Money and Banks: Recent Episodes
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Search Money and Banks for explanations of how they function in a mixed economy. Historical events are included.
Contrary to the government's line that "inflation hurts everyone," inflation really is a wealth transfer from those without political power to the politically connected.
Original Article: "Inflation Is a Giant "Skim" on the American People"
The Austrian(TA): What is the global currency plot, and who benefits most from the success of this effort?
Thorsten Polleit (TP): The global currency plot denotes a rather inconvenient truth: the existence of states (as we know them today) sets into motion a dynamic process toward creating a single world fiat money controlled by a world central bank, and most likely a central world government. The beneficiaries will be the very few—the “elite”—in charge of running the state and those few privileged by the state, such as big business, big banking, Big Pharma, and Big Tech. However, the great majority of the people will suffer a very great disadvantage. In fact, a single world fiat currency would most likely entail tyranny.
TA: The first half of the book is largely focused on economic theory and method. Why is economics so important to understanding the global fiat currency threat?
TP: I would argue that thinking about the method of economic science is actually the most important part of all of this. You know, economics is not an empirical science but must be conceptualized as a science of the logic of human action—or “praxeology,” as Ludwig von Mises called it. The logic of human action allows us to understand that there are regularities in human reality to which we must adapt our actions to succeed. It also makes us understand what will happen if— under certain conditions—actions that are contrary to the logic of human action are taken. For instance, we can know in advance (without having to resort to any kind of testing) that a state—defined as a coercive territorial monopoly—will (other things being equal) continue to expand no matter what; that it will seek control of money, replacing commodity money with its own fiat currency; and that states will form a cartel and strive to eventually establish a world government with its own world fiat currency. The logic of human action reveals these dynamics that many people are most likely unaware of.
TA: What role do central banks such as the Federal Reserve play?
TP: It may be hard to swallow, but central banks were not created for the greater good but to support the state and special interest groups. After World War II, the US became the dominant economic and military power in the world, and the Federal Reserve (the Fed), founded in 1913, became the world’s most powerful central bank, issuing the US dollar, the world’s leading reserve currency. It is fair to say that the Fed does indeed call the shots in the international financial and economic system. The Fed acts as the unofficial world central bank. Central banks play a crucial role in making a fiat currency system possible, and if they form a cartel, they can basically create a single world fiat currency.
TA: The dollar has played a central role in the global economy for decades. Does the dollar’s global hegemony help or hinder efforts to create a single global currency?
TP: The dominance of the US dollar is certainly helping to push the world toward a single fiat currency. Just imagine a major crisis that will eventually hit us. When the worldwide fiat currency regime starts to unravel, the US dollar will likely be the last man standing. In such a situation, it is also very likely that many countries will try to peg their currency to the US dollar (i.e., effectively adopt the US dollar as base money). It may not sound realistic right now, but imagine a scenario in which the United States and China join forces and endorse exchange rate fixing through the International Monetary Fund’s special drawing rights, later declaring the exchange rates irrevocably fixed. The world would be closer to a single world fiat currency than ever.
TA: What would it look like if the dollar were replaced by some sort of new international currency?
TP: Most recently, the BRICS countries (Brazil, Russia, India, China, and South Africa) have openly challenged the hegemony of the US dollar and considered introducing their own currency. What could it look like? It could be a basket consisting of various national fiat currencies or a new gold-backed unit of account. I believe the only challenge to the dominance of the US dollar might come from a gold-backed BRICS money. But even then, the US could also link the US dollar to the Federal Reserve’s theoretical gold holdings (which are actually owned by the Treasury). As you can see, dethroning the US dollar will not be easy under the current conditions. Whatever comes from states pursuing their own monetary interests, we should not get our hopes up that the states will provide sound money to the people. If states monopolize money production, they will use it predominantly to serve their own needs.
TA: You note that the world needs free market money, and you say it could be anything the market accepts—from gold to cryptocurrencies. Why is market-based money better?
TP: There are only two ways human beings can interact: voluntarily or coerced/violently. Voluntary cooperation is economically and ethically acceptable; coercion and violence are not. The free market is voluntary. In a free market in money, people are free to choose the type of money that best suits their needs and people are free to offer a good people may want to use as money. The outcome will be sound money—simply because no one (in their right mind) will demand bad money. For instance, people could decide to use gold as a base money and implement digital gold payment systems. If people want prosperity and freedom, nationally and internationally, they must abandon fiat monies, end the government’s control of money, and embrace a free market in money. The alternative is tyrannical government money, with the unpleasant prospect of eventually ending up with a tyrannical fiat world currency. I hope my book will inform and stimulate discussion on these extremely important issues.
On this episode of Good Money with Tho Bishop, Dr. Murray Sabrin joins the show. Dr. Sabrin shares his story of how he became an Austrian economist and discusses his analysis predicting a recession later in the year. Tho and Dr. Sabrin also talk about this week's anniversary of Nixon closing the gold window.
Join Dr. Sabrin in November for a Mises Circle in Ft. Meyers, FL on The White House, the Fed, and the Economy. Use promo code Tampa23 for $10 off registration.
Dr. Sabrin's Article on the Coming Recession: Mises.org/GM19a
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
While FedNow seems benign, there is the larger problem of the entire banking system itself being built on a foundation of sand. FedNow can only make that problem worse.
Original Article: "FedNow Isn't a CBDC, but It Is Dangerous"
Banker and financial expert Caitlin Long believes that fractional reserve banking is closer than ever to collapse, and she has a 100 percent reserve banking solution in progress.
Original Article: "Can Fractional Reserve Banking Survive the Twenty-First Century?"
By corrupting the meaning of inflation, mainstream economists have given a false picture of what happens when monetary authorities expand the money supply. Mises and Rothbard understood.
Original Article: "Taking Back the Meaning of "Inflation""
George Gammon, host of the popular Rebel Capitalist show, warns that the Fed won't have to force the public to adopt a central bank digital currency (CBDC). Instead, the public might clamor for it, being promised safe, high-interest checking accounts at the Fed, just like Jamie Dimon.
The Rebel Capitalist show: Mises.org/HAP405a
Join us in Nashville on September 23rd for a no-holds-barred discussion against the regime: Mises.org/Nashville23
The Federal Home Loan Bank (FHLB) is the latest "weapon" in the government's so-called arsenal to keep the banking system afloat. But the system needs much more than just "liquidity." It needs sound money and sound banking practices.
Original Article: "The Backstops for Banks Are Full of Holes"
How can a bank “create money out of thin air”? We must enter the magical kingdom of “fractional-reserve banking,” where deposits are turned into loans, loans are turned into money, and so on, to find out.
Original Article: "Banks Create Money out of Thin Air. What Could Possibly Go Wrong?"
With each iteration of the banking crisis, the Federal Reserve System and federal regulators gain in power and authority. Maybe the banking crisis isn’t an accident.
Original Article: "Is the Banking Crisis Being Orchestrated?"
The problem here not that the central bank is "setting" the "wrong" interest rate. The problem is the Fed has long been relentlessly forcing down interest rates to satisfy various politically determined "needs."
Original Article: "Wall Street to the Fed: Inflation Is Over. Give Us More Easy Money!"
On this episode of Good Money with Tho Bishop, Ryan McMaken joins the show to talk about America's debt crisis. Tho and Ryan discuss both the damage done to the economy by runaway government spending, as well as how Federal Reserve policy has incentivized consumption and punished savings, which has resulted in record-high credit card debt.
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
Ryan McMaken (RM): There is a lot of talk these days about the US losing its global monetary hegemony. But a lot needs to happen in terms of unwinding the present system before that can happen. At the heart of this seems to be what you call “globalized money without a global money.” What do you mean by that, and what does it have to do with the dollar’s global importance?
Brendan Brown (BB): Globalization of money under the fiat regime magnifies and extends national monetary power. The currency of the largest economy, so long as it is freely tradable and meets minimally sufficient standards as a store of value, becomes the dominant international money. Dominance brings hegemony. Smaller countries in defying the lead of the dominant money, whether by choosing an alternative type of monetary regime or simply pursuing a different type of monetary policy, become subject to severe economic stress.
This is all quite different from in a world of gold monies. There, all countries in the gold bloc have a common monetary base consisting of above-ground supplies of gold bullion and coin. One national brand of gold money can become dominant—but this will depend less (than for fiat money) on the criterion of economic size (though this still counts) and more on whether there is trust in the given country keeping to the rules of the gold standard. Hence in the years 1880–1914 the pound remained the number one global money even though Britain had been overtaken as an economic power by first the US and then Germany.
RM: One important factor in this that is rarely understood is how monetary inflation with the dollar can spread inflation in other countries as well. How does this work?
BB: In principle, where currencies are freely floating, each country can choose its own monetary path. Foreign countries are not tied (as under a fixed exchange rate system built around the dollar) to inflationary US monetary policy. At best the given foreign country’s monetary system has a solid anchor attached to a well-functioning monetary base whose supply is independent of US influence.
In fact, we are now in a world with no such anchor anywhere. Instead, independence refers to interest rate policy, whose potential outcomes are largely unknown except by those who pretend to know the neutral rate level. In any event, defiance of US monetary policy, whether achieved ideally, via monetary base control, or by interest rate policy implementation, means potential sharp currency appreciation. This would result in losses for politically powerful economic groups in the traded goods and services sector of the economy. Moreover, money which boasted of intrinsic superiority (in terms of quality) to the dollar could become subject to large fluctuations in global demand as a haven. Individuals (in the defiant country) would still hold the domestic money in some combination with dollars to reduce their exposure to a sudden fall in [their currency’s] international purchasing power if and when the dollar rebounds. Hence, they have direct exposure to US inflation risk. In any case, the defiant country would still be subject to asset inflation spread by the US. Yield-hungry, “maddened” dollar-based investors influence the behavior of asset markets even in sound money countries—as for example equity sectors enjoying speculative narratives or sometimes a speculative bubble in their currencies.
RM: You’ve also noted, however, that the dollar is not the only player here. Other currencies are important too. Moreover, the central banks of key currencies can also “make life more difficult” for other countries. Why is this?
BB: The worse the monetary quality of the dollar, the more likely in principle it is that a foreign country would be defiant at considerable cost to US monetary hegemony. Hence in the 1970s Germany pursued an independent monetary course, seeking to shelter itself from the greatest US peacetime inflation. The Bundesbank developed and implemented a practical monetarist agenda in cooperation with a Social Democrat–liberal government which won elections on the promise of defying US inflation and thereby benefiting the middle classes. Germany became the regional monetary hegemon. Similar monetary policies in several neighboring countries meant a dampening of the deutsche mark’s potential effective exchange-rate volatility. The spectacular fall of the dollar against the deutsche mark in the crisis of 1978 helps explain the Carter administration’s bringing in Paul Volcker to head the Fed and implement the “monetarist experiment.” This turned out to be brief, and in the next US episode of monetary inflation (1985–1988/89) German defiance of the dollar hegemon finally crumbled amidst emerging flaws in Bundesbank monetarism. In a changed political climate less tolerant of sharp deutsche mark appreciation, Germany joined the euro train. There was no European or Japanese defiance of the US monetary inflation episodes of 1996–2005 or of 2013–22. Asset inflation—the chief simple manifestation of monetary inflation up until the pandemic—does not excite political reactions like high goods inflation. When this erupted in 2021–22 on both sides of the Atlantic, European central bankers and governments could not plausibly blame US hegemony, given they had been administering similar policies to Washington with enthusiasm and vigor.
RM: It seems there are many downsides to this system, yet it has persisted for a long time. Perhaps one of the best questions you ask in the book is what keeps a bad system in power. How does politics keep this system afloat?
BB: Big government, big finance, Big Tech gain much from the actual bad monetary system. The gains take the forms respectively of vast, partly camouflaged taxation; privileges and profits buoyed by asset inflation; and sky-high valuations nourished by speculative narratives about the Eldorado of endless monopoly rents. Hence in the political arena, the monetary status quo enjoys defense and attack lines fortified by crony capitalism. Reformers have not succeeded in breaking through these. Failure is due in part to monetary inflation under the present regime having shown up (until the pandemic) as asset inflation, with goods inflation largely camouflaged.
There are, however, also serious lessons which transcend the wheel of fortune. A winning message of reform, such as would emanate from a vision based on theory and application, and which reformers could deliver in response to the cheap shots of the status quo’s propagandists, has been missing. Reformers have a challenging task to persuade opinion on the basis of counterfactuals and a laboratory of history, which by its nature cannot deliver verdicts of “beyond reasonable doubt.”
Anchoring an unanchored monetary system is likely to be costly at the start. The reformers would surely gain from generating excitement about the new world in which sound money will have an integral part—joining their cause to the benefits of competitive capitalism. The reformers should aim also at undermining the status quo’s efforts to find scapegoats for crisis and societal damage as these erupt or emerge.
RM: As banks fail or the economy looks unstable, we hear repeated calls for more government regulation. But isn’t a lot of this instability caused by the monetary policy of the central banks, who are also supposedly in charge of stabilizing things? Will new regulations solve the problem?
BB: A vicious circle starts with monetary inflation. The bust phase of asset inflation follows, during which banking crisis often erupts. The regime finds its scapegoats—risky, irresponsible practices in the banking and broader financial industries motivated by greed, coupled with a giant savings surplus, which overwhelms the equilibrating mechanisms of a capitalist economy. New safety devices (deposit insurance, enhanced lender of last resort, minimal and multiple capital ratios) to prevent the eruption of future banking crises undermine further the monetary anchoring system previously in place (by diluting the “super-money” qualities of the monetary base, meaning that the demand for this is no longer strong and broad when not interest-bearing as essential to solid anchoring). Hence the danger increases of further monetary inflation episodes even harsher than the last one; the warnings about oversaving and long, sustained periods of recession, in which automatic recovery mechanisms are too weak to bring recovery, justify the authorities’ being ever ready to take “bold preemptive action” against any threatened downturn. Hence super-long cycles become the norm, but eventually these are broken by great recessions, when accumulated malinvestment and financial fragility just become too great. Safety brakes may eventually become so powerful as to mean violent banking crises no longer occur, severe asset inflations notwithstanding; that would be symptomatic of a mutation of capitalism into a China-style economic and financial system.
RM: It seems that if the dollar is weakened, this will primarily be the fault of the US central bank itself. Couldn’t the central bank take unilateral steps to strengthen its own currency? What are the benefits of a stronger currency?
BB: The implementation of a weak-dollar policy, whether declared or not, always involves the Federal Reserve’s pursuing monetary inflation. Counterfactually, an independent Fed which refused to shift policy in that direction could frustrate the aim of devaluation. That has never happened and is implausible in any gaming of possible outcomes taking account of likely shared perspectives and power relationships between Congress, the administration, and the central bank. In all episodes of dollar devaluation—Nixon-Burns (1968–72), Reagan-Volcker (1985–87), Clinton-Greenspan (1993–96), [George W.] Bush-Greenspan (2003–5), Obama- Bernanke (2009)—the accompanying inflationary monetary policy has wrought, eventually, economic destruction in the US and abroad which has been mutually reinforcing. Before that phase of destruction, the initial monetary stimulus and devaluation has gone along with a win in the first election for the president or his party. A strong-dollar policy, by contrast, means the Fed pursuing sound money and the administration/Congress renouncing devaluation. Then most other countries, small and large, would follow the US in following sound monetary principles: the dollar exchange rate would often be a key part of the anchoring system for their currency. These countries no longer would incur the costs of potential high exchange rate volatility, including sharp appreciations in consequence of their hard-money choice. The world, including the US, would be a safer and more prosperous place under the strong dollar than under a weak dollar.
RM: As a final question, it seems we should address the overall theme of the book, which is about returning to “good money.” What are the most basic tenets of good money?
BB: Good money is an excellent store of value and medium of exchange. As such, at the level of society money does not “get out of control and become the monkey wrench in all the other machinery of the economy” (to quote J.S. Mill). Good money, whether fiat or gold, has at its base a set of assets characterized by extreme moneyness and reflecting “super-money” qualities.
These assets enjoy a broad and strong demand even though they pay no interest. Constitutional rules (for fiat money) or geology and mining technology (for gold money) keep the monetary base scarce. Over the long run the supply of the monetary base grows at a very slow pace. Interest rates both short and long are freely determined without any official interventions.
The Mises Institute's Executive Editor Ryan McMaken joins Bob to discuss his latest article, in which Ryan spells out the state of the M2 money supply and possible implications for consumer prices and an impending recession.
Ryan's Mises.org article on M2: Mises.org/HAP402a Ryan's QJAE article on the inverted yield curve: Mises.org/HAP402b
On this episode of Good Money, Tho Bishop is joined by Wesley Schlemmer, president and co-founder of Bitcoin Bay. Wesley discusses the benefits of creating local professional networks around common values and how Bitcoin Bay is helping Tampa residents convert Bitcoin into real goods and services, including locally raised beef.
Learn more about Bitcoin Bay at Bitcoinbay.live.
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
Mises Institute Fellow Patrick Newman joins Bob to discuss a recent tweet from Stephanie Kelton, which argued that the government's "red ink makes our black ink possible." Patrick and Bob point out that these MMT tautologies are very misleading at best. Patrick also lays out the argument in his journal article, saying that MMT's debt monetization won't cause a boom-bust cycle, but will still reduce living standards.
The usual suspects are "relieved" that Congress gave President Biden what he wanted on the so-called budget deal. Without sound money, however, the borrowing and spending regime will collapse sooner or later.
Original Article: "Sound Money Is Required for Real Budget Discipline"
On this episode of Good Money with Tho Bishop, Peter St Onge joins the show to discuss this week's Fed announcement and what it means to normal Americans. Tho and Peter also discuss the political battles in DC over the future of CBDCs and the dangerous trojan horse some Republicans may be creating on the issue.
Find more from Peter St Onge on Substack at StOnge.Substack.com. You can also find him on Twitter @ProfStOnge.
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
On this episode of Good Money with Tho Bishop, Jeffrey Kauffman joins the show to discuss recent attacks from the SEC on major crypto exchanges. Kauffman, CEO of LBRY and content platform Odysee, shares his own company's battle with the SEC, the impossible burdens regulators have placed on legal compliance, and why DC's Operation Chokepoint 2.0 could be a positive for the industry in the long run.
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
We are familiar with the five stages of grief. However, it is not a stretch to apply those stages to what is happening to the banking system. Right now, we are in the second stage: anger.
Original Article: "The Five Stages of Bank Failure Grief"
A "soft landing" is impossible unless the government cuts both taxes and government spending at the same time interest rates are rising. This won't happen, so get ready for a hard landing.
Original Article: "Crowding Out: The Fed May Be Killing the Private Sector to Save the Government"
A new Fed survey shows that banks are cutting back on lending big time. Over the past thirty-five years, this almost always predicts recession. Our economy can't survive without endless new infusions of easy money.
Original Article: "Banks Are Lending Less Money, and That's a Formula for Recession"
In this episode of Good Money, Tho Bishop is joined by Dr. Jonathan Newman to discuss the real costs of government spending. The end of the debt ceiling battle has resulted in the predictable outcome of normalizing the fiscal insanity of covid-era spending. Tho and Jonathan discuss how this was predictable to those familiar with the work of Dr. Robert Higgs, how mainstream GDP measures miss the true costs of government, and alternative approaches Austrian economists use to provide a clearer understanding of what is really going on in the economy.
Good Money listeners can order a special $5 book bundle that includes How To Think About the Economy and What Has Government Done to Our Money? with free shipping using promo code "GoodMoney" at Mises.org/Good
Receive a free subscription to The Austrian magazine at Mises.org/Magazine
Can the injection of new money into the economic system enhance economic growth? Not really. Increasing (or decreasing) the money supply affects the demand for money but doesn't make us wealthier.
Original Article: "Understanding Relationships between Money Supply and Liquidity"
Economically speaking, the US government is bankrupt even if the government won’t admit what is obvious. But how would an actual bankruptcy proceeding go?
Original Article: "In the Event of an Official US Bankruptcy"
Despite the soothing hot air from the White House and Fed officials, the financial system is becoming increasingly fragile and unstable. Maybe all of that intervention the past decade was not wise.
Original Article: "Finance Discovers Sting: "How Fragile We Are""
This episode of Good Money with Tho Bishop features guest Ryan Griggs of Griggs Capital Strategies. During the show, Ryan discusses his work with Bob Murphy on an Austrian understanding of inverted yield curves as a signal for recessions and how it differs from the mainstream analysis. He also discusses Nelson Nash's infinite banking strategy as a means for capital accumulation, in contrast to traditional investment approaches.
Ryan and Bob Murphy on the Austrian understanding of inverted yield curves: Mises.org/GM7aGriggs Capital Strategies: Mises.org/GM7b
By any conventional measures of finance, the Federal Reserve has negative equity. In the long run, cooking the books only puts off the day of reckoning.
Original Article: "The Fed Is Overindebted, Isn’t It?"
The dollar became the dominant global currency not so much because of its own merits, but because of the self-destruction of the pound sterling caused by the British state and central bank.
Original Article: "How the Dollar Became the World's Top Global Currency"
While the Fed and the Biden administration try to assure Americans that their banks are safe and secure, the numbers tell a different story.
Original Article: "Charles Schwab and Other Big Banks May Be Secretly Insolvent"
Dr. Paul Cwik joins Bob to discuss the inverted yield curve's "signal" of an impending recession.
Dr. Cwik's dissertation on inverted yield curves and economic downturns: Mises.org/HAP395a
Bob on the link between inverted yield curves and recessions: Mises.org/HAP395b
Bob's Understanding Money Mechanics: Mises.org/Mechanics
Canada created its central bank during the Great Depression, ostensibly to stabilize the currency and protect the banking system. Today, that system is falling apart, thanks to inflationary central bank policies.
Original Article: "Canada’s Legal Counterfeiting Ring Is a Product of Progressive Democracy"
The current banking crises have deep roots in US financial history. Monetary authorities have engaged in inflationary behavior for more than a hundred years.
Original Article: "A Pyrrhic End to 130 Years of Vicious Bad Money and Banking Crises"
Walter Bagehot, as Jim Grant writes, believed that bankers and central bankers should exhibit financial discipline. He would not recognize today's banking world.
Original Article: "From Discipline to No Discipline: The Sorry Evolution of Modern Banking"
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."
As markets settle down after the last set of bank failures, political elites claim the crisis is behind us. But it is not over, not by a long shot.
Original Article: "No, the Financial Crisis Is Not Over"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Recorded in Birmingham, Alabama on April 22, 2023.
From the Mises Institute's recent event in Birmingham, Alabama dedicated to the global threat of "The Great Reset".
Even a partial weakening of the dollar's global demand will limit the US regime's ability to throw its weight around internationally. Yet Washington is unwilling to do what's necessary to prevent it.
Original Article: "Why the Regime Needs the Dollar to Be the Global Reserve Currency"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Jonathan Newman joins Bob to dissect Paul Krugman's latest NYT op-ed, in which he derides Ron DeSantis as paranoid for thinking a central bank digital currency (CBDC) could be used to control citizens.
Krugman's op-ed in the New York Times: Mises.org/HAP391a
Bob breaking down negative interest rates: Mises.org/HAP391b
Money proper is not artifice. It is a physical "thing" of value, acquired through labor and emerging out of the needs of individuals, who through voluntary exchanges determine its value.
Original Article: "Is It Real Money or Just Artifice?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Like the arsonist who then heroically fights the fire he set, the Fed is increasing its efforts to bail out banks both at home and abroad. This does not end well.
Original Article: "Is the Fed Trying to Bail Out the World? Sure Looks Like It"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Central banks usually don't admit their guilt in the destruction of money, but the Bank of England unwittingly comes clean.
Original Article: "The Bank of England: Money Creation in Their Own Words"
This Audio Mises Wire is generously sponsored by Christopher Condon.
With commercial banks exposed by the recent bailouts, Americans question whether “their money” is truly safe despite the promises of FDIC insurance.
Jeff and Bob walk through the mechanics of how a full reserve bank could work in a truly free market based on the concepts and taxonomy of Mises’s Theory of Money and Credit.
Mises's A Theory of Money and Credit: Mises.org/TMC
Bob's study guide to A Theory of Money and Credit: Mises.org/HAP388a
John Cochran, 'The Safest Bank the Fed Won't Sanction': Mises.org/HAP388b
Even if Powell is sincere in this stated desire to slay inflation with more rate hikes, recent bank failures will put the Fed under enormous pressure to end its rate hikes and to once again embrace easy money to save the banks and Wall Street.
