental policy to the internet to immigration.
There is no denying that the secret negotiations among unelected elites appointed by TPP members may result in the lowering of trade barriers for selected friends of the global regulators. This cronyist system of rewards and punishments for global favorites, however, should most certainly not be confused with free trade.
Real Free Trade is About Decentralization of PowerFull-blown free trade is about total decentralization in trade policy. In a country that enjoys free trade — that is, a country that has implemented unilateral free trade — it is fully up to the individual consumer and entrepreneur as to whether or not he wishes to do business with foreign suppliers. Under such a system, a baker who must buy delivery trucks and flour for his business can choose whether or not he will obtain his supplies from foreign or domestic suppliers. In most cases, he will choose the most economical option, and the marketplace will reflect this reality.
Trade agreements like the TPP and NAFTA, on the other hand, leave these decisions not up to individual citizens, but to government regulators and negotiators who make decisions in the interest of the state and its favored special interests.
Because of this, any agreement that threatened to implement true free trade would pose a significant threat to the status quo which greatly favors powerful special interests over the interests of small business owners and ordinary consumers. As Murray Rothbard pointed out:
If authentic free trade ever looms on the policy horizon, there’ll be one sure way to tell. The government/media/big-business complex will oppose it tooth and nail. We’ll see a string of op-eds “warning" about the imminent return of the nineteenth century. Media pundits and academics will raise all the old canards against the free market, that it’s exploitative and anarchic without government “coordination.” The establishment would react to instituting true free trade about as enthusiastically as it would to repealing the income tax.
In truth, the bipartisan establishment’s trumpeting of “free trade” since World War II fosters the opposite of genuine freedom of exchange. The establishment’s goals and tactics have been consistently those of free trade’s traditional enemy, “mercantilism” — the system imposed by the nation-states of sixteenth to eighteenth century Europe.
Capitalizing on Fear of Freedom in TradeUnfortunately, it would likely be very easy for the media and business and political elites to turn the population against any move toward genuine free trade.
Concerned only with what they see in their own industries and not with the unseen benefits to others, special interest groups such as workers and owners in domestic industries will seek to use the coercive power of government to their own benefit.
By resorting to the violence of the state to control trade and crush the competition, what these groups are saying is people should not be able to freely choose what products and services they want. “We reserve the right to dictate to others what their choices should be,” is the position of the protectionist.
They are no different from taxi drivers who seek to crush Uber or native workers who seek to increase their own wages by legally sanctioning employers who hire immigrant labor.
For an illustration of the real effects of protectionist trade policy, we could look to the plight of any small business person who seeks to lesson his costs in the pursuit of making a living. Take an entrepreneur, for example, who finds there is a need in his city for more lawn and garden maintenance services. He or she then seeks to find the lowest-priced and most-reliable lawn mowing machines he can. He knows that the lower he can keep his costs, the lower his own prices will be. Or, if competition is light, he will be able to make more profit and hire more employees.
Ready to stand in the way of all of this are the workers at a domestic lawn mower factory who are quite happy producing lawn mowers that are both more expensive and less reliable than the mowers produced in a neighboring country.
The workers succeed in pressuring the government to slap a tariff on foreign lawn mowing machines which raises costs for the entrepreneur. The entrepreneur then sees his own profits drop which leads to layoffs and even to unemployment to the small business owner himself.
Protecting One Domestic Industry at the Expense of AnotherNow, supporters of protectionism would no doubt come back with their own tale of woe about how, if the lawn business has been able to buy cheap mowers, the workers at the domestic lawn mowing factory would be laid off and destitute.
But, implied in the protectionist position is that it is good for the government to make a purely arbitrary decision to support one industry over another. For the protectionist, the freely-made decision of homeowners and gardeners is not to be tolerated and must be quashed by government. Moreover, to make sure that none of those sneaky gardeners gains access to any of these “cheap” foreign-made machines, a small army of customs workers must be hired to ensure compliance and that anyone who dares furnish any business owner with the “wrong” kind of machine will be punished, fined, and possibly imprisoned under federal law.
For the protectionist, this is all a perfectly good and legitimate function of government. The act of buying an economical machine becomes a crime, and the workers at the factory are able to go on producing their second-rate product.
Truly Free Markets Don’t Need a TPPObviously, to simply let Americans be free to buy what they want, we don’t need a NAFTA, or TPP, or global junkets of trade bureaucrats to decide what will or will not be allowed to cross over international borders. Certainly, the growth of the TPP moves member states further from the possibility of true free trade since trade policy will become increasingly enmeshed within a multilayered international bureaucracy that only inhibits a nation-state’s ability to unilaterally reduce trade barriers.
When not prevented by international treaties, however, all that need happen for freedom in trade to appear is for the government to refrain from punishing private citizens who seek to do business with foreign suppliers of desirable goods. That would be real “trade liberalization.”
The standard narrative floating about the mainstream press is that the developing world is held back by a quagmire of free market fundamentalism. Sure, there are a few exceptions to this narrative, such as Peter Bauer and William Easterly. But pretty much all we hear is a chorus from the likes of Jeffrey Sachs; that in order for these poor countries to become wealthy, they must receive aid from wealthy countries and rein in the free market.
Salon even had the audacity to refer to Honduras as a “modern day libertarian dystopia.” As the author states, “Eliminate all taxes, privatize everything, load a country up with guns and oppose all public expenditures, you end up with Honduras.” A country where “the police ride around in pickup trucks with machine guns, but they aren’t there to protect most people. ... For individual protection there’s an army of private, armed security guards.”
And then there’s Naomi Klein, whose popular book The Shock Doctrine claimed those who support free markets actually use crises to enact their free-market reforms on poor countries and ensure such poverty continues.
There is so much wrong with all of this that it’s hard to know where to start. First of all, Klein gets things backward. While corporations have certainly done their share of wrong (usually with the help of the government), Robert Higgs showed quite clearly in Crisis and Leviathan that it is the state that uses crises to grow. In the United States, the government grew vastly during World War I, the Great Depression, World War II, and even the Cold War. It is now using the War on Terror to grow once again.
Economic Freedom Is Still Too Rare In the Developing WorldAs Johan Norberg noted in his critique of Klein’s book,
If we look at the Fraser Institute’s Economic Freedom of the World statistics (EFW), we find only four economies about which we have data that haven’t liberalized at all since 1980. All the others have. Obviously this also means that we will see economic liberalization even in brutal dictatorships, just as in peaceful democracies. ... Klein relies on her personal interpretation of anecdotes and examples and never tries to supply broad, statistical evidence for her case. It’s an understandable omission, because the data don’t support her argument. There is a very strong correlation between economic freedom on the one hand and political rights and civil liberties on the other.
Indeed, while these reforms leave much to be desired and the world has taken a massive step backward since the financial crisis, there has still been a decent amount of liberalization. And the world’s economic progress, while again leaving much to be desired, has been undeniable.
One must merely glance over the Economic Freedom of the World rankings to see that the developing world ranks by far the lowest. The index takes into account the following,
Size of Government: Expenditures, Taxes, and Enterprises;Legal Structure and Security of Property Rights;Access to Sound Money;Freedom to Trade Internationally;Regulation of Credit, Labor, and Business.Western countries in North America and Europe rank the most free followed by countries in Eastern Europe and Asia, then comes the Middle East and Latin American with Africa at the bottom. Hong Kong ranks first with an 8.98 rating, the United States comes in 12th at 7.81 (behind Canada at 7th). Even “socialist” countries such as Norway and Sweden come in high at 30th and 32nd respectively. Yes, they may have a large government welfare system, but they also have (relatively speaking) sound property rights and free trade.
On the other hand, El Salvador comes in 60th, Brazil 103rd, Mali 133rd, and Chad at 146th. Venezuela — which just happens to be going through a major economic crisis — comes in dead last. (There is no data on North Korea.)
Remember the “free market dystopia” of Honduras that “eliminated taxes” and “privatized everything”? Well, it ranks 116th on the 2015 Index of Economic Freedom and 104th by the World Bank Group on the ease of doing business. The same group ranked Honduras 153rd on how cumbersome the tax burden is. Apparently, eliminating taxes actually means having a 25 percent top personal tax rate, 30 percent corporate tax, and a brutal 15 percent national sales tax. It’s almost as if Ludwig von Mises himself had come up with Honduras’s economic policies.
On the contrary, the developing world is thoroughly interventionist. Property rights are scarce so raising capital is extremely difficult. Local police can and do harass business owners into bribes and without strong property rights and fair courts to settle disputes, much of these economies are little more than a black market. It’s like the illicit drug market in the United States writ large. The government’s themselves, far from laissez-faire, could often best be described as kleptocracies. Indeed, the reason Honduras needs “private security guards” is because the state police do little more than harass their own citizenry.
Another example of Latin American interventionism is Peru. While researching his book The Mystery of Capital, Hernando de Soto decided to try and start a small clothing factory in Peru. He hired a lawyer and a few students and set them on their way. The result?
They had to do a lot. They had to get 11 different permits from seven different ministries. They were asked for bribes 10 times, had to actually pay bribes twice, there were lots of delays. ... In total, it would take you at least 278 days working eight hours a day to do business with a small, little factory.
A friend of mine who had a business in Ecuador, told me of similar experiences to that of Hernando de Soto. And it’s certainly not just Latin America either. The documentary Commanding Heights describes “the Permit Raj” in India that came to being after the British Raj was removed in 1947. As Narayana Murthy, the chairman of Infosys Technologies put it, “It used to take us about 12 to 24 months and about 50 visits to Delhi to get a license to import a computer worth $1500 dollar.”
Because of this, “Businessmen found it almost impossible to get things done.” India’s Finance Minister P. Chidambaram noted that “Every permit was procured by corrupt means.” In other words, a bribe. This giant, corrupt bureaucracy is the primary factor in keeping the underdeveloped world underdeveloped. Fortunately, in India’s case, it has liberalized somewhat and seen robust economic growth.
How Rich Countries Get RichOverall, the wealthiest countries generally have freer markets. As noted above, Hong Kong is ranked as the world’s freest economy and has had some of the most remarkable growth in world history. In fact, John Stossel tried the same experiment as Hernando de Soto in Hong Kong. He filled out a one page form and opened his business the following day.
As a paper from the National Center for Policy Analysis noted, “Per capita income is seven times higher in the economically freest economies compared with the least free countries.” In the top quintile in 2002, the per capita income was $26,106 per year. In the bottom quintile, it was a mere $2,828.
These countries are also freer. Freedom House releases a report ranking countries by political rights and civil liberties. The colored map they provide looks almost identical to the one released by the Fraser Institute. And the same National Center for Policy Analysis report found an almost perfect correlation between economic freedom and political freedom.
How Foreign Aid Perpetuates Corruption and Human Rights AbusesMany might concede this point, but argue that foreign aid is still needed as a stop gap measure. But foreign aid just locks in corrupt leaders and their bad economic systems by allowing the corrupt elites in those countries to linger on with their failed policies. A report from The Center for Strategic and International Studies observed that “The history of U.S. assistance is littered with tales of corrupt foreign officials using aid to line their own pockets, support military buildups, and pursue vanity projects.” Or as one snarky pundit put it, “foreign aid is taking money from poor people in rich countries to give to rich people in poor countries.” Tom Woods puts this all in perspective,
Not long ago Parade magazine published a ranking of the twenty worst dictators currently in power. The U.S. government had contributed aid to all but one of them.
How exactly is this supposed to break the cycle of poverty?
Not surprisingly, it doesn’t. A study by Raghuram G. Rajan and Arvind Subramanian for the World Bank noted,
we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others.
Instead of foreign aid, what these countries need is freedom; economically and politically. And unfortunately, the developing world is sorely lacking in both.
The ECB is now two months into its bond buying binge but the European Central Bank (ECB) never clearly explained the goal and purpose of its own version of quantitative easing. The deflation bogeyman was never a serious threat, nor was it based on any solid theoretical foundation.
A possible justification may have been to make the 1 percent much wealthier so that their extravagant lifestyles trickled benefits down to the average working stiff. Another possible reason may have been to lower the value of the euro to benefit exporters at the expense of the rest of European consumers, the middle class, and the poor. This would be a violation of the unwritten rule that monetary policy should not be targeting the value of the currency directly.
Of course, when the rule maker breaks his own rules, it reduces the importance of all rules. The commitment not to print to finance government spending has gone to the same graveyard as the 60 percent debt-to-GDP rule or the under-3 percent budget deficit rule. Meanwhile, the ECB’s current actions are making a mockery of the alleged independence of central banking.
Central Banks Are Buying Up Government DebtUnder normal conditions, economists take it for granted that interest rates cannot drop below zero. Instead of paying someone to borrow your money, you could just as easily stuff the money in your mattress. So why is so much of European government debt actively trading at negative rates? Why would you take money out of your mattress and pay 1,060 euros for something that will only get 1,000 euros in a year?
The answer is simple: buying government debt can make sense if you have no intention of holding the debt to maturity and think you can find a “greater fool” who will buy the debt from you. That greater fool is often the European Central Bank which, like many other central banks around the globe, is buying up government debt to keep debt-financed programs alive for another day.
And now, faced with very low or even negative interest rates on government debt, governments have been rushing to issue even more debt before announcing, in all likelihood, more vote-getting government expenditures. So, let’s not be fooled by the ECB’s charade that its actions are not indirectly financing new government expenditures.
Why Aren’t Banks Lending More?What about bank lending? Isn’t the ECB’s quantitative easing and negative-interest-rate policy spurring a Europe wide surge in borrowing? After all, negative interest rates are supposed to have the effect of discouraging saving and encouraging movement away from presumably safe government debt into other types of borrowing.
You can lead a horse to water, but you cannot make him drink, so the fact that interest rates are at rock bottom levels is not necessarily enough to spur a frenzy of borrowing by businesses in the face of an uncertain economic future.
Banks also face new hurdles. Not surprisingly, the ECB’s current actions are, in reality, being somewhat defeated by its previous monetary policy. Banks, as financial intermediaries, make money between deposit rates and lending rates. They borrow short term and lend long term.
By setting negative rates on reserves, however, and by inducing negative interest rates on government bonds, the ECB has created a significant compression in yields. This has reduced bank profits. Banks must now charge customers for deposits. Large customers such as hedge funds and mutual funds have been withdrawing funds, further drawing down bank profits.
For example, several large pension funds in Switzerland have recently rediscovered the advantages of the mattress. As Pater Tenebrarum noted,
One fund manager showed that for every CHF 10 million in pension money, his fund would save CHF 25,000 — in spite of the costs involved in vault rent, cash transportation and other expenses.
Furthermore, Basel III forces banks to hold more risk-free assets. Banks have been forced to load up on government debt at negative rates. This also has been squeezing profits. Does anyone really expect European banks to lend more in such an economic environment?
What’s the Endgame?The real objective of the ECB’s current money printing is essentially to kick the can down the road. It won’t solve Europe’s deep-seated structural problems. It will only postpone the inevitable and will also make the final reckoning much, much worse. Printing intrinsically worthless paper will not solve Europe’s fundamental problem of supply being misaligned with demand — a misalignment created by government’s incessant interference with the workings of the price system.
With this new phase of monetary expansion, Europe is slowly walking down the same slippery slope toward hyperinflation that is the inevitable endgame of all fiat currency systems.