Original Article: "Looming Bank Failures Point to More Price Inflation as Real Wages Fall Again"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Fed is launching a new billionaire bailout designed to keep banks afloat, and the FDIC is promising to back potentially trillions in deposits. The taxpayer will ultimately be on the hook.
Original Article: "Yes, the Latest Bank Bailout Is Really a Bailout, and You Are Paying for It."
This Audio Mises Wire is generously sponsored by Christopher Condon.
This past weekend saw extraordinary actions by the Fed to address the meltdown of Silicon Valley Bank. Did the central bank break the law by effectively authorizing unsecured loans to banks based on the face value—rather than significantly lower market value—of those banks' Treasury holdings?
Bob's study guide to A Theory of Money and Credit: Mises.org/HAP387a
Jeff on the Fed as the ultimate bank: Mises.org/HAP387b
Because of inflation and a lack of a savings ethic, Americans are less prepared for retirement than ever. The numbers are discouraging.
Original Article: "Ready for Retirement? Fewer and Fewer Americans Are Saving for That Time"
This Audio Mises Wire is generously sponsored by Christopher Condon.
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
People are innovative—if government doesn't get in the way. Entrepreneurs in developing countries find alternatives for people cut off from commercial banking services.
Original Article: "Poor People in Developing Countries Find Alternatives to Commercial Banking"
This Audio Mises Wire is generously sponsored by Christopher Condon.
We're still living with the consequences of the massive monetary inflation by Trump and Biden. Prices are stubbornly high, and falling real wages are driving Americans to say things are getting worse.
Original Article: "Food and Shelter Prices Keep Climbing as CPI Growth Hits a Three-Month High"
This Audio Mises Wire is generously sponsored by Christopher Condon.
By itself, the end of the petrodollar won't destroy the dollar. But it will continue a trend that weakens both the dollar and the US regime's power.
Original Article: "Why the End of the Petrodollar Spells Trouble for the US Regime"
This Audio Mises Wire is generously sponsored by Christopher Condon.
For nearly three decades, the Japanese economy has slowly imploded under low interest rates and heavy government debt. It may soon be time to pay the piper.
Original Article: "Is the Japanese Low Inflation–Low Interest Rate Model at an End?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The fact the money supply is actually shrinking serves as just one more indicator that the so-called soft landing promised by the Federal Reserve is unlikely to be a reality.
Original Article: "More Recession Signs: Money Supply Growth Went Negative Again in December"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Monetary authorities have come up with numerous clever ways of measuring money. However, they are unable even to define money, much less measure it.
Original Article: "Do Correlations Help Define Money?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The "True" Money Supply (TMS), developed by Professor Murray Rothbard and myself,Professor Rothbard presents the theoretical framework for this statistic in the following works: Murray N. Rothbard, America's Great Depression (Princeton, NJ: D. Van Nostrand, 1963), pp. 83–86; idem, "Austrian Definistions of the Supply of Money," in Louis M. Spardaro, ed., New Directions in Austrian Economics (Kansas City: Sheed Andrews & McMeel, 1978), pp. 143–56; and idem, The Mystery of Banking (New York: Richardson & Snyder, 1983), pp. 254–62. is an admitted imperfect attempt to provide a statistical measure of money that is consistent with the theoretical definition of money as the general medium of exchange in society.For a sample of recent contributions that have emphasized general acceptability in exchange as the defining characteristic of money, see: Lawrence H. White, "A Subjective Perspective on the Definition and Identification of Money," in Israel M. Kirzner, ed., Subjectivism, Intelligibility and Economic Understanding: Essays in Honor of Ludwig M. Lachmann on His Eightieth Birthday (London: The Macmillan Press, 1986), pp. 301–14; Dale K. Osborne, "What Is Money Today?" Federal Reserve Bank of Dallas Economic Review (January 1985), pp. 1–15; idem, "Ten Approaches to the Definition of Money," Federal Reserve Bank of Dallas Economic Review (March 1984), pp. 1–23; Leland Yeager, "What Are Banks?" Atlantic Economic Journal 6 (December 1978): 1–14. Also see the classic article, Leland Yeager, "The Medium of Exchange" in R.W. Clower, ed., Monetary Theory: Selected Readings (Baltimore, MD: Penquin Books, 1970), pp. 37–60.
Measure of the U.S. money stock in current use in economic and business forecasting and in applied economics and historical research are flawed precisely because they are not based on an explicit and coherent theoretical conception of the essential nature of money. Given the all-pervasive role of money in the modern market economy, existing money-supply measures therefore tend to impede, rather than to facilitate, a clear understanding of the past or future development of actual economic events. Each one of the familiar set of M's calculated by the Federal Reserve System, for example, both excludes some items that are identifiable as money by our definition and includes other items that lack the essential properties of general medium of exchange.
As the general medium of exchange, money is a good universally and routinely accepted in exchange by market participants; or, put another way, it is the one good that is traded for all other goods on the market. One important implication of this fact—and an important empirical test of whether or not a thing can be counted as money—is that money serves as the final means of payment in all transaction. For instance, credit cards are not counted as part of the TMS, because use of a credit card in the purchase of a good does not finally discharge the debt created in the current transaction. Instead, it gives rise to a second credit transaction that involves present and future monetary payments. Thus the issuer of the card or lender is now bound to pay the seller of the good immediately with money on behalf of the card-holder or borrower. The latter, in turn, is obliged to make a monetary repayment of the load to the issuer at the end of the month or at a later date, at which time the transaction is finally completed.For a similar view of credit cards see: Paul A. Meyer, Monetary Economics and Financial Markets (Homewood, IL: Richard D. Irwin, 1982), p. 34; and White, "Definition and Idenfication of Money," pp. 310–11.
In the case of a paper fiat money, such as the current U.S. dollar, there is a second test that can be applied to determine whether a particular item should be counted in money supply statics. Unlike any good produced in the market, including a commodity money, whose quantities are ultimately determined by the interaction of supply and demand, On this property of a pure commodity money, see, for example, Milton Friedman, "Commodity-Reserve Currency" in Milton Friedman, Essays in Positive Economics (Chicago: The University of Chicago Press, 1953), pp. 206–10. the quantity of government fiat money (but not its purchasing power) at any point in time is determined solely by decisions if suppliers of the good, i.e., government central banks, without respect to the desires and actions of the demanders. The fact that money is routinely accepted as the final means of payment by all participants in the market means that fiat money can be literally lent and spent into existence regardless of the public's existing demand for it. For example, if an additional quantity of Fed notes is printed up and spent by government on various goods and services, an excess supply of money will temporarily be created in the economy. The initial recipients of the new money will quickly get ride of the excess cash simply by increasing their own spending on goods; those who eagerly receive the new money as payments in the second or later rounds of spending will do likewise, in the process bidding up the prices of goods, reducing the purchasing power of the dollar, and consequently, increasing the quantities of dollars that each individual desire to keep on hand to meet expected future payments or for other purposes. In summary, any excess supply of fiat money does not go out of existence, but is spent and respent and continually passed on like a "hot potato" throughout the economy until the surplus money is finally and fully absorbed by the resulting increase in general prices and in desired dollar holdings.For a description of the unique process by which, in nominal terms, "the supply of money creates its own demand," see Yeager, "The Medium of Exchange," pp. 42–43; and idem, "What Are Banks?" pp. 6–7. It is this criterion which is applied below in resolving the apparent inconsistency of including demand deposits and money market accounts (MMDAs) in the TMS, while excluding checkable money market mutual fund (MMMF) equity shares.
In what follows, I explain briefly why various items have been included in or excluded from the TMS. To simplify the exposition, I organize my explanation around the several Fed definitions of the money supply and of total liquid assets.
Components of M1Currency in the hands of the nonbank public, i.e., excluding currency held by the U.S. Treasury, the Fed, and in the vaults of commercial banks, is counted in the TMS, precisely because it is the physical embodiment of the generally accepted medium of exchange in the U.S. economy. Federal Reserve notes of various dollar denominations (as well as token coins and paper notes issued by the U.S. Treasury) are the "standard money" or ultimate "cash" of the U.S. monetary system, having replaced gold in this function, at least for American citizens, in 1933.
Demand deposits or checking account balances at commercial banks and other checkable deposits, such as NOW accounts held at S&Ls, are included in the TMS by virtue of the fact that they are claims to the standard money redeemable at par on demand by the depositor or by a third party designated by the depositor. Despite the fact that these deposits are only fractionally backed by cash or immediately cashable reserve deposit at the Fed, their instantaneous redemption at par is effectively guaranteed by two factors. First, there is federal deposit insurance, which legally insures up to $100,000 of each and every depositor at a given bank or thrift against loss, hue which, in practice, has almost always guaranteed the full worth of all deposits, usually by subsidizing the merger of an ailing institution with a healthy one.As a former FDIC Chairman has recently written: "The pendulum has swung once again toward 100 percent protection of depositors and creditors. Despite the fact that Congress made it clear in the 1950 Act that FDIC was not created to insure all deposits in all banks, in the years since Congress has gradually increased the insured amount to $100,000. In addition, the regulators have devised solutions that protect even the uninsured in the preponderance of cases." (Irving H. Sprague, Bailout: An Insider's Account of Bank Failure and Rescues [New York: Basic Books, 1986], p. 32.) Moreover, the uninsured depositors who incurred losses in a dandful of recent bank failires were mainly holders of deposits in the category of "large time deposits," which, for the reasons stated below, are not included in the TMS definition of the money supply. The FDIC's recent attempt to enforce market discipline on the banking industry by leaving the uninsured holders of large time deposits in small (but not large) banks unprotected appears to have had little substantive effect. One this, see R. Alton Gilbert, "Recent Changes in Handling Bank Failures and Their Effects on the Banking Industry," The Federal Reserve Bank of St. Louis Review 67 (June/July 1985): 21–28. Second and more importantly, there is the Fed itself, which, in its much-publicized function as the "lender of last resort," always stands ready to head off a banking panic by simply printing up and lending the needed quantities of Fed notes to banks or thrifts unable to meet their demand liabilities.In his refusal to include "transactions balances," including demand deposits, in his statistical definition of the U.S. money supply, because they allegedly all cannot be spent simultaneously in any conceivable pattern of payments, Osborne ignores these institutional considerations. Thus, contrary to Osborne's contention, demand deposits in the U.S. today are indeed "means of simultaneous payment," precisely because, as the lender of last resort, the Fed is empowered to created base money ad libitum and would exercise this power to prevent a wholesale collapse of the fractional-reserve, multibank system. By neglecting this momentous institutiona factor, the strict application of Shackle's "simultaneity" criterion to the empirical identification of the money stock leaves Osborne with only the monetary baseas the "generally acceptable means of exchange," i.e. money, in the U.S. See Osborne, "What Is Money Today?" pp. 3–5. For reasons, checkable deposits held at federally-insured banks and thrifts are readily acceptable in exchange as perfect substitutes, dollar for dollar, for Federal Reserve notes.As Barger observers, "... it is the bank deposit which is money—not the check which transfers the deposit. Bank deposits are always acceptable: checks may not be, for sometimes they turn out to be make of rubber. If your creditor refuses your check, it's not doubt because he's not convinced he's getting title to a bank deposit." (Harold Barger, Money, Banking and Public Policy, 2nd ed. [Chicago: Rand McNally, 1968], pp. 16–17.) This is an obvious point, but White appears to overlook it in the significance he attaches to the limited "sphere of acceptance" of "ordinary bank checks [emphasis mine]." (White, "Definiation and Identification of Money," p. 305.)
In contrast, travelers' checks issued by nonbank financial institutions, such as American Express, are excluded from the TMS because they neither are riskfree claims to immediate cash nor serve as final means of payment in transactions. What a travelers' check represents from an economic point of view is a credit claim on the investment portfolio of the issuing company. The purchase of travelers' checks from American Express involves, in effect, a "call" loan by the purchaser to American Express, which the latter pledges to repay to the purchaser or to a designated third party at an unspecified date in the future. In the meantime, most of the proceeds of such loans are invested by American Express on its own account in interest bearing assets, while a fraction is held in the for of demand deposits to meet anticipated payments of its travelers' check liabilities they "mature." In exchange for the foregone interest (an a small fee) the purchaser receives access to an alternative payments system which avoids the risk of loss associated with carrying cash payments and the potential delay or nonacceptance involved with payment by personal check drawn on a distant bank. But the travelers' checks themselves are not the final means of payment in a transaction;Meyer is inconsistent in counting nonbank travelers' checks as part of the money supply merely because they are "means of payments." As Meyer recognizes in his discussion of credit cards, however, it is not enough that an item is able to serve as a means of payment in most transactions for it to be considered money; it must also serve, in his words, "to extinguish obligations between two parties," that is, serve as the final means of payment, to deserve the classification of money. See Meyer, Monetary Economics, pp. 33–34. the sellers who receive travelers' checks in exchange quickly and routinely present them for final payment at a bank and obtain either cash or a credit to their demand deposit accounts, with the sums paid out ultimately being debited to the demand deposit account of American Express. Moreover, in the highly unlikely event that financial reverses force the issuing company into institutional liquidation, the holders of its outstanding stock of travelers' checks would be, economically and legally, in the same boat as debtholders of any insolvent business firm, having no political guarantee of a dollar-for-dollar payoff of their debt claims, such as that provided by federal deposit insurance and privileged access to the lender of last resort.
Components of M2 Not Included in M1Savings deposits, whether at commercial banks or thrift institutions, are economically indistinguishable from demand deposits and are therefore included in the TMS. Both demand and savings deposits are federally insured under the same conditions and, consequently, both represent instantly cashable, par value claims to the general medium of exchange. The objection that claims on dollars held in savings deposits typically do not circulate in exchangeFor example, White argues that, because time deposits "... are not directly transferable, they do not serve as media of exchange, let alone as generally accepted media." (White, "Definition and Identification of Money," p. 310.) Yeager holds that the liabilities of nonbank financial intermediaries, such as deposits at S&Ls, are not money because they are not "routinely exchange." (Yeager, "The Medium of Exchange," pp. 40–46, 53–56.) (although certified or cashier's checks may be readily drawn against such deposits and are certainly generally acceptable in exchange), while not unimportant for some purposes of analysis, is here beside the point. The essential , economic point is that some or all of the dollars accumulated in, e.g., passbook savings accounts are effectively withdrawable on demand by depositors in the form of spendable cash.As Rothbard pertinently remarks, "... the 30-day notice [of withdrawal of savings deposits] is a dead letter; it is practically never imposed, and, if it were, there would be a prompt and devasting run on the bank. Everyone acts as if his time deposits were redeemable on demand, and the banks pay out their deposits in the same way they redeem demand deposits. The necessity for personal withdrawsl is merely a technicality; it may take a little longer to go down to the bank and withdraw the cash than to pay by check, but the essence of the process is the same. In both cases, a deposit at the bank is the course of monetary payment." (Rothbard, America's Great Depression, p. 84.) In addition, savings deposits are at all times transferable,Today, many institutions permit such transfer to be effected by means of telephone. lnterestingly, one weighted aggregate of "transactions assets," the "MQ" measure, includes "savings deposits subject to telephone transfer" while excluding conventional savings deposits. See Dallas S. Batten and Daniel L. Thornton, "Are Weighted Monetary Aggregates Better Than Simple-Sum Ml?" The Federal Reserve Bank of St. Louis Review 67 (June/July 1985): 29–40. dollar for dollar, into "transactions" accounts such as demand deposits or NOW accounts.ln an early, though unfortunately neglected, contribution, Lin clearly recognized the economic equivalence of currency, demand deposits, and savings deposits, based on their "interchangeability" within the modern banking system. Thus, according to Lin, The term "means of payment" describes but one phase of the meaning of money. It indicates only in what form money is "spent," but not in what form it may be 'kept.' In the modern banking and monetary system money may be kept in one form and spent in another. This is possible and is always done today [1937] because all forms of money issued either by banks or by the state must be interchangeable to maintain parity.... Money in whatever form it is kept and spent must be of general acceptability and of free interchangeability. By these criteria, all other credit devices are automatically eliminated because they are not generally acceptable and cannot be freely interchanged into one another. Treasury currency, bank notes, time and demand deposits are ... constantly interchanging into one another unit per unit without altering the total supply of money. (Lin Lin, "Are Time Deposits Money?" American Economic Review 27 [March 1937]:85.)For one of the earliest hints of recognition of the monetary function of time deposits, see Frank A. Fetter, Economics, vol. 2: Modem Economic Problems, 2nd ed. (New York: The Century Co., 1923), pp. 102–103.
The common-sense case for the inclusion of savings deposits in the stock of general media of exchange was cogently presented by the eminent German banker and economist, Melchior Palyi:
In their own minds, money is what people consider as purchasing power, available at once or shortly. People's "Liquidity" status and financial disposition are not affected by juristic subtleties and technicalities. One kind of deposit is as good as another, provided it is promptly redeemable into legal tender at virtual face value and is accepted in settling debts. The volume of total demand for goods and services is not affected by the distribution of purchasing power among the diverse reservoirs into which that purchasing power is placed. As long as free transferability obtains from one reservoir to the other, the deposits cannot differ in function or value ...
A source of confusion is the identification of savings deposits with savings. The former are no more and no less "saved" than are the funds put on a checking account or the currency held in stocks. In all three cases, someone is refraining from consumption (for the time being); in all three, the funds constitute actual purchasing power. And it makes no difference in this context how the purchasing power is generated originally: dug out of a gold mine, "printed" by a government agency, or "created" by a bank loan. As a matter of fact, savings banks and associations do exactly what commercial banks do: they build a credit structure on fractional reserves.Melchior Palyi, An Inflation Primer (Chicago: Henry Regnery, 1961), pp. 137–38.
Overnight repurchase agreements or "RPs" were devised in the mid-1970s as a means of evading the legal prohibition against the payment of interest on demand deposits. They are, in essence, interest bearing demand deposits held by business firms at commercial banks and therefore are included in the TMS. In a repurchase agreement, a firm, in effect, makes a loan to a bank which is collateralized by government securities. The bank "sells" government securities to the firm with an agreement to "repurchase" them the following day at a slightly higher price, i.e., repay the loan plus interest. When the purchase or loan is initially made, the bank debits the firm's demand deposit balance and credits its RP account by the amount of the loan. On the following day the bank repays the loan with interest by reversing the process and crediting the firm's demand deposit with a sum that exceeds the previous day's debit by the amount of the interest payment. Since the loans are mating daily, the firm has virtually instant access to the full amount of its dollars on deposit with the bank.For a discussion of overnight RPs, see Meyer, Monetary Economics, p. 28.
Overnight eurodollars are counted in the TMS for the same reason as overnight RPs: they are basically an accounting fiction that permit U.S. banks to pay interest on their business demand deposits and are therefore virtually redeemable on demand. In the case of overnight eurodollars, deposits are made by U.S. firms in interest bearing accounts at the Caribbean bank of a U.S. bank, where U.S. interest-rate regulations have no legal force. The dollars thus deposited plus interest earned are credited daily to the firms' demand deposit accounts held at the parent bank.On overnight eurodollars, see ibid., pp. 28–29.
Money market deposit accounts, as a hybrid of demand and savings deposits, are considered pare of the TMS. MMDAs are federally insured up to $100,000 per account, feature limited checking privileges, and offer par value cashability upon demand of the depositor.
Although MMMF share accounts at first glance look like MMDAs, they are clearly excludable from.the TMS, because they are neither instantly redeemable, par value claims to cash, nor final means of payment in exchange. This requires a brief explanation of the nature of MMMFs.The next three paragraphs, with some alterations are drawn from Joseph T. Salerno, "What Investors and Depositors Should Know about Banks and the Financial Services Revolution," Jerome Smith's Investment Perspectives 2 (June 1984): 3–4. A more detailed analysis of the nature of MMMFs and their relationship to the supply and demand for money under the gold standard may be found in Joseph T. Salerno, "Gold Standards: True and False," The Cato Journal 3 (Spring 1983): 255–58.
Each MMMF share represents a claim to a pro rata share of a managed investment portfolio containing shore-term financial assets, such as high-grade commercial paper, certificates of deposit, and U.S. Treasury notes. Although the value of a share is nominally fixed, usually, at one dollar, the total number of shares owned by an investor (abstracting from reinvested dividends) fluctuates according to market conditions affecting the overall value of the fund's portfolio.For a similar characterization of MMMFs, see Meyer, Monetary Economics, p. 29; and White, "Definition and Indentification of Money," p. 310. Under extreme circumstances, such as a stratospheric rise in shore-term interest races or the bankruptcy of a corporation whose paper the fund has heavily invested in, the fund's investors may well suffer a capital loss in the form of an actual reduction of the number of fixed-value shares they own. Unlike a check drawn on a demand deposit or MMDA, therefore, an MMMF draft does not simply represent a direct transfer of current claims to currency, but a dual order to the fund's manager to sell a specified portion of the shareowner's asset holdings and then to transfer the monetary proceeds to a third party named on the check.Typically, the funds establish a central clearning account at a bank. When checks, really drafts, written by individuals are presented to the bank, it notifies the mutual fund of the number of fund shares that must be liquidated to cover the check." (Monica Langley, "Holds on Checks Annoy Investors in Money Funds," The Wall Street Journal (November 11, 1986), p. 39. Note that the payment process is not finally completed until the payee receives money, typically in the form of a credit to his demand deposit.As White points out, "... the item that the check-writing MMMF customer relinquishes (ownership of shares in a portfolia of assets) is not what the payee accepts (ownership of an inside-money claim to bank reserves). Because the actual MMMF shres are not what the second part accepts (or intends to accept), MMMF shares cannot be considered a generally accepted medium of exchange; hence, they are not money." (White, "Definition and Identification of Money," p. 310.)
Another feature that distinguishes checkable MMMF shares from demand deposits and MMDAs is the fact that the former cannot be permanently expanded beyond the limit set by the public's willingness to hold such assets. If an excess supply of fund shares happens to emerge, the consequence would not be the general rise in prices occasioned by people's attempts to rid themselves of surplus dollars through increased spending.See above, pp. 2–3, for the description of this process. Unwanted MMMF shares simply go out of existence, as fund investors directly redeem them for money or use MMMF drafts to purchase alternative investment assets or consumers' goods. In the extreme case, if the public suddenly preferred to invest directly in the short-term credit market, without the intermediation of managed mutual funds, checkable MMMF shares would simply disappear from existence.
It is important to realize that the existence of MMMFs does have an effect on overall prices in the economy, but not because checkable fund shares constitute an addition to the money supply. Rather, the liquidity and checkability features of these assets permit their holders to reduce the amount of money they need to keep on hand to meet anticipated payments and to insure against future contingencies. This is also true, as we saw, of credit cards, which similarly provide their holders with access to an alternative payments system that economizes on money. By thus reducing the overall demand for money, MMMFs and credit cards encourage a higher rate of aggregate spending in the economy that results in a general rise in prices. However, the price increase associated with a given expansion of MMMFs is a "one-shot" phenomenon, whose magnitude is strictly governed by the corresponding reduction in the aggregate desired money balances of market participants. This sharply contrasts with inflation, which typically refers to a money-supply phenomenon involving a persistent decline in the purchasing power of the monetary unit that results from the creation of additional quantities of government fiat money, which, in theory, is limited only by the onset of a hyperinflationary currency breakdown.
Small-denomination time deposits refer mainly to federally-insured certificates of deposit (CDs) in denominations of less than $100,000 and are excluded from the TMS because they involve loans by the public to banks and thrifts.For details on institutional features of CDs, see Lester V. Chandler and Stephen M. Goldfeld, The Economics of Money and Banking, 7th ed. (New York: Harper & Row, 1977), pp. 148–49; also see Meyer, Monetary Economics, p. 88. As time deposits, CDs nominally are not cashable on demand, but are payable in dollars only after a contractually fixed period of time ranging from thirty days to a number of years. However, the fact that issuing institutions stand ready to redeem these liabilities in current dollars at any time prior to maturity does constitute a theoretical argument for their inclusion in the TMS at their current redemption value. On the other hand, depositors do have a strong incentive to abstain from cashing small CDs before their maturity dates, because issuing institutions typically assess heavy penalties—varying from forfeiture of accrued interest to loss of the original principal—in the event of premature redemption. The ultimate decision to exclude this item was also heavily influenced by the practical problem of obtaining the data necessary to permit a reasonable estimate of its value in current dollars, i.e., net of penalty assessments.
Components of M3 Not Included in M2Large-denomination time deposits, such as CDs issued in denominations of at least $100,000, are bona fide time liabilities, because they are not payable by the issuing institution before maturity.Chandler and Goldfeld, Money and Banking, pp. 148–49. Since they are not par value claims to immediately available dollars, they are excluded from the TMS. The same reasoning applies to the exclusion of term RPs and term eurodollars from the TMS. The shares of "institution-only" MMMFs are excluded from the TMS for the same reasons as the shares of the "general purpose & broker/dealer" MMMFs included in M2.