In this, Germany missed an opportunity to set the ship straight. It should have made it crystal clear that any purchase of government bonds by the ECB (which violates European law) would have meant Germany’s leaving the currency union and reestablishing the deutschmark under German control. But then again, the German government is not the German people. Such quantitative easing makes it much easier to finance government spending, and the resulting inflation will lower the real value of the government’s existing debt. Of course, this is all for short-term benefits to the government, with long-term costs to everyone else.
Argentina will hold elections this year, and a number of provinces will be electing governors. Buenos Aires, the capital city, is holding elections for mayor, and Mauricio Macri, who is stepping down as mayor, is a favorite to become the next president. Toward the end of the year, a presidential election will be held and Cristina Kirchner, after two consecutive mandates, will have to step down because she cannot be re-elected.
Like Chávez and Maduro in Venezuela, Argentina can be described as a country that fell victim to extreme populism during the Nestor and Cristina Kirchner administrations, which began in 2003. Twelve years later, this populist political project is about to end.
The economic policy of populism is characterized by massive intervention, high consumption (and low investment), and government deficits. This is unsustainable and we can identify several stages as it moves toward its inevitable economic failure. The last decade of extreme populism in Argentina can be described as following just such a pattern.
After observing the populist experience in several Latin American countries, Rudiger Dornbusch and Sebastián Edwards identified four universal stages inherent in populism in their article “Macroeconomic Populism” (1990). Even though populism can present a wide array of policies, certain characteristics seem to be present in most of the cases.
Populism usually fosters social mobilization, political propaganda, and the use of symbols and marketing practices designed to appeal to voter’s sentiments. Populism is especially aimed at those with low income, even if the ruling party cannot explain the source of its leaders’ high income. Populist rulers find it easy to use scapegoats and conspiracy theories to explain why the country is going through a hard time, while at the same time present themselves as the saviors of the nation. It is not surprising that for some, populism is associated with the left and socialist movements, and by others with the right and fascist policies.
The four stages of populism identified by Dornbusch and Edwards are:
Stage IThe populist diagnosis of what is wrong with an economy is confirmed during the first years of the new government. Macroeconomic policy shows good results like growing GDP, a reduction in unemployment, increase in real wages, etc. Because of output gaps, imports paid with central bank reserves, and regulations (maximum prices coupled with subsidies to the firms), inflation is mostly under control.
Stage IIBottleneck effects start to appear because the populist policies have emphasized consumption over investment, the use of reserves to pay for imports, and the consumption of capital stock. Changes in sensitive relative prices start to become necessary, and this often leads to a devaluation of the exchange rate, price changes in utilities (usually through regulation), and the imposition of capital controls. Government tries, but fails, to control government spending and budget deficits.
The underground economy starts to increase as the fiscal deficit worsens because the cost of the promised subsidies need to keep up with a now-rising inflation. Fiscal reforms are necessary, but avoided by the populist government because they go against the government’s own rhetoric and core base of support.
Stage IIIShortage problems become significant, inflation accelerates, and because the nominal exchange rate did not keep pace with inflation, there is an outflow of capital (reserves). High inflation pushes the economy to a de-monetization. The local currency is used only for domestic transactions, but people save in US dollars.
The fall in economic activity negatively affects tax receipts increasing the deficit even more. The government needs to cut subsidies and increases the rate of the exchange rate, depreciation. Real income starts to fall and signs of political and social instability start to appear. At this point the failure of the populist project becomes apparent.
Stage IVA new government is swept into office and is forced to engage in “orthodox” adjustments, possibly under the supervision of the IMF or an international organization that provides the funds required to go through policy reforms. Because capital has been consumed and destroyed, real wages fall to levels even lower than those that existed at the beginning of the populist government’s election. The “orthodox” government is then responsible for picking up the pieces and covering the costs of failed policies left from the previous populist regime. The populists are gone, but the ravages of their policies continue to manifest themselves. In Argentina the expression “economic bomb” is used to describe the economic imbalances that government leaves for the next one.
Economic Populism is Alive and WellEven though Dornbusch and Edwards wrote their article in 1990, the similarities to the situation in countries like Venezuela, Bolivia, and Argentina is notable. In recent years, to keep populist ideas going in the minds of voters, Venezuela created the Ministry of Happiness, and Argentina created a new Secretary of National Thought.
These four stages are actually cyclical. The populist movement uses the fourth stage to criticize the orthodox party, and argues that during the populists’ tenure, things were better. The public opinion discontent with stage IV allows the populist movement to win new elections, receive an economy in a crisis or recession and the cycle starts over again from stage I. It is not surprising that populist governments usually appear following the hard times caused by economic crisis. A more bold populist government could avoid stage IV by finding a way to remain in office, calling off elections, or creating fake election results (as was the case in Venezuela). At such a point, the populist government succeeds in turning the country into a fully authoritarian nation.
One of the more interesting economic debates in the past couple of decades is why the economy is slowing down.
Since 2000, per capita GDP growth in the US has been 0.9 percent per year, compared to 2.3 percent per year in the previous fifty years. This is a big difference: at 2.3 percent growth we double in wealth every generation. At 0.9 percent it takes us close to a century to double. So why the slowdown?
Even fresh young blogger Ben Bernanke’s in on the game with his new blog, while Tyler Cowen has written a minibook on the subject, called The Great Stagnation.
One thing that most economists, left and right, agree on is that it takes investment to make an economy more productive. So, naturally, economists focus on investment rates. Which have indeed come down, across most of the industrial world, mirroring the US numbers above.
Misplaced Fears of Hoarding and DeflationTo Keynesians, any problem is a demand problem — it’s their one hammer to solve them all. So the position of Bernanke, Summers, and the ever-present Krugman is, with minor adjustments, that there’s too much savings sloshing around in this world instead of being invested. That savings acts as a deadweight on productivity improvements.
“Savings” for both Keynesians and Austrians means the money not spent on consumption. But Keynesians miss that you can do two very different things with savings: you can hoard it, or you can invest it. Hoarding means you secret it away, which terrifies Keynesians. Investing means you indeed spend the money on some productive good or service.
When the Keynesians complain about dead money, they mean there’s too much hoarding. But this completely misunderstands how hoarded savings affect investment. A dollar that’s unspent is equivalent to temporarily removing that dollar from existence. You may as well have buried it. This means that all remaining dollars increase in value.
To illustrate, let’s say you’ve got $100 billion running around the economy, and you burn $25 billion. What happens? The remaining $75 billion do the work of that original $100. Meaning each dollar rises in value by 33 percent. Now, if instead of burning that money you hoard it instead, the impact is the same: the remaining dollars in circulation rise in value. You get deflation. You still get your $100 billion spent, it’s just being accomplished with fewer pieces of paper.
So hoarding merely transfers purchasing power to dollars still in circulation. Meaning that Keynesian bugbear of “savings gluts” have no impact on investment. Because hoarding cancels itself by purchasing-power adjustment.
The Role of RegulationSo what is causing the slowdown? Cowen, who is among the few mainstream economists actually trained in Austrian economics, gets closer to what I think is the true cause, when he looks at supply-side problems. Still, I think he’s missing the obvious. Cowen claims that we have plucked the low-hanging fruit — excess land on the frontier, basic education of kids — and now we just have to suck it up and get used to the new normal.
The problem here is the timing. The frontier “closed” over a century ago, actually before the greatest leap in US economic growth (the “Gilded Age”). Literacy rates, too, leveled off a century too early. I suspect a statistical analysis would say that, by sheer coincidence, the exact opposite occurred: economic growth soared once the frontier closed and literacy rates leveled off.
So what is the cause of the slowdown? Well, we need something that actually occurred in the right timeframe. For me, the problem is pretty obvious: creeping regulation. It’s hard to quantify the impact of regulations: how do we measure a regulation against, say, selling street food or braiding hair without a license? So we need to use proxies.
Here’s a chart of the annual number of pages in the Federal Register. This is a proxy for how many rules come up, which is in turn a proxy for the regulatory burden. These took a huge jump starting in the 1970s, briefly interrupted by Carter’s deregulation drive, then resumed their march upward from the 1980s.
Comparing the productivity numbers to regulatory pages matches up pretty well: pre-1971 real GDP ran at 2.4 percent. Since 1971, it’s run at 1.8 percent. Still, the big drop-off since 2001 isn’t simply explained by pages — there was no big jump in 2000 in Federal Register pages.
So the timing’s not perfect, but there are other comparisons we should make as well. Specifically, we need to look at other countries because our view of the causes of the slowdown will change depending on whether or not all countries are experiencing a slowdown, or just certain countries.
In both the Summers-Bernanke-Krugman savings glut theory and in the Cowen low-hanging-fruit explanation, they are proposing something that should be affecting at least all rich countries. In the regulations explanation, we’d expect different harm depending on the regulatory zeal of particular countries.
The data supports the country specific — regulatory — explanation, simply because there are still rich countries that are growing. The slow-down’s not affecting everybody. Here’s a chart of performance during the so-called stagnation of the top five countries in economic freedom, ranked by Heritage’s 2015 Index of Economic Freedom:
Most interesting are the three countries that actually passed the US during the supposedly world-wide stagnation: Singapore, Australia, and Switzerland. Singapore only passed the US in per capita income in 2011, Australia in 2010, and even Switzerland was at the same income as the US in 2000 — and now it’s nearly 50 percent richer.
So what’s so special about these countries? In general, there’s almost nothing that, say, Australia, Singapore, and Switzerland have in common — language, size of country, resources, structure of economy, type of government. What they do have in common, though, is low regulatory burden, limited governments, rule of law. In fact, both Switzerland and Singapore are regularly threatened by the US as tax havens.
If, indeed, it’s this relatively business-friendly attitude that lets some countries escape the supposed Great Stagnation, we have yet another reason to doubt the policy prescriptions of the Summers-Bernanke-Krugman position. Rather than the expanded government role in lending, or Cowen’s pessimism, the solution is clear: put as much effort into removing regulatory and tax deadweight as we put into hatching new burdens.
With the victory of the Conservatives in last week’s British election, the future of both the European Union and the United Kingdom looks more doubtful. Newly re-elected Conservative Prime Minister David Cameron, in order to please anti-EU constituents who were essential to his re-election, promised a referendum on EU membership by 2017, although it could come sooner than that.
At the same time, the promised referendum is again inflaming secessionist sentiment among Scottish nationalists and separatists who wish to remain a part of the EU.
Naturally, it would be highly simplistic to point to the EU issue as the only major issue behind the Conservative victory. As Louis Rouanet points out here, the British economy in recent years has performed relatively well — with an emphasis on the word “relatively” — and has done so by eschewing the French model of tax hikes and increased interventionism. Whether deserved or not, Cameron was probably able to convince more than a few voters that he deserved some credit for this.
A Gain for EuroskepticismNevertheless, the election was a good sign for the euroskeptics, even in the face of the United Kingdom Independence Party (UKIP)’s inability to deliver much in the way of electoral success to its members. CNBC explains:
Yes, [UKIP] got one MP — but 3.5 million people (in a country of around 62.5 million) voted for the anti-EU party. If there is a low turnout for the EU referendum, and you add the number of people who voted UKIP to those who voted for other parties but aren’t keen on the EU, there might be a real risk of exit.
So, the Cons were able to peel a lot of people out of the UKIP camp, but there remains a real core of anti-EU voters out there whom Cameron (who is a Europhile) can’t simply ignore in the face of his razor-thin victory.
Cameron’s promised referendum has caused the term “Brexit” — with obvious allusions to the possible Greek exit or “Grexit” — to enter the international lexicon. But of course a British exit would be a totally different matter than a Greek exit. For one, Greece is part of the eurozone, while Britain is not, but more importantly, Greece is a net receiver of EU welfare while Britain is a net payer.
In other words, Britain, like Germany and France, are the larger productive economies in the EU that pay the EU’s bills, give it economic influence, and produce the wealth that gets spread around to the less-productive countries like Greece and Ireland.
It’s not difficult to see why some Brits might tire of paying Portugal’s bills when Britain has plenty of economic challenges of its own.
Scotland Looks to the EU and SecessionOf course, I use the term “Brits” loosely. “The English” would be a more accurate term in this case since the Scots, knowing how their bread is buttered, continue to look to secession and the EU as a possible escape plan if the Conservatives deliver at all on their promises to slash government spending or withdraw from the EU.
This would make perfect sense for the Scots, of course, since the EU might indeed offer more generous welfare benefits than the Tories in England. Scotland only has to look next door to Ireland — which benefited mightily from EU largesse during the 1990s — to see how a small relatively poor country can do quite well as an EU receiver state. The Irish state still brags about being a net receiver of EU funds.
Thus, we find that if the British manage to leave the EU, the Scots would be likely to seek secession soon after. Rather than living largely off the forced generosity of taxpayers in England, though, the burden would be passed over to German and French taxpayers, among other northern Europeans.
The biggest loser in this whole reshuffling would be members of the Labour Party in England, who would still be subject to the edicts of London, but who — without reliable left-wing Scottish votes on their side — would be relegated to a political party with little hope of gaining a majority in Parliament in the near term.
(This analysis of course ignores all the non-financial repercussions of a more Conservative British state such as the decline of civil liberties, a strengthened surveillance state, and possibly a more belligerent foreign policy.)
Meanwhile, Back on the ContinentAt the other end of the equation, the balance of power in the EU would shift dramatically as well. With the departure of the UK, the productive economic base — the “net tax payer states” of the EU, such as Germany — would be depleted even more, and the balance of power would shift even more to the more numerous net tax receiver states. Would this accelerate a German exit in a scenario similar to that imagined by Patrick Barron? Possibly, although it’s hard to predict how long the Europeans can keep using Nazi war guilt to keep the gravy train flowing out of Germany to the rest of Europe.
In addition to promising an EU referendum, Cameron has said that he will seek to renegotiate the terms of the UK’s relationship with the EU. With recent floods of refugees and migrants to Europe, the pressure on Cameron for successful renegotiation has increased. EU politicians have proposed spreading out migrants in a resettlement plan across numerous European countries. Naturally, British nationalists aren’t fond of that idea, since new migrants would place additional pressure on the British welfare state. But even if no migrants ended up in the UK at all, the British would end up at least partially funding resettlement through their EU taxes. A partial answer to it all can be had by simply leaving the EU.
As a final note, it might be worth remembering that back in America, the land of the free, the net tax payer states face few legal options if they grow weary of funding welfare programs and government projects in other states. If Colorado and Texas and Minnesota tire of being made to throw money at Mississippi, South Carolina, and Vermont, it’s just too bad for them. In Europe, wanting to break off from the centralized political structure is often called “skepticism.” In America, it’s usually called “treason.”
In recent decades, the tech sector has brought us newer and better goods and ever-dropping prices. In an unhampered market, the same would happen across the entire economy. But, the Fed won't allow this to happen, writes Edin Mujagic.
This audio Mises Daily is narrated by Robert Hale.
Volume 18, Number 1 (Spring 2015)Sweden and the Revival of the Capitalist Welfare State is the third updated (and first English) edition of Andreas Bergh’s well-researched book on the rise, fall, and return of the world-renowned Swedish welfare state. The work importantly traces the origins of the Swedish wonder, in which Sweden rose from being one of Europe’s very poorest to being the world’s fourth richest country in a period of 100 years. Bergh further discusses how this trend came to a halt and, in this third edition, analyzes how Sweden rediscovered its previous path and remained financially strong through the recent financial crisis.
A good chunk of the debate over inequality today centers around what Milton Friedman identified as “the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.” This fallacy is one that any student of economics is familiar with, but the layman may not be: the fixed pie fallacy. The fixed pie fallacy is synonymous with the zero-sum fallacy in economics: that anyone’s benefit comes at someone else’s expense. In other words, if one person earns a dollar, someone else is worse off by a dollar. We know the logic behind the fallacy is faulty because if it were true, no transactions would take place. People aren’t so misinformed that they would remain blind to coming out the loser in half the transactions they take part in.
Well, maybe I’ve spoken too soon in saying that only the layman would be unfamiliar with this fallacy. Weighing in on the income inequality debate in a piece at the Financial Times, former Harvard President Larry Summers attempted to quantify how much better off most Americans would be had inequality remained at 1979 levels. “If the US had the same income distribution it had in 1979, the bottom 80 per cent of the population would have $1tn — or $11,000 per family — more. The top 1 per cent $1tn — or $750,000 — less,” writes Summers.
Quoctrung Bui of NPR reported on Summers’s argument and broke it down even further, estimating the benefits by income quintile. Under the 1979 income distribution, the bottom 20 percent would be earning $3,282 more, the next 20 percent $6,928 more, the middle 20 percent $8,752 more, and the next 19 percent would be earning $17,311 more. This only leaves the demonized top 1 percent, which would be earning $824,844 less.
Bui was intellectually honest enough in his reporting of Summers’s argument that he included this comment: “Of course, this is a purely theoretical exercise. It combines two different worlds: an economy as big as today's, but with 1979 levels of inequality. Some economists would argue that this could never exist, because economic growth has been driven by forces, such as globalization and technological change, that have also driven up inequality.” A question that must be answered is whether or not the economic pie would be smaller, the same size, or larger had inequality not risen by the same extent since the late 70s. The consensus among rich countries is the last option: that inequality, contrary to popular belief, actually promotes growth. Quoting Harvard economist Robert Barro in the Journal of Economic Growth, “higher inequality tends to retard growth in poor countries and encourage growth in richer places.” Even Jared Bernstein in a report for the liberal Center for American Progress stated “there is not enough concrete proof to lead objective observers to unequivocally conclude that inequality has held back growth.”
Since we know that rising inequality has promoted growth above what it has otherwise been, we can’t simply look at economic output today and figure out how much each quintile would be earning had the income distribution remained at its 1979 levels. A good exercise would be to compare current levels of output and earnings distribution against the counterfactual: a smaller economy with 1979 levels of distribution.
In a recent debate hosted by Intelligence Squared U.S., Scott Winship of the Brookings Institution did what I outline. In his opening remarks, he argued:
So, essentially if you enlarge the pie enough, the economic pie enough, then the poor and middle class actually can get more pie even if their slice becomes skinnier.
If you claim that absent rising inequality, the middle class would have had thousands of dollars more than they did, as you sometimes hear, there are a couple of really big assumptions hidden behind that. One is that if we had capped the incomes at the top, that the economic pie would have become just as big as it actually did. The second assumption is that if we had capped those incomes, then essentially the proceeds would be equally distributed across the population. Now, in actuality, if we somehow managed to cap the incomes of the top 1 percent, what would likely happen is we'd be shifting incomes to knowledge workers and professionals who are in the upper middle class or in the rest of the top 10 percent.
To see how important these assumptions actually are, consider one possible outcome if we had successfully held the top 1 percent’s income share in 2007 to their 1979 level, okay? So assume, for sake of argument, that, that would have reduced economic growth, not by a lot, say, by 8 percent. And assume that the middle 20 percent, instead of receiving 20 percent of the proceeds from this redistribution, got 13 percent of the proceeds. Well, I've done the math, and what it works out to is that in this scenario the middle class actually would be no better off for having limited the increases at the top.
So, when we take into account the effects that inequality has on economic growth into the equation, Summers’s purely theoretical exercise becomes just that, a purely theoretical exercise. Quintiles at different levels of income distribution would not be thousands of dollars better off had inequality remained the same as it had in 1979 for the past thirty years, because the economy would not have grown by the same amount. We don’t even know if they would be any better off at all. The fixed pie fallacy may make for good politics, but it has no place in economic analysis.
Mises Institute: How did you first learn about Austrian economics and the Mises Institute?
Jing Jin: I will give you a little background of myself to provide some context of my answers. I earned my undergrad degree in China where I majored in economics. Then I earned my masters of Public Policy at Georgetown University, plus a PhD. of East Asian Studies and International Economics at Johns Hopkins (SAIS). I also worked at the World Bank Research Group in Washington D.C. as a consultant for two and half years. I came back to Asia in 2004 and worked in UBS, Lehman Brothers, and J.P.Morgan. All were based in Hong Kong. I worked in the banking industry in Hong Kong until late last year.
Several months after I had gone over to J.P. Morgan from Lehman Brothers, came the 2008 financial crisis. Obviously anyone with some degree of intellectual curiosity was curious about the true cause (you may be surprised how many sell-side analysts simply wrote it off as part of natural order of the world), and all sorts of analyzes in media and academics did not seem satisfying. I had a hunch that the cause of this crisis had more to do with the government policies rather than the reactionary behavior of the economic agents in the society.
Then I came across two research papers, which directed my attention to the term “Austrian school of economics.” The first paper discussed why the interest rate level was so much lower than real GDP growth rate in emerging markets than that in the developed ones, in particularly the case with China. Applying the Austrian theory of capital and interest appropriately, the paper provided a sensibly simple answer — higher savings rate drove down real interest rate and therefore drove up investment and capital deepening (in China household savings rate ranges from 25 to 35 percent since the start of the economic reforms). The second academic paper discussed the heterogeneous nature of capital in the Austrian school framework. all of these made total sense to me and was intuitive as well as logical.
While I no longer work for J.P. Morgan, somehow the entrepreneurial spirit inside me has been activated (I like to think this also has something to do with Austrian economics). I am currently planning to launch a business to direct international investors to invest in Chinese firms via Hong Kong, sticking to the Austrian teaching that the private sector realizes its greatest potential where the market is least hampered.
MI: Do students in China learn about Austrian economics at the universities?
JJ: The answer to this question is not as simple as it seems and certainly not a yes or no one. Also, universities by far are not representative enough in terms of the Chinese people’s exposure to Austrian economics. I therefore take the liberty to answer this question by not limiting it to university teaching.
I have the impression that Chinese readers overall are not completely unfamiliar with some of the literature of the Austrian school, but their knowledge is of an ad hoc and non-systematic fashion. The Road to Serfdom by Hayek has been widely read by several generations of Chinese students, and with the exception of the Cultural Revolution period from 1966 to 1976, it was commonly read by those who went to high school and university in the 50s, early 60s, late 70s, and 80s.
The use of Austrian economics in class varies case-by-case depending on personal preferences of the professors. I heard from a friend that some of her professors openly discussed Austrian economics in class. But I don’t recall this happened to me when I was in college. Personally, I feel that Chinese bureaucracies and mainstream teaching methods treat the Austrian school either as just a type of institutional economics, and some go as far as to understand the Austrian school as just a subset of “western economics.”
In university curricula from the 1950s to the 1990s, “Western economics” is a classification along ideological lines whereas all those non-Marxist approaches ranging from Keynes to Milton Friedman are included. I know, oddly enough, Karl Marx was a Western guy too.
The neo-classical framework has dominated Chinese universities since the first decade of this millennium, and the discussion of Austrian school thoughts seemed to subside on campus.
However, an interesting phenomenon is that works by Murray Rothbard and Mises are quite popular in discussions by young people on the Internet in China. After I got into the literature of Austrian economics, I traveled to Beijing only to find that quite a few people around me had already read The Ethics of Liberty years ago, and there are so many books already translated into Chinese. My salsa tutor told me about Internet groups that publish articles and books on just about any topic using the Austrian economics framework. He himself is an active writer for these Internet sources as well. The online articles are similar to the publications on Mises Daily. There are also book clubs dedicated to translating the works by Rothbard, Mises, Hoppe, and others.
MI: Are Chinese readers able to easily access Austrian books and articles in China or is the language barrier still a major concern?
JJ: I would say the accessibility is pretty good. Quite a list of books by Mises, Rothbard and Hayek are already translated and anyone can find them on the biggest online bookstore in China. Some of their books have been reprinted many times and always sell out. There are also books by others such as Menger, Huerta de Soto, etc. More e-books are available online as well. In the academic circle, many can read English directly and use the website of the Mises Institute.
While searching for the availability of the Chinese translations, I sensed there is a group of passionate translators for Rothbard’s works. What I want to share with you here is that one of the translators of The Ethics of Liberty posted the following message on his blog after finishing the work that night. [This is my own translation from the Chinese]:
Rothbard and Vodka are my companions throughout the final nights of 2007. Rothbard’s work made me think of the nature of human beings and ethics from time to time all through the year, and tonight this episode came to an end. … I have this rare opportunity to look at the vicissitudes in history from the eyes of a young scholar in such a special day. But, to be honest, proof reading of other’s work can sometime be more depressing than translating. The half empty Vodka bottle is the proof. When I do translations, I can do nothing but to make the music in super high volume and read the sentences out loud for over several dozen times. … Rothbard is classic, and I was at awe to know that the second half of the twentieth century could still encounter such a classic. He has faith in The Truth and spares no efforts, using formal logic, to prove its eternal existence and power …”
Having said this, I feel that Chinese is a difficult language and translation is not easy. The language barrier is an issue. To allow more people’s access, more translation work is definitely needed for the spread of Austrian economics, especially for those classic short essays and academic papers of Rothbard’s and others.
MI: Overall, whether focused on Austrian economics or not, is there much discussion of free markets in China?
JJ: In China the term “market economy” is used instead of “free markets.” The discussion about the role of the market is extensive and exists at all levels. At the top, to let markets play a “decisive role” in the economy is written into the resolution of the third global session of the eighteenth Communist Party Congress (2013). Considering China’s experience of decades of a highly centrally planned economic system, it is fortunate that today, even among top Chinese leaders there is a firm belief in the free market’s power to create economic growth and in the sure demise of interventionist policies. The central government urges deregulation in many areas and is pushing to reduce the power of various regulatory agencies and the sub-national governments that are making the regulatory process complicated and slower than expected due to the misaligned incentives of the parties involved.
After decades of economic reform, the state’s role in the economy decreased substantially. This round of reform is targeting the remaining monopolized state-owned sectors. Inviting the private sector to purchase the shares previously owned by the state in these sectors is also a major market-leaning measure currently implemented by the central government.
At the grassroots level, people don’t talk but just act by opening their own businesses as a direct response to the contracting state sector. This is also encouraged by the government as these relative smaller businesses provide employment opportunities for hundreds of millions of Chinese people. The number of new start-up companies reached a historical high in China and almost everyone wants to have their own business nowadays. This is confirmed by many personal stories of friends and acquaintances. In the financial sector where I belong, many started their own investment funds or consulting businesses as well.
When I was in banking, our team covered large Chinese institutions (mostly major Chinese banks) and later focused on their overseas financing activities. We had to monitor the overseas media coverage as well as academic research on China because these analyzes affect investors’ sentiment. Our experience with Chinese clients and markets have taught us that today’s China, despite still claiming to be a “socialist” country in name, is becoming incredibly business friendly and filled with entrepreneurial spirit.
However, the western mainstream media’s portrayal of China is entirely different. Comparisons of apples and oranges are commonplace, groundless generalization is ample, pure fantasies are not unusual and some comments simply take your breath away. … It’s almost like the mainstream media’s judgment of China had been pre-made before any evidence was collected. Their negative comments on China are simply several worlds’ away from what we see on the ground.
MI: How would you describe thinking about market economies within the business community in China?
JJ: The business community is not an easily defined group in China. In my view, businesses can be broadly pooled into two distinctive groups. The first group is composed of those who make money by allying with the government and its bureaucrats, or rather becoming their agents. The second group is all those smaller businesses which, like weeds, survive and even thrive wherever and whenever the government didn’t take away all the soil, water, and air. This pattern has its deep historical roots that can be traced back to more than two thousand years ago when the then-dynastic regime successfully transformed the aristocracy into a bureaucracy. Since then, Chinese history had been a drama of the emperors and the bureaucrats striving for supremacy over the other with the bulk of society struggling to survive in between them. So the economic theory talked and preferred by these two groups of business communities, I gather, are surely different.
In today’s context, the first group is less hindered by Keynesianism as long as they can find ways to benefit themselves given their bond with the government and its agents. At the same time, however, they are also trying to legalize and crystalize the private ownership of the property they acquired through their government connections. This is the target of the stormy anti-corruption campaign that is sweeping China today.
But it’s the second group I see more and more people joining, and clearly that’s where the majority is. Austrian economics should be intuitive to them, as demonstrated by so many online publications using the Austrian framework and these discussions go beyond economics.
Macroeconomics is discussed in the mainstream media within the neo-classical framework, and monetary policy is obviously the most talked about topic. This is a global trend rather than China’s. My observation is that the Chinese people are very sensitive to money printing. Indeed, over two thousand years of the vicissitudes of dynasties and debasement cycles is more than long enough to build such sensitivity. This can also explain the long tradition of the Chinese people’s love for gold.
Since I’m not a person who follows the climate-change debate or climate science in detail, I don’t get involved in discussions over temperature readings or climate trends. On the other hand, I find it’s a very bad idea to leave the science of economics and political economy up to climate scientists and their friends in politics who tend to be woefully deficient in their knowledge of how economies work or how scarce goods and amenities can be preserved, obtained, or manufactured.
It seems that for the global warming lobby, all that is necessary to set everything right is to hand control of the global economy over to governmental central planners. In their minds, the machinery of government only needs to be set in motion, and everything will be done with righteous precision to preserve the climatological status quo by increasing the cost of energy and cutting economic activity. The costs of such a venture, whether in money or in human lives and human comfort, need never be considered, because, we are told, the only alternative is the total destruction of planet earth.
This “Follow Us or Die!” routine is a propagandist’s dream of course, but in real life, where more rational heads — on occasion — prevail, the costs of any proposed government action must be considered against the costs of the alternatives. Moreover, the burden of proof is on those who wish to use government, since their plan involves using the violence of the state to carry out their proposed mandates.
For the sake of argument, let’s say that global climate change is occurring and that the sea level is rising. This still leaves several unanswered questions for the global warming enthusiasts:
What is the cost of your plan to various populations in terms of the standard of living and human lives?Is the cost of your plan greater than or less than the cost of other solutions, such as the gradual relocation populations from coastal areas.Can you show that your plan has a very high probability of working, and if not, why should we implement it when we could spend those same resources on other more practical solutions and more immediate needs such as clean water, food, and basic necessities?All too often, the response to questions such as these are angry diatribes about how we must act now. But of course, such a position is similar to that of a person who, upon seeing that winter is approaching demands that everyone build the winter shelter his way immediately. “Can’t you people see it’s getting colder?” he says. “If we don’t build the shelter my way, we’ll all freeze.” When faced with questions of whether or not his shelter plan is really the best way to proceed, or if a different type of shelter might be more cost effective, or if others would rather build their own shelter, he angrily declares “you winter deniers don’t care if we all die.”
Naturally, if the group then goes ahead with their belligerent companion’s shelter plan, they may find in the end that the shelter fails to keep out the cold or is structurally unsound. In that case, the group is actually much worse off because it expended large amounts of valuable resources that should have been applied elsewhere.