Components of L Not Included in M3U.S. Savings Bonds are instantly cashable at the U.S. Treasury (or at banks and thrifts acting in its behalf) at a fixed discount from their face value.Meyer, Monetary Economics, p. 152. As U.S. Treasury liabilities, moreover, their redeemability is "insured" by the full faith and credit of the Federal government. U.S. Savings Bonds are therefore included in the TMS at their redemption value, because they represent secure and current claims against the Treasury for contractually fixed quantities of the general medium of exchange.In 1946, Fetter recognized savings bonds as "immediate purchasing power," and, as part of a comprehensive anti-inflation package, recommended the absorption of savings bonds "redeemable on demand" by exchanging them for long-term bonds and life annunities. (Frank A. Fetter, "Inflation's Basic Causes: Too Much Money," Saturday Evening Post [July 13, 1946], p. 124.) Palyi adopts a definition of the U.S. money supply that includes U.S. Savings Bonds at redemption value. However, from our medium-of-exchange perspective, Palyi goes too far afield by including in the money supply "highly liquid" assets such as Treasury securities of less than one year's maturity, commercial paper and bankers' acceptances. On the other hand, we sympathize with Palyi's apparent support for the inclusion of the cash surrender value of life insurance policies in money-supply figures. See Melchior Paly, The Twilight of Gold, 1914–1936: Myths and Realities (Chicago: Henry Regnery, 1972), pp. 301–15. Albert G. Hart and Peter B. Kenen present a statistical definition of "liquid assets of the nonbank public," including U.S. Savings Bonds and the "net cash values of life insurance," which comes very close to the TMS. There are no significant omissioins, and the only clearly objectionalbe item is short-term government securities. See Albert G. Hart and Peter B. Kenen, Money, Debt and Economic Activity, 3rd ed. (Englewood Cliffs, NJ: Prentice-Hall, 1948), pp.3–6. In fact, U.S. Savings Bonds may usefully be treated as specific claims against "Treasury Cash," since this provides a rationale for the conventional omission of the latter item from money-supply statistics.Actually, "Treasury cash" refers to the small amount of Treasury-held gold which has not been monetized by the issue of gold certificates to the Fed in exchange for Treasure deposits. Nonetheless, since this "nonmonetized" gold stock may be converted into a stock of dollars at any time, via the issue of gold certificates to the Fed, it may be considered a monetary reserve for the redemption of savings bonds. On Treasury cash, see John G. Ranlett, Money and Banking: An Introduction to Analysis and Policy, 3rd, ed. (New York: John Wiley, 1977), pp. 60–67/
In contrast to savings bonds, shore-term Treasury securities are not payable before maturity and are therefore excluded from the TMS.
Memorandum ItemsThree items which are not included in any Fed measure of the money supply (Ml, M2, M3) or even of overall "liquidity" (L) find a place in the TMS. These are the demand and other deposits held by the U.S. government, foreign official institutions, and foreign commercial banks at U.S. commercial and Fed banks.
The somewhat mysterious exclusion of these items from money-supply measures is typically justified by one recent writer who claims that the deposits of these institutions "... serve an entirely different purpose than the holdings of the general public" or are "... viewed as being held for 'peculiar' reasons."Meyer, Monetary Economics, pp. 26–27. This overemphasis on the particular "motives" for holding money, as opposed to the importance of the quantity of money itself, is one of the modern legacies of the Keynesian revolution.In analyzing the Keynesian motives for holding money, Hart and Kenen cogently argue that "We cannot divide the cash balance of a given holder into definite parts representing each of these motives.... If, for example, he also has accumulated cash for speculative pruposes, he also has a margin of safety, so that he needs under the [precautionary] motive are swallowed up in those under the [speculative motive]. Besides, the different motives shad into one another. In analyzing them, it is less important to keep them distinct than to keep track of the common element that binds them all together—the adaption of business dealings to uncertainty." (Hart and Kenen, Money, Debt and Economic Activity, pp. 223–34.)
Moreover, there is nothing at all "peculiar" about the reasons for which such deposits are held. As one modern advocate of their inclusion in money-supply statistics points out:
The Treasury's deposits are not part of its reserve against money that it has issued, but are rather part of the general fund of the Treasury available for meeting general expenditures. Output is purchased and taxes are collected with the help of these deposits, and they would seem to be as much a part of the money stock with which the economy operates as are the deposits of state and local governments, which are included in adjusted demand deposits. Much the same may be said of Treasury deposits at Federal Reserve Banks. Also foreign-owned deposits at commercial banks are included, so why not foreign-owned deposits at the Federal Reserve?Barger, Money, Banking and Public Policy, p. 53.
Finally, pre-Keynesian monetary theorists routinely and properly counted "U.S. Government Deposits" in the "Total Deposits" component of the money supply. See, for example: Edwin Walter Kemmerer, High Prices and Deflation (Princeton, NJ: Princeton University Press, 1920), p. 27; Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914–1946, 2nd ed. (Indianapolis: Liberty Press, 1979), pp. 98, 183, 265; and Palyi, The Twilight of Gold, p. 36. This was and is the proper procedure, because it is variations of the total stock of money owned by all economic agents that are of vital importance in analyzing and attempting to forecast inflation and business-cycle phenomena.
There is an undeniable negative trend in European employment and wages that is a direct consequence of constantly increasing intervention in the economy.
Original Article: "European Shadow Unemployment Is a Real Problem"
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Does cheap money and credit make us richer? Does more money and credit create more stuff, or better stuff? Do they make us happier and more productive? Or do these twin forces actually distort the economy, misallocate resources, and degrade us as people?
These are fundamental questions in an age of monetary hedonism. It is time we began to ask and answer them. Millions of people across the West increasingly recognize the limits of monetary policy, understanding that more money and credit in society do not magically create more goods and services. Production precedes consumption. Capital accumulation is made possible only through profit, which is generated by higher productivity, thanks to earlier capital investment. At the heart of all of it is hard work and human ingenuity. We don’t get rich by legislative edict.
How we lost sight of these simple truths is complex. But we can begin to understand it by listening to someone smarter! The great financial writer James Grant probably knows more about interest rates than anyone on the planet. So we should pay attention when he suggests America’s four-decade experiment in rates that only go down, down, and down appears to be over.
The striking thing about the bond market and interest rates is that they tend to rise and fall in generation-length intervals. No other financial security that I know of exhibits that same characteristic. But interest rates have done that going back to the Civil War period, when they fell persistently from 1865 to 1900. They then rose from 1900 to 1920, fell from 1920 or so to 1946, and then rose from 1946 to 1981—and did they ever rise in the last five or 10 years of that 35-year period. Then they fell again from 1981 to 2019–20.
So each of these cycles was very long-lived. This current one has been, let’s say, 40 years. That’s one-and-a-half successful Wall Street careers. You could be working in this business for a long time and never have seen a bear market in bonds. And I think that that muscle memory has deadened the perception of financial forces that would conspire to lead to higher rates.
—James Grant, speaking to the Octavian Report
Do the brilliant young Ivy League quants working at central banks and investment houses really understand this history? Why should they? The baseline cost of capital has been less than 3 percent throughout their careers. Cheap credit and rising stock markets are all they know. Lots of projects make sense when funded with debt rather than equity; or as we might say, with other people’s money. And when those projects go public, the numbers go up!
Until they don’t.
One fears our under-forty financiers really have little understanding of the basic function of interest rates, a function Mises explained so clearly more than one hundred years ago. Interest rates should act as “prices,” as Mr. Grant states, or more precisely, as exchange ratios. They bring together borrowers and savers, thus performing a critical function of capital markets and allocating resources to their best and highest uses.
Yet, in 2022, interest rates are widely viewed as policy tools. They are economic controls, determined and tinkered with by technocratic central bankers when the economy overheats or chills. We expect central banks to “set” interest rates, an impossibility in the long run but also a perverse goal in a supposedly free economy.
What other prices do we want centrally planned? Food, energy, housing? Should the Fed direct how many cars GM produces in 2022, the price of a bushel of wheat, or the hourly wage for an Amazon warehouse employee? Is this the Soviet Union?
Of course not. But those who view money as a political creation are once again prone to fundamental errors. They don’t understand money qua money. They certainly cannot imagine a world without “monetary policy,” which is plainly a form of central planning.
Austrian economists like Carl Menger and Ludwig von Mises illustrated how money can arise on the market as simply the most tradeable commodity, with the most desired features of “moneyness.” We don’t need state treasuries or public banks to issue it. And we should care about the quality of money, much as we care about the quality of the goods and services we exchanged for it.
But in fiat land, that quality goes down, down, and down. Everything politics touches gets worse; why would we expect money to be an exception?
This four-decade experiment in price fixing of interest rates, described as cyclical by Mr. Grant, not surprisingly corresponds with a dramatic rise in the US M1 money supply. In January 1982, the Fed’s “narrow money” was less than $450 billion. In January 2022, it was more than $20 trillion—roughly forty-four times bigger!
We can call this monetary hedonism: a combination of low rates and ever-growing money supply designed to create an illusion of real wealth. Monetary hedonism is an arrangement which encourages our whole society to live beyond its means, using monetary policy rather than direct tax-and-spend policy. It directly benefits both the Beltway and the banking classes, who enjoy an exorbitant political privilege due to their proximity to newly created cheap money. After all, Congress can service $30 trillion+ of debt with interest payments of less than $400 billion—thanks to a weighted average interest rate of only about 1.6 percent on that debt. And it’s awfully nice for spendy politicians to know the Fed stands ready to create an instant market for Treasurys owned by commercial banks.
To be sure, cheap money and low rates benefit all of us in a shortsighted sense. They make the cost of doing business lower and enable corporations to carry more (tax-deductible) debt. They make house payments and mortgages more affordable. They make college and cars and dinners and vacations purchased on credit cheaper. They make it easy and fun to spend.
Yet there is always a price to be paid for unearned profligacy. The hangover follows the party. We all sense it. A reckoning is coming for the inflationary US dollar. That reckoning will come for entitlements, for congressional spending, for deranged US foreign policy, and for Treasury holders.
But this economic reckoning is not the full story. We must also consider the incalculable but rarely considered social and cultural costs.
What happens to a society when spending is encouraged and saving is for chumps?
Our grandparents understood the power of compound interest rates. They could save 10 percent of their income at, say, 10 percent interest rates, and their nest egg doubled roughly every seven years. They could get ahead simply, if not easily, through sheer thrift. They could follow the most human of compulsions, the deep-rooted desire to put money away for a rainy day. They could leave something for future generations. Even when consumer inflation approached 10 percent in the 1970s and ’80s, they could get 14 percent on a simple CD or money market account!
Compare their experience to that of a hapless young person today, attempting to save up a 20 percent down payment on a modest $300,000 house. In 2022, with inflation at least 6 points above simple savings rates, this seems like a pipe dream.
This is the perversity of our times: with inflation rates higher than savings rates, the overwhelming incentive is to spend and borrow rather than produce and save.
Bitcoiners already understand the problem. The simple economic concept of time preference explains so much: some people are more than willing to forego consumption today to reap a larger reward later—even if that “later” is beyond their lifetimes. Time preference is the only way to make sense of interest rates and their critical function in society; interest rates reflect the relative preferences of borrowers and savers. Manipulation of interest rates by central banks severs this critical mechanism, allowing bubbles to occur in the form of new credit without new saving.
Without interest rates determined by time preference, society’s signals become mixed up. We all understand, axiomatically, why humans prefer something today (certain) over something in the future (uncertain). We may die unexpectedly, our financial positions could change radically due to unforeseen events, or external conditions could influence our desires. We all understand borrowing money to buy a dream home at age forty instead of paying cash at age ninety. We all understand why lenders, given the uncertainty and forbearance that goes with lending, want to be paid interest for their risk.
It is a matter of time.
Everything we do in this corporeal world has a temporal element. When governments or central banks interfere with money and interest rates, they distort the vital information provided by real people’s relative time preferences.
Hans Hoppe, in his infamous Democracy, the God That Failed, goes further—describing time preference as the essential civilizing or decivilizing element in society.
The saver-investor initiates a “process of civilization.” In generating a tendency toward a fall in the rate of time preference, he—and everyone directly or indirectly connected to him through a network of exchanges—matures from childhood to adulthood and from barbarism to civilization.
When lots of people save and invest, across society, we call it capital accumulation. And as Hoppe posits, this is not just economic—it is cultural and civilizational. Thrifty people like our grandparents, generation after generation, bequeathed to us an almost unimaginable world of affordable food, water, habitation, transportation, communication, medicine, and material goods of every kind. They did this out of love and sacrifice, but they also did it because the monetary system rewarded saving.
Today, the opposite is true. Monetary policy across the West is an agent of decivilization. It upends the natural, innate human impulse to save for a rainy day and leave our children better off. It encourages consumption over production, profligacy over thrift, and political promises today that will be paid for by savers and taxpayers tomorrow. Monetary policy degrades and deforms the economy, but ultimately its corrosive effects impact the broader culture.
In short, it makes us worse people.
Does bitcoin fix this? Maybe. In the eyes of many maxis (or “bitcoin realists,” per Cory Klippsten), certainly. But time is running short. We face a toxic mix of high–time preference junkie politicians and central bankers who are only too willing to provide the fix. We are depleting capital and borrowing against the future. We consistently display high time preference, both as individuals and as a society. This cannot end well for our children and grandchildren.
It is past time for all of us to demand better money, not better monetary “policy.” It is time for money to comport with human nature and reward the saving impulse. It is time for us to reconsider our bequest to future generations and make their lives better and more prosperous than ours.
Monetary hedonism, in the form of low interest rates, is coming to an end. The hangover will not be pretty. Readers would be well served to prepare themselves and act accordingly. Politicians and bankers are unlikely to do this for us.
[This article first appeared in the fall 2022 issue of Bitcoin magazine]
Once upon a time, the USA had sound, reliable money. Then, a small group of "really intelligent" people decided to "improve" it. We know the rest of the story.
Original Article: "The Rise and Fall of Good Money: A Tale of the Market and the State"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Federal Reserve has yet to get price increases anywhere near its own arbitrary 2-percent goal, but a mild slowing in growth rates has Biden claiming that price inflation is "falling."
Original Article: "Real Wages Fall for the Twenty-First Month as Rent and Food Prices Keep Rising"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In a market economy, gold is sound money. There is no need for monetary authorities when gold rules.
Original Article: "A Short Essay on Sound Monetary Policy"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The fiat monetary system is slowly breaking down, taking the economy with it.
Original Article: "The Present Fiat Monetary System Is Breaking Down"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Only Father Time helps us cut through the policy nonsense and understand interest rates conceptually.
Original Article: "Father Time versus Central Bankers"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Twenty-six years ago, the debate was over whether or not the target inflation rate should be raised from zero to 2 percent. Now we're being told it should be 4 or 6 percent.
Original Article: "No Surprise: Wall Street Wants to Raise the Target Inflation Rate above 2 Percent"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Long before there was the infamous German inflation of 1923, the Reichsbank created the scenario of monetary debasement.
Original Article: "The Reichsbank: Germany's Central Bank Lays Foundation of Monetary Disaster"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Investors should not care whether the Fed pivots or not if they analyze investment opportunities based on fundamentals and not on monetary laughing gas.
Original Article: "Why Investors Are Obsessed with the Fed "Pivot""
This Audio Mises Wire is generously sponsored by Christopher Condon.
One hardly can imagine a better tool of social control than a digital currency. Not surprisingly, U.S. monetary authorities are moving in that direction.
Original Article: "Digital Currency: The Fed Moves toward Monetary Totalitarianism"
This Audio Mises Wire is generously sponsored by Christopher Condon.
All of the excess of unproductive debt issued during the period of complacency will exacerbate the problem in 2023 and 2024.
Original Article: "Will Global Rate Hikes Set Off a Global Debt Bomb?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The 2004 Nobel Prize in economics was awarded to two economists for their claim that "technology shocks" cause boom-bust cycles. They have it wrong.
Original Article: "Do "Technology Shocks" Create the Boom-Bust Cycles?"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
While we speak of a desire for honest money, the larger problem is that the Federal Reserve System cannot coexist with an honest money regime.
Original Article: "Honest Money in Dishonest Hands"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
Insurance protects individuals from events that cannot be foreseen. As Murray Rothbard noted, however, deposit insurance exists to "protect" a system that is inherently bankrupt.
Original Article: "Murray Rothbard Was Right: Deposit "Insurance" Is Not Insurance at All"
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. '
Recorded at the Arizona Biltmore Hotel in Phoenix, Arizona on October 7th, 2022.
Sponsored by Remy Demarest.
Recorded at the Arizona Biltmore Hotel in Phoenix, Arizona on October 6th, 2022.
Sponsored by Tracy and Joe Matarese.
What happens when banks lend money? It depends the lending process itself. If lending comes about because of an expansion of credit, then it creates problems.
Original Article: "Does Bank Lending by Itself Set Off Boom and Bust Cycles?"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
Progressives are fond of telling us that we are under a "social contract" with the government, in effect justifying whatever abuses authorities inflict. Putting up with massive inflation is the latest iteration of this so-called contract.
Original Article: "The Fraudulent Social Contract of Bad Money Regimes"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
The US dollar is not the world's "reserve" currency because of responsibility on behalf of the monetary authorities. Instead, the dollar's "strength" wages from the USA's self-appointed role as the world's protector.
Original Article: "It's All about the Benjamins: Why the Dollar Determines US Policies"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
UK entrepreneur and founder of the Cobden Centre Toby Baxendale joins Bob to discuss meeting Hayek, the history of economists supporting 100% reserve banking, and the tools central banks and governments will use to enact "financial repression."
Standard economic theory states that as an economy grows, the money supply should grow with it. Appealing to the Austrian tradition, Frank Shostak shows that belief is mistaken.
Original Article: "Should the Fed Increase the Money Supply in Response to a Growing Economy?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Fed's entire "strategy" can be summed up as "hike 'til it breaks, cut 'til it inflates." That's the best all those PhDs at the Fed have managed to come up with.
Original Article: "The Fed Is Finally Seeing the Magnitude of the Mess It Created"
This Audio Mises Wire is generously sponsored by Christopher Condon.
This is bad news for the administration, which has repeatedly attempted to downplay the relentless increases to the cost of living being inflicted on Americans after years of deficit spending, fueling inflationary monetary policy.
Original Article: "August's Price Inflation Soared, and That Means Earnings Fell Yet Again"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Powell isn't a villain for pulling his foot off the money-creation accelerator a little. No, Powell's villainy stems from his role in helping create the boom in the first place.
Original Article: "Blame the Fed for Both the Inflationary Boom and the Inevitable Bust"
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.
Powell said that moving forward "we think it's time to just go to a meeting by meeting basis." Translation: "Things might go even more off the rails at any time, so let’s just play it by ear."
Original Article: "The Fed Is Making It Up as It Goes, So It Ditched Forward Guidance"
This Audio Mises Wire is generously sponsored by Christopher Condon.
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.
June was the fifteenth month in a row during which price inflation outpaced earnings growth. June's gap is also among the biggest we've seen in decades.
Original Article: "Inflation Hits 9.1 Percent after Months of Empty Talk at the Fed"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Jeff and Bob discuss the effect of rising interest rates on Uncle Sam's ability to service debt—and promote the increasingly less radical idea that a default on Treasury debt is both inevitable and good.
Jeff's article on rising rates: Mises.org/HAP351-1 House Budget Committee report on higher interest rates and US debt service: Mises.org/HAP351-2 Rothbard on the ethics of debt repudiation: Mises.org/HAP351-3
The relative lack of inflation in Japan doesn't mean real wages haven't fallen.
Original Article: "How the BOJ Created "Noninflationary" Money While Ruining the Japanese Economy"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The relative lack of inflation in Japan doesn't mean real wages haven't fallen.
Original Article: "Here We Go Again: The Fed Is Causing Another Recession"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Tightening the interest rate hurts both bubble and solid businesses. The Fed should just focus on reducing the money supply.
Original Article: "The Fed's Tightening Will Only Drag Out the Economic Slump"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Ben Bernanke once claimed that a monetary gold standard caused economic instability. He failed to mention that his fiat money standard causes the boom-and-bust cycles.
Original Article: "Contra Ben Bernanke, the Gold Standard Promotes Economic Stability"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Federal Reserve was supposed to prevent recessions that people blamed on the lack of central banking. Not surprisingly, the post-Fed recessions have been worse.
Original Article: "How Bad Were Recessions before the Fed? Not as Bad as They Are Now"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Did you feel happy when the government gave you a check paid with printed money? Watch now as your daily groceries, gas and power become unaffordable.
Original Article: "How Governments Expropriate Wealth with Inflation and Taxes"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Real deflation—both monetary inflation and price inflation—is necessary, and that can only be accomplished if the Fed can resist the temptation to keep doing what it's been doing since 2008.
Original Article: "What Will It Take to End Rampant Home-Price Inflation?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Mises.org economist and senior editor Ryan McMaken joins Jeff and Bob for a hard look at the economic reality Americans face today.
Shostak on the true definition of a recession: Mises.org/HAP349-Shostak Bob's article in the QJAE: Mises.org/HAP349-Murphy
Skyrocketing asset prices are great for hedge fund managers and Wall Street types, but they increasingly drive ordinary people into unsustainably large amounts of debt.
Original Article: "Are Today's Homeownership Rates Sustainable?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Today, inflation and prices are soaring. We know that Federal Reserve monetary policy is the cause. But why didn't something similar happen after the 2008 financial crash?
Bob Murphy and professor Ross McKitrick discuss the government policies, Fed actions, and banking movements that lead up to the 2008 crisis, and why the current economic situation is different.
Ross McKitrick on inflation then versus now: Mises.org/HAP-McKitrick Bob explains how Keynesians missed the latest bout of price inflation: Mises.org/HAP347-Murphy Bob's book Understanding Money Mechanics: Mises.org/Mechanics
Ignorant politicians who create no wealth can only impede great visionaries like Henry M. Galt from creating wealth with monetary chicanery, antitrust litigation, labor laws, and other regulatory measures.
Original Article: "The Great Capitalist Novel"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Jeff and Dr. Murphy discuss a recent interview with IMF economist Manmohan Singh in the context of central banks co-opting digital technology for bad ends.
Find Manmohan Singh's Interview: Mises.org/HAP-Singh Janet Yellen, "I was wrong about inflation": Mises.org/HAP-Yellen Kristoffer Hansen on the basics of central bank digital currencies: Mises.org/HAP-Hansen Block and Barnett on Maturity Mismatching: Mises.org/HAP-BlockBarnett
Recorded at Maggiano’s Little Italy in Orlando, Florida, on May 14, 2022.
Slides used in this talk are available here.
Special thanks to Greg and Julann Roe for sponsoring this event.
Recorded at Maggiano’s Little Italy in Orlando, Florida, on May 14, 2022.
Special thanks to Greg and Julann Roe for sponsoring this event.
In the face of the coming hardship, central bankers and globalist institutions are going to demand more power to respond to the crisis they created. Bitcoin gives their political opponents a weapon against them.
Original Article: "From El Salvador to Africa, the Next Currency War Pits Populists against Bankers"
This Audio Mises Wire is generously sponsored by Christopher Condon.
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.
Will Japan ever change course on its negative interest rates? Only if voters begin to realize that the lack of inflation to date in Japan is simply good luck.
Original Article: "Why the Yen Fell While the Dollar Rallied"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Washington regards the entire world as its "sphere of influence." But now Beijing is looking to follow the US playbook on hegemony and expand Beijing's network of military bases abroad.
Original Article: "Expect Washington to Throw a Fit over China's New Deal with the Solomon Islands"
This Audio Mises Wire is generously sponsored by Christopher Condon.
It is interesting that the founder and leader of the market monetarists declared in January 2020 that the world was about to enter a "golden age" of low inflation for the Federal Reserve.
Original Article: "Keynesians and Market Monetarists Didn't See Inflation Coming"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In a recent episode of “The Problem With Jon Stewart,” the former Daily Show host asks former president of the Kansas City Fed Thomas Hoenig why the Fed couldn’t have bailed out homeowners, or just “quantitative ease” away the Treasury’s debt. Hoenig gives muddy answers, so Bob tries to clarify.
Mentioned in the Episode and Other Links of Interest: Jon Stewart’s full interview with Thomas HoenigJon Stewart skewers Paul KrugmanJon Stewart interviews Kelton and Gray on MMTBob’s book Understanding Money Mechanics For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
Jeff and Bob discuss the mechanics—and pain—required to put an end to inflation.
Read Bob's Understanding Money Mechanics: Mises.org/Mechanics
Some blame high prices, wages, the Ukraine war, or the weak recovery. The fact is currency destruction is at the heart of generalized price rises everywhere.
Original Article: "Commodities Do Not Cause Inflation. Money Printing Does."
This Audio Mises Wire is generously sponsored by Christopher Condon.
Jeff talks to Keith Weiner of Monetary Metals about why gold still plays a major role in the global economy.
Listen to Bob's interview with Keith at mises.org/BMS234 Find out more about Monetary Metals at monetary-metals.com
Saudi Arabia could flee to gold or cryptocurrencies to escape the money-printing machine, but it won't replace the US dollar with an inferior fiat currency.
Original Article: "Why Saudi Arabia Won't Abandon Dollars for Yuan"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Keith Weiner is founder and CEO of Monetary Metals, an investment firm that pays interest on gold, and the founder of the Gold Standard Institute USA. Weiner’s mission is to provide entrepreneurial services and education to help restore gold as the world’s money par excellence.
Mentioned in the Episode and Other Links of Interest: The YouTube version of this interviewKeith Weiner’s bio at Monetary MetalsWeiner’s Forbes article on gold and silver coins not circulating For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
Imposing sanctions will advance the reach of surveillance capitalism while strengthening the power of states to control the financial system overall. The end result will be a lower standard of living and a less free economy.
Original Article: "The West's Russia Sanctions Could Lead to Many Unpredictable and Unpleasant Outcomes"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
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.
A central bank whose policies accommodate irresponsible deficit spending by the federal government is a menace to society, unleashing uncontrollable forces.
Original Article: "Inflation: Who or What Is the Culprit?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Price inflation has been accelerating upward since April of last year. Yet the Fed has done virtually nothing. What's the Fed waiting for?
Original Article: "With Inflation at a 40-Year High, the Fed Is Too Afraid to Act"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
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.
The evolution from gold standard to gold exchange standard to the dollar fiat system is one based largely on deception and broken promises.
Original Article: "Today's Fiat Dollar Standard Is Founded in Lies"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Fannie Mae is helping ensure easy money flows to apartments. That means multifamily prices are heading skyward like asset prices overall.
Original Article: "Rising Rents and Cheap Money Flowing—So Apartment Prices Are Soaring"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Monetary inflation results in a general rise in prices, often called "price inflation." But rising prices are not always "inflation." In any case, more government regs and subsidies won't help.
Original Article: "When Higher Prices Are Not Inflation"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In its effort to patch together a working financial system out of postwar crises, the Federal Reserve would wildly exceed its mandate, flooding the world with dollars.
Original Article: "Money and Banking in the US after the Crises of the 1970s and '80s"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Thanks to vast regulatory powers, regimes have many tools and many advantages in propping up fiat currencies when faced with competition from other currencies.
Original Article: "What the Regime Will Do to Fight Private Digital Currencies"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Bob continues his series on Klaus Schwab, explaining the WEF’s plans for redesigning the world, and providing quotes from Schwab’s book on the fourth industrial revolution.
Mentioned in the Episode and Other Links of Interest: Part 1 of this seriesThe WEF’s bio for its founder, Klaus SchwabSchwab’s books The Fourth Industrial Revolution and Covid-19 and the Great ResetThe WEF’s Global Redesign Summit and the Global Redesign InitiativeNick Buxton’s article on Davos and the danger to democracyForbes’ article on Schwab the power brokerFEE article on the socialist roots of fascism1983 article in Harper’s on the Bank of International Settlements (BIS) For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
Bob starts a series looking into Klaus Schwab, founder of the World Economic Forum and, along with Prince Charles, proponent of the “Great Reset.”
Mentioned in the Episode and Other Links of Interest: Klaus Schwab and Prince Charles promoting the “Great Reset”The World Economic Forum’s page on the Great ResetAn example of a session from the WEF’s Davos Agenda 2021 conferenceThe WEF’s bio for its founder, Klaus SchwabSchwab’s books The Fourth Industrial Revolution and Covid-19 and the Great ResetThe video of Schwab explaining his connection to KissingerThe “red pill” documentary Wake Up CallMurphy’s new book from the Mises Institute, Understanding Money Mechanics For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
Overall, at least 50 percent of the consumer price index in Japan appears to be government controlled, which is reflected in the significant growth of government spending on subsidies.
Original Article: "Japan's Inflation Is Hidden behind Central Bank–Financed Subsidies"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
When we ask ourselves the question, “Can states survive without fiat currency?” the answer is clearly yes.
Original Article: "Ending Fiat Money Won't Destroy the State"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The Fed admits inflation is a problem, so now begins the search to find a fix that doesn't involve a recession or anything else that might allow the economy to heal its malinvestments.
Original Article: "Welcome to a New Chapter in the Latest Boom-Bust Cycle"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Thanks to covid shutdowns, declining productivity finally brought price inflation to the fore. But the world's governments have learned nothing and cling to the same inflationist policies.
Original Article: "Western Economies Are Self-Destructing with Inflation, Debt, and Taxes"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The Fed may slow or eliminate new bond purchases but is not planning to sell. Meanwhile, producer prices have skyrocketed and Americans are consuming more but producing less. Get ready for entrenched price inflation.
Original Article: "The Fundamentals Point to Inflation That's Much More than 'Transitory'"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Deflation empowers the citizen by allowing her modest savings to purchase more goods over time. Inflation empowers the state by reducing the size of its enormous debts in real terms—and through the inflation tax.
Original Article: "Price Deflation and the Horrors of Falling TV Prices"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The huge amounts of monetary inflation of 2020 have indeed been translated into price inflation in 2021. Yet with the Fed now poised to slow things down, we might find asset inflation could suddenly go into reverse.
Original Article: "The Economy May Be Finally Peaking, and the Fed Won't Help Matters"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Easy money monetary policy only serves to weaken and destroy savings and investment. And that means weaker future economic growth.
Original Article: "Money Supply Growth Is Slowing—That Points to a Slowing Economy"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
If the private sector does not accept a currency as a general means of payment and a store of value, the currency becomes worthless and ceases to be money. Ultimately, it becomes useless paper.
Original Article: "When Fiat Currency Stops Being Money"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
It took many centuries for regimes to secure the sort of prestige and power necessary to claim a monopoly over money. From the state's perspective, it has been worth it.
Original Article: "How Governments Seized Control of Money"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The Bank of Canada's stated mission is "to preserve the value of money by keeping inflation low and stable." Yet, the BOC works to inflate away the value of Canadians' purchasing power every single day.
Original Article: "The Bank of Canada's Failed Mission to 'Preserve the Value of Money'"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
When prices fall as a result of rising wealth that's good news. But deflation is also good news when it follows the bursting of a financial bubble caused by money creation.
Original Article: "We're All Talking about Inflation, but Deflation May Also Be on the Way"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In one recent thread, Weisenthal mocked the people worried about the falling purchasing power of the US dollar, and claimed that it would be immoral for currency to maintain its value over time.
Original Article: "Joe Weisenthal Thinks Debasing the Dollar Is the Moral Thing to Do"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
This book provides the intelligent layperson with a concise yet comprehensive overview of the theory, history, and practice of money and banking, with a focus on the United States. Although the author considers himself an Austrian school economist, most of the material in this book is a neutral presentation of historical facts and an objective description of the mechanics of money creation in today's world.
The book is intended to be a reference for all readers, whether "Austrian" or not, and to bridge the gap by providing a crash course in the necessary theory and history while keeping the discussion tethered to current events.
— From the Introduction
The fact that various electronic money transfers are taking place does not mean that we do not require cash any longer. On the contrary, the fact that the cash exists enables those transfers to take place.
Original Article: "'Going Cashless' Isn't as Easy as It Seems"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
According to the Marxists and their fellow travelers, inflation is good because it transfers wealth from creditors to debtors, and debtors are "the 99 percent." But inflation doesn't work that way.
Original Article: "No, Inflation Is Not Good for You"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
After thirteen years with on average negative real returns to conservative savings, it is time to require the Federal Reserve to address its impact on savers.
Original Article: "Since 2008, Monetary Policy Has Cost American Savers about $4 Trillion"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Contrary to popular thinking, there is no such thing as a price level that should be stabilized by the central bank in order to promote economic prosperity.
Original Article: "Is Price Stability Really a Good Thing?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The Nigerian central bank uses all the same tools as other central banks. And it uses them a lot.
Original Article: "How Nigeria's Central Bank Inflates the Money Supply"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Tho Bishop, guest-hosting A Neighbor's Choice, interviews Jonathan Newman, author of The Broken Window.
Tho and Jonathan discuss the supposedly transitory aspect of inflation, the overshadowing of economics by central planning, Keynesian economics, and more.
Purchase The Broken Window online at Mises.org/BWindow.
In an age of growing productivity and technological advancement, goods would be getting cheaper every year. This is a reason why price inflation rises more slowly than money supply inflation.
Original Article: "In a Free Economy, Prices Would Be Going down, Not Up"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Any economist should have been able to see that having the monetary spigot on full blast to “stimulate” would raise prices down the road. We are now down that road.
Original Article: "The Federal Reserve’s Assault on Savers Continues"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The idea that supply chain problems are “driving inflation” gets the causation backward. It’s money supply inflation that’s causing the supply chain problems, not the other way around.
Original Article: "The Fed's Inflation Is behind the Supply Chain Mess"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The One Ring of power stands for the particularly evil idea of creating a state of states, a world government, a world state. A one-world fiat currency is similarly dangerous.
Original Article: "A Global Fiat Currency: 'One Ring to Rule Them All'"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
It is not possible to replace productive credit by means of the easy monetary policies of the central bank. If this could have been done, then the world would have already ended poverty.
Original Article: "'Idle Resources' Are Problems Caused by the Central Bank"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Policy normalization—defined as closing down the nonconventional toolbox and restoring a well-functioning price-signaling mechanism to the bond market—is difficult but possible.
Original Article: "Three Things the Fed Must Do to Normalize Bond Markets"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
It was government policies that kick-started the engine of financial innovation, wrongly blamed by many in the press and left-leaning academia for this increased economic instability.
Original Article: "How the Fed's Easy Money Spurred Today's Financial Frenzies"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Years of bubbles and malinvestment have a downside: the destruction of the productive, wealth-building parts of the economy. And that could mean higher interest rates.
Original Article: "Why a Bear Market in Bonds Points to a Weakening Economy"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
We wrap up our look at Murray Rothbard's sprawling two volume An Austrian Perspective on the History of Economic Thought with Dr. Joe Salerno, Rothbard's friend and colleague. This show covers the second volume exclusively, starting with the Frenchman JB Say and working through Ricardo, the British Currency School, John Stuart Mill, and finally Karl Marx. Salerno has penetrating insights about all of these thinkers, from Say's understanding of production to Ricardo's erroneous systemization of Adam Smith. He also has great background regarding Mises and the Currency School vs. Banking School debate, on free banking and full reserve banking, and on Mill's deep misconception of money. The show ends with a thorough look at Rothbard's treatment of Marx over more than 100 pages: Marx's sick view of man as a collective, his hatred for the division of labor, his absurd and deterministic "laws of history," his materialism as a replacement for spiritualism, and the underlying folly of "superabundant production."
You don't want to miss this show!
Additional Resources Read Rothbard's important work: Mises.org/APHET
Why do individuals desire to have money, which cannot be consumed and produces nothing? To provide an answer to this one must go back in time to establish how money emerged.
Original Article: "Why Does Money Have Value? Not Because the Government Says It Does."
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The current surge in inflation is not due to a shortage of supply as central banks want us to believe. It is primarily due to soaring consumer demand fueled by monetary creation.
Original Article: "'Shortages' Aren't Causing Inflation. Money Creation Is."
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Let's stop pretending default is unprecedented. The US defaulted on debts in 1934 and again in 1979. Today it engages in de facto default through financial repression and monetary inflation.
Original Article: "Yellen Is Wrong. The US Government Doesn't Always Pay its Debts."
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
As inflation becomes more obvious, governments will be blaming businesses for causing the inflation that policymakers have fueled. This is a step on the way to price controls.
Original Article: "Inflation-Loving Governments Are Now Blaming Private Businesses for Inflation"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The new "2 percent average" standard from last year helped the inflationists, but there are now calls for scrapping the "too low" 2 percent inflation limit altogether.
Original Article: "Too Much Inflation? Just Raise the Inflation Target!"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
A euro collapse, rather than gas prices and bottlenecks, is the most likely source of sustained high CPI inflation in Europe following the Merkel era.
Original Article: "Europe Faces a Fragile Economy as the Merkel Era Ends"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
An economic depression is not caused by a decline in the money supply per se, but results from a shrinking pool of savings made possible by a previous bout of monetary inflation.
Original Article: "Before a Bust, There Is Always a Boom (and Malinvestment)"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Some fed officials simply shrugged off what was an obvious conflict of interest when they traded stocks and real estate holdings while making policy. The rules don't apply to central bankers.
Original Article: "You'll Be Shocked the Learn There's Corruption at the Fed"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Without establishing the underlying causes of boom-bust cycles, employing policies in response to changes in economic indicators to counter economic cycles is likely to destabilize the economy.
Original Article: "Can Economic Data Explain the Timing and Causes of Recessions?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The Fed’s apparent plan to somehow get to full employment and then deal with inflation sounds nice, but reality could easily derail the plan. Meanwhile, job growth is low and prices are rising.
Original Article: "The Fed's Plan Is Failing: Stagflation Looms as Job Growth Stalls"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
There won't be a taper tantrum if the Fed seriously moves toward tapering. Investors now understand how the game works. Tapering doesn't actually mean the end of monetary inflation, and everyone knows it.
Original Article: "Don't Be Fooled by the Fed's Taper Talk"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The collapse of the monetary order in 1971 reflected the massive dislocations and malinvestment of resources that ultimately turned the decade into one crisis after another. Keynesians are doing something similar today.
Original Article: "The Great Keynesian Coup of August 1971: Fifty Years Later"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In 1971, Nixon used a fiscal crisis to justify severing the dollar's last connection to gold. It was the same old story: "we must vastly expand government power because of a 'crisis.'" The government never gives up these new powers.
Original Article: "How Nixon and FDR Used "Crises" to Destroy the Dollar's Links to Gold"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Bob gives a brief history of money in the United States, explaining that the dollar was much “harder” in, say, 1810 than it was in 1910. This explains why there was significant consumer price inflation even in 1970, the year before Richard Nixon officially severed the dollar’s link to gold.
Mentioned in the Episode and Other Links of Interest: Bob’s chapter in the new book, Understanding Money Mechanics, discussing the history of the US gold/silver standardsHis chapter on Mises’ theory of the business cycleBob’s articles discussing the 50th anniversary of Nixon closing the gold window: (1) Basic intro, (2) discussing the different regimes of the US gold standard, and (3) explaining the different inflation rates and the connection to Austrian business cycle theory [Note that this third article hadn’t posted as of the original publication of the podcast episode; this link will be updated when available.]Bob’s article in the Quarterly Journal of Austrian Economics on Mises’ theory of the business cycle. For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
Fifty years after Nixon closed the gold window, prices are heading toward 1970s-era increases. Yet the Fed cannot increase interest rates as long as the politicians keep creating billions of new debts.
Original Article: "The Secret Ronald Reagan Told Me about Gold and Great Nations"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Even at a "mere" two-percent level, cumulative price increases over time are nothing to scoff at. Even worse, if we look at what people really spend money on, price inflation doesn't much reflect the conclusions of "official" stats.
Original Article: "Two Percent Inflation Is a Lot Worse Than You Think"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In 1971, David Rockefeller favored a “new international monetary system with greater flexibility” and “less reliance on gold.” Seeing an opportunity to expand his own power, Richard Nixon enthusiastically embraced the scheme.
Original Article: "How Nixon and the Rockefellers Teamed Up to Destroy the Dollar"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Abstract: Recent debates in monetary theory have centered on so-called free banking and the role of banks in providing money in the form of fiduciary media in a pure market economy. This paper examines how and to what extent fiduciary media can emerge in a pure market economy. Based on the theory of value, it is argued that those economists are mistaken who claim that money substitutes must in all cases be interpreted as being money titles. Those economists too are mistaken, however, who claim a large role for the circulation of fiduciary media in a pure market economy. It is argued that holding fiduciary media in one’s cash balance is an entrepreneurial error, as fiduciary media by their nature do not have the qualities people demand in holding money. Money is the comparatively most certain good and the present good par excellence, qualities that fiduciary media do not have. Holding fiduciary media instead of money is therefore an entrepreneurial error, and like all errors in the free market, it will tend to be eliminated in the process of entrepreneurial profit and loss, leading to the virtual disappearance of all fiduciary media from the market economy.
JEL Classification: B53, E22, E51, G21
Kristoffer J. Mousten Hansen (kristoffer.mousten_hansen@uni-leipzig.de) is research assistant at the Institute for Economic Policy at the University of Leipzig.
The author would like to thank Mr. Karras Lambert, Dr. Tate Fegley and Dr. Karl-Friedrich Israel for comments on an earlier draft of this paper, as well as Dr. Salerno, Dr. Thornton, Dr. Newman and the other participants in the 2020 Mises Institute Summer Fellows’ Seminar, where an earlier version of the paper was presented, and the participants in the session on institutional analysis of the 2020 Southern Economic Association meeting. Two anonymous reviewers also provided helpful comments that significantly improved the paper. The final version was completed during a stay as visiting fellow at the American Institute for Economic Research, whose support is gratefully acknowledged.
There has in recent decades been a fierce debate among economists and monetary theorists following in the footsteps of Ludwig von Mises between the so-called free banking school, which admits a large role for fractional reserve banking in the monetary system, versus what we here will call the full-reserve school, which denies any social benefit from fractional reserve banking and the issuance of fiduciary media. A lot of the controversy has centered on whether fiduciary media—money substitutes not covered by reserves—are fraudulent or not, and therefore whether they are at all legitimate in a pure free market based on complete respect for property rights and freedom of contract.
In this article the issue of fraud will be sidestepped and the focus will be on the question of the emergence of fiduciary media in a pure market economy, where all men and institutions, and specifically all banks, are subject to “the rule of common law and the commercial codes that oblige everybody to perform contracts in full faithfulness to the pledged word” (Mises 1953, 440). In particular, there would be no legal tender laws, no deposit insurance, and no central bank acting as lender of last resort. In such a free market order, a bank that failed to honor its contractual obligations would be treated no differently from any other company or person that failed to do this.
If fiduciary media would naturally emerge in such an order, this would prima facie be evidence that they are compatible with it. Mises, despite his hostility to inflation and credit expansion of all kinds, nevertheless suggested that the use of fiduciary media would be a part of a free banking system absent government interventions (Mises 1998, 440; my italics):
Free banking [i.e., banking subject to the commercial codes etc.] is the only method for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder a slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all information required about their financial status.
The free bankers have gone further than this and argue that the use of fiduciary media is beneficial to the economy; while the full-reserve school, pursuing the economic analysis of Mises critical of inflation and credit expansion, have often assumed the position, following the example of Murray N. Rothbard, that fractional reserve banking is a harmful institution and must be outlawed wherever it appears in the free market, since money substitutes are interpreted as titles to money and fiduciary media are by this definition necessarily fraudulent (Rothbard 2009, 2008; Huerta de Soto 2009; Hoppe 2006a, 2006b; and Bagus, Howden, and Gabriel 2015).
It is this article’s contention that the full-reserve theorists are mistaken when they insist that money substitutes must be interpreted as always being money titles, as this is at odds with the theory of value. A callable loan, for instance, could become a fiduciary medium if it is judged to be just as certain and serviceable as money proper by acting individuals. The free bankers too, however, are mistaken when they claim a large role for the circulation of fiduciary media in a pure market economy. It will be shown how it is fundamentally erroneous to consider a mere unbacked claim on a person or an institution as equivalent to money. The error consists in mistaking a future good, or a claim to a future good, for a present good, and in mistaking an unsafe asset for the comparatively safest good, viz., money. As all other errors in the free market, the error of mistaking fiduciary media for fully backed money certificates will tend to be corrected in the process of entrepreneurial profit and loss, leading to the virtual elimination of all fiduciary media from the market economy.
Thus, it will be argued that the full-reserve theorists are correct in asserting that fractional reserve banking has no role to play in the free market, since only by an error of judgment would anyone accept fiduciary media as money. Rather than encouraging the use of fiduciary media, the free market and free banking would correct such errors, leading to the virtual suppression of fiduciary media.
A Note on Definitions In this paper we will take the approach to monetary theory developed by Ludwig von Mises for granted. As already noted, Mises’s influence on both free-banking and full reserve theorists is apparent, but his monetary theory is also the one that best elucidates the economic facts. Specifically, the classification of money in the narrow and the broader sense that Mises (1953, 50–59; cf. Hülsmann 2012, 33–34) pioneered in 1912 helps distinguish between fiduciary media, other money substitutes, and money in the narrow sense.
Money, taken simply, is a common medium of exchange, valued for its purchasing power. If two commodities are commonly used as money, they are valued separately according to the laws that govern the value of money; they are not somehow aggregated to form one total money supply.
Money in the narrower sense, or money properly speaking, is simply the commodity used as money. Under the gold standard, physical gold was money in the narrow sense. In the modern economy, physical cash is money in the narrow sense.Reserves with the central bank might also be considered money in the narrow sense, despite their character as claims on the central bank, because there is no doubt that the central bank, empowered with the ability to create physical cash at will, will always be able to honor these claims. I thank an anonymous reviewer for pointing out the special case of central bank reserves.
Money in the broader sense is perfectly secure and instantly redeemable claims to money in the narrow sense. They can be used in commerce in exactly the same way as money is. “A claim to money may be transferred over and over again in an indefinite number of indirect exchanges without the person by whom it is payable ever being called upon to settle it.” (Mises 1953, 50). The reason for this is that money is not consumed or “used up” in the way that other goods are. Simply by possessing money, the individual gains all the services that money can render, and hence fully secure and present claims to money will be deemed equivalent to money in the narrow sense. Money in the broader sense is more usually referred to as money substitutes and can be further subdivided into money certificates and fiduciary media.
Money certificates are claims to money that are fully backed by money in the narrow sense. E.g., a bank that held physical cash for the full amount of its outstanding demand deposits would only issue money certificates. This would clearly only be a change of the form, not the substance, of money, and issuing money certificates would have no influence on the money supply.
Fiduciary media are claims to money that are not fully backed by money. Commercial demand deposits are nowadays the prime example of this, but historically private banknotes too were fiduciary media. These claims are used as if they could be instantly redeemed, but in reality the issuing bank only ever keeps reserves on hand to be able to redeem a fraction of its issue of money substitutes. Fiduciary media can take the legal form of warehouse receipts, titles to money, and callable loans, that is, instantly redeemable claims on a person or bank such as demand deposits.
Since an issue of titles to money or warehouse receipts in excess of what is kept on reserve is clearly fraudulent, this case will not be considered. This article will deal exclusively with fiduciary media in the form of callable loans. Every time the terms fiduciary media and claims to money are used, they will refer only to callable loans.
It is important to note that the individual holding a money substitute cannot tell whether it is a money certificate or fiduciary medium. This distinction can only be made on a systemic level, as an outsider looking at the economy. To the individual person holding money, the money substitute must have the status of a money certificate, he must be certain of the issuer’s ability to redeem it on demand, since, as Jeffrey Herbener has noted (2002, 83), “people only demand money-substitutes, not fiduciary media, and their demand exists only when they have confidence in full redemption.”
The reader will excuse this brief outline of the basic definitions in the Misesian system. Most of it should be familiar to monetary theorists, but since the argument made here hinges on a clear understanding of the relation between money and fiduciary media, it was thought expedient to include this brief synopsis.
THE FREE BANKING SCHOOL AND THE FULL RESERVE SCHOOL There are two fundamental positions in the debate on the status of fiduciary media: the free banking school and the full reserve school.The full reserve school could also, following Salerno (2012b, 100), be called the neocurrency school. The free bankers believe that fiduciary media are a useful part of the money supply, and that no fraud is necessarily involved in issuing them. What is here termed the full reserve school is of the opposite view: fractional reserve banking is necessarily fraudulent, and not only is it not beneficial, but the use of fiduciary media is positively harmful, as it causes inflation, Cantillon effects, and the business cycle. While these controversies have a long history reaching back into the nineteenth century and the great British monetary debates (cf. Smith 1936), the current debate among modern Austrian and Austrian-inspired economists began in the wake of the contributions of Ludwig von Mises.