The True Costs of Global Climate RegulationHere’s a representative paragraph from a publication that claims it disproves the “myth” that economic controls will have a negative impact on the economy:
In the long term, unless we drastically reduce the rate at which we are still emitting greenhouse gases, we are very likely to incur huge costs as a result of climate change. Part of these costs will be in adaptation, and the inevitable disruption. In part costs will escalate due to turmoil and uncertainty throughout the economic world. There will also be costs that cannot be quantified, particularly when we try to value a human life and its loss.
What are these “huge costs”? How many of them will come from “disruption” and how many will come from “adaptation.” If we look more deeply into the proposed plans, we find the attempts at estimating such costs are based on wildly speculative computer models. There is nothing more than the assumption that their course of action is superior to the course of action preferred by others. But again, the burden of proof is on those who wish to use government coercion against others.
Moreover, even the mainstream research recognizes that the proposed cuts in carbon emissions, such as cutting “CO2 emissions to 80 percent of 1990 levels,” are purely arbitrary. Indeed, they must be arbitrary because the people who advocate for such measures have no idea how much carbon emissions should be cut to accomplish their goals, or indeed, if any level of cuts would accomplish their goals, ever.
What we do know, on the other hand, is that fossil fuel energies are behind most of the enormous progress made in the developing world. They make mechanization, transportation, and industrial economies possible. It is the rise of factories and other industrial operations that have pulled countless millions of Chinese (to name one example) out of the drudgery of low-productivity agricultural work and into factories where they can earn more than ten times as much. These workers send money back to elderly family members and they make possible the enormous savings rates that are driving the Chinese economy.
This work is safer, more productive, and provides access to more and better food, better medical care, and better housing, than does agricultural work.
Fossil fuel energy is a key factor in all of this, and to propose that the rug now be pulled out from under these people displays a callousness toward humanity that is truly unnerving.
But, the global warming lobby may say, “the effects of global warming will hurt them.” Perhaps. And if so, they need to prove to us that the costs of global warming will be greater than the costs of making these people less productive, poorer, and possibly destitute.
Less Energy Use Means Less Clean WaterA second major factor here in the necessity of energy is fresh water. The California drought has reminded us that fresh water is a scarce resource, even if the government likes to treat it as if it were not. But even as larger populations demand more water, fresh water can be produced through the use of energy via desalinization and pump-based aqueducts.
Today, most such schemes are still uneconomical because the problem of water scarcity can usually be solved through cheaper means such as importing food from wetter climates and through cheaper aqueduct systems that are primarily gravity-based.
In the future, however, as water does become more and more scarce as populations grow, the most practical answer will indeed become more energy-intensive solutions.
By centrally planning and artificially limiting energy usage, however, what the global warming lobby wants to do is raise the price of water processing, and by limiting the use of such methods, also inhibit technological progress by preventing practical experience in the use of water processing and fresh water production.
Bizarrely, many of these same people claim that government regulation of water is necessary because “rich people” will hoard all the water, but by raising the cost of water processing, the global warming lobby is ensuring more monopolistic control over water and higher prices for everyone.
“But global warming is causing droughts!” some will say. Perhaps. But those people still have yet to prove that their plan will end droughts and produce sufficient water for everyone. They still can’t even prove that droughts like the California drought are due to global warming. And, needless to say, the proposition that global controls on energy will make water flow from the hillsides in some distant future is pure speculation. But, in the meantime, we know the effect on the cost of living for ordinary people will be enormous. In other words, the global warming lobby wants humanity to abandon a real bird in the hand — developing technology in water production — for two very theoretical birds — a future without droughts — in the bush.
An Experiment Built on the Backs of the Most At-Risk PopulationsThus, a world of carbon controls and other central plans designed to prevent global warming, is a world of greater expense for everyone when it comes to food, water, and any basic necessity that involves the expenditure of energy. Which is to say, most everything. Naturally, the people in the least industrialized and poorest parts of the world will suffer the most. The global warming lobby likes to point out that their global warming policies are primarily directed at the richest countries. But if they think that will spare the developing world, they’ve only made clear that they don’t understand how global economies work. Crushing economic activity and consumption in the developed world only serves to lower wages and economic growth in the developing world.
Like the man who hysterically demands that everyone build a winter shelter his way or die, the global warming lobby thinks that its highly speculative, unproven, massively expensive, and poverty-producing plan is the prima facie solution to everything. Naturally, they want to use the coercive power of the state to force everyone to conform to their plans as well, and if a billion poor people have to pay a steep price, well, that’s a price that wealthy and upper middle-class academics and activists are willing to have the poor pay.
Interviewed by host Jack Thompson, Mark Thornton discusses discusses his work on what is known as "The Skyscraper Index," which posits that each time the world's largest skyscraper is built, an economic crisis follows.
In recent years, Paul Krugman has incessantly defended France and its welfare state, even going so far as to pretend that the French economy was in fact in better shape than the British economy. According to him, “To an important extent, what ails France in 2014 is hypochondria, belief that it has illnesses it doesn’t.” However, except for some Keynesian propagandists, nobody believes that the French economy is not deeply in crisis and it is now more and more obvious that Krugman is wrong.
The UK, on the other hand, is growing faster than any other major advanced economy this year. Growth has picked up since the first quarter of 2013 to 2.6 percent in 2014 — a seven fold higher rate than for France — and employment in Britain, both in absolute terms and as a share of the adult population, has never been higher. Even wages, which were constantly depressed after the 2008 crisis, has begun to rise again.
As usual, British politicians took advantage of the British economy’s good performances to make fun of France. Chancellor Mr. Osborne has claimed: “And which county has created more jobs than the whole of France? The great county of Yorkshire,” after the latest UK jobs figures showed employment at a record high. David Cameron recently stated that “Labour will make us as bad as France.” French bashing is almost part of the British culture, it is true, but for now, the UK is indeed in better shape than France.
Fiscal Austerity vs. Spending AusteritySince 2009, France and the UK have used opposing economic policies. France increased taxes and didn’t decrease government expenditures. The UK, on the other hand, decreased government expenditures but didn’t increase taxes. Between 2010 and 2013, the UK reduced its structural deficit by more than any other advanced economy (4.7 percent of GDP).
If you follow Krugman’s ideas, then this should suggest to you that there was less economic growth in the United Kingdom and more in France. Not very surprisingly, however, the exact opposite happened, and while the French economy stagnates, the UK has mounted an economic recovery.
Public spending in France is now more than eleven points of GDP higher than public spending in the UK. Taxes are also much higher in France and government regulations, particularly in the labor market, are not as problematic in the UK. Thus, it was easier for the structure of production to adapt itself after the crisis in UK than in France.
But while the public sector shrank in the UK, it expanded in France. Therefore, measuring economic progress via GDP — a deeply flawed strategy — underestimates the development of the British economy.
People who are forced to pay for public expenditures via taxation were not expressing actual preferences. Thus, as Dr. Salerno put it: “it is certainly true that a reduction in real government spending causes a reduction in real GDP, as it is officially calculated. But ... the reduction in government spending does not retard the growth of production of goods that satisfy consumer demands and, in fact, most likely accelerates it.”
But even if the French economy is as great as Paul Krugman says it is, why then are so many French leaving their country to cross the English Channel? When you want to know if an economy is thriving look how people vote with their feet. If Krugman had done that, he could have seen that it is mainly the French that are immigrating to London, and not the English to Paris. Indeed, the number of French immigrants in the UK has increased dramatically over the past twenty years. The mayor of London, Boris Johnson, likes to say that he is the mayor of the sixth largest French city in the world. There are now more than 200,000 French immigrants in London alone.
Of course, the UK is far from perfect. Public debt and deficits remain too high and much needs to be done, mainly in the very public British healthcare sector. Indeed, health care public spending is still rising — 4 percent in volume between 2010–2011 and 2014–2015. Moreover, the Bank of England has conducted an expansionary monetary policy which could lead to instability and further crisis. There could be, for example, a new real estate bubble in England in the works.
Krugman’s Data vs. Actual DataOn November 8, 2013, Krugman denounced the S&P decision to downgrade France:
I’m sorry, but I think that when S&P complains about lack of reform, it’s actually complaining that Hollande is raising, not cutting taxes on the wealthy, and in general isn’t free market enough to satisfy the Davos set.
A few days after Krugman wrote those lines, better than expected employment figures where published for Britain whereas France still had a double digit unemployment rate. Already in 2013, it was visible that something was wrong with France’s economic policies. But Krugman was convinced otherwise.
Early in January 2015, Krugman published another article which aimed at showing the superiority of the French economy over the British economy. And again, it wasn’t long before new statistics showed that what Krugman was saying was simply wrong. To sustain his argument, he published the following graph without any sources:
Krugman wrote:
Austerity triumphant. Or, maybe not. Part of this is the growth rate fallacy — no matter how badly an economy has done over an extended period, you proclaim success after a year or two of good growth.
There are two major problems with Krugman’s claim. First of all, if you look at GDP per capita growth since 2000, the UK outpaces France. Second, Krugman’s graph is wrong. Whether you look at the data of the IMF, the World Bank, or Eurostat, no one matches with his data. The graph actually looks like this:
Source: EurostatFurthermore, austerity policies in the UK were introduced only after 2009. Thus, the Keynesian orthodoxy is unable to explain why growth, decrease of unemployment, and austerity took place at the same time. Krugman gave no explanation.
UnemploymentFrom December 2009 to December 2014, in Britain, the number of employees in the public sector went from 6,370,000 to 5,397,000 whereas total employment went up by about 1,700,000. However, the public and private sector employment series have been affected by a number of major reclassifications where bodies employing large numbers of people have moved between the public and private sectors. But even if you take this into account, the number of jobs created by the private sector is still very impressive. On the other hand, the number of government employees in France never stopped increasing and unemployment is still at a very high level. Keynesianism is completely unable to explain what happened. They expected that austerity would have led to a strong recessionary effect. This is not what happened.
For those not bogged down by Keynesianism, however, the graph can certainly be explained, as can the relatively superior growth levels experienced in the UK. A reduction in the number of government employees is good because that labor becomes available for private companies, and wages fall. This fall makes new investment projects viable. When the public sector shrinks, it becomes relatively more attractive to work in the private sector. Only then can entrepreneurial energies be used to serve consumers on the market place rather than being directed toward rent-seeking in the political arena.
The future of France is not as bright as Paul Krugman thinks it is and his recommendations are far from being verified by theory and facts. During a crisis, the best rule the government can follow is, as Rothbard wrote “don’t interfere with the market’s adjustment process.” One other thing the government can do however is to slash government spending and taxes. To an extent, this is more or less what was done in the UK, especially when compared to France. As Rothbard showed, “depression is a time of economic strain. Any reduction of taxes, or any regulations interfering with the free market, will stimulate healthy economic activity; any increase in taxes will depress the economy further.”
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The prime minister of Iceland recently commissioned a report by Frosti Sigurjonsson to recommend a better money and banking system for Iceland. The recently released report recaps Iceland's sorry history of money and banking disasters and lays the majority of the blame for the 2008 collapse on the institution of fractional reserve banking, which caused an out-of-control increase in the money supply. Sigurjonsson recommends the abolition of fractional reserve banking, a separation of deposit and loan banking, and an end to deposit insurance.
Unfortunately, Sigurjonsson also recommends more power for the central bank through what he calls the “sovereign money system.”
An Out-of-Control Money Creation ProcessSigurjonsson is correct that the central bank lost control of the money supply in the years leading up to 2008 as the banks leveraged their excess reserves into new loans, which created new money. In turn, this led to greater involvement from the central banks since, as Sigurjonsson notes, it was the duty of the Central Bank of Iceland (CBI) to "provide banks with reserves as needed in order to not lose control of interest rates or even trigger a liquidity crisis between banks."
He then accuses the private banks of lending for speculative rather than worthwhile purposes. Curiously, though, he has no such concern over government control over this powerful economic lever. He is confident that the central bank would expand and contract the money supply in a fashion that would be beneficial to all society and that government would spend new monies only for purposes that would benefit the nation.
Limiting Money Creation to the Central BankSigurjonsson believes that government needs the power to introduce new money to meet the needs of an expanding economy and that the central bank and government will do so for the good of the nation as a whole and not for private purposes. At a minimum he believes that the money supply must expand in order for the economy to expand. In this regard he is a full-fledged Friedmanite, who little understands the adverse impact of even a low level of money growth on the structure of production. On the contrary, he sees money growth as necessary for economic growth and has full confidence that government will spend any newly created money only for good.
It is obvious that either he's never heard of public choice theory or does not subscribe to its conclusions. Really, who today believes that government, which after all is manned by some of the most fallible humans in society, can (1) be completely altruistic in its spending decisions and (2) would know what is best anyway? (I refer Sigurjonsson to F. A. Hayek's wonderful Nobel speech in which he clearly articulates his theory of the pretense of knowledge.)
Sigurjonsson concludes his proposal with a call for what he terms the "sovereign money system." Right away we have reason to be concerned when he states "The CBI will create enough money to promote the non-inflationary growth of the economy." He would separate money creation from money allocation. A money creation committee would decide how much money to create and then the parliament would decide how to spend it. New money would serve five purposes: fund new government spending, reduce taxes, pay off the public debt, provide a citizen bonus, and increase lending to business. Money would not be backed by debt, but would be a sovereign asset created at will.
Transferring More Power to GovernmentThe proposal does remove the ability of banks to increase the money supply through the lending process. All to the good so far. But it then transfers this power to government. It allows government to spend what it wishes, as long as the money creation committee goes along, by counterfeiting whatever amount is desired. Government would not be required to increase taxes or issue new debt. This is a counterfeiter's dream! It’s also a government dream. Somehow, I have little confidence that the money creation committee will not go along with whatever spending plans the parliament desires.
In short, Sigurjonsson wants to rein in the ability of private banks to expand the fiat money supply while giving free rein to central banks.
On the other hand, perhaps Iceland's central bank and government will exercise their money printing power with discretion long enough for the rest of the world to see the benefits of abolishing fractional reserve banking and moving toward a one hundred percent fiat reserve system. After that we can fight the next battle — prohibiting central banks from expanding the fiat money supply and then finally tying money to specie at a legally enforceable ratio. At that point money production can be turned over completely to private hands and the central bank abolished.
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Even as the Saudi Arabian state steps up bombing raids in Yemen and spends billions on new military infrastructure, plans are moving forward for the Kingdom Tower in Jeddah. The new tower is to be a kilometer tall and will contain at least 200 floors. It will include both a luxury hotel, class A office space, residences, and many other luxury features. It represents phase 1 of a multiphase development just north of the city of Jeddah on the Red Sea.
The Kingdom Tower project is organized by the Kingdom Holding Company, the chairman of which is Saudi Arabian Prince Al-Waleed bin Talal. He is nephew of the late King Abdullah and is the wealthiest Arab in the Middle East.
The project has been in the works for several years. Between 2008 and 2013 contracts were negotiated and signed, technologies were selected and developed, and preliminary work was carried out. In early 2013 work was begun on the underground foundation and was completed in early 2014. The above-ground construction commenced in the fall of 2014 and is proceeding apace.
The Latest Skyscraper Alert?Since the 1990s, when James Grant and Andrew Lawrence noticed a correlation between the construction of record-setting skyscrapers and economic busts, so-called skyscraper alerts — to warn of a possible “skyscraper curse” — are issued shortly after a building project to set a new world record for the tallest building has broken ground, and is well under way.