Murray N. Rothbard can be considered the founder of the full reserve school. He first clearly advanced the position that all fiduciary media are necessarily fraudulent, as he saw all money substitutes as titles to a sum of money (Rothbard 2008; 2005). He also categorically denied any economic advantage to society as a whole from the use of fiduciary media, and considered their use the basic cause of the business cycle as well as the problems of inflation (Rothbard 1963, 34–36). Other full reserve theorists follow this basic framework. Jesús Huerta de Soto has argued with a foundation in Roman law that money substitutes are a type of irregular deposit and therefore cannot be increased beyond the amount of money on reserve (Huerta de Soto 2009, 1–36, 119–24) and he too considers the elasticity introduced in the money supply by their use as central to understanding the problems of the business cycle. Hans-Hermann Hoppe (2006a, 2006b) clearly enunciates the Rothbardian position, for instance when he writes (2006b, 200):
Freedom of contract does not imply that every mutually advantageous contract should be permitted. Clearly, if A and B contractually agree to rob C, this would not be in accordance with the principle. Freedom of contract means instead that A and B should be allowed to make any contract whatsoever regarding their own properties, yet fractional-reserve banking involves the making of contracts regarding the property of third parties.
While Robert P. Murphy too belongs to the full reserve school, he has avoided engaging the question of legality in his recent contribution (Murphy 2019) and has focused exclusively on the issue of distortions introduced by fiduciary media and fractional reserve banking. Philipp Bagus, David Howden, Walter E. Block, and Amadeus Gabriel (Bagus and Howden 2010; Bagus, Howden, and Block 2013; and Bagus, Howden, and Gabriel 2015) have entered the ranks of the full reserve school as well, arguing for the impermissibility of fractional reserve banking for involving a confusion between deposits and loans.
Joseph T. Salerno (2010) and Jörg Guido Hülsmann (1996, 2003a) are also here placed in the full reserve camp, although their positions differ slightly. On the one hand, Salerno is fully in agreement with Rothbard when he says that “the 100 percent reserve requirement is not arbitrarily imposed from outside the market, but is dictated by the very nature of the bank’s function as a money warehouse” (Salerno 2010, 362); on the other, he allows that in a fully denationalized system, the shares of banks or money funds that invest part of their “reserves” could become the predominant means of payment in the economy (Salerno 2010, 364). Hülsmann for his part allows for the possibility of “callable loans plus a redemption promise” (IOU + RP) circulating on par with money proper (Hülsmann 2003a). Both clearly, however, see no social benefit from stimulating the issue of fiduciary media and both think that it is a historical truth that the vast majority of actually circulating fiduciary media were and are fraudulent, which is why they are decidedly in the ranks of the full reserve school.
The free banking school takes its modern beginning from the works of Lawrence White and George Selgin (White 1995, 1999; Selgin 1988; and Selgin and White 1987, 1996) and also includes economists such as Kevin Dowd (1993), Larry Sechrest (1993), and Steven Horwitz (2000). The point at issue here, the possibility of fiduciary media in a free market, is a key component of free banking theory, and has been defended at length by the free bankers. Their basic claim is that the issue of fiduciary media can take the legal form of a loan or a note with an option clause. Historically, White (2003) has claimed that banknotes indeed took the form of a loan, not a title of ownership to underlying money. This is a strong argument against the full-reserve school’s insistence on interpreting all money substitutes as ownership titles.
The free bankers argue that a free banking system is based on freedom of contract, and therefore interfering with and redefining contracts between banks and their customers, changing loans into warehouse receipts, would be incompatible with the system (Salin 1998) and an unwarranted imposition of the economist’s own ethical judgments on other people (Rozeff 2010). Banks and their clients would be free to make whatever contracts they want, and fractional reserve banking would arise from their free agreement. Selgin (2012) and Evans and Horwitz (2012) have also answered the critiques raised by Bagus and Howden of the free banking position. Selgin in particular argues that the attempt to identify free banking theory with the real-bills doctrine is misguided and that full reserve theorists are wrong to claim that free bankers “confuse an increase in the demand for money with an increase in the overall extent of saving” (Selgin 2012, 139). Selgin here also makes the point, previously made by Hülsmann (1996, 34), that although aggregate demand for money is not the same as the public’s willingness to save and invest, demand for money to hold is a kind of saving. Selgin disagrees with Hülsmann, however, as Selgin (2012, 139) argues that demand for inside money—bank liabilities—is also a supply of savings for investment, whereas Hülsmann sees it as a form of plain saving.
MONEY AND FIDUCIARY MEDIA Clearly, the point at issue is whether callable loans can come to circulate as fiduciary media spontaneously in the free market. Issuing titles or warehouse receipts to more money than the issuer has in his reserves would be fraudulent and therefore ruled out by definition in a pure free banking system, where all must honor their contracts and banks benefit from no special privileges (Mises 1998, 437–41), but it is by no means clear that issuing callable loans would be. Although borrowing money at call and investing it in longer-term loans and securities might be seen as an extreme case of maturity mismatching, this practice is not in itself illicit (Bagus and Howden 2009). On the contrary, there seems to be nothing in this practice at odds with respect for property rights and freedom of contract. It might be a very risky kind of financial practice, and the investor in callable loans would probably expect a return commensurate with his assessment of the risk involved; however, that does not make it illegitimate. But does it mean that such loans can come to form part of the money supply?
In order to solve this question, we will adopt Hülsmann’s (2003a) idea of a callable loan plus redemption promise as our starting point.White’s (2003) criticism of Hülsmann, that banks don’t promise to pay but contractually obligate themselves to pay is, for our purposes, immaterial. What matters is how these claims are appraised by the acting individuals who possess them, not their legal nature. Hülsmann argues that the source of fractional reserve banking is to be found in a confusion between money titles and what he calls IOUs with a redemption promise. If this confusion did not exist, the IOUs could not circulate as part of the money supply, and the only money substitutes would be money titles. However, Hülsmann does not explain in depth why callable loans could not circulate as money substitutes absent this confusion. In order to do this, fiduciary media will have to be linked back to the laws of value governing money as well as all other economic goods.
Carl Menger first described the prerequisites for a thing to become an economic good (Menger 2007, 52ff.), a description that Mises later amended in order to emphasize the subjective nature of all value and, hence, of economic goods (Mises 1998, 120–21). All that is necessary for a thing to become an economic good is that the acting individual believe that control over it will help him attain his goals; it is his subjective judgment of the suitability of a thing for satisfying his wants that confers value on a good. Man’s judgment may be erroneous, and he may find from experience that he was wrong in judging a certain thing capable of helping him attain his ends, thus realizing that it was only what Menger termed an imaginary good (Menger 2007, 53–54), but until the actor in question revises his judgment, the thing in question will continue to be a good for him, no matter what the objective facts of the case may be.
Incorrect judgments are usually corrected when the actor is confronted with reality, as can easily be seen in the case of consumer goods and producer goods. For consumer goods, this happens when the individual realizes that he does not attain the end he thought he would by using it; e.g., when a man discovers that sea water is not good drinking water. For producer goods, an erroneous judgment concerning a good will be corrected when the production process in which the good, mistakenly thought to be suitable in this production process, was employed fails or at the very least does not return a product sufficient to warrant the previous valuation of the good. In both cases, what was previously considered a good immediately loses its goods character once its employment in action proves that the actor’s judgment was mistaken. Just as acting man profits from correct judgments, so he loses from incorrect ones. Entrepreneurial profit and loss is the basic mechanism that teaches man to conform his thinking and judgment to reality, as incorrect judgments and erroneous reasoning are punished and correct judgments rewarded.
The same holds true for money, although the consequences of incorrect judgments do not appear in exactly the same way. This is due to the special position of money among economic goods and the particular laws governing its value (Mises 1990). Whereas consumer goods are valued for the ends we expect to be able to achieve through their employment, and producer goods are valued for their contribution to the production of consumer goods, the medium of exchange is valued for its purchasing power. The value of money depends on the array of other goods that people expect to be able to trade each monetary unit for. It is the individual’s subjective judgment of the utility of having this purchasing power available to him.
Let us assume a society employing only gold as money, with no other media of exchange in use. In this society the acting individual will only accept pieces of gold in exchange and only consider gold pieces as part of his cash balance. Mistakes in this matter are usually quickly corrected, since it is comparatively easy to recognize and verify whether a given substance is indeed gold, and since all other people too will also only accept gold as money. A man may, for instance, think that lead is just as serviceable as gold, since it is similar to it in some respects. However, he will quickly be disabused of this notion once he tries to pay with it, since nobody else shares his peculiar evaluation of lead.
Because money is only ever exchanged, appraisals of a commodity in its role as money are never confronted with reality in the same way as evaluations of producer and consumer goods are. Whether a given commodity (or claim) is considered part of the money supply depends on how it is judged by people in the community. To continue with the example of a man who thinks lead and gold are interchangeable, if his trading partners disagree with this judgment, he will quickly realize that he was in error and that lead is not in fact gold. However, if other people accept lead as gold, lead becomes part of the money supply for as long as this mistaken judgment is not corrected. For as long as no one notices the difference between lead and gold, the money supply is increased by the addition of a quantity of lead. Widespread entrepreneurial error has led to a mistaken expansion of the money supply. Since money, titles, and claims to money are only ever exchanged and never consumed, the holders of money are never confronted with the same kind of test as owners of producer and consumer goods are. Erroneous judgments may therefore persist for longer here than in other areas of economic life. There are, however, powerful incentives at play to verify and certify the money commodity one accepts in exchange and holds in one’s cash balance. Nobody has an interest in receiving false coins or bad checks in exchange for their goods, since that would mean a heavy loss of purchasing power once the mistake is discovered. The precious metals gold and silver were selected as money to a large extent because it is comparatively easy to distinguish them from other materials (Menger 2009; and Selgin and White 1987, 440–42).
Claims to money obey the same laws of value: if they are perfectly secure and safe, they will be valued as money. In the normal course of affairs, we would expect a loan to be valued according to its maturity and its safety. Both of these factors would impose a discount, as individuals would tend to judge a loan, even if instantly redeemable, as less valuable than actual possession of the amount of money in question. This is so, since, objectively, such loans can never be as secure as money proper or fully secured money certificates—there is always some uncertainty attached to them.The only exception would be the case where the debtor kept on hand full reserves at all times. However, as just argued, the primary factor in establishing a thing as a good is the subjective judgment of individuals, and there is nothing to stop people from subjectively deeming callable loans on a par with money certificates. Therefore, they may gain the status of fiduciary media and constitute part of the money supply without any fraud or other violation of property rights having been committed. So long as claims to money are considered perfectly secure and instantly redeemable, they can perform all the functions of money in the narrow sense. Says Mises (1953, 267):
The fact that is peculiar to money alone is not that mature and secure claims to money are as highly valued in commerce as the sums of money to which they refer, but rather that such claims are complete substitutes for money, and, as such, are able to fulfil all the functions of money in those markets in which their essential characteristics of maturity and security are recognized.
There is thus no logical barrier to the acceptance of callable loans as money substitutes, since this depends on the judgment of the people receiving and holding money—on their recognizing “their essential characteristics of maturity and security,” whether those characteristics truly exist or not.
That said, this does not mean that such loans will constitute money substitutes for any length of time. First of all, the community as a whole has to accept the claim in question as a money substitute. One individual may have no doubts on the matter, as he trusts the issuing bank implicitly; but he cannot force other people to accept the claims at par value, and until they are widely considered money substitutes, they will continue to trade at a discount to money in the narrow sense. Although the clients of the same bank may treat their claims on it as equivalent to cash in their mutual exchanges, those outside the bank’s orbit may have no interest in holding claims on it as part of their cash balance.
Secondly, a claim’s character as a money substitute depends on there never being any doubt as to its safety and to the ability of the issuing institution to redeem it in full without delay. What the issuer requires to maintain his credit is a special kind of goodwill, without which the fiduciary media he has issued will immediately lose their character as money. Mises explained this very lucidly (1998, 442):
What makes a banknote a money-substitute is the special kind of good will of the issuing bank. The slightest doubt concerning the bank’s ability or willingness to redeem every banknote without any delay at any time and with no expense to the bearer impairs this special good will and removes the banknotes’ character as a money-substitute. We may assume that everybody not only is prepared to get such questionable banknotes as a loan but also prefers to receive them as payment instead of waiting longer. But if any doubts exist concerning their prime character, people will hurry to get rid of them as soon as possible. They will keep in their cash holdings money and such money-substitutes as they consider perfectly safe and will dispose of the suspect banknotes. These banknotes will be traded at a discount, and this fact will carry them back to the issuing bank which alone is bound to redeem them at their full face value.
Only if the public thinks the bank’s money substitutes are fully secure will they accept them at par with money, and only thus can they gain any circulation at all. Yet since fiduciary media in the form of loans are inherently less certain than money or true money titles, accepting them on par with money constitutes an entrepreneurial error no less than in the other cases of mistaken identity detailed above. The status of any claim as a fiduciary medium is therefore inherently perilous on the free market. As soon as the slightest doubt arises as to the issuer’s ability to redeem them in full and without delay—as soon as he loses the goodwill of the public—all his circulating notes will lose the character of money substitutes, trade at a discount to money, and return to the issuer. This process will continue until the issue of fiduciary media has been eliminated and the claims to money issued are again deemed to be fully backed.
UNCERTAINTY AND MONEY In order to understand more fully the error involved in holding fiduciary media, it must be asked exactly why people choose to hold some of their wealth in the form of money. Here the role of uncertainty is crucial. Uncertainty is here used in the sense of Mises (1998, 105–18) and Knight (1921) and distinguished from calculable risk. It is concerned with what Mises (1998, 110, 111) called case probability:
Case probability means: We know, with regard to a particular event, some of the factors which determine its outcome; but there are other determining factors about which we know nothing … Case probability is a particular feature of our dealing with problems of human action. Here any reference to frequency is inappropriate, as our statements always deal with unique events which as such—i.e., with regard to the problem in question—are not members of any class.
When dealing with uncertainty, acting man does not have recourse to the methods of actuarial science and numerical evaluation of risks. Rather, like the historian, he must use his specific understanding of what is unique and relevant in each event or class of event he is considering (Mises 1998, 58; cf. 2007):
Understanding is not a privilege of the historians. It is everybody’s business. In observing the conditions of his environment everybody is a historian. Everybody uses understanding in dealing with the uncertainty of future events to which he must adjust his own actions. The distinctive reasoning of the speculator is an understanding of the relevance of the various factors determining future events…. Acting man looks, as it were, with the eyes of a historian into the future.
Since there is always some uncertainty about the future, acting man cannot plan his actions completely and allocate all his income to purchases of consumer and producer goods. By keeping some cash on hand, acting man is better able to provide for unforeseen contingencies in the future. His degree of felt uncertainty is therefore at the root of his demand for money.
Free bankers seem to downplay the importance of uncertainty in explaining the demand for money. White (1999, 15–16, 54ff.) does not mention it in his discussion of par acceptance of bank money, and Selgin (1993, 354, 362) impatiently dismisses the idea that uncertainty could have any role in evaluating money and money substitutes, claiming that the historical record contradicts that idea. When Selgin discusses the role of trust in driving demand for money, he is exclusively talking about demand for banknotes relative to demand deposits, not demand for money proper versus money substitutes (Selgin 1988, 109). This is in clear contradiction to Mises’s basic insight that we would only hold money under conditions of uncertainty (Mises 1998, 414, 415):
Where there is no uncertainty concerning the future, there is no need for any cash holding. As money must necessarily be kept by people in their cash holdings, there cannot be any money…. On the market there is always change and movement. Only because there are fluctuations is there money. Money is an element of change not because it “circulates,” but because it is kept in cash holdings. Only because people expect changes about the kind and extent of which they have no certain knowledge whatsoever, do they keep money.
The fundamental reason for demanding and holding any money at all is that money is the most certain good. By holding money we avoid all the uncertainties affecting particular consumption goods and investment opportunities. Consumer goods are either immediately consumed or, in the case of durable consumer goods, can only be used for a few specific purposes. Durable goods are not as readily exchangeable as money and are furthermore subject to specific price risks concerning their specific market. Investment in producer goods has the same disadvantages, while investment in financial assets—shares, bonds, etc.—might be more liquid. Yet both of these are still subject to greater uncertainty and greater risk of loss than simply holding money. When people add to their cash balances instead of buying consumer or producer goods, they are thus essentially investing in reducing felt uncertainty, since money is the comparatively most certain good—its future purchasing power is less uncertain than the prices of consumer and producer goods.
This can be further elucidated by considering the quality of money (Bagus 2009, 2015): Money of high quality is such as can be expected to maintain a stable or increasing purchasing power in the future, while money of lower quality is that which is expected to lose purchasing power. On a gold standard, for instance, money production will be constrained by the same factors that constrain the production of other goods, namely the law of costs (H. F. Sennholz 1975, 47–48). Additional money will only be produced if there is a sufficient return, that is, a sufficient spread between the quantity produced (gold ounces) and expenditures (in gold ounces) (Hülsmann 2003b).
It is therefore possible to forecast with some accuracy the future evolution of gold’s purchasing power, and it is reasonable to expect it to be stable or even increase slightly, since gold production generally only increases in response to increases in the purchasing power of the monetary unit. Fiat paper money, on the other hand, is completely subject to the policies of the issuing institution, which may have to serve political interests at odds with sound monetary policy, and which may be guided according to erroneous economic principles. Even a relatively sound central bank is always at risk of being taken over by more inflationary leaders, which introduces an element of uncertainty that simply does not exist in the case of commodity money. Similarly, in the case of claims on banks there is an added element of uncertainty, since the holder of claims on the banks has to trust that the banks will always want to and be able to redeem the claims. Although this may be true under normal circumstances, it is precisely under unusual, unforeseen circumstances, when the holders of money might need their claims, that the banks are likely to default on their promises.
This is not to say that money is a certain good in some absolute sense. This would be patently false, since the purchasing power of money is always changing as conditions in the various goods markets change. Rather holding money is the comparatively most certain way of holding one’s wealth. Holding any money at all, then, is fundamentally a hedge against uncertainty (Rothbard 2009, 264–65), and adding to one’s cash balance is therefore best understood as an investment in reducing one’s felt uncertainty (Hoppe 2012; cf. Hicks 1935, 7–9), as money provides the service of immediately available purchasing power for whatever unforeseen purchases one will make in the immediate future (Hutt 1956).
Money, as the comparatively most certain good, can be seen as at one end of the spectrum of investment possibilities when considering their risk or uncertainty. Consequently, a man who, wanting to add to his cash balance, increases his holding of fiduciary media, is fundamentally in error: he wants to reduce the uncertainty of his investments by increasing his cash balance, but fiduciary media are precisely not the most certain investment option; they are claims on other people, whether individuals or institutions such as banks. As such, they are always liable to the risk of default and nonpayment. Wanting to increase his certainty by increasing his holding of fiduciary media, the individual in fact renders himself liable to lose all if the issuing institution suspends redemption.
THE CONFUSION OF DEMAND FOR MONEY WITH SUPPLY OF CREDIT Money, in addition to being the comparatively most certain good, is also a present good. In fact, according to Rothbard it is the present good par excellence (2009, 375). People demand money in order to be able to spend it immediately on other goods. However, one of the main claims of the free bankers is that issues of fiduciary media are an efficient way to regulate the money supply in order to compensate for changes in the demand for money and thereby avoid monetary disequilibrium (Yeager 1997, 93–94). Not only are they more flexible than production of commodity money, but an increase of fiduciary media is an increase in the supply of loanable funds, and this means that there is more money available for investment when banks extend their issues of fiduciary media to meet an increased demand for money.
In the free banking system, an increased demand to hold money is met by an increased issue of fiduciary media in order to maintain monetary equilibrium. The substitution of fiduciary media for commodity money means that
every increase in real money demand becomes a source of loanable funds to be invested by banks, whereas under a pure commodity-money regime an increase in money demand either leads to further investments in the production of commodity money, or, if the supply of commodity money is inelastic, to a permanent, general reduction in prices…. Thus, fiduciary issues made in response to demands for increased money balances allow Ruritania to enjoy greater capitalistic production than it could under a pure commodity-money regime. (Selgin 1988, 22)
This position is also common among economists outside the free banking school (e.g., Sanches 2016; and Mishkin 2019, chap. 9) and can seemingly be traced back to John Stuart Mill, who argued that banks of deposit make the “idle” capital of depositors to be employed through lending out the majority of their deposits (Mill 1909, bk. 3, chap. 11, § 2).
There are two problems with this view: first, the assumption that the supply of commodity money could not change fast enough to accommodate changes in the demand for money, or that, failing that, price changes could not adjust the stock of money to the new demand; and second, the idea that demand for money in the form of money substitutes is the same as supplying credit to banks is a fundamental error. The demand for money, no matter what form that demand may take, is very different from demanding financial assets. The demand for financial assets is always the supply of a present good in exchange for future goods, whereas the demand for money is always demand for a present good. Money and financial assets are two different things, and they serve different functions in the economy.
To briefly address the first problem, there is no reason to consider the supply of money fixed, but more fundamentally, there is no reason to assume that an increased demand for money has to be compensated in any way by an increase in supply. An increase in the demand for money necessarily implies a decreased demand schedule for nonmonetary goods and an increased supply schedule for nonmonetary goods and services (the inverse of an increased exchange demand for money).On exchange demand and reservation demand for money, see Rothbard (2009, 137–42, 756–62) and Salerno (2015). An increase in the demand for money would therefore naturally lead to lower prices as the change in the market data works itself out in a step-by-step process (cf. Hayek [1937] 1989, 19–25). In the short run there may be instability and a prolonged adjustment period caused by “sticky” prices, as entrepreneurs may at first be unwilling to adjust their prices downward. However, the process of entrepreneurial profit and loss will quickly overcome this as those entrepreneurs who make the necessary price adjustments profit at the expense of those who are reluctant to do so: the longer an entrepreneur refuses to sell his inventory at the market price, the greater his loss will be. Sticky prices are at most a problem of short-term adjustment.
In any event, should the demand for money increase, the purchasing power of money will increase through the process just described, and under a gold or other commodity standard this will stimulate the production of money (White 1999, chap. 1; and Herbener 2002). This may be a slower response to changes in demand for money than issuing fiduciary media, but that does not mean that the money supply could not adjust in the absence of fractional reserve banking. An increase in the demand for money might be caused by economic expansion, as savings, investment, and population growth increase productivity. As more goods are offered on the market (an increase in the exchange demand for money), money prices of goods fall and the purchasing power of the monetary unit increases. As the purchasing power of the monetary unit increases, entrepreneurs can afford to invest more in the production of commodity money, e.g., by mining gold where it was previously too expensive to do so or by prospecting for new gold mines. It might even be said that a pure commodity standard would mirror a “productivity norm” (Selgin 1997) in regulating the supply of money over the long term: economic expansion would stimulate money production, while economic contraction would shift the monetary commodity into nonmonetary employment. The way it has been presented here, however, this process is nothing but an implication of the traditional currency principle as articulated by Mises and his epigones. Monetary equilibrium thus does not depend on the issue of fiduciary media.
The second and more serious problem with free banking theory is the confusion of demand for money with a supply of savings that can be lent out. In the free banking system, the issuance of new money in response to an increase in demand for money takes the form of loans. As Selgin (1988, 22) puts it, “every increase in real money demand becomes a source of loanable funds to be invested by banks.” Increased demand for money is taken for an increase in the supply of credit. It is here immaterial that the new loans are of very short, i.e., instant, maturity (Hülsmann 1996, 20; and Machlup 1940); the new loans serve as a source of credit no matter their duration. The argument in favor of free banking is that holding money is a form of saving, and that it is therefore legitimate to transfer these savings from savers to investors by means of fiduciary media. It may be granted that increasing one’s cash balance can in certain circumstances be considered increasing savings, but it does not follow from this that more credit should be extended.
Holding any kind of asset instead of using it amounts to savings investment (Hülsmann 1996, 34), as it necessarily means that resources are allocated to an expected future need instead of being consumed in the present. This is also true of money: if people reduce their consumption in order to increase their cash holdings, this is a form of saving. This does not, however, mean that additions to people’s cash balance are available to be invested; rather, they constitute a peculiar form of investment. Following Bagus and Howden (2010, 41), we may say that there is a continuum of investment projects of different duration. Investment in cash balances is peculiar in that money is the present good par excellence (Rothbard 2009, 375), and increasing one’s cash balance therefore does not liberate resources for more roundabout projects—quite to the contrary, as it is possible that increased demand for money reflects decreased demand for investments of longer duration. We may call it monetary or cash balance saving to distinguish it from both plain saving and capitalist saving.Cf. Mises (1998, 527–28) for the distinction between plain and capitalist saving.