The connection between skyscrapers and economic crises dates back a century. For example, the Panic of 1907 occurred while the Singer Building and the Metropolitan Life Building were under construction. The Empire State Building opened in 1931 in the depths of the Great Depression. Construction on the Burj Khalifa Tower surpassed the height of the then record holding Taipei 101 on July 21, 2007 just as the housing crash began. The correlation sounds farfetched, but in 2005, I explored the connection further, and found that it can, in fact, be explained by Austrian business cycle theory and its emphasis on central-bank induced malinvestment and Cantillon effects.
Will This Time Be Different?The Burj Khalifa, the current tallest skyscraper, stands 830 meters tall. It opened in January 2010 as its owner was forced to accept a $10 billion bailout. The physical topping-off of the tower occurred in mid-January of 2009. Like the Empire State Building, it opened in the depths of a major recession.
For now, we can only speculate about timing, but the Kingdom Tower also shares many of the financial and physical features of the Burj Khalifa, including the highly speculative nature of building such a structure in a sparsely populated desert. Both projects were designed and begun during periods of artificially low interest rates. Both buildings are symbols of lavishness, opulence, and extravagance as such projects are the classic “high end” in luxury spending.
Both projects represent the need for a large number of new technologies (elevators, cement pumping, temperature control, exterior finishes, etc.) as well as an expansion of the bundling of consumer goods (hotel, residents, entertainment, shopping, office space, etc.) under one roof.
Based on projected reports, tenants will begin moving into the Kingdom Tower in 2019, though construction should be completed in 2017. During construction it will surpass the height of the Burj Khalifa, and thus become the world’s tallest building, sometime in 2016.
Adding to the bubble-like feeling in the region, and the global economy in general, is the fact that Saudi Arabia, where the line is blurry between the regime’s money and the ruling family’s money, continues to move forward simultaneously with a myriad of new spending projects.
There is the new tower, and the fact that the military spending was boosted 17 percent in 2014. The Saudi state has also announced it may decide to develop nuclear weapons at any time, and in January, it announced it plans to build a 600-mile wide barrier from Jordan to Kuwait.
Image source: iStockphoto
Sometimes one finds true gems in one’s archives. Recently I came across a speech by then-chairman of the Fed, Ben Bernanke, from May 18, 2013. It was the commencement speech at Bard College at Simon´s Rock, in Great Barrington, Massachusetts. In it, Bernanke chose to forget for a while the dire straits the Western economy is in and focused on prospects for economic growth in the long run, which he defined as “measured in decades, not months or quarters.”
In short, Bernanke focused on scientific and technological progress, more commonly described as innovation. He envisaged a fourth wave of innovation — the first three being the early industrial era (mid-1700s until mid-1800s), the modern industrial era (from 1880 onwards), and the IT-revolution.
His commencement speech was a speech of hope and of encouragement. But Bernanke did not tell the whole story. The then-Fed chairman failed to mention that living standards will depend on more than innovation. At least as important is the role of the very institution he chaired, the Federal Reserve, and what it does or does not do. If it allows high inflation to take hold — either through action or inaction — that would annihilate a very substantial part of the increase in living standards due to innovation.
And yet, recent history strongly suggests that the Fed will end up destroying a large part of the increase in living standards of those graduates Bernanke was speaking to. For example, at the beginning of 2013 Bernanke spoke at another American college. During the Q&A session, he said that “the worst mistake the Fed can make is to tighten monetary policy too soon.” In other words, the then-chairman essentially promised to raise interest rates too late. Nowadays, Bernanke may be gone from the Fed, but his line of thinking on monetary policy certainly has not, and indeed, this line of thinking reflects dominant fed policy well beyond the Bernanke years.
Innovation and Living StandardsBernanke, like Greenspan before him, is counting on innovation to keep the economy moving. As well he should. Technological innovation often leads to more efficient production and greater worker productivity which leads to higher wages and more affordable goods.
But if Bernanke is going to tell students that technology will make their lives better, he should also mention the role that he himself and other central bankers play in stifling the positive effects of innovation.
We can see multiple examples of this phenomenon in recent decades. For example, if we consider the effect that China’s entrance into the global economy should have had on living standards in the US, we find the actual results to be somewhat underwhelming. We should have witnessed growth in living standards similar to what we witnessed toward the end of the nineteenth century as the US industrialized. But in fact, the record of growth in real wealth in the US has been disappointing at best.
For example, technological progress due to the Industrial Revolution and globalization in the late nineteenth century led to continuous deflation in the US, and hence unprecedented increases in welfare. Research by Michael Bordo at Rutgers, shows that on average, prices fell by 1.2 percent each year between 1870 and 1896. Real living standards increased substantially over the same time period. Labor market economists in the United States have been able to reconstruct wage development in the United States since 1830. In every decade the real wage was higher than the preceding decade. That is, until the 1970s.
In contrast, in the decades since the early 1980s, as Asia was joining the world with its own industrial revolution, each year prices increased in the US by more than 2 percent. According to the statistics available from US Census, real median household income in the United States (i.e., income adjusted for inflation) barely moved between 1980 and 2012. This is odd, given the fact that economic growth averaged some 3 percent per annum and labor productivity soared by some 50 percent in total. A working American male earned approximately $48,000 in 1969. Adjusted for inflation, his income had barely grown by the time the current economic crisis started.
The main difference between the two periods is that in 1800s there was no Federal Reserve, and the money supply, while certainly not completely non-inflationary, was restrained by the absence of a central bank.
Lost OpportunitiesIn an unhampered market, technological progress, innovation, and globalization in the decades before the current crisis should have led to three things: slower wage growth, larger profits, and lower prices. In other words, what firms like Apple accomplished (i.e., the creation of innovative, labor-saving products made available at ever-lower prices) on a micro scale, should have happened on the macro-level as well. Slower wage growth would have been inevitable because of increased global competition in the labor market and the constant and increasing threat of jobs being offshored. Larger profits would have occurred economy-wide because of this fact, and the fact that production costs fell. And finally, lower prices would have spread throughout the economy because, due to technological progress, globalization, falling wages, and falling transportation costs.
The first two effects manifested themselves. As mentioned, real income barely budged in the last few decades in the United States. This becomes evident when we take a look at the total employee compensation in the United States. Measured as a share of GDP, US wages in recent years have been lower than during any other period since World War II. At the end of the war, the ratio was 53.6 percent. Nowadays, we find it below 45 percent.
Moreover, as a rule of thumb, the lower the share of wages in any country’s GDP, the higher the share of profits. So we find the second effect evident as well: profits increased.
The third effect, however, falling prices, has been largely prevented by the intervention of the central bank. In fact, the Fed aimed for, and continues to aim for some 2 percent inflation per annum. The Fed has been very successful in preventing prices from falling even when the downward pressure on prices was strong, due to the aforementioned combination of technological progress, innovation, globalization, and free trade.
In more than a century before the inception of the Fed in 1913, cumulative inflation in the United States was approximately 0 percent. Between January 1, 1914 and July 2013, cumulative inflation in the United States stood at 2,236 percent, prompting Milton Friedman to write — way back in 1988 —that “no major institution in the US has so poor a record of performance over so long a period, yet so high a public reputation.”
A logical consequence of any “fourth wave” of innovation should be deflation, or falling prices. Then and only then will the living standards of those graduates who were listening to Bernanke indeed increase strongly. It will not happen as long as the Fed continues to aim for inflation every year and certainly not if the Fed continues to follow its current policy that will, according to many, cause even higher inflation in years to come.
Image source: flickr.com
Brazil's government has long been devoted to the idea that more government spending will create more economic prosperity. For a time, it seemed to work, but now reality and disillusionment have set in, writes Antony Mueller.
This audio Mises Daily is narrated by Robert Hale.
All Keynesian roads lead to stagflation. That was the case in Europe and in the United States in the 1970s when both stagnation and inflation hit the economies at the same time. Currently, this is the case in Brazil.
Since coming into power in 2003, the Brazilian labor government has religiously implemented the economic policy doctrine of growth by spending. Now, the country has fallen into stagnation with a recession looming while inflation is on the rise. All economic indicators flash red lights: from economic growth to inflation and the exchange rate, from productivity to investment and industrial production.
Booms and Bubbles, Brazilian StyleOnce again, Keynesian policies have led to stagflation. Reality has finally set in. The illusion of easy wealth is shattered. The Keynesian wonder weapon has become impotent. The economic policy teams at the Ministry of Finance and the Central Bank have no notion what to do now. After all, they know of no other economic policy doctrine than to stimulate the economy by spending ever more. Yet with the government’s coffers empty and inflation high and rising, the policy tools of deficit spending and monetary expansion have run out of fuel. Favorable external conditions such as the China boom and high demand for commodities had benefited the Brazilian economy during the presidency of Luiz Inácio “Lula” da Silva. These external factors together with massive internal stimuli accelerated economic growth. With the end of the commodities boom and the slowing of economic growth in China, the external environment factors no longer helped when at the same time internal consumption hit the wall, as consumers had to scale back along with the government as the debt burden approaches its limit.
In early 2015, it became obvious that the country has lived in an illusionary world under the Labor Party over the past twelve years. Now it seems like a joke that President Lula once announced that Brazil’s economy was about to overtake that of the United Kingdom and from then on move upward on the ladder of the large economies. Yet when it was announced in 2007 that Brazil was to host the Soccer World Championship in 2014 and when in 2009 the Olympic Committee selected Rio de Janeiro for the Olympic Games in 2016, it seemed that the much-wanted international recognition of the president’s achievements had arrived. The jubilation at home was fully matched by the exuberance abroad about how Lula would lead Brazil into the twenty-first century.
Just as much as many Brazilians did not want to recognize, foreign observers, too, shut their eyes to the fact that the Brazilian Labor Party has been practicing one of the crudest forms of Keynesianism. The Brazilian kind of Keynesianism is deeply mixed with the Marxism of Michal Kalecki. In Europe and the United States remnants of sound economics survived at the onset of the “new economics,” and later on partially recovered classical and neoclassical principles. In Brazil there has been an almost complete victory of “Kaleckian Keynesianism” with most other types of macroeconomics cast aside.
Can the Government Turn Stones into Bread?Even today, the Polish economist Kalecki is still held in high esteem at some of the most prominent Brazilian universities. The version of “Keynesianism” that he developed in the 1930s has become the leading paradigm for economic policymaking albeit this type of macroeconomics lacks any micro-foundation and is largely void of realistic content. The Kaleckian version of Keynesianism takes the macroeconomic symbols for real and by moving them around according to the basic rules of algebra, the model finally is brought to the conclusion that “workers spend what they earn,” while “capitalists earn what they spend” (as this theory was once summarized by Kaldor).
Kalecki and his Marxist followers consequently decided that when the state assumes the capitalist function, government could spend the country to wealth while workers would get their fair share as consumers. Even more so than Keynes, Kalecki’s gospel preached that its believers could turn stones into bread. Government spending for whatever purpose combined with mass consumption promised a most pleasurable way to prosperity. This promise has been the economic policy principle of the Brazilian Labor Party government over the past twelve years.
During much of the two presidential periods of da Silva from the beginning of 2003 to the end of 2010, the Kaleckian-Keynesian recipe seemed to work. The Brazilian government under the former trade union leader spent, the consumers consumed, and the economy grew. All the while, price inflation remained subdued and the unemployment rate fell. No wonder that President Lula enjoyed immense popularity during his two terms and that Lula’s Labor Party would remain in power when his handpicked successor won the elections for presidency in 2010 and in 2014.
Dilma Rousseff, however, a politician by trade and former urban guerilla fighter, had a hard time winning the elections. When running for her second mandate, dark clouds began to overshadow the still blatant optimism of the ruling party. In 2011, the economic growth rate began to fall. The government first brushed it away as a temporary dip, yet when the rate continued to decline even more in 2012, the government began to panic. With the election coming up in 2014, the government did what the Kaleckian-Keynesian recipe prescribes and accelerated even more its expansive policies. This may have won the election for her, but the price to pay came in high later on.
Disillusion Sets InNow, in early 2015, disillusion has fully set in. People feel cheated by the false optimism of the government. The corruption scandal of the Brazilian oil company Petrobras together with the rapidly deteriorating economic conditions drove over a million of Brazilians to the streets on March 15 in protest against the government.
What many of the protesters fail to see, however, is that Brazil needs more than just a change of government. The country needs a change of mind. In order to get on to the path of prosperity, Brazil has to discard its prevalent economic ideology. Brazil has to get rid of its tradition of profligate government spending and easy money, Marxist-inspired state involvement in the economy, and the protectionism that had come with the adoption of Cepalism (the economic policy concept of the Economic Commission of Latin America). Not special circumstances lie at the heart of the current malaise, but wrong ideas about economic policy.
Brazil needs a huge dosage of economic liberalization to find its way out of the current crisis. Less state intervention and much more freedom of doing business must be the first steps. For this to happen a change of mind is needed. Brazilians must open up to an alternative beyond state capitalism. Brazil must embrace laissez-faire in order to prosper.
This task is tremendous and not much different from earlier elections, almost all parties currently represented in the Brazilian Congress belong to the left and the extreme left. There is neither a truly conservative nor an authentic pro-market political party. This situation is more than peculiar because, as surveys consistently show, most of the Brazilians locate their political orientation at the center-right and in favor of free markets.
Marxism Still Dominates the UniversitiesThe reason for this discrepancy lies in the fact that the left dominates higher education, particularly in the social sciences, economics, and law. It is from this group that most political activists come. When the military dictatorship ended in 1984, the university system fell under almost complete control by leftists of all kinds. This way, academic life is ideologically very different from the rest of the Brazilian society where common sense still has prevailed.
Fortunately, intellectual evolution is no longer largely dependent on academia. While the Kaleckian brand of Keynesianism and Marxism still dominates the universities, a strong libertarian movement is on the rise spearheaded by the Brazilian Mises Institute. Young people in particular flock to this site like the proverbial wanderer in the desert in the search for water. In the past, changes of mentality took decades and even centuries in order to unfold.
Nowadays, with the internet, ideas have a market place of their own with free access for all. It should be easy for the Brazilians to learn that it is not enough to be fed up with the present government, but it is high time to transform the country’s state capitalism into a free market system in order to prosper.
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In spite of a seemingly endless number of examples to the contrary, we continue to be confronted, even in 2015, with the widespread idea that technological innovation can destroy jobs and wealth. Each new labor-saving technology leads to worried speculations by those who fear any challenge to the status quo.
Astute economists and observers in every era have debunked this idea again and again. Writing in 1911, for example, the French economist and philosopher Gustave de Molinari addressed this issue in his final book, Ultima Verba : Mon Dernier Ouvrage (Ultima Verba: My Last Work). At that time, Molinari was ninety-one years old and had only one more year to live. However, he was still writing with great lucidity and his book is a merciless attack against protectionism, taxation, the military-industrial complex, and government privilege.
In Ultima Verba, Molinari address the common argument claiming new technologies are destroying wealth and jobs — an argument which had been refuted by Frédéric Bastiat more than sixty years before in Economic Sophisms.
Molinari asks the question: “is an automobile wealth?” This question, today, seems completely absurd. Unless one is a radical environmentalist, one is extremely unlikely to conclude that an automobile does not have value. The enormous number of people worldwide who own automobiles have already demonstrated their disagreement.
However, as it happens for almost each new technology, some people — and intellectuals in particular— have often thought cars were harmful, that they did not improve economic conditions, but rather destroyed jobs and prosperity.
One skeptic of innovation — or at least of automobiles — was the economist Charles Gide. He wrote:
It is certain that the automobile is extremely successful, it created around it many riches; we owe it huge and active factories, employing thousands of workers; its trade is abundant and wealthy ... but there are disadvantages. The money that goes to automobiles does not go elsewhere. …
Even from a psychological point of view, there are objections to be made; everyone can enjoy in his life a limited amount of sensations; the time devoted to those of motoring (and I believe them to be very large) is taken at the expense of others: theaters, museums, reading.Translation by the author. The original version is : “Il est certain que l'automobile est extrêmement prospère, qu'elle a créé autour d'elle de nombreuses prospérités; on lui doit des usinés immenses et actives, elle emploie des milliers d'ouvriers ; son commerce est abondant et fortuné... mais il y a des contre-coups. L'argent qui va vers elle ne va pas ailleurs. […] Ce qu'on a pris pour elle, on l’a enlevé à d'autres obligatoirement. ... Oui, mais il y a les exportations, dira-t-on. C'est de l'argent qui entre. Qui entre, oui, mais on oublie celui qui est sorti. […] Même au point de vue psychologique, il y a des réserves à faire; chacun ne peut goûter dans sa vie qu'une somme limitée de sensations ; le temps consacré à celle de l'automobilisme (et je les crois très grandes) est pris au détriment de certaines autres : les théâtres, les musées, la lecture…”
Charles Gide’s fuzzy rationale against innovation is, of course, preposterous. It is noteworthy that, according to him, the automobile — which was at the time a luxury good — leads to less culture (i.e., reading, museums, etc.). This is the same old argument according to which capitalism leads to more consumerism and less culture. To this argument, Molinari answered that the opposite is likely to happen: theaters and museums, because they now compete with automobiles, have to adapt their supply to consumer preferences which will lead to an improvement of culture. However, Gustave de Molinari’s major point in favor of innovation is not about culture, it is the following:
What made this extraordinary, if uneven, increase of population and wealth [during the last century]? It is obvious that human work has become more productive. It means that in exchange for the very same amount of effort and pain man was able, using new equipment provided by inventors, to create an incomparably greater quantity of products that he previously obtained with coarse material that had been bequeathed him over the centuries.Translation by the author. The original version is the following: “A quoi tient cette augmentation extraordinaire, mais inégale, de la population et de la richesse [depuis un siècle]? C'est évidemment à ce que le travail de l'homme est devenu plus productif, c'est à ce qu'en échange de là même somme d'efforts et de peine, il a pu, en employant le nouvel outillage que lui fournissaient les inventeurs, créer une quantité incomparablement plus considérable des produits qu'il obtenait auparavant à l'aide du matériel grossier que lui avaient légué les siècles. ”
Then, Molinari explained that the rise of productivity decreased the prices but also freed resources for consumers. Resources which can be spent somewhere else in the economy. In the case of the automobile, it is not only money but also time which is saved — and can presumably be spent reading and visiting museums. Furthermore, said Molinari, in the case of automobiles, there are many beneficial indirect effects. For example, cars entered into competition with train companies which were forced to adapt by reducing their prices and increasing the speed of their locomotives. Finally, remarked Molinari, the improvement in the transport industry fostered the division of labor by making new markets accessible and therefore increasing their size.
It is fascinating that Molinari, a ninety-one year old man, at the very beginning of the twentieth century, wasn’t afraid of innovation, whereas the fear of change today is common, particularly among politicians. Despite his advanced age, Molinari, reflecting the liberalism and optimism of the French Bell Epoque in which he was immersed, did not succumb to conservatism.
The same, unfortunately cannot be said for France today. This modern conservatism in France has led to economic sophisms and bad economic policies. In the 1990s, the French government considered outlawing the internet — an alleged symbol of American imperialism — in order to create a national internet. More recently, some French politicians have stated that Amazon destroys jobs. But Amazon destroys no more jobs than the consumer who chooses to buy on Amazon. If bookstores go bankrupt, it is only because they don’t respond well enough to consumer preferences.
Similarly, if motorists prefer driving to visiting museums and theaters, these are choices they have freely made. Charles Gide and his modern followers may object to such decisions, but in fact, the greater productivity in labor and travel provided by automobiles allows consumers more time and more money to spend on a trip to the theater. If consumers still elect to avoid reading and the fine arts in such cases, well, the automobile haters will have to find something other than the automobiles to blame.
Image source: iStockphoto
According to economic historian Timur Kuran, “Around roughly the tenth century, the Middle East was an economically advanced region of the world, as measured by standard of living, technology, agricultural productivity, literacy or institutional creativity. Only China might have been more developed.” Today, however, the Middle East is a victim of historical legal impediments that increase time preference among consumers and investors, and which are fraught with failures to restructure Islamic legal code to fit for the numerous changes in the nature of commerce.
Corporate GovernanceOne of the most critical impediments to Islamic economies has historically been partnership laws. While Europe was building up large corporate enterprises that had hundreds, even thousands of shareholders, businesses in the Islamic world had limited partnerships to no more than six people. The rationale behind this is based on Islamic contract law, whereby if one of the business partners dies, the partner must liquidate the assets of the deceased, and give them to the heirs. However, this did not imply the business must be abolished with the death of a partner, but the added complication — compounded with skewed egalitarian Sharia inheritance laws which stated that two-thirds of any estate are to be distributed amongst relatives, both male and female — made it difficult for companies to achieve economies of scale due to a lack of longevity, specialization, and predictability within companies under Islamic regimes.
Furthermore, families in many areas have tended to be quite large due to the practice of polygamy, so due to many heirs being recipients of the inherited wealth, the business would often just dissolve. As Kuran notes, “Middle Eastern entrepreneurs minimized the risk of premature termination by keeping their partnerships small and ephemeral.” The consequence for Islamic economies has been a long-term game of catch-up once the Industrial Revolution commenced in Europe.
The Legacy of the WaqfsSome scholars conclude that cultural and religious fatalism has contributed to the inadequacy of Middle Eastern economies, as the idea that "everything is in God’s” hands allows idleness to triumph. But, there is more empirical proof that the underdevelopment of the Middle East today has been heavily affected by the Ottoman Empire’s bureaucratization of special endowments called waqfs.
There were two kinds of waqfs depending on its waqfiyya, or deed, whereby the waqf’s founder would decide what its primary function would be. Either they were charitable waqfs, or family waqfs. Charitable waqfs were established for a social function — for operating a religious center and eventually expanding to take care of the poor, providing health services, schools, libraries, and the overall provision of public goods. Family waqfs, on the other hand, were used to establish property rights for families in need of a safe haven to stash their savings away from the confiscation by the sultan.
Due to the sanctity that waqfs were given, they were theoretically tax exempt. However, according to Murat Cizacka, “Given the authoritarian governments in power, the rulers could expropriate the private property for the sake of the ummah.”
Furthermore, when complications erupted in the case of family waqfs (since charitable waqfs operated under the public radar and its utilization of resources were transparent), they ran into more controversial problems that could not be as easily resolved in court. Moreover, the endowment deeds often were destroyed or damaged by war. Over time, these issues led to more and more expropriation and regulation by the Ottoman government. Meanwhile, Europe was providing similar services through a thriving profit-bearing corporate sector, as well as adopting double-entry bookkeeping and joint-stock companies. According to Kuran, "Westerners had access to commercial banks that could channel capital mobilized from the masses into large-scale productive ventures.”
Essentially, the catalyst of the waqfs’ stagnation was their very strict adherence to religious code. Competition for waqfs from other institutions was not allowed by Sharia Law. Through the legal system, by regulation of the ulama, waqfs attained a monopoly on the provision of public goods, including even the use of school textbooks.
Thus, a correlation can be drawn between the decentralized period of waqfs, in which Islamic countries were at the peak of international trade and prosperity, and the era of centralized control by the Ottoman state which led to a lagging and underdeveloped Middle East economy. As Kuran states, “the waqf was economically inefficient because of its perpetuity, inflexibility, lack of self-governance and absence of separate legal personality.” While once characterized by decentralized and more flexible institutions which brought greater economic prosperity, Middle Eastern economies today look quite different.
In the same way that the Russian people were the victims of totalitarian Russian regimes of the past, the people of the Middle East are today victims of brutal extractive regimes whose main enemies have commonly been their own people. And unfortunately, these regimes can still rely upon restrictive institutions of old to control the marketplace and enrich themselves.
Image source: iStockphoto
Historically, low oil prices have been perceived by many as an overriding positive for the economy. This has especially been the case in the United States where most households rely on car travel as a primary means of transport. Low oil prices allow households to spend more on economic activities other than gasoline and other oil-related expenses. Historically, every time the oil price soared — such as the 1973 oil crisis, the 1991 Gulf War, and in 2008 when oil reached a historical high of $147 a barrel — public opinion always regarded these events as a serious threat to the economy.
It was often understood that falling oil prices have many benefits both for the economy and for those subject to monetary policy. For example, price inflation is reduced when oil prices fall, which lowers pressure on the central bank to raise interest rates. And, all things being equal, the economy benefits from the price stability and lessened intervention on the part of the central bank.
Oil Prices and the “New Normal”However, by the third quarter of last year, falling oil prices were not being hailed as good fortune. Instead, commentators claimed the economy would suffer as a result. In fact, ever since the global financial crisis of 2008 occurred, this counter-intuitive analysis is promoted as a part of the “New Normal” which is widely believed to be kick-started by the Fed’s unprecedented easy-money policies.
Nevertheless, the argument in favor of high oil prices is logically not difficult to grasp: the longer oil prices stay above $100, the more investment would pour into new oil fields and also new energy alternatives to oil and shale gas. The result is an increase in employment in the oil industry.
The costs of such projects were only justified in the case of high oil prices. So, when oil prices go into decline, many companies — or at least many extraction operations — will consequently lose competitiveness and be forced to shut down. Layoffs will follow and the ripple effect brings more unemployment and an unwanted increase in bad debts.
Will Central Banks Hit the Panic Button?At this point, Keynesians step in and argue central banks have an important role in “fixing” the problem. That is, they will argue that the central banks should offset the subsequent risk of deflation by increasing the money supply.
First of all, note there is a double standard at work here. When oil prices rise, the central bankers claim there is too much volatility in oil prices and so the central bank will exclude energy prices from core inflation and postpone an interest rate hike. But when oil prices fall, the central bank no longer focuses on core inflation, but looks to a broader deflationary view that includes energy prices. Then, the response is to cut interest rates further.
Regardless of whether the oil price is high or low, central banks can come up with a rationale to adopt a loose monetary policy in order to fit the agenda that suits them.
It is important to clarify that falling oil prices that follow massive investment in extraction (causing layoffs, unemployment, and increases in bad debts) may harm a set of individuals or certain industries, but for the long-term development of the overall economy, it is a good thing. We must understand that after the financial crisis of 2008, a variety of resources — including oil prices — experienced a V-shaped rebound because both the US and China, the biggest two economies in the world, undertook a substantial increase in government spending and embarked on unprecedented credit-creation programs.
These government “stimulus” programs inevitably caused overinvestment (i.e., malinvestment) in many industries, and, in the most recent cycle, the oil industry is one such industry.
The Role of ChinaHowever, in 2010, the Chinese government became concerned about malinvestments and inflation and the People’s Bank of China began significantly tightening the money supply (although they again turned to easy money last November). This led to a slowdown in China's economic growth, and falling demand led to a drop in the prices of commodities — first copper and iron, and subsequently energy.
Moreover, the increase in the oil supply (due to the shale gas revolution), and reduced demand, combined for a double attack, until finally a substantial decline in oil prices appeared this year.
A Necessary CorrectionThe oil industry and related industries are facing the inevitable: companies which miscalculated and predicted ongoing price growth will go bankrupt, and industry resources will be acquired by investors with more insight. The short-term pain the oil industry is currently facing is necessary, and governments and central banks must not stop this natural process through misguided stimulus in an effort to prevent oil company layoffs. Such efforts are likely to only benefit the giant oil companies, as we witnessed in the wake of the 2008 crisis where the biggest banks were the biggest winners.
Image source: iStockphoto
Beyond nice wines, warm beaches, and sultry women, Italy is well-known for something less savory — the mafia. It is interesting to understand how such a powerful “machine” managed to enter society in such a strong and meaningful way, but more importantly to grasp its role alongside the central government of Italy. On the one hand, it is easy to state that the mafia and the corrupt economic system it functions within are wrong and unproductive for the country. On the other hand its presence may be of help to a country’s economy, something that is especially true in the case of Italy.
In order to understand how corruption infiltrated the highest echelons of Italian society, it is essential to understand the progression of Italy throughout the twentieth century, both politically and economically.
The growing strength of crime organizations such as the “Sicilian mafia,” the “Camorra” (located in the Naples region), and the “Ndrangheta” (from the region of Calabria) have been noted for their relations with the construction industry, typically through a direct channel with the Italian government. These “associations” have grown enormously over the past fifty years creating empires that are clearly visible throughout the major sectors of the economy.
The Italian State: A Reliable Partner for the MafiaThis growth was fueled by the political and economic model present in Italy during the second half of the twentieth century following the Second World War. One major political party (Democrazia Cristiana) ruled the country for almost forty years. The reason for this very partisan approach to politics was the opposition to a strong and growing Communist Party (the largest in Western Europe during the 70s and 80s) that was seen as a major threat as most people feared they were going to be taken over by a Soviet-style central government. This feeling was especially endemic during the height of the Cold War. This period of Italian politics was dominated by one ruling political party and fostered engrained political-business connections that fueled the growth of organized crime.
This latter point in particular was less costly as belligerents were assured that the necessary authorities that needed to be “paid off” to look the other way would remain the same for an extended period. Coupled with a desire to supply goods that were either rationed after the war or taxed heavily (such as cigarettes), the mafia was an outgrowth of the desires of consumers coupled with weak governance structures. The resultant corruption restructured Italy’s economy almost completely.
As was the case during the nineteenth century, these corrupt associations were found in the southern regions of Italy. With the strengthening of this direct channel with the central government the mafia´s rapid growth moved north to more industrialized and much more strongly developed areas of Italy. What was once a contained problem has now entered all major industrial sectors by forming an intricate web between business and politics. (Dwight Eisenhower´s Italian counterpart would likely have warned of this “industrial-political” complex.) Organized crime has spread like a form of cancer that has become untreatable and has progressed to the stage where its removal would likely imperil the already shaky economy. In short, even if the surgery were a complete success, the patient would likely die.
The fact that corruption has been deeply rooted within Italy’s political, social and economic structures makes it even more challenging to perform its obligations within the European Union. It will be very challenging for Italy to exit the recession it is facing with such a corrupt and unhealthy system it possesses. Public debt is currently over 130 percent of Italian GDP. One obligation to remain a part of the Eurozone is to keep public debt under 60 percent of GDP, and the annual public deficit under 3 percent of GDP. Italy is nowhere near fulfilling either of these criteria (though, in its defense, few European countries are). One reason for the difficulty in getting public finances in order is the engrained political-economic order. This is a similar problem to America´s own difficulties in making necessary budget cuts to its own warfare-welfare economy. Too many entrenched interests make balancing the budget all but impossible.
In Italy the problem is accentuated because the relevant parties are inside the government itself. In America, public finances are a shambles mostly because voters don´t want to give up entitlements, or hold politicians accountable for boondoggles spiraling out of control (e.g., the War on Terror, the War on Drugs, etc.). In Italy it is the same politicians drafting the budget who directly use these funds to the benefit of themselves and the people who surround them.