It does not matter for our point whether the increased demand for money takes the form of increased demand for money substitutes. Money substitutes are just as much a present good as money proper. According to Mises (1953, 266),
The peculiar attitude of individuals towards transactions involving circulation credit is explained by the circumstance that the claims in which it is expressed can be used in every connexion instead of money. He who requires money, in order to lend it, or to buy something, or to liquidate debts, or to pay taxes, is not first obliged to convert the claims to money (notes or bank balances) into money; he can also use the claims themselves directly as a means of payment. For everybody they therefore are really money-substitutes; they perform the monetary function in the same way as money; they are “ready money” to him, i.e., present, not future, money.
Although it is true that legally and formally fiduciary media take the form of credit claims, the “lender,” the holder of the claim, has not surrendered control of any present good. He has engaged in what Mises calls a claim transaction, not a credit transaction; he has exchanged a present good (money) for a claim to a present good (a claim to money). Only because he considers the claim completely certain and instantly redeemable is it equivalent to him to money in the narrow sense. If the issuing bank does not keep full reserves, therefore, the holder of the bank’s notes makes an entrepreneurial error: he thinks he owns a certain, present good, when in fact he only has an uncertain claim to a partly present, partly future good. If such error becomes widespread and many people are willing to hold fiduciary claims in their cash balance, banks can engage in credit expansion leading to inflation and initiating a business cycle.Cf. Hüslmann (1998) on error as the root of economic cycles. Since the business cycle must result in a bust, the banks’ shaky position will inevitably become apparent. The more they expand their fiduciary issues, the less credible their promise to pay in full on demand becomes. The result is bank runs when the banks’ special goodwill evaporates and all the holders of fiduciary media try to exchange them for money in the narrow sense. The error that initiated the business cycle—mistaking a fiduciary claim to a future good for a present claim to money—is then realized, claims on the banks lose their status as money substitutes and the resulting deflation helps purge the economy of the malinvestments of the boom (Rothbard 2009, 1008–10; cf. Mises 1998, 565; and Salerno 2012a).
It follows from this insight that the doctrine that increased demand for money liberates resources for investment is fundamentally wrong. Contra Selgin and Mill, the demand for fiduciary media in no way constitutes a supply of loanable funds. What the acting individual wants in holding fiduciary media is control over present goods (Rothbard 2009, 800ff.), not future goods, and he therefore does not invest in a longer production structure when he increases his cash balanceThis is not meant to imply that increasing one’s cash balance necessarily shortens the production structure. If the cash balance is increased by reducing consumption, it may be that the production structure is actually lengthened. See on this point Mises (1998, 518–20). Demand for money is not the same as supply of loans, but by mistaking fiduciary media for money certificates, the individual unwittingly extends credit; he means to increase his holding of money, a present good, but he commits an error and in reality acquires a claim to a future good. As with all errors of judgment, it is liable to be corrected by the mechanism of profit and loss. Specifically, the individual may find one day that he cannot redeem his claims at par, or someone else has realized this already, and as the issuing institution has lost the good will of the market, the claims now circulate at a discount and are no longer part of the money supply. This is the mechanism of “brand extinction” identified by Salerno (2012b, 112–15; cf. Mises 1998, 431ff.) as the primary limitation on the issue of fiduciary media: long before a bank’s reserves are depleted through the principle of adverse clearing, holders of its notes and deposits will have lost confidence in it and no longer value its liabilities as part of their cash holding. These liabilities would therefore trade at a discount, and return to the issuing bank in the hope of an arbitrage profit. This would make a bank run inevitable, but only after the claims in question have already lost their status as money substitutes (Salerno 2012b, 113).
It is also possible for entrepreneurial error to take another form, as the acting individual may recognize that fiduciary media are not in reality secure claims to cash but may judge holding them a safe investment anyway, as other people are willing to accept them as money. Since he recognizes their defects, he may very well think himself able to profit from using fiduciary media, e.g., from interest payments on demand deposits or through access to easy credit, while still being able to realize his assets before they lose their money character thinking that he will always be able to get rid of them at par—or at least do so before the rest of the populace panics and a bank run develops. Fiduciary media and fractional reserve banking are fundamentally unstable institutions however, and always liable to collapse. Although individual entrepreneurs may benefit from fiduciary issues, just as individual investment projects may be completed in the boom phase of the business cycle, on a systemic level there is no escape from the result of error: depression and a purge of fiduciary media.
In the free market, where no special privileges protect banks and no legal tender laws can compel the public to accept claims on banks as money, the dangers inherent in issuing fiduciary media would be apparent to bankers as well as to the general public. Again, according to Mises (2006, 125): “[A]s soon as bankers recognized the dangers of expanding circulation credit, they would have done their utmost, in their own interests, to avoid the crisis. They would then have taken the only course leading to this goal: extreme restraint in the issue of fiduciary media.”
The nature of fiduciary media is simply incompatible with the aim people have in holding money: having access to a presently available, safe medium of exchange.That is not to say that people could not demand fiduciary media for other reasons, but then it would by definition not be demand for money. E.g., if a person holds a callable loan to earn interest, and if he does not consider it part of his cash balance, then this demand would not be demand for money but demand for a claim to a future good. In this case, the holder really is supplying savings for investment. The lines between demand for money and demand for investments are often blurred in modern financial practice, but conceptually the two kinds of demand are quite distinct.
A CRITIQUE OF THE THEORY OF “MONEYNESS” Part of the disagreement over the nature of money may stem from a basic error in the free bankers’ conception of what money is. Their conception of money can be termed the theory of “moneyness.” The origin of this theory seems to be F. A. Hayek’s remark that he would rather conceive of money as an adjective rather than a noun (Hayek 1990, 56; italics in original):
I have always found it useful to explain to students that it has been rather a misfortune that we describe money by a noun, and that it would be more helpful for the explanation of monetary phenomena if “money” were an adjective describing a property which different things could possess to varying degrees.
Hayek attributes the term to Fritz Machlup, although it is not clear that he meant by it exactly what Hayek and the free bankers do (Machlup 1970, 220, 225). Be that as it may, we cannot subscribe to the idea that “moneyness” is really a characteristic possessed by all goods to different degrees (Horwitz 1990, 462–63; cf. White 1989, 203–17). By this theory, “moneyness” is simply a characteristic of a good or a claim that may explain its value along with other characteristics. Thus, money in the sense of cash is high in “moneyness”—it may very easily be exchanged for other goods—but does not have an interest yield, while a bond may not be as high in “moneyness” but to compensate for this offers an interest yield. In this way, all financial assets may be placed on a “moneyness” continuum from cash to bonds.
There are several problems with this theory. It is not clear how “moneyness” can be conceived of if it is not already known what money is. In order to appraise a claim as worth one hundred dollars, for instance, it must already be known what a dollar is. When a good or claim’s moneyness is evaluated, what is really occurring is what Mises calls appraisement (1998, 328–30): evaluating what the good will sell for on the market. This estimate can either be in terms of money or in terms of other goods, but it is manifest that when discussing moneyness, the theorists in question discuss the value of claims in terms of money. They therefore assume the existence of money and simply assume that other claims share a degree of moneyness.
The core problem is a confusion of Mises’s distinction between money and money substitutes, on the one hand, and the concept of secondary media of exchange on the other (Mises 1998, 459–63). What is described as “moneyness” is really best understood in terms of Menger and Mises’s concept of marketability: the ease and speed with which a good can be sold without discounting its expected market price. Money proper is the marketable good par excellence, while some other goods and claims high in marketability may be more easily marketable than other goods, but their degree of marketability is still much less than that of money. As a consequence, such goods and claims’ price is expressed in and fluctuates in terms of money. This is why Mises says that these goods and claims have a high degree of secondary marketability—because their marketability is secondary to that of money, the existence of which is the condition sine qua non of the advanced exchange economy, where highly liquid claims can emerge.
The distinction between secondary media of exchange and money substitutes is crucial (Mises 1998, 459–63). The latter are complete substitutes for money in the narrow sense, as they can perform all the functions of money and each unit is evaluated on a par with the monetary unit—banknotes and transferable demand deposits are the best examples of this. The precise legal nature of such claims is not essential, however: the crucial consideration is that they are deemed to be always redeemable in money at par. Secondary media of exchange, on the other hand, are not money substitutes, as it is not certain that they can be transformed into money at par or at a set ratio. They are, however, always highly sought after and can therefore easily be sold at their expected market value. In other words, they are very liquid—they have a high degree of secondary marketability, in Mises’s terms—and may therefore supplement market actors’ cash holdings, as they help economize on the holding of money in the narrow sense. In the “moneyness” view, on the contrary, the distinction between secondary media of exchange and money substitutes is obliterated. All the goods and claims used in exchange are simply placed on a continuum, with cash at one end and very liquid claims such as government bonds at the other end, with no regard paid to the essential difference in the nature of these economic goods.
By holding secondary media of exchange, economic actors economize on the need to hold cash. Assuming that the secondary media are financial assets of some kind, the cost saving can be expressed as the interest payment received on the financial assets that substitute for money. Callable loans, bills of exchange, and other financial instruments and claims have been employed in this role, and this extra demand for these claims will tend to raise their price, lower their yield, and stimulate their issue by expanding the market for them. This, however, does not change their goods character into that of money substitutes, and it is unlikely that they will jump this divide. After all, the issuers of secondary media are in precisely the same difficulty as we detailed above in the case of callable loans: they will have to invest the borrowed funds in order to make a return and pay interest on the outstanding claims, leaving them unable to at all times “redeem” the claims at par.“Redemption” is here just a metaphor, as there is no legal obligation to redeem in the case of secondary media. The fact that these secondary media are heterogeneous, different products, and thus require a separate evaluation in each case, is also significant, as it imposes a cost on their use as secondary media of exchange. There is no such cost attached to holding money and money substitutes.Perhaps the main secondary medium used today is US Treasurys. The fact that these do not trade at par and are not considered part of the money supply indicates that even in the absence of the problem of heterogeneity, secondary media cannot jump the gap and become money substitutes.
CONCLUSION This article has examined the question of fiduciary media and their possible existence on the purely free market. Although this paper disagrees with Rothbard and the full reserve school when they claim that all money substitutes have to be interpreted as money titles, the conclusion reached agrees with their perspective. Fiduciary media will have virtually no role to play in a free market. Elaborating the suggestion first made by Hülsmann (2003a), it has been argued that fiduciary media can only come into existence due to entrepreneurial error: specifically, due to individuals erroneously judging an uncertain claim to future money as a certain claim to present money.
Like all errors on the market, this erroneous judgment and its consequences will tend to be temporary, ephemeral, and self-correcting as the reality of the situation asserts itself. Since there are no institutions on the free market that will systematically spread the errors leading to the rise of fiduciary media, these will tend to only circulate locally and for a short time, as people unfamiliar with the claims in question will not accept them in lieu of money. In the same way, the societal consequences of fractional reserve banking—malinvestment, inflation, and so on—will also be very limited in scope.
The confusion of loans for money is the root cause of dysfunction in the contemporary monetary system. This has been known for a long time – as the great English banker Thomson Hankey (1873, 29) wrote:
Ready money is a most valuable thing, and it cannot from its very essence bear interest; every one is therefore constantly endeavouring to make it profitable and at the same time to retain its use as ready money, which is simply impossible. Turn it into whatever shape you please, it can never be made into more real capital than is due to its own intrinsic value, and it is the constant attempt to perform this miracle which leads to all sorts of confusion with respect to credit.
Mises (1953, 409) wrote that “the development of the fiduciary medium must necessarily lead to its breakdown.” We hope here to have shown that on a free market, with no privileged banking system, this breakdown will come quickly, before the fiduciary medium has gained widespread currency.
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Original Article: "From Livestock to Bitcoin: "Legitimacy" and the Evolution of Money"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Saifedean Ammous, famous for The Bitcoin Standard, has a remarkable new book detailing the effects of fiat money on virtually every aspect of society. In the tradition of Guido Hülsmann's The Ethics of Money Production, Ammous returns with The Fiat Standard. From a framework of Austrian economics, this book explains the sordid history of central banks severing currencies from gold redemption—both to finance war and enjoy the political benefits of default. But it also considers the far-ranging effects of inflation on civilization: as time preference increases, everything gets worse. Education, food, architecture, family, and science all suffer, as inflation makes us live today at the expense of tomorrow.
On the 50th anniversary of Nixon's gold shock, The Fiat Standard is an amazing explication of how the West fell to its current state. You don't want to miss this show, especially Saifedean's epic takedown of fiat academia at the end!
The outcome of today's currency race is uncertain. The credibility of the leading fiat currencies has suffered substantially. Their instability has fueled crises and weakened growth, so the demand for an alternative store of value is high.
Original Article: "Can the Dollar Survive Both Cryptocurrencies and China?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
An increase in the supply of money does not necessarily cause the boom-bust cycle. It is only when more money is created out of nothing that the cycle begins.
Original Article: "Sound Money versus Fiat Money: Effects on the Boom-Bust Cycle"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Bob concludes his series on areas where he’s changed his mind. This episode covers the economics of climate change, fractional reserve banking, the US gold standard, his notorious inflation bets, Nelson Nash’s Infinite Banking Concept, and the God of the Bible.
Mentioned in the Episode and Other Links of Interest: Bob’s chapter on the gold standardMises’ plan to put the USD back on goldBob’s blog post, “Why I Know There Is a God"Bob’s full interview on the Free Born podcastThe Foundation of IBC video seriesThe documentary, “This Is Nelson Nash.” For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Google Podcasts, Stitcher, Spotify, and via RSS.
Thanks to so many government restrictions on the use of potential monies that aren’t the dollar, we can only guess as to what the relationship between dollars and bitcoin would be in a functioning marketplace. But it doesn't have to be that way.
Original Article: "Let's Level the Playing Field between the Dollar and Competing Currencies"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
One of the most in-demand aspects of physical cash is that it is totally fungible. Every dollar is the same as every dollar. But cryptocurrencies can leave a digital trail which may lead to later problems in fungibility.
Original Article: "Why Fungibility Is Important in Understanding Money and Crypto"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
With Jerome Powell and Janet Yellen focusing on using monetary policy to manage climate change, the M1 money supply has gone parabolic, from just over $4 trillion in February to $18.6 trillion in March. This is right out of Zimbabwe's playbook.
Original Article: "The Fed Embraces Its Inner Zimbabwean"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Instead of trying to spin conservative justifications for disastrous monetary policy, conservatives should join libertarians and classical liberals in working to limit government power while restoring sound money and greater market freedom.
Original Article: "No, Conservatives Should Not Embrace MMT"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The central bank has basically destroyed the business of risk, and commercial real estate remains a looming disaster. As a result, banks aren't lending to regular people. The economy increasingly relies on little more than newly printed money.
Original Article: "Thanks to the Fed, the High-Risk, Small-Time Borrower Is Becoming a Thing of the Past"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Rothbard called Mises's The Theory of Money and Credit "the best book on money ever written." But Rothbard himself may have written the best money book for lay readers, namely What Has Government Done to Our Money?
Bob Murphy joins the show to discuss this superb and eminently readable tract: a mini-course on money itself, from its origins and uses to its degradation by kings, politicians, and central bankers. In only 119 short pages, Rothbard gives us everything we need to know about this most critical commodity in society—along with the ruinous development of fully fiat (unbacked) state money. Readers also enjoy a brilliant history of money regimes, from early barter to the classical gold standard and the ultimate collapse of the Bretton Woods agreement.
Read this fantastic book for free in HTML format: Mises.org/WHGD
Bob Murphy's series, "Understanding Money Mechanics": Mises.org/MM
Bob Murphy interviews Fed economist David Andolfatto on the devaluation of money, among other topics: Mises.org/BMS175
Hans-Hermann Hoppe reconsiders Hutt's seminal article, "The Yield from Money Held": Mises.org/HoppeHutt
Stephan Livera hosts a popular podcast on Bitcoin and Austrian economics. He recently had Bob on to discuss, appropriately enough, the economics of Bitcoin from an Austrian perspective.
Mentioned in the Episode and Other Links of Interest: Stephan Livera’s YouTube pageBob and Silas Barta’s guide to BitcoinBMS ep. 191 clarifying the debate over Bitcoin For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on Apple Podcasts, Stitcher, Spotify, and via RSS.
I would be silly to suggest that I know the precise potential of cryptocurrencies, but I would be even sillier if I were to say that the Indian government does.
Original Article: "India's Crypto-Clueless Regulators"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The fact that gold can be used for, say, industrial purposes does not mean it has "real value" while more intangible goods and services have none.
Original Article: "Value Is Subjective: Neither Gold Nor Crypto Have 'Real Value'"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
If we look beyond the mere tax revenue totals, we begin to understand that the cost of taxation to society is far higher than the tax revenue raised and that the costs to society of taxation grow faster than the size of government.
Original Article: "The True Cost of Taxation Is Much Higher Than Your Tax Bill"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In a 2019 article, Bob quoted Mises who believed that new gold discoveries, in principle, could cause a (small) boom-bust cycle if the gold hit the loan market before other sectors. Walter Block and Bill Barnett have responded in a new article, arguing that in a free market, new commodity money can't cause such distortions.
Mentioned in the Episode and Other Links of Interest: The YouTube version of this interviewBob’s 2019 QJAE article, which Block & Barnett (2020) criticizesBob’s blog post explaining why Block & Barnett (2020) misunderstands his argument in his 2019 QJAE paperBob Murphy Show ep. 67, in which Block and Barnett explained their problems with the Hayekian triangleRothbard’s classic essays on utility & welfare economics and the legal treatment of air pollutionBlock and Barnett’s paper on the optimal quantity of moneyOne entry in Block and Barnett’s debate over maturity mismatching; it contains references to the earlier volleys for the interested reader. For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
An unheralded work on the Austrian business cycle that rivals the work of the greats is Jesús Huerta de Soto’s Money, Bank Credit, and Economic Cycles, which outlines a multistate process of boom and bust.
Original Article: "Jesús Huerta de Soto’s Six Stages of the Austrian Business Cycle: Which Stage Are We in Now?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
From the dollar to bitcoin to Facebook's Diem, private monies and quasi monies are making the monetary landscape a lot more complicated.
Original Article: "Digital Currencies Are Changing the Money Landscape"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Americans have benefited mightily by holding and trading with the world’s reserve currency, though most people haven’t given it a thought. No one remembers when the pound sterling held this distinction a hundred years ago.
Original Article: "The Dollar's Reserve Currency Status Won't Last Forever"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
A store of value is not necessarily a medium of exchange, and in our current fiat money system, gold is not money. But it has most of the desirable properties of money, and there is much to learn form the process of how it became money in the past.
Original Article: "Is Gold Money?"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
As a result of past reckless fiscal and monetary policies the pool of real wealth could be declining. If so, stagflation will result.
Original Article: "Time Preference, Interest Rates, and Stagflation"
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.
Rothbard: "At the outset of every step forward on the road to a more plentiful existence is saving….Without saving and capital accumulation there could not be any striving toward nonmaterial ends."
Original Article: "The Upside of Lockdowns: More Saving"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Guido Hülsmann's The Ethics of Money Production is a masterclass both on the fundamentals of money and the disastrous moral consequences of monetary "policy." Inflation is not only an economic problem which impoverishes us materially, but a deeply corrosive force in society for individuals. There is no better work to explain the broader implications of central banking which go almost totally unremarked in the financial press.
Podcaster Stephan Livera is a big fan of the book and joins the show to explain why you need to read it.
Guido Hülsmann's The Ethics of Money Production: Mises.org/Ethics
Listen to Stephan's podcast at StephanLivera.com
Corporate cost cutting sets the stage for future gains in profitability and productivity, and there is no resulting "paradox of thrift" requiring easy money policies to "fix" the problem.
Original Article: "Why the Corporate Paradox of Thrift Isn't Really a Problem"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
For people who remain mystified as to how populists like Donald Trump get elected, they need not look much further than this.
Original Article: "Larry Summers Reminds Us That Federal "Stimulus" Mostly Exists to Help Wall Street"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
While it took the Federal Reserve almost six years to create 3.5 trillion in new US dollar liquidity after 2008, this time around, it took only ten months to unleash a monetary tsunami of $3 trillion, with the projection of at least another $1.8 trillion next year.
Original Article: "The Result of "Too Much Money": Asset Price Inflation and Inequality"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Ryan McMaken joins the show to discuss Adam Fergusson's seminal history of Weimar-era hyperinflation in Germany, When Money Dies. Americans accustomed to the dollar's king status have no idea how quickly and brutally a currency can lose value, especially when war finance distorts the entire structure of a nation's economy.
What follows is sobering: hunger, violence, crime, and degradation. This fascinating book makes for a great study of how and why inflation rises quickly, and provides a cautionary tale for central banks and fiscal policy makers today.Plus listen to the show for a link to your free copy of the book!
Read Hans Sennholz on Hyperinflation at Mises.org/HyperInflation
Find Henry Hazlitt's What You Should Know About Inflation at Mises.org/InflationHazlitt
Read Lyn Alden's article on inflation at Mises.org/Alden
Central bank digital currencies need to be centralized and manipulable to some extent in order to use them to implement monetary policy, which is central bankers' goal. This characteristic makes them a very risky proposition.
Original Article: "Privacy, Power, Fiscal Policy, the Poor: Four Reasons to Worry about CBDCs".
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
No, “societal” value is not what you want or think is good, and “we” are not a homogenous entity of observable, aggregated preferences.
Original Article: "Modern Monetary Collectivism"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Even if the central bank were to be successful in preventing the fall of the money stock, this would not be able to prevent a depression if the pool of real savings is declining.
Original Article: "A Drop in the Money Supply Was Not the Cause of the Great Depression".
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
A free market in money means real freedom to choose what money we use. This may mean people turn to gold and silver. Or they may turn to crypto. What's important is that it's market-based money.
Original Article: "Why We Need a Free Market in Money"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
It seems the reach and influence of central banks has never been higher, yet they are increasingly flying blind in an environment where central bank tools are growing ever more imprecise and dangerous.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Central Banks and the Problem with Playing God".
[From the 2020 Supporters Summit, presented at the historic Jekyll Island Club Resort on Jekyll Island, Georgia, on October 9, 2020.]
At breakfast, I ran into Ed Griffin who wrote that wonderful book The Creature from Jekyll Island, the greatest book written about the monstrosity that was created 110 years ago and he said, “I heard you’re talking this afternoon. What are you going to talk about?” I said, well the title of my talk is the Constitution and Central Banking. He said, “Oh, you’re going to go for about thirty seconds,” because there’s nothing in the Constitution about central banking whatsoever. But there is, of course, a history that brought us to where we are now and my job, with deference to the great speakers who have appeared before me, is to try and tie a lot of this together by telling you about the history and telling you about how the Constitution has been tortured and twisted even as we speak in an effort to allow big government to control our lives. And then I have a little surprise for you at the end of my talk. Don’t let me forget the surprise. I’ve revealed it to one person, Professor Newman, I know he’s going to remind me to reveal the surprise.
So, when we were colonists and the king was looking for ingenious ways to raise money, one of those ingenious ways was the Stamp Act. This required that every adult in the colonies—not in Great Britain; it would have fomented a revolution there—but every adult in the colonies have in their possession, on every piece of paper in their home, every book, every pamphlet, every financial document, every letter, a stamp issued by the British government. So, you went to a British government—you think the post office is bad today—you went to a British government post office here in the colonies and purchased these stamps to put them on the papers in your home. Question: How did the King and the Parliament three thousand miles away know if you had the stamps on the papers in your house here? The answer, the Writs of Assistance Act. The Writs of Assistance Act permitted British agents—see if this sounds familiar—to go to a secret court in London and ask the secret court for a search warrant to search wherever they wished and seize whatever they found which was evidence of any lawbreaking by not having the stamps on your papers. So, it would not be uncommon for you to hear a knock on the door, and it was a British soldier very politely showing you the writ of assistance and telling you, We have the right to come in your household—ostensibly to look for the stamps. Of course, he might be looking for alcohol that you couldn’t prove you had paid tax on; he might be looking for furniture that you had imported from the island that you couldn’t prove you paid tax on. He might even be looking to expel you from the house so that he could take it over for himself and his buddies, which is why we have the Third Amendment written ten years later.