Italy’s economic instability is not only destroying its economy from the inside, but also from the outside. Investors coming from abroad (e.g., other Europeans, Americans, Arabs, Chinese, etc.) do not want to cope with or run afoul of such a corrupt system. This creates instability that is quite visible because there is no real possibility of growth within the country due to government mismanagement and a lack of foreign investment. Italy only managed to attract 1.4 percent of its GDP in foreign direct investment last year, far less than the European average of 3.3 percent.
What Can Be Done?The Lega Nord party recently proposed that the more productive and prosperous northern regions should separate from the poorer and more stagnant southern regions. The southern regions are where the mafias are most heavily concentrated, however, corruption is country wide. Exiting the euro (another popular proposal) would be rather difficult due to the complexity of the problem, though more to the point, it would be damaging to the country even if successful.
The fact of the matter is that Italy needs the help of Europe. One of the only forces keeping further widespread corruption in check is that it is somewhat “regulated” by a larger system: the European Union. The Stability and Growth Pact that should keep government finances better balanced does create pressures on the Italian government to conform. Throughout the 1970s and ´80s, this unwholesome business-political system had managed to turn Italy into the most heavily indebted country in Europe. External pressure from the EU forced Italian public finances on a more sustainable trajectory. (Between the advent of the euro and the dawn of the financial crisis, Italian government debt to GDP had fallen by a fifth; annual inflation which averaged more than 10 percent during the 1970s and ´80s has been below 3 percent since 2000.)
Aiding this process was the birth of the common currency in 2002. Unable to print new lire to satisfy its spendthrift ways, the Italian government (much like the other inflationary periphery countries) was forced to be held accountable by its tax payers. The ECB may not have shown the most restraint over the past six years, but compared to the central banks of Southern Europe it replaced, it has been a veritable enforcer of a gold standard.
Italy is between a rock and a hard place. The mafia-dominated corruption that entangles the country is so deeply rooted that it is all but impossible to reform (or preferably eliminate). Such reform could today only come about by eliminating the central government. The system that exists today was the result of unchecked political power for an extended period of forty years. (Strangely, this outcome was in response to the fear of unchecked political power in the form of communism.) If this undesirable system cannot be changed, Italians will have to change the one thing they can — where they live. Young Italians, especially skilled and ambitious Italians, have been leaving their beloved country in droves, a trend magnified since the recession began. Leaving their homeland may be a small price to pay to ensure that the failing system in place today dies off so that a better Italy can rise from its ashes.
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We refer to the dollar as a “reserve currency” when referring to its use by other countries when settling their international trade accounts. For example, if Canada buys goods from China, China may prefer to be paid in US dollars rather than Canadian dollars. The US dollar is the more “marketable” money internationally, meaning that most countries will accept it in payment, so China can use its dollars to buy goods from other countries, not solely the US. Such might not be the case with the Canadian dollar, and China would have to hold its Canadian dollars until it found something to buy from Canada. Multiply this scenario by all the countries of the world who print their own money and one can see that without a currency accepted widely in the world, international trade would slow down and become more expensive. In some ways, its effect would be similar to that of erecting trade barriers, such as the infamous Smoot-Hawley Tariff of 1930 that contributed to the Great Depression.
There are many who draw a link between the collapse of international trade and war. The great French economist Frédéric Bastiat said that “when goods do not cross borders, soldiers will.” No nation can achieve a decent standard of living with a completely autarkic economy, meaning completely self-sufficient in all things. If it cannot trade for the goods that it needs, it feels forced to invade its neighbors to steal them. Thus, a near-universally-accepted currency can be as vital to world peace as it is to world prosperity.
What “Reserve Currency” Really MeansHowever, the foundation from which the term “reserve currency” originated no longer exists. Originally, the term “reserve” referred to the promise that the currency was backed by and could be redeemed for a commodity, usually gold, at a promised exchange ratio. The first truly global reserve currency was the British pound sterling. Because the Pound was “good as gold,” many countries found it more convenient to hold pounds rather than gold itself during the age of the gold standard. The world’s great trading nations settled their trade in gold, but they might accept pounds rather than gold, with the confidence that the Bank of England would hand over the gold at a fixed exchange rate upon presentment. Toward the end of World War II, the US dollar was given this status by treaty following the Bretton Woods Agreement. The US accumulated the lion’s share of the world’s gold as the “arsenal of democracy” for the allies even before we entered the war. (The US still owns more gold than any other country by a wide margin, with 8,133.5 tons compared to number two Germany with 3,384.2 tons.)
The International Monetary Fund (IMF) was formed with the express purpose of monitoring the Federal Reserve’s commitment to Bretton Woods by ensuring that the Fed did not inflate the dollar and stood ready to exchange dollars for gold at $35 per ounce. Thusly, countries had confidence that their dollars held for trading purposes were as “good as gold,” as had been the British pound at one time.
The Advent of the Fiat Reserve CurrencyHowever, the Fed did not maintain its commitment to the Bretton Woods Agreement and the IMF did not attempt to force it to hold enough gold to honor all its outstanding currency in gold at $35 per ounce. During the 1960s, the US funded the War in Vietnam and President Lyndon Johnson’s War on Poverty with printed money. The volume of outstanding dollars exceeded the US’s store of gold at $35 per ounce. The Fed was called to account in the late 1960s first by the Bank of France and then by others.
Central banks around the world, who had been content to hold dollars instead of gold, grew concerned that the US had sufficient gold reserves to honor its redemption promise. During the 1960s the run on the Fed, led by France, caused the US’s gold stock to shrink dramatically from over 20,000 tons in 1958 to just over 8,000 tons in 1970. At the accelerating rate that these redemptions were occurring, the US had no choice but to revalue the dollar at some higher exchange rate or abrogate its responsibilities to honor dollars for gold entirely. To its everlasting shame, the US chose the latter and “went off the gold standard” in September 1971. (I have calculated that in 1971 the US would have needed to devalue the dollar from $35 per ounce to $400 per ounce in order to have sufficient gold stock to redeem all its currency for gold.) Nevertheless, the dollar was still held by the great trading nations, because it still performed the useful function of settling international trading accounts. There was no other currency that could match the dollar, despite the fact that it was “delinked” from gold.
Why the Dollar Continued To Be a Reserve CurrencyThere are two characteristics of a currency that make it useful in international trade: one, it is issued by a large trading nation itself, and, two, the currency holds its value over time. These two factors create a demand for holding a currency in reserve. Although the dollar was being inflated by the Fed, thus losing its value vis-à-vis other commodities over time, there was no real competition. The German Deutsche mark held its value better, but the German economy and its trade was a fraction that of the US, meaning that holders of marks would find less to buy in Germany than holders of dollars would find in the US. So demand for the mark was lower than demand for the dollar. Of course, psychological factors entered the demand for dollars, too, since the US was the military protector of all the Western nations against the communist countries.
Today we are seeing the beginnings of a change. The Fed has been inflating the dollar massively, reducing its purchasing power and creating an opportunity for the world’s great trading nations to use other, better monies. This is important, because a loss of demand for holding the US dollar as a reserve currency would mean that trillions of dollars held overseas could flow back into the US, causing either inflation, recession, or both. For example, the US dollar global share of central bank holdings currently is 62 percent, mostly in the form of US Treasury debt. (Central banks hold interest-bearing Treasury debt rather than the dollars themselves.) Foreign holdings of US debt is currently $6.154 trillion. Compare this to the US monetary base of $3.839 trillion.
Should foreign demand to hold US dollar denominated assets diminish, the Treasury could fund their redemption in only three ways. One, the US could increase taxes in order to redeem its foreign held debt. Two, it could raise interest rates to refinance its foreign held debt. Or, three, it could simply print money. Of course, it could use all three to varying degrees. If the US refused to raise taxes or increase the interest rate and relied upon money printing (the most likely scenario, barring a complete repudiation of Keynesian doctrine and an embrace of Austrian economics), the monetary base would rise by the amount of the redemptions. For example, should demand to hold US dollar denominated assets fall by 50 percent ($3.077 trillion) the US monetary base would increase by 75 percent, which undoubtedly would lead to very high price inflation and dramatically hurt us here at home. Our standard of living is at stake here.
So we see that it is in the interest of many that the dollar remain in high demand around the world as a unit of trade settlement. It is necessary in order to prevent price inflation and to prevent American business from being saddled with increased costs that would come from being forced to settle their import/export accounts in a currency other than the dollar.
Threats To the Dollar as Reserve CurrencyThe causes of this threat to the dollar as a reserve currency are the policies of the Fed itself. There is no conspiracy to “attack” the dollar by other countries, in my opinion. There is, however, a rising realization by the rest of the world that the US is weakening the dollar through its ZIRP and QE programs. Consequently, other countries are aware that they may need to seek a better means of settling world trade accounts than using the US dollar. One factor that has helped the dollar retain its reserve currency demand in the short run, despite the Fed's inflationist policies, is that the other currencies have been inflated, too.
For example, Japan has inflated the yen to a greater extent than the dollar in its foolish attempt to revive its stagnant economy by cheapening its currency. Now even the European Central Bank will proceed with a form of QE, apparently despite Germany's objections. All the world’s central banks seem to subscribe to the fallacious belief that increasing the money supply will bring prosperity without the threat of inflation. This defies economic law and economic reality. They cannot print their way to recovery or prosperity. Increasing the money supply does not and cannot ever create prosperity for all. What is more, this mistaken belief compounds a second mistake; i.e., that savings is not the foundation of prosperity, but rather spending is the key. This mistake puts the cart before the horse.
A third mistake is believing that driving their currencies’ exchange rate lower vis-à-vis other currencies will lead to an export-driven recovery or some mysteriously generated shot in the arm that will lead to a sustainable recovery. Such is not the case. Without delving too deeply into Austrian economic and capital theory, just let me point out that money printing disrupts the structure of production by fraudulently changing the “price discovery process” of capitalism. When this happens, capital is allocated to projects that will never be profitably completed. Bubbles get created and collapse and businesses are suddenly damaged en masse, thus, destroying scarce capital.
Possible Future ScenariosBecause of this money-printing philosophy, the dollar is very susceptible to losing its vaunted reserve currency position to the first major trading country that stops inflating its currency. There is evidence that China understands what is at stake; it has increased its gold holdings and has instituted controls to prevent gold from leaving China. Should the world’s second largest economy and one of the world’s greatest trading nations tie its currency to gold, demand for the yuan would increase and demand for the dollar would decrease overnight.
Or, the long festering crisis in Europe may drive Germany to leave the eurozone and reinstate the Deutsch mark. I have long advocated that Germany do just this, which undoubtedly would reveal the rot embodied in the euro, the commonly held currency that has been plundered by half the nations of the continent to finance their unsustainable welfare states. The European continent outside the UK could become a mostly Deutsch mark zone, and the mark might eventually supplant the dollar as the world’s premier reserve currency.
The underlying problem, though, lies in the ability of all central banks to print fiat money; i.e., money that is backed by nothing other than the coercive power of the state via its legal tender laws. Central banks are really little more than legal counterfeiters of their own currencies. The pressure to print money comes from the political establishment that desires both warfare and welfare. Both are strictly capital consumption activities; they are not “investments” that can pay a return.
In a sound money environment, where the money supply cannot be inflated, the true nature of warfare and welfare spending is revealed, providing a natural check on the amount of funds a society is willing to devote to each. But in a fiat money environment both war and welfare spending can expand unchecked in the short run, because their adverse consequences are felt later and the link between consumptive spending and its harm to the economy is poorly understood. Thus, both can be expanded beyond the recuperative and sustainable powers of the economy.
The best antidote is to abolish central banks altogether and allow private institutions to engage in money production subject only to normal commercial law. Sound money would be backed 100 percent by commodities of intrinsic value — gold, silver, etc. Any money producer issuing money certificates or book entry accounts (checking accounts) in excess of their promised exchange ratio to the underlying commodity would be guilty of fraud and punished as such by both the commercial and criminal law, just as we currently punish counterfeiters. Legal tender laws, which prohibit the use (in many cases) of any currency other than the one endorsed by the state, would be abolished and competing currencies would be encouraged. The market would discover the better monies and drive out less marketable ones; i.e., better monies would drive out the bad or less-good monies.
We need to look at the concept of a reserve currency differently, because it is important. We need to look at it as a privilege and a responsibility and not as a weapon we can use against the rest of the world. If we abolish, or even lessen, legal tender laws and allow the process of price discovery to reveal the best sound money, if we allow our US dollar to become the best money it can — a truly sound money — then the chances of our personal and collective prosperity are greatly enhanced.
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This weekend, we feature our own Senior Fellow Mark Thornton in an appearance on Paul Molloy’s "Freedom Works" radio show.
Mark is known for his work on the Skyscraper Index Model, which can help us understand why booms are followed by busts, why malinvestment is inevitable in an era of artificial interest rates, and how central banks cause so much harm.
Building booms—especially in the context of big city skyscrapers—can be clear signs of dangerous bubbles and hubris. It’s no coincidence that the Empire State Building was built on the cusp of the Great Depression, and Moscow’s empty new financial center is an eerie reminder that phony growth can end very quickly. With huge mega-towers planned for China, Korea, Saudi Arabia, among others, the “skyscraper curse” may strike again.
The Europeans have decided to limit funding and credit extended to the Greeks. This puts the Greek financial system under pressure, but there are free-market solutions that could set the Greeks on the path to a sound economy, writes Frank Hollenbeck.
This audio Mises Daily is narrated by Clay Barnett.
The ECB decision to limit liquidity to Greek banks was another nail in the euro-coffin, and rumors of a “Grexit” caused bank withdrawals to accelerate. Over 25 billion euros have been withdrawn from Greek banks since the end of November 2014. But there’s a problem. Fractional-reserve Greek banks do not have the funds to cover all the withdrawals if trends continue. Current non-performing bank loans in Greece are close to 40 percent and banks hold large amounts of high risk Greek government debt.
Despite rumors in the press, there are no European mechanisms to force Greece out of the eurozone. Greece would have to be the one to decide to leave. So for now, Europe will continue to pretend it will be paid back, and Greece will continue to pretend it is implementing significant structural reforms.
Current conventional wisdom is that a bank run would force Greece to return to the drachma. Although this is a possibility, it is not a foregone conclusion. Even if Greece defaulted, it would still probably have a large euro-based debt.
So what can Greece do?
Step One: DefaultGreece should default on as much debt as possible. There is no benefit to meeting the EU halfway. The Greek government is currently running a primary surplus (or is very close to it) so it does not need EU funds to cover Greek government expenses. However, the Greek banks will not have sufficient funds to cover withdrawals (and thus prevent a bank run) once the European Central Bank (ECB) and the EU cut off funds.
Greece could impose capital controls and bail-ins, but most deposits are from Greeks whose average monthly income is less than 780 euros per month, and these people are the voting foundation of the new government’s popularity. In 2013, the Cypriot government quickly backtracked on its own attempt to bail-in small deposits once the population rose up in widespread anger over the measure.
Step Two: Implement True AusterityIf it wants to survive politically, the new government must find a way to meet this extra funding necessity.
To find the funds to meet growing withdrawals from Greek banks, the Greek government could drastically reduce excessive government salaries by reducing payments over 1,500 euros per month by 50 percent.
For example, a parliament employee in 2011 received an average of 3,000 euro net per month, not counting the bonuses and allowances on top of the wages. According to the budget of the National Assembly, the “15th and 16th month” salaries alone for these employees in 2011 cost taxpayers 16.9 billion euro. Politically speaking, a socialist government could easily get away with such a maneuver.
Step Three: Implement True Free-Market BankingAssets currently held by the Greek government in banks should be sold off and Greece should then make a clear distinction between true depository institutions and loan banks.
Depository banks would function in a manner similar to that of a storage facility where customers are charged fees for the storage of items such as furniture, boats, clothes, books, etc. Attempts to lend money to such institutions should be viewed as a type of fraud.
However, 100-percent equity-financed loan banking should remain available and open to competition. Customers would need to keep in mind that putting money in a loan bank would be like putting money in the stock market. You know you risk losing everything. Such banks, or investment trusts, would be like any other business and this industry would not need any more special regulation than the potato chip industry.
Step Four: Institute Monetary CompetitionGreece should then consider leaving the euro and emulating Switzerland in how it manages the relationship between the Swiss franc and the euro.
Unlike Switzerland however, a monetarily independent Greece would allow the new drachma and the euro to trade side by side as legal tender. The Greeks would benefit from competing currencies. Yet government revenues and payments would be in new drachmas, and no longer in euros. This would be necessary for the Greek government to sever its direct link with the ECB.
Step Five: Fix the New Drachma to GoldGold has many drawbacks, but gold’s primary advantage lies in the fact that it constrains current and future governments from using the printing presses to finance government expenditures. Once the tie to the euro is broken, Greece should then fix its new currency to gold. Even though Greece has no significant gold reserves, it can follow the example of Germany in 1923 when a broke Germany slowly returned to a gold standard by first fixing its money to non-gold commodities (i.e., rye bread in the German case).
By instituting true austerity and freeing the banking sector from the euro and the EU, Greece could go from being the example to avoid to the example to emulate in a relatively short period of time. With such a financial structure, Greece would benefit from long-term financial and economic stability. It would force Greece to make hard choices up front, thus avoiding later problems in the first place.
Image source: iStockphoto
The harm that Britain’s protectionist Navigation Acts imposed on the colonies was a major impetus for the American Revolution. But the United States did not abandon those unjustifiable restrictions. Even before the Bill of Rights was adopted, Congress in 1789 enacted similar protectionist restrictions on coastal shipping. It is centuries past time to eliminate such harmful restrictions and the Jones Act that is their modern progeny.
What is the Jones Act?The Jones Act (1920) mimics the rationale and terms of Britain’s Navigation Acts. It was meant to guarantee a merchant marine fleet “for the national defense and the development of the domestic and foreign commerce of the United States,” that was “capable of serving as a naval and military auxiliary in time of war or national emergency.” It also restricts trade between American ports to vessels built and owned by Americans, and to vessels whose crew is at least three-quarters American. Unfortunately it works against its stated goals, and does so at a steep cost.
The need for the Jones Act restrictions to strengthen our naval defense capability would make sense only if our naval defense was inadequate without such restrictions.
One might make the case that during the early days of the fledgling American government that privateers could be effective military assets. However, the US navy has grown to be the world’s premier naval superpower and has been for longer than most Americans have been alive. It was President Eisenhower in 1961, in his farewell address, that warned of the military-industrial complex that would give America more military than it needed. Despite this the Jones Act has been maintained.
Britain’s Navigation Acts were directly aimed at undermining Dutch sea power, which Adam Smith called “the only naval power which could endanger the security of England.” One could say that the burgeoning Chinese military sea power posses a similar threat today. But restricting America’s coastal trade to American ships cannot appreciably thwart Chinese sea power, military or otherwise, given the tidal wave of goods their ships carry around the world.
The Jones Act’s Record of FailureIn 1950, 43 percent of global shipping was done by US-flagged vessels. According to a 2009 Department of Transportation report that percentage has fallen to 1.5 percent. US-flagged ships engaged in international trade also shriveled by more than three-quarters, and their cargo capacity by more than half, from 1975 to 2007.
Vessels meeting Jones Act requirements fell by more than half, from 193 in 2000, to 90 in 2014. Eligible tanker capacity similarly fell by more than half. In 2013, it was reported that only thirteen ships could legally move oil between American ports, and they were fully booked, severely handicapping shipments to domestic refineries with excess capacity, raising US gas prices as much as fifteen cents a gallon.
Despite Jones Act restrictions to American-flagged ships, almost five times as many ships owned by American interests instead fly a foreign “flag of convenience.” When the vast majority of those a law is intended to subsidize intentionally opt out, making themselves ineligible for domestic shipping, it reveals the Jones Act as a stark failure.
Even if the Jones Act did have positive effects on American shipping, it would do little for our ability to produce naval vessels, because only one of the shipyards that builds the Navy’s primary vessels also builds large commercial shipping vessels.
To justify the Jones Act, American-built, owned, and crewed ships must also provide services that would otherwise be unavailable during hostilities and national emergencies. Here too, the rationale falls short.
Restricting Foreign Shipping Restricts FreedomIn the Persian Gulf war, 85 percent of dry-cargo ships chartered by Military Sealift Command (MSC) were foreign-flagged. In 2014, less than a third of the Maritime Administration’s Ready Reserve Fleet, which transports unit and combat support equipment and resupply, were American-built. The Department of Defense reported that “Unfortunately, very few commercial ships with high military utility have been constructed in US shipyards in the past twenty years. Consequently when MSC has a requirement to charter a vessel, nearly all of the offers are for foreign-built ships.”
The Jones Act also actually undermines emergency preparedness. In the aftermath of Hurricanes Katrina and Sandy, Jones Act restrictions were suspended because they hindered emergency responses. In 2014, New Jersey was not allowed to use a foreign ship to bring rock salt from Maine in time to respond to a snowstorm. A Jones Act-eligible ship required far more time and added $700,000 to the cost. And such problems extend beyond emergencies. Maryland imports rock salt from Chile rather than Louisiana, because shipping it all the way from Chile is three times cheaper than Jones Act domestic transportation.
Despite a lack of evidence of Jones Act benefit in terms of defense or emergencies, its costs are substantial.
Ships meeting Jones Act requirements may cost triple or quadruple what those in Korean or Japanese yards cost. US-flagged ships’ crewing expenses can be a similar multiple of foreign vessels payrolls. Foreign-flagged tankers can transport oil for one-third the cost of American-flagged tankers. Maintenance and repair costs are also far higher.
Jones Act costs are made clearest in Hawaii, Puerto Rico, and Alaska, where it most severely limits supply lines.
In 2014, shipping a forty-foot container from Los Angeles to Honolulu reportedly cost more than ten times shipping it to Singapore. Dependent on Jones Act shipped petroleum for three-quarters of its electricity generation, Hawaii’s electricity prices are almost double the next most expensive state.
A 2012 report found that sending a container of household goods from the east coast to Puerto Rico cost more than double that to nearby Santo Domingo. A GAO study found that some Puerto Rico companies had shifted sourcing from America to Canada, due to cost savings from escaping Jones Act restrictions.
Alaska is restricted from shipping oil by tanker to the lower forty-eight states or to Hawaii, due to Jones Act restrictions. The costs are so extensive that the state’s governor is mandated to use “all appropriate means to persuade the United States Congress to repeal those provisions of the Jones Act.”
The Jones Act doesn’t expand America’s naval defense capability. It has created a sharp reduction in American-flagged shipping and the cargo they carry, which looks more like extinction than preservation of critical capacities. It hinders emergency operations. The otherwise unavailable military support services it is supposed to provide are already being provided more efficiently by foreign ships. And the costs are very high, staggeringly so in Hawaii, Puerto Rico, and Alaska. It is time to jettison Jones and free Americans from its abusive grip.
Image source: iStockphoto
The Birth of Korean Cool, by Euny Hong, Picador Press, 2014
Those of us who have reached a certain age remember the late 80s and early 90s when we were told that the Japanese were taking over the world. We bought their cars. We played their video games. We used their technology for pretty much everything. The Japanese were destined for world domination, we were told. They were better team players. They put more emphasis on the group than on the individual. They worked harder. In 1992, a high-ranking Japanese politician, Yoshio Sakurauchi, declared that Americans are “too lazy” to compete with Japanese workers, and that a third of American workers “cannot even read.” Michael Crichton’s 1992 novel Rising Sun (and the 1993 movie adaptation) fueled these controversies further in the minds of many Americans.
Nobody thinks the Japanese are taking over the world anymore. It turned out that the supposedly ironclad Japanese economy was less reliant on team players and hard work than it was on central planning, easy money, corporate welfare, and trade barriers. Thus, the bust that followed the boom should have surprised no one.
Today, South Korea (which I’ll simply call “Korea” in this article) appears to have, in many respects, taken up where Japan left off. Japan’s Sony has gone into deep decline, but Korean brands Samsung and LG are now internationally respected brands. Hyundai, while still regarded as a low-quality by many, has nonetheless expanded massively in the past decade, with Hyundai building a billion-dollar factory in Alabama in 2005, and a second in Georgia in 2009.
Korea’s Rise On the Global StageBut Korea’s attempt at global domination is different from Japan’s. While Japanese pop music, film, and TV never attained much popularity outside Japan, Korean pop culture has become a global phenomenon. We drive their cars and use their mobile phones, but Koreans also want us to listen to their music and watch their movies.
Few in the US noticed the rise of Korean pop culture until 2012 when the music video for Korean rapper PSY’s single “Gangnam Style” became one of the most-viewed YouTube videos of all time. Suddenly, almost everyone had heard of “K-pop.”
Moreover, anyone who browses new releases on Netflix is likely to have noticed a sizable increase in the number of Korean-language films available, including internationally successful films such as 2003’s action-thriller Old Boy and 2006’s monster movie The Host.
The rise of Korean music, film and TV — and also video games — is not an accident of free markets, however. It’s the result of Korean government policy that coordinates, subsidizes, and protects Korean pop-culture industries, among many others.
In her new book The Birth of Korean Cool, Euny Hong explores the origins and successes of this program, heavily supported and coordinated by Korean government agencies, and known as Hallyu, or “the Korean Wave.” It’s not just about economic power, but about international relations, and the Korean state uses Hallyu as part of a larger program designed to project Korean soft power.
They Do Things Differently In KoreaHong, a journalist, approaches the topic through her own experiences as an American-born ethnic Korean who lived in Korea during her teen years. She recounts the rampant nationalism in Korean schools and society, the necessity of conformity, the general deference of Koreans toward the state and the nation, while “individualistic” behavior is regarded as a type of social pathology.
Hong relates many anecdotes illustrating these points with a sympathy for Korea and Koreans, although laissez-faire minded Westerners will likely view such experiences with bemusement and perhaps even dismay. That all-American personality type, the “bad boy,” so prominent in American pop culture, is non-existent in Korea, Hong tells us.
This comes through in the country’s popular culture. The closest thing the Korean pop-music scene has to a “bad boy” is the rapper PSY, who is regarded as rebellious because he didn’t get straight-A’s in school and occasionally disappointed his parents.
Not surprisingly, then, Hong tells us, popular culture in Korea is regimented, corporate, planned, and governed by an ethic of commitment to the group and the subversion of the individual artist.
Through a government agency called “The Ministry of Future Creation,” the Korean government works with ostensibly private sector pop-culture enterprises to maximize the influence of Korean pop culture both domestically and abroad.
Historically, the Korean government has employed protectionism to encourage Korean pop culture. For example, Hong notes that in decades past, the Korean government required Korean movie theaters to show Korean-made movies a minimum of 146 days per year, and that “[f]ilm companies had to produce one Korean film for every non-Korean movie they imported. It’s safe to say the Korean film industry benefited from this kind of protectionism. …The government also built and operated art house theaters.”
Since the Asian financial crisis of the late 1990s, however, the Korean government has also taken to widespread assistance of Korean pop culture in international markets, using taxes to finance dubbing of Korean programs in foreign languages and using diplomats to negotiate scheduling of Korean programs on foreign television stations.
Government-Corporate “Cooperation”This all fits well within Korea’s established political practices.
Just as the Japanese economy has long been influenced and even dominated by major government-connected corporate entities known as keiretsu and zaibatsu, Korea has somewhat analogous corporations known as chaebols. The Korean version of “too-big-to-fail,” but far more significant to the overall Korean economy, these entities have been key in executing Korean government policy through “government-chaebol cooperation.”
Hong notes that the rise of government-promoted pop culture in Korea cannot be fully understood outside this context, and in the final chapters of her book, she examines this tradition of corporate-government cooperation by looking at the case of Samsung, LG, and other recently-successful Korean business enterprises that are nonetheless built on government favors and taxation.
Hong writes: “As with many of Korea’s success stories discussed in this book, Samsung’s rise to the world stage is attributable [to] … the direct intervention of the Korean government at crucial stages.”
And lest anyone think that Samsung is just another corporation, Hong reminds us that “Samsung alone generates one-fifth of the country’s GDP.” It’s not hard to see how the Korean state would see Samsung as essentially an adjunct of itself. “What’s good for Samsung is good for Korea” is no doubt a sentiment in the halls of Korean government agencies.
Hong, being a journalist, simply accepts the economic policy of the Korean state at face value. Of course all this central planning of the Korean economy has been an enormous success. We can see it in how the Korean standard of living has grown by leaps and bounds since the 1960s when Korea was essentially a third world country.
It’s yet another success story — we’re told — of Keynesian neo-mercantilism in which government-owned or -subsidized corporations execute government plans for improving the economy based on the decisions of government agents.
For one with an understanding of classical or Austrian economics, however, you can only look at this economic set-up and wonder what is “the unseen” behind all the government favoritism and centralized decision-making. What would Koreans spend their money on if it weren’t confiscated and given to the chaebols and spent on guaranteeing loans for government-favored enterprises? What innovations might occur if small enterprises and start-ups in Korea had the opportunity to actually compete against huge too-big-to-fail enterprises? We’ll never know.
Cautionary TalesWhat we do know, however, is that when a national government puts most of its eggs in one basket, as the Korean state has done, success can be fleeting, indeed. What happens when Samsung goes the way of Sony? Or Hyundai goes the way of General Motors? Will there just be more bailouts, more “stimulus,” and as the Japanese and American experiences suggest, more tidal waves of easy money?
In a culture where leisure is regarded by many as suspect, and students are expected to study eighteen hours per day, it’s possible to go on seemingly indefinitely while malinvestments pile up and government siphons off more and more wealth to prop up its favored corporations. But, in the end, as Japan — and increasingly the United States — have shown, such policies eventually lead to stagnation and capital consumption. Under such conditions, Japanese and American workers can work harder and longer hours to maintain a standard of living, but disposable income never seems to increase.
Japan, the once-future-ruler-of-the-world is a cautionary tale here, but so is the United States. True, the US economy is more diverse and entrepreneurial than either the Japanese of Korean economies, but how many more decades can the American economy endure its own devotion to propping up a financial sector and other corporate friends-of-government all at the expense of taxpayers and entrepreneurs? We may be experiencing the answer to that question already.
A reading of The Birth of Korean Cool tells us that Korea is still in the boom phase. But we’ve seen this movie before, albeit not in Korean.
Image source: iStockphoto.
In this interview, Mark Thornton talks to host Scott Horton about how we are much better off without the fed, and how QE monetary policy is causing the global economy to contract.
Interviewed by host John O’Donnell, Mark Thornton discusses Say's Law and how Keynesian economics still disputes it today. They also discuss 2015 capital market forecasts, and why quantitative easing is not working in Japan, Europe, and the USA.