This all happened in 1765. The Stamp Act was so unpopular that Parliament eventually rescinded it, but before Parliament rescinded it, a group of students at the College of New Jersey, now called Princeton, did some quick math and concluded it cost the government more to enforce the Stamp Act than was generated by the sale of the stamps. Now that’s a headscratcher. We all know that George III was an idiot, but was he that stupid that he would enact that tax that cost more to enforce it than was generated and collected by it? Unless the purpose of the Stamp Act was not to collect money, but to remind the colonists that the king was still the king and he could enter their homes at his whim. One of the Princeton students who wrote the report was a 5’4” kid from Virginia by the name of James Madison, known then and throughout his life to his colleagues as Little Jimmy. I hope when I go to heaven I get to stand next to Little Jimmy, because I’ll look like Shaquille O’Neal by comparison.
We fought a revolution; we won the Revolution. Jefferson wrote that “We are endowed by our creator with certain inalienable rights.” Tom Woods explained them: they are life, liberty, and the pursuit of happiness, and they come from our humanity, they don’t come from the government. And because they are natural rights, the government can’t take them away, whether it’s by edict under the name of science, whether it’s by edict under the name of power, whether it’s by a majority of votes, whether it’s by the vote of everyone but one. These rights belong to us and they are ours to exercise as we see fit.
That is, at least, the theory of the Declaration of Independence; the rights that Jefferson calls inalienable we also refer to as natural. Most judges are too secular to use the word natural, so they’ll call those rights fundamental, but they basically mean rights that preexist the government. After we won the Revolution and we wrote the Constitution, Little Jimmy is the scrivener in Pennsylvania. He’s the one collecting the notes; he’s the one refining the language. We all know that that constitution would never have been adopted, but for the promise of the addition of a bill of rights. We also know that that constitution would not have been adopted but for a bribe. The bribe was an agreement by the new federal government to assume the debts of the state governments that they had incurred in the Revolutionary War. Now you can’t call it a bribe. When I call it a bribe—the government actually bribes people?—I get my fingers burned. That’s like saying abortion is murder, taxation is theft; you’re not supposed to say these things on television, but when you do say them, people’s ears perk up. Yeah, it was a bribe. New Jersey got its debts removed and the feds agreed to take over those debts in return for New Jersey ratifying the Constitution, yes, and the same was the case with the majority of the other states as well.
Madison is the most interesting character in all of this because of the various phases of his career. As a student at Princeton and during the Revolutionary era, he’s a radical along with Thomas Jefferson. When he’s crafting the declaration of the Constitution of the United States, he’s a big government person that’s using all kinds of artifices to craft this constitution which allows the federal government to sap the authority of the states and even to take away liberties from individuals. But then something happens to him. He’s a member of Congress; it’s time to write the Bill of Rights. He’s the chair of the committee of the House of Representatives to write the Bill of Rights, and he writes twelve amendments; only ten were adopted, the ten that we now know as the Bill of Rights. So, that iconic language, “Congress shall make no law abridging the freedom of speech,” is Madison’s. All of that beautiful language, your right to say what you want, to think what you say, to publish your thoughts, your rights, your worship or not to worship, your right to assemble or not to assemble, your right to keep and bear arms—which is not the right to shoot deer, it’s the right to shoot tyrants if they take over the government.
That quintessential American right, your right to be left alone—all of those rights are articulated by Madison in the Bill of Rights. The Bill of Rights, of course, is adopted in record time and the first ten amendments are part of the Constitution. And then it becomes time for the Federal government to pay off that debt that it assumed. And so, Alexander Hamilton, who was the secretary of the Treasury, persuades President George Washington and Vice President John Adams and all the big government Federalists who control the House of Representatives and the Senate to enact the First National Bank of the United States. And who do they look to as to whether there is authority in the Constitution to enact a bank? The guy that wrote the Constitution, the guy that just wrote the Bill of Rights, the congressman from Charlottesville, Virginia, little Jimmy Madison. But, this is a different Madison at this point. Madison knows there’s no authority in the Constitution for a central bank and Madison gives one of the greatest speeches in American history, known simply as the bank speech. Google it. It is a masterpiece of the following argument: the federal government has no authority but what was given to it in the Constitution. He doesn’t say this because he was too modest: I know because I wrote the Constitution. But the argument is clearly there. (By the way, if you do Google it, they didn’t have stenographers in those days, they had people writing as fast as they could, so some of the bank speech is literally what came out of Madison’s mouth, some of the bank speech is a summary by the persons taking notes of what they heard Madison say.
But by the time of the bank speech, the former radical, the then big government guy, now becomes a small government Anti-Federalist. They call themselves by the name that’s alien to our ears today, the Democratic Republicans, but this was Jefferson’s maximum individual liberty, maximum state rights, minimum federal government party. Madison has now left the Federalists and he’s back with them. Maybe some of this was personal, I don’t know, but clearly when he gave that bank speech, he exalts two of the ten amendments: the Ninth Amendment, which says, Just because we listed rights in the first eight, doesn’t mean that those are the only rights. There are other rights that human beings have, which the government shall not disparage. And the Tenth Amendment, which says, Those powers not delegated in this Constitution to the federal government are reserved to the states or to the people, respectively. Among those powers never delegated away and among the rights never articulated in the first eight, was the right of the states to create a bank. So, Madison’s argument is clear: there’s no authority under the Constitution for the federal government to create a bank. This argument will come back to haunt him. The bank, of course, passes. Professor Newman gave us a wonderful historical description. It was a disaster. It passes, and then it passes out of existence because it was such a disaster.
When it comes time for the Second National Bank, Madison is in the second half of his second term as president of the United States. He vetoes the Second National Bank of the United States, and then his buddies start to get to him and he changes his mind and he signs into law the Second National Bank of the United States—and by doing so contradicts everything he said in the bank speech, all the arguments that he made about how the federal government can only do what is delegated to it in the Constitution. And this is 1816; the bank comes into existence in 1817. In 1819, the State of Maryland decides to tax the bank. It taxes the Baltimore branch of the Bank of the United States and that tax is challenged in the Maryland state courts, and the State of Maryland prevails in the state courts, and then the federal government appeals it to the Supreme Court, and we have arguably the most consequential Supreme Court case in American history after Marbury v. Madison, which gives the court the right to engage in judicial review, to void what the Congress and the president have done when they exceed their authority under the Constitution. This case is called McCulloch v. Maryland.
McCulloch is the head cashier at the branch of the Second National Bank of the United States in Baltimore, and he is suing Maryland, asking the Supreme Court of the United States to invalidate the tax by invalidating the bank. So, the issue before the Supreme Court is, Does the Constitution of the United States authorize the Congress to establish a national bank? If you read the Bank Speech, Madison’s greatest artistry next to the Bill of Rights, it is clear that it doesn’t, but this is a different Madison and this is a different era, and by this point John Marshall—who, as Professor Newman pointed out, was an investor in the Second National Bank of the United States but sold the investment before ruling on the case—John Marshall writes again, one of the more consequential decisions he’s ever written. But this one—rather than restraining the government as judicial review did in Marbury v. Madison—this one unleashes the government.
So, where in the Constitution can the federal government establish a bank? Here is the government’s argument: well, the federal government can tax, the federal government can collect taxes, so the federal government needs a bank in which to put the taxes that it collects. Well, wait a minute, up to this point the federal government has put tax dollars that it collected into private and state-chartered banks. Why do they need their own bank? Ah, after the seventeen clauses in the Constitution giving seventeen specific, unique, discrete powers to the federal government is the Elastic Clause, also known as the Necessary and Proper Clause, which says, I summarize, I paraphrase, Congress shall have the power to do whatever is necessary and proper to put into action the foregoing authorities that we have given it. So, is the bank necessary and proper—not necessary or proper, necessary and proper—in order for the government to collect taxes and to store the tax dollars before it wastes them?
So, I’m going to take a little break from this. I’m going to come back to necessary and proper. Two theories of the origins of law: one is our humanity, natural rights; by the exercise of reason, we know right from wrong. The other is what’s known as positivism—whatever the lawgiver says the law is, as long as the lawgiver has written it down and it’s been ratified, that’s the law. So, positivism would say “necessary and proper” literally means necessary and proper. John Marshall comes up with an inverse positivism. Because the Constitution didn’t say absolutely necessary, the word necessary doesn’t mean necessary. It means needful or helpful. So, McCulloch v. Maryland says “necessary and proper” doesn’t mean necessary and proper because it didn’t say “absolutely necessary” and Little Jimmy could have put the word absolutely in there but he didn’t. So, by arguing from a word not present in the Constitution, Marshall upholds the constitutionality of the bank.
What about the Tenth Amendment? The bank speech dwells on the Tenth Amendment: the states never delegated away the authority to establish banks. We know that because the states have established their own banks. Ah, Marshall says, But the Tenth Amendment doesn’t say whatever is expressly delegated to the federal government. So, again, this inverse positivism. Two words that are not in the Constitution authorize him to expand the power of the federal government, and in doing so, he writes the following language, which is frequently quoted today, much to our dismay. “Let the end be legitimate. Let it be within the scope of the Constitution an all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consistent with the letter and spirit of the Constitution, are constitutional.” Basically meaning, If Congress wants to do something because it is helpful to the specific powers given to Congress, it can do so. This case, and Marshall’s language, has been cited thousands of times. Regrettably, it is still the law of the land; it is the lynchpin to allow the federal government to get away with the chicanery that it gets away with today.
We’re fighting the War between the States. Lincoln’s government is issuing greenbacks pursuant to a statute the Congress authorizes which allows them to pay the government’s bills in worthless, not gold- or silver-backed, but worthless greenbacks because people are accepting the greenbacks. This is challenged shortly after Lincoln’s death in a very famous case called Hepburn v. Griswold. A lot of these challenges are not somebody suing the federal government because they think the greenbacks are unconstitutional. It’s two private citizens suing each other because one wants to pay his debt to the other in greenbacks and the other says, The war is over, Lincoln’s dead, the legislation was temporary, I’m not going to accept the greenback. So, the litigation is over whether or not a debt, a legitimate, not denied debt under a contract, can be paid in greenbacks. And the Supreme Court says, No, Congress did not have the authority during the Civil War to issue greenbacks because the Constitution says only gold and silver is money in the United States, and there’s no central bank at this point in time.
And then there occurs something that everybody’s talking about today called court packing. So, Andrew Johnson is the president of the United States and the radical Republicans who control the Congress do not want him to be able to appoint new justices to the Supreme Court. So instead of expanding the Supreme Court, they shrink it. It goes from nine to six, meaning when somebody dies or leaves the court there’s no seat for him [Johnson] to replace somebody with. The Supreme Court goes down to six, Johnson is impeached, he survives the impeachment, he doesn’t run for reelection. Ulysses S. Grant is elected. What do the radical Republicans do? Increase the court back up to nine, and Ulysses S. Grant appoints three of his buddies to the Supreme Court. And then there’s a second challenge, again involving a private contract, this one called Knox v. Lee, and the same issue is before the court in 1871 that had been before it in 1869, except you have a different makeup on the court. And this time the court says, Greenbacks, greenbacks. The government can issue whatever it wants and these are lawful for debt.
This case, Knox v. Lee, and its companion cases are known to lawyers and judges as the Legal Tender Cases. They have been argued by scholars time and again, over whether the Legal Tender Cases were properly decided. Justice Scalia told me he did not think they were properly decided but believed that it would be cataclysmic if the Legal Tender Cases were to be overruled and greenbacks not backed by gold or silver were to become money. That is the last time this issue of the power of the federal government to issue paper money is resolved, and the challenges to the Federal Reserve never succeed. There have been a dozen efforts by various litigants to challenge the constitutionality of the Federal Reserve as we now understand it, and all of these challenges are swatted away by judges saying either, This is a political question and if you don’t like the Federal Reserve, go elect a Congress that will undo the Federal Reserve, or—this is judge-made law, this is what judges do when they don’t want to decide cases—You don’t have the standing to bring this litigation, meaning, Your injury is not unique to you and therefore under the Case or Controversy requirement of the Constitution, we’re not going to hear the case. So, the last time the courts examined the constitutionality of the Federal Reserve, it had to do with how people get on the Federal Reserve and is it constitutional for the president to appoint these people and for the Senate to confirm them. And the court said, We’re washing our hands of it.
Some years ago, Lew Rockwell asked me to give a talk entitled “Do We Still Have a Constitution?” At the time I gave the talk, I said barely. I’m not sure that we still have a Constitution now because of the ability of the government, the ability of courts, to twist and torment words, and we have this thing called precedent. Just because John Marshall in 1819 said that “necessary and proper” really means needful and helpful, should we be bound by that? For those of us who believe that the Constitution is an instrument of restraint, this is the contrary of that. For those who believe like the progressives and the Left today that the Constitution is an instrument that unleashes the federal government, they delight in this. The Madisonian view of the Constitution was, I take this from the bank speech, I don’t take this from his signing the legislation. (By the way, when you sign the legislation establishing the Second National Bank, he never repudiated the bank speech; he never repudiated his veto. He just signed it because the popular will was so strong. He also signed it because he wanted to help his fellow Virginian James Monroe get elected president of the United States and he didn’t want the issue of a Second National Bank to be a campaign issue in the presidential election of 1816.) But just because we have these precedents that permitted the big government people to get away with what they wanted 150 years ago, should we be bound by them today?
Unfortunately, that’s the way the legal system works. All those beautiful words in the Declaration of Independence and the Bill of Rights, some of which I summarized for you, work in a law school classroom and can excite us in an environment like this. But unless we resist the forces of government that are sapping power liberty, whether it is our liberty to say to the government, I have the right to take chances and you can’t take that right away from me, or whether it’s our liberty to leave, or liberty to ignore the government, our right to travel, our right to say to the government You shall not pass this threshold. Whatever these rights are, they only work when we exercise them. We can talk about them all day. We can write about them well into the night, but unless courageous people exercise these rights, we are going to be stuck under the thumb of government, whether it’s a state government like New Jersey or Michigan or New York or whether it’s a federal government like we have today.
There’s an argument that I made holding up my iPhone during the Justice Kavanaugh hearings which evolved around his personal behavior in which I said, Here’s my problem with him: he thinks that the federal government and the state governments can get in here without a search warrant and he’s written that. And I encouraged Republicans on the Senate Judiciary Committee to ask him about that. Nobody asked him about it. He may be conservative politically on certain social issues, but not when it comes to the power of the government to intrude in our lives. I fear that with the court today. I once had the privilege to interrogate Justice Scalia before about twenty-five hundred people at the Brooklyn Academy of Music, and I was pounding him on the natural law, and he looked at me and he goes, “You’re a freak for the natural law. The fourth amendment only protects persons, houses, papers, and effects. That’s the language in the fourth amendment.”
I say, “Justice Scalia, this is an iPhone.”
“Yes, I know. I may be older than you, but I know what it is.”
“In the iPhone is a computer chip. Is the computer chip an effect?”
“I’d rather not answer; I think that case is coming before us. You tried to trap me and tried to trick me.”
Well, I mean, I knew the case was coming before them and I did try and trap and trick him, but I also wanted to make a point. The language that Madison used—persons, houses, papers, and effects—was intended to protect our right to privacy, what Madison called the right to be left alone.
So, where does all of this leave us today? We know that most of what we have heard about covid is utter nonsense, driven by those in power who want to use a crisis to control us. I have never heard a more articulate vision and version of that nonsense than my longtime bosom buddy Tom Woods just gave us earlier this afternoon. We know from reading Bob Hicks’s masterpiece Crisis and Leviathan that government always grows in crisis. We also know that there is nothing in the world more permanent than a temporary government program. And we know, we can laugh at the juxtaposition of words, but we know what the government will do. It will hang on to that power, keep it long, keep us under its thumb, get us accustomed to it. There is no concentration camp easier to manage than one where the inmates are familiar with its terrors, because they have allowed its terrors to be visited upon them in the name of democracy and electing people to terrorize them.
I expect that when I die, I will die in my bed peacefully surrounded by those who love me, faithful to first principles; but not everybody will have the luxury of dying that way. Some young people here may die in a government prison, faithful to first principles. Some young people here may die in a government town square, to the sound of the government’s trumpets blaring, but faithful to first principles. When the time comes, you will know what to do, because freedom lies in the human heart and no government, no army, no tyrant can take it away. But it must do more than lie there. We must exercise it. We must terrify the government, because, as Jefferson said, “When the people fear the government, there is tyranny. When the government fears the people, there is liberty.” Thank you and God bless you.
About twelve years ago [in 2016], an obscure law professor wrote a law review article arguing that the Federal Reserve, Social Security, Medicare, and paper money is unconstitutional. Her name: Amy Coney Barrett.
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".
Hayek’s last proposal for monetary reform calls for privately issued, competing fiat currencies. It's debatable whether or not this is a good idea.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "Hayek's Plan for Private Money".
Despite double-digit unemployment rates, banks are keeping loan-loss provisions low, no doubt assuming Uncle Sam will keep everyone’s boat afloat. But all good things come to an end.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "How the CARES Act Is Still Kicking the Can"
Economic growth results from increasing production, and the money supply is always sufficient to foster exchange. The boom-bust cycle only occurs when production is distorted by a growing money supply.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Say's Law and the Effects of a Growing Money Supply".
Kristoffer Hansen joins the show to discuss everything about interest rates, as detailed by Rothbard in Chapter 6 of Man, Economy, and State.
Hansen and Jeff Deist cover the "pure" rate of interest, expressed via time preference, and why the temporal nature of production helps us understand the premium for present goods relative to future goods. Far from exploiting workers or borrowers, capitalists actually advance money today in exchange for a more risky and uncertain return tomorrow—in the process making us all wealthier based on our individual subjective preferences. At every stage of production, interest helps producers get the capital they need now to bring us, the consumer, all the goods and services we enjoy. This show explains why we can't understand the productive economy without understanding interest rates.
Read the book free of charge in searchable HTML format here.
Use the code HAPOD for a discount on Man, Economy, and State from our bookstore: Mises.org/BuyMES
Additional Resources Dr. Joe Salerno's introduction to Man, Economy, and State: Mises.org/SalernoMES
Man, Economy, and State: Mises.org/MES
In a very comprehensive discussion, Bob talks with Rohan Grey, Assistant Prof. of Law at Willamette University. Rohan is an expert on the history of US fiscal and monetary legislation, as well as Modern Monetary Theory (MMT).
Mentioned in the Episode and Other Links of Interest: The YouTube version of this interview.Rohan Grey’s CV, and his paper on the history of US coinage.Rohan’s presentation on money as a creature of the law, not the State.Jon Stewart rips Paul Krugman on the trillion dollar platinum coin.Bob’s original book review at Mises.org of Stephanie Kelton’s book on MMT. George Selgin’s response, which in turn prompted this post from Nathan Tankus.Kelton’s book, The Deficit Myth. #CommissionsEarned (As an Amazon Associate I earn from qualifying purchases.)Bob’s older critique of an MMT accounting argument.Bob Murphy Show ep. 18, interview with Warren Mosler.Bob’s critique of fractional reserve banking.Bob on Bob Higgs on World War 2 (a portion of the presentation).Help support the Bob Murphy Show. For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
There are some reasons to be optimistic about the future of free market money. On the other hand, the world's governments will fight true currency competition every step of the way.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Why Governments Hate Currency Competition".
After the Great War, Austrian cities and towns began issuing their own money. The Germans tried something similar, but without the voluntary and decentralized aspects of the Austrian model. German disaster ensued.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Austrian "Credit Money" Craze of 1920".
It is possible to conceive of a world where fractional reserve banking is understood by both banker and depositor and involves no deception or fraud. But in that world, deposits cease to be money and become complex credit securities.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Are Fractional Reserve Bank Deposits Money?"
It's easy to dismiss MMT out of hand, but the impulse to create something from nothing resides deep in the human psyche.
Narrated by the author.
Original Article: "MMT: Not Modern, Not Monetary, Not a Theory".
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".
Abstract: Given Bitcoin’s apparent lack of non-monetary uses, Luther (2018) argues that its emergence as a medium of exchange invalidates the regression theorem, or at least severely limits its relevance to identifying which commodities could emerge as media of exchange in the absence of State intervention. However, this view misinterprets both the regression theorem itself and the problem it was developed to address. The goal of the regression theorem was not to identify which commodities could become monies, but to provide a subjectivist explanation of the purchasing power of money. To do this, it requires only that some individuals valued the good in question before its use as a medium of exchange, not that it had some objective pre-monetary use.
money — regression theorem — austrian economics — bitcoinJEL Clssification: B53, E42, E49
George Pickering (georgepickering@gmail.com) is a graduate student at the University of Oxford. The author would like to thank Dr. Luther and all the other participants at the Harwood Graduate Colloquium on Monetary Policy and Institutions, hosted at the American Institute for Economic Research from July 28–31, 2019, for their insightful discussion and comments on this topic.
I. INTRODUCTION The emergence of Bitcoin and other private cryptocurrencies over the past decade has posed a number of interesting questions for economists, and practitioners in the Austrian tradition have embraced the opportunity to judge these peculiar case studies against the established canon of Austrian monetary theories, and vice versa (Selgin 2014, Livera 2019). In particular, much attention has been paid to the relevance of cryptocurrencies to Ludwig von Mises’s famous regression theorem (Davidson and Block 2013, Murphy 2014, Šurda 2014). One recent addition to this literature by Luther (2018) is representative of much of the broader conversation in that it judges the use of private cryptocurrencies as media of exchange to be a threatening counterexample to the validity of the regression theorem, while offering a novel and interesting justification for this familiar conclusion.
Luther argues that, due to Bitcoin’s lack of obvious non-monetary uses, Austrian economists are left with two equally plausible conclusions to choose between: one can concede that Bitcoins actually are “intrinsically worthless,”Luther uses the unnecessarily confusing term “intrinsically worthless” to mean lacking in “value apart from any role the item might play as a medium of exchange” (Luther 2018, 33). or one can reason that, since the regression theorem requires that media of exchange must have first had some non-monetary use, Bitcoin therefore must have had some pre-monetary use, even if that use was the mere satisfaction of the peculiar tastes of its early adopters. The first of these two conclusions, Luther argues, entirely invalidates the regression theorem, while the second preserves its validity by severely limiting its scope and prescriptiveness to the point of practical irrelevance. Specifically, Luther argues that the “practical relevance” of the regression theorem, which Bitcoin has swept away, was “in (1) distinguishing which items might emerge as money without government support and (2) offering suggestions as to how the government might launch a money that could not emerge naturally” (Luther 2018, 40).
Luther’s argument is worth addressing not only for its own particular claims, but also because it rests on a misinterpretation of the regression theorem which is not uncommon in the broader conversation on cryptocurrencies. Mises’s goal when formulating the regression theorem was not to explain the origin of money, nor to comment on which particular commodities could and could not spontaneously emerge as monies, nor even to advise governments on how to launch fiat monies, but specifically and exclusively to provide a subjectivist explanation of the present purchasing power of money. To do this, it requires only that the commodity in question was subjectively valued and exchanged by individuals prior to its use as a medium of exchange, not that it had some objective pre-monetary use.
II. THE GOAL OF THE REGRESSION THEOREM Mises’s goal when developing the regression theorem was to explain the purchasing power of money using Menger’s subjective marginal utility theory of value. Previous authors (Helfferich [1903] 1923, 577) had considered such an application of subjectivism impossible without falling into circular reasoning: money has purchasing power because individuals value it, but individuals only value money qua money because it has purchasing power. In order to break out of this circularity, Mises’s regression theorem famously introduced the time dimension, arguing that individuals in fact value acquiring money in the present because they expect it will have purchasing power in the future, an expectation informed by the observable array of prices in the past.
Anticipating the criticism that this merely pushed the circularity problem backwards into an infinite regress problem, Mises emphasized that this regress did in fact have a concrete starting point at the time before the commodityIn this context, “commodity” should be taken broadly to mean something subjectively valued by individuals, rather than denoting a good with any particular physical characteristics. in question was used as a medium of exchange, and was simply traded directly against other commodities on account of its own subjective valuation by consumers (Mises [1912] 1953, 120–21; Mises [1949] 1998, 405–08). “At this point the theory must hand over all further investigation to the general [subjective marginal utility] theory of value” (Mises [1912] 1953, 120).
Luther’s assertion that the goals of the regression theorem extend beyond this explanation of money’s purchasing power leaves us in the difficult position of attempting to prove a negative, especially given that his own interpretation of the purpose of the regression theorem is more an underlying assumption of his paper than one of its explicit, fully-stated arguments. However, in addition to our above summary of what the goals of the regression theorem were (and, by extension, were not) several other pieces of circumstantial evidence combine to undermine the persuasiveness of Luther’s interpretation of the goals and “practical relevance” of the regression theorem.
Perhaps most fundamentally, the view that the regression theorem was an attempt to explain the origin of money and “which items might emerge as money without government support” (Luther 2018, 40) sits ill at ease with the fact that Mises subscribed to Carl Menger’s theory of the origin of money ([1871] 2007, 257–62; 1892), which he included uncritically in both The Theory of Money and Credit ([1912] 1953, 30–34) and Human Action ([1949] 1998, 398–404), going so far as to describe Menger’s theory as “irrefutable” in the latter work (ibid., 402).
Furthermore, Mises’s exposition of the regression theorem in The Theory of Money and Credit takes place in an entirely different section of the book from his discussion of the origin of money, separated by nearly 100 pages. In Human Action, Mises’s discussion of the regression theorem takes place in a section explicitly marked as being concerned with “the determination of the purchasing power of money” (ibid., 405), rather than with its origins or the question of which particular commodities could become monies. After having completed his exposition of the regression theorem in The Theory of Money and Credit, Mises explicitly states that “the preceding investigation” had been “concerned to explain the origin of the objective exchange-value [i.e. the purchasing power] of money” ([1912] 1953, 123, emphasis added), rather than having been an attempted explanation of the origin of money, or what particular qualities a commodity must have to become money. Mises further stressed that the regression theorem does not claim that a money’s present purchasing power is strictly determined or solely explained by the ratios at which consumers exchanged it prior to or apart from its role as a medium of exchange ([1949] 1998, 407), which handles any objection that the regression theorem is unable to account for Bitcoin’s high purchasing power now relative to the humble rates at which it was originally exchanged against other goods.
None of these facts could, in isolation, be said to prove the negative that the regression theorem has no relevance to the question of which particular types of commodities are capable of emerging spontaneously as monies. However, they all tend much more toward the view that the goal of the regression theorem was to provide a subjectivist explanation of the purchasing power of money, rather than to distinguish “which items might emerge as money without government support” (Luther 2018, 40).
III. THE KEY REQUIREMENT OF THE REGRESSION THEOREM: SUBJECTIVE VALUE OR OBJECTIVE USE? In his article, Luther (2018, 39) explicitly distinguishes between a commodity’s subjective valuation by individuals and its objective non-monetary uses, pointing to the latter as supposedly the more relevant to the question of whether Bitcoin violates the regression theorem:
There is no denying that some people valued bitcoin prior to its use as a medium of exchange. But the question is not whether people valued bitcoin; it is why people valued bitcoin. Did they value it because it had nonmonetary uses? [Emphasis original.]
If it were true that the regression theorem required that the money commodity must have had some objective use prior to its use as a medium of exchange, in order to have gained purchasing power, then it could conceivably be argued that Bitcoin still threatens the regression theorem regardless of that theorem’s original goal. However, this is flatly not the case. Indeed, Mises repeatedly and explicitly emphasizes that “the original starting-point of the value of money was nothing but the result of subjective valuations” ([1912] 1953, 121, emphasis added). In this light, the idea that Bitcoin first gained purchasing power because individuals exchanged it directly due to their “peculiar preferences” (Luther 2018, 41), rather than due to any objective use, not only fails to threaten, but falls entirely in line with the regression theorem.
This subjectivist nature of the regression theorem is admittedly shrouded somewhat by Mises’s unnecessarily confusing use of the word “industrial” to denote the qualities of the monetary commodity that might lead an individual to value it aside from its use as a medium of exchange.
However, a closer reading reveals that even this objective-sounding word masks a decidedly subjective definition: “to use it for industrial purposes, i.e., either for consumption [the direct satisfaction of one’s subjective preferences] or for production” (Mises [1949] 1998, 406). This further emphasizes that it is subjective value, not objective uses, that the regression theorem requires a commodity to have originally possessed, in order to explain its purchasing power as a medium of exchange.
IV. CONCLUSION Luther (2018) misinterprets the purpose and requirements of the regression theorem in a manner that leads him to significantly overestimate “the constraint the regression theorem imposes on the set of potential monies” (2018, 42). The goal of the regression theorem was not to delimit which particular commodities can and cannot emerge as a money, but to explain the purchasing power of money using the subjective marginal utility theory of value. To do this, it requires only that the commodity in question was subjectively valued by individuals, and hence directly exchanged, prior to its use as a medium of exchange, not that it had some objective pre-monetary use. In light of this, it should be clear that the supposed threat posed to the regression theorem by the emergence of Bitcoin as a medium of exchange has been significantly overstated.
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"
Our guest is economist Ryan McMaken, senior editor at the Mises Institute. He was the economist for the Colorado Division of Housing from 2009 to 2014. He is also the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre — a book that reveals his aptitude for analyzing economic events in their broader cultural context.
Additional Reading Thanks to Lockdowns, State and Local Tax revenues Are PlummetingThe Fed’s Balance Sheet Skyrockets As It Doubles Down on Inflating Asset PricesAnother Right Abolished by the Government’s COVID Lockdown: The Right to a Speedy TrialColorado County Says It Will Arrest All Tourists, Including Those Who Own Property ThereThe COVID Lockdowns Are What Twenty-First Century Mob Rule Looks Like
[Money, Inflation, and Business Cycles: The Cantillon Effect and the Economy, by Arkadiusz Sieroń. Abingdon: Routledge, 2019. x + 162 pp.]
Abstract: Austrian economists hold that money matters a great deal in concrete terms in the immediate short run and has permanent long-run effects. Sieroń's book investigates the Cantillon effect, which indicates that money is not neutral because inevitably it is injected unevenly, creating economic distortions. These distortions are important to the long run and the Austrian theory of the business cycle.
Economists agree that money matters, but that agreement stops when it comes to how money matters. For example, some say it only matters in the short run while others believe that it matters in the short and long run. Austrian economists hold that money matters a great deal in concrete terms in the immediate short run and has permanent long-run effects.
Given that the world economy has experienced more than a decade of radical and unproven monetary policy by central banks and half a century of fiat currencies, the effects of money are more important than ever. Professor Sieroń has produced a comprehensive review of this question and has extended the analysis of this key question in many different directions.
The central topic of the book is the Cantillon effect, which appears in the titles of all but one chapter. This effect was named after Richard Cantillon, the first economic theorist. He wrote, circa 1730, that the effect of new money depended on where it was injected into the economy.
Chapter one deals with the neutrality of money, where money has no effect on the economy. Five types of money neutrality are described and examined. The assumptions made for each are explained, and in particular, all the conditions that must exist for “dynamic neutrality” are explained. The reader will no doubt come the conclusion that money is never neutral and that it could be dangerous to make such an assumption as part of one’s economic analysis.
In chapter two, the theory of the Cantillon effect is explained. It begins with an increase in the money supply and who first receives the money. That means the increase of money changes income distribution in favor of who first receives the new money. Then, depending on the preferences of those who first receive the money, some goods will experience an increase in demand, while other goods will experience a relative decrease. This in turn changes outputs of various goods and ultimately investments. Cantillon famously noted that if the new money comes into the hands of savers, that the interest rate would decrease, but if it comes into the hands of consumers, the interest rate would increase, as entrepreneurs would need to borrow more to meet the increased demand for goods.
Chapter three recaps the Cantillon effect in the history of economic thought. Beginning with Cantillon himself, the views of David Hume, John Cairnes, and other classical economists are examined. Then Irving Fisher, John Maynard Keynes, New Keynesians, Post Keynesians, and other modern schools of macroeconomics are considered, including the Austrian school, along with a special emphasis on Milton Friedman’s approach. In general, non-Austrians tend to think that Cantillon effects exist only in the short run and the effects can be generally assumed away, whereas the Austrian economists incorporate them as central to their analysis and show that the effects are important even in the very long run.
Chapter four provides a complete classification of the various types of Cantillon effects. Cantillon’s own analysis is presented and then extended to the modern context. Chapter five examines the Cantillon effect in the modern context of credit expansion. In chapter six, the various types of credit expansion are examined to explain the secondary characteristics of a business cycle. So, for example, if the expansion is mainly in the area of home mortgage credit, then a housing bubble results. In the next chapter, price bubbles in certain asset prices are shown to be proof par excellence of the Cantillon effect to which Austrian economists are alert, but which mainstream economists ignore, except perhaps in the positive light of the so-called wealth effect.
The next two chapters explore two of the more controversial topics, from the mainstream perspective. The first, chapter eight, analyzes the impact of new money on income and wealth. It is shown here that there are winners and losers from new money. For example, the Fed’s monetary expansions tend to help the wealthy, banks, big corporations, and the financial industry more generally. Subsequently, as prices rise, the Fed’s policy hurts retirees, those on fixed incomes, and wage earners who receive the new money last, if at all. This is one reason why the Fed and most mainstream macroeconomists vigorously deny the existence and importance of Cantillon effects and adopt the assumption of neutral money. Tragically, they often get away with this ruse because the theft cannot be directly seen, except in the final result.
The last substantive chapter, chapter nine, explores the Cantillon effect in the international context. Given globalization, the structure of production is now more integrated than ever, and that is a good thing. However, as a result, new money creation by central bank will have negative international consequences. Under certain circumstances the channels of new money flow can dampen the business cycle and price inflation, but the primary impact is for major central banks, in particular the Fed, to export business cycles, economic crises, and price inflation. Obviously, the Fed would vigorously deny that it is the source of global economic instability, but others have found that this is empirically the case. The book is concisely written and is “insight dense,” and is a much-needed contribution to the literature.
Dr. Bob Murphy joins the Human Action Podcast to discuss one of the most important issues of all: how money and credit work in today's society. Jeff Deist recently commissioned Murphy to write a series of articles on money mechanics (Mises.org/MoneyMechanics), an exceedingly important topic for critics of the Fed — and today's podcast serves as an introduction to the project. The articles will be compiled into an e-book, with plenty of graphics to simplify the basic process of money creation in a fractional reserve system. If you want to understand how the Fed works, how money and credit come into being, how interest rates arise, and what it all means for you, don't miss this great upcoming series at mises.org.
Additional Resources Jeff Deist on Understanding Fed Money Mechanics
Along with Carlos Lara, David Stearns, and the late Nelson Nash, Bob Murphy has been heavily involved in educating the public and financial professionals about the Infinite Banking Concept (IBC). This is a process of using a dividend-paying Whole Life policy as a cash management tool, to “become your own banker” (in Nelson’s famous words). Bob gives the quick explanation of how this works.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Central bankers dismiss gold as a relic, even as they buy up more of it. Politicians dismiss gold as money they don't control and can't expand. Holders dismiss gold as outdated tech. And investors dismiss gold as a static metal paying no yields.
So why does gold still matter? Why does it hold value over millennia? Why does it threaten inflationist governments? Why does it seem to be flowing West to East? Why does an ounce of it still trade for more than $1,000, if the critics are right? This is the comprehensive show on gold and its enduring role in today's economy, with Keith Weiner of Monetary Metals.
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.
Quarterly Journal of Austrian Economics 22, no. 2 (Summer 2019) full issue. ABSTRACT: Inflation not only debases the value of currency by lowering purchasing power. It also serves to erode the quantity and quality of marriages while creating distortions in the decision-making processes of those hoping to form marriages and to have children. Furthermore, a loss of purchasing power helps to create relational tension for married couples, contributing to increasing divorce rates throughout the globe. As for the formation of families via marriage, the literature surrounding inflation and the family shows that price increases in higher education and housing both limit the number of first marriages as well raising the average age at which they occur. These phenomena are present in Western democracies, Islamic theocratic regimes, and highly-developed East Asian economies. Rising prices impact already married couples who would pro-create, but decide to accelerate or nearly eliminate child-bearing based on the inflationary environment in which they live. Finally, the literature shows that a loss of purchasing power leads to marital tension and higher rates of divorce. This trend is exhibited all over the world. This relationship occurs across cultural and religious systems as well as differing levels of economic development. While the problem of rising prices is economic in nature, it is shown to have deleterious effects upon the family institution.
inflation family JEL Classification: D10, E34 INTRODUCTION At the centennial gathering of the American Economic Association, Dr. Gary Becker addressed those assembled and described a growing awareness of how macroeconomic forces affect the family institution. In his concluding remarks, he noted that the, “evolution of the economy greatly changes the structure and decisions of families.” (Becker 1988) The aim of this review is to summarize the literature that describes how a variety of rising prices impact family formation, fertility, and failure. Since family institutions exist throughout the varied cultures of the world, the review will observe the heterogeneity of inflation’s impact on the family across cultures and national borders.
There are two key distinctions that this writer wishes to articulate. The first is in regards to the philosophical framework and definition of the family institution. In my understanding of the role of family in society, I borrow from the Dutch Calvinist philosopher Abraham Kuyper (while rejecting his views on state intervention into various markets among other views). He describes the family as a divine creation. As such, this ‘sovereign sphere’ is an institution designed with its own rights, responsibilities, norms, roles, and limits. In addition, the family institution is not subject to the control of other institutions such as ruling authorities, religious institutions, or markets. While at the same time, the family social unit will freely interact with all of the other institutions without being absorbed by or otherwise diminished in its role as the primary way in which children are raised, educated, and socialized. In Kuyper’s view, the other divinely inspired institutions such as markets (for goods, services, money creation, and financial assets) and governing authorities also have their own divinely constructed purposes, jurisdiction, and limits.
Our world now represents what happens when mankind rejects the divine order and decides to merge the distinct spheres, regardless of the rationale for doing so. The most important example of such an ‘unholy marriage’ in our time occurs when the market for money creation is combined with the governing institution. In such instances both of these institutions have already stepped outside of their divinely-ordained spheres of operation. Furthermore, this new, man-made organization necessarily sets itself up against the other institutions that choose to retain their intended form and function. As such, this man-made entity will inevitably infringe on the proper operations of the other sovereign spheres. This viewpoint provides a narrative for the corrosive effects of modern central banking cartels upon the family institution. In Kuyper’s view, “surely, to centralize all power in the one central government is to violate the ordinances that God has given for nations and families. It destroys the natural divisions that give a nation vitality, and thus destroys the energy of the individual life-spheres and of the individual persons.” (Van Dyke 2015)
This observation is quite meaningful in our time as we observe both Central Bank inflation and the ‘deinstitutionalization’ (Cherlin 2004) of the family and of marriage throughout the world. Altered family structures and decisions are seen in the delay of family formation and by increasing divorce rates across the globe. Perhaps unwittingly, Cherlin affirmed that a growing disregard for Kuyper’s definition of the family institution has emerged in 20th century America for the very reasons that Kuyper describes. In light of this deinstitutionalization, this literature review seeks to describe how researchers have linked declining purchasing power to the crumbling institution of marriage.
The second point of clarification is that the writer of this review defines inflation as any increase in the supply of money and credit. I reject the notion of ‘inflation’ as an increase in government-measured price levels. In most cases, the literature does not adopt this writer’s definition. Therefore, when some writers refer to “inflation”, I will refer to “price increases”. The first reason for this clarification is based on Richard Cantillon’s observation that price increases are not simultaneous, universal, nor do they occur by the same degree in all places after monetary injections have occurred. (Murphy 1989) In addition, the writer discards the mainstream use of the term ‘inflation’ on the grounds that it is considered to be synonymous to the US Bureau of Labor Statistics’ Consumer Price Index. I reject the CPI and commonly used term ‘inflation’ precisely because it does not reflect the experience of rising prices within households, across income levels, races, or even genders. (Michael 1975, Hobijn and Lagakos 2003, Armantier et al. 2012, Sequino and Heintz 2012, Bryan and Venkatu 2002)
To provide an overview of the literature on family formation, I first begin with the economic theory of family formation articulated by Gary Becker. In 1974, he described marriage as a process of “Positive Assortive Mating” where potential spouses seek to improve their overall utility as compared to the utility held by remaining single. The existence of mate selection processes by no means requires one to dismiss marriage as a divinely created institution. The fact that men and women select partners to improve overall utility does not require that the institution is therefore simply a man-made institution. Just as a person may select a seat on a airplane based on their subjective values that account for prices, comfort and other factors does not mean that they are responsible for the construction of the plane or for the physical laws that govern its operation. Likewise, in mate-seeking, the desire to gain additional marginal utility in a state of marriage, potential partners consider factors such as IQ, education level, height, ethnicity and more, while not altering the fundamental design of marriage itself.
Recent scholarship has revealed that in the US, price increases and the ensuing distress borrowing by young people is positively correlated to the average age of first marriage. (Bosick and Estacion 2014, Gicheva 2016) To be more precise, education-based debt levels of the potential spouse have been shown to have a negative impact on the positive assortive mating that Becker describes. These high debt levels are associated with inflation in higher education tuition. However, these high debt levels are more consistent with the educational attainment of middle and upper middle-class American youths who can afford to delay the necessity of work.
Among these more affluent young people, it is obvious that not every couple wishes to live together or to have children. The literature shows that among those with higher incomes and higher levels of educational attainment, many couples avoid traditional marriage and choose to cohabitate simply because they have different costs in view than their poor counterparts. The literature affirms that these couples are waiting to reach financial milestones, not in terms of nominal cash holdings or income, but in terms of real asset and property accumulation. The achievement of such goals is made more difficult with a lack of purchasing power. (Smock et al. 2005) All told, the literature paints a picture wherein inflationary pressure across geographic, racial, and educational descriptors is linked to delayed marriage formation and non-formation in the case of cohabitating couples.
In the case of the poor in the US, rising prices for the goods that they consume have been shown to increase criminality among single males. Males who have resorted to more lucrative criminal activity and the incarceration that often ensues has, resulted in low marriageability status across cohorts in the United States. Another consequence of male criminality is that there are increasing levels of fatherless children throughout racial groups, as these men are viewed as reproductive partners, but not as traditional husbands or fathers. (Rosenfeld et al. 2018) This situation further erodes the family institution when coupled with the wage inflation that has been more prominent for females in the US, which leads many women (even those with low labor productivity) to eschew husbands as providers in exchange for provision from the state, their own wages, or older family members. (Schneider et al. 2018)
The presence of increasing prices has also been shown to impact the fertility rates of married couples over time and in different cultural and economic settings. Robert T. Michael observed that wealthy and poor households experience price increases differently in the modern US economy. Since this is the case, it follows that the poor and the wealthy would approach fertility decisions differently as well. (Michael 1979) This observation foreshadowed Caldwell’s work in international family economics, which asserted that families in low-income countries respond to price increases by growing the number of children they bring into the world. They decide to do so because their offspring represent net positive income flows and because the children can contribute to overall family wealth with their low-skilled labor. Conversely, in developed nations, the increasingly high price of educating children for modern economic life leads families to have fewer children, as each child produces negative income flows during their years under their parents’ roofs. (Caldwell 1983)
In more recent research, Kaplan suggested an update to Caldwell’s view by introducing different measures for ascertaining intergenerational wealth flows. Specifically, there is a call to recognize the fact that underdeveloped economies often measure wealth in terms of commodity acquisition rather than nominal monetary amounts. (Kaplan 1994) When considering the body of literature on how higher prices effects fertility, it is shown that a lack of wealth across time, culture, and economic standing all produce fertility rates that are distortions from a natural state of reproductive supply and demand within households. Ultimately, developed nations tend to have lower fertility rates, leading some to fall short of zero population growth, while developing nations still struggle with the challenges of young, booming populations. When families in these poor nations also experience price increases, fertility rates are also shown to increase. The literature also demonstrates that there is a negative relationship between price increases and fertility in developed nations.
Across the world, families also dissolve under the pressure of escalating prices. The literature examining US divorce rates since 1929 has shown that during periods of large price increases that there is a robustly positive relationship to marriage dissolution. (Nunley and Zietz 2012) This relationship was most powerfully illustrated throughout the 1960s and all the way through the Vietnam Era. The escalating prices caused by ‘Great Society’ legislation such as Medicare and Medicaid, coupled with the massive expenditures on the war in Vietnam both occurred during this period and represented a shift of real resources from American households to the welfare state and to war-making. These macroeconomic realities left the already married with a loss of purchasing power and all of the relational strains that come along with it. Some literature has asserted that this ongoing increase in the divorce rates in the US, and particularly the high divorce rates of the 1970s, were caused by the adoption of no-fault divorce law. (Peters 1993, Friedberg 1998, Rogers et al. 1999) However, Wolfers finds that while these changes in the legal environment did have an initially positive but weak correlation to divorce rates, these effects did not persist over time. (Wolfers 2006)
Meanwhile, in the UK, a similar conclusion was reached by research which showed that the liberalization of divorce law simply lowered the cost of the divorce transaction, ensuring the end of marriages that were already “on the rocks”, while having no impact in the long-run trend. (Smith 1997) Throughout the European continent, divorce rates have also climbed substantially in the post-WWII era. Some have indicated that the rise of the welfare state (itself a part of the inflationary regime) has encouraged both lower rates of family formation and more frequent divorce. (Balestrino et al. 2013)
In southwestern Asia, price increases in the Iranian housing sector and for dowry payments have been shown to drive increased divorce rates from 1982 through 2010. (Farzanegan and Gholipour 2015) The authors note that this is a particularly troubling social trend in such a conservative Islamic state. Also, in Pakistan, connections have been drawn between price increases for the goods that households typically consume to increases in domestic violence and female spousal abuse, clinical depression among both men and women, and understandably, an increasing divorce rate. (Khanam et al. 2015)
Across the planet, central bank inflation has led to price increases in the markets for goods that are important to families everywhere. There is little doubt that local customs surrounding family formation and expectations for familial behavior can produce a wide variety of responses to the loss of purchasing power. In order to capture more of those specific examples, this review will now turn to a more precise look at the realities of family life under the pressure of elevated prices.
PRICE INCREASES AND FAMILY FORMATION In 1960, the average age for first family formation for US females was 20.1 years and 22.2 for males. Forty years later, the first marriage for US women had jumped to 24.4 and to 26.1 for men. (Schoen and Canudas-Romo 2005) Even greater change has been afoot in England and Wales during the same time period. There, the average age of first marriage for women went from 21.0 to 26.3 and from 23.4 to 28.3 for men. At the same time these researchers note the increase in co-habitation as an alternative arrangement for adults living together, leading to a decline in the real prevalence of marriage over time.
Recent research in the US regarding the later age of first marriage has yielded findings stating that the rising cost of higher education and the accompanying debt load held by both men and women is positively correlated to the average age of first marriage. (Addo et al. 2018) More specifically, Addo’s research shows that the greater the student loan debt, the more likely young men and women are to cohabitate and for longer as opposed to entering a marriage relationship. Furthermore, with more education, the expectations of young people are that they would marry one with similar educational status. (Becker 1974) In addition, it has been shown that MBA students not only raise their age of first marriage, but that they decrease the likelihood of ever being married at all. (Gicheva 2016) This relationship is stronger among female MBAs than for their male counterparts. Research has found that for every $1,000 in student loan debt that women carry, they reduce their odds of first marriage by 2 percent per month after undergraduate graduation. (Bozick and Estacion 2014) Although massive higher education debt loads are peculiar to the US it is plausible that if significantly negative net worth is carried into the housing market, that a person carrying the debt will seem less marriageable. (Bleemer et al. 2014) Alongside such credit-based challenges is the lack of affordable housing, a phenomenon that is hardly unique to the US. In Great Britain price increases in the housing market have also kept young people at home (and single) longer than in past decades, thus delaying the age of first marriage there as well. (Ermisch and Francesconi 2003)
The marked increases in East Asian first marriage age have also been driven by housing prices. In Singapore, qualitative studies on the attitudes of young singles make it clear that the male is under considerable social pressure from family and their potential spouse to acquire a flat. (Jones et al. 2012, Quah 2008) Delays in first marriage in Eastern Asia demonstrate similar trends as those in the US but to an even higher degree. In Japan the average age of first marriage for men has risen from 26.9 in 1970 to 30.5 in 2010. Their female counterparts have seen a change in this statistic go from 24.2 to 28.8. (Raymo et al. 2015) The pattern is similar in South Korea and Taiwan. The question addressed here is whether price increases have anything to do with this phenomenon. The literature does indicate that the later age for family formation in East Asia is largely driven by rising prices. These prices include the housing, education, food, and energy sectors. It is apparent to researchers that these increasing costs of living do have a positive relationship to age at first marriage. (Park and Sandefur 2005) These rising prices are coupled with cultural expectations of aspirational consumption which also contribute to first marriage delays. (Mu and Xie 2014) Other features that delay first marriages in East Asia include extended family expectations of co-residence, educational mismatches in the marriage market, and extended family expectations regarding fertility. Despite these nuances, the common theme of price increases and their positive correlation to age at first marriage is present both in the East and the West.
PRICE INCREASES AND FAMILY FERTILITY When Robert T. Michael observed that poor families within the US experienced price increases differently than the wealthy, and that their experiences were worse than the reported CPI measurements, it became clear that the poor would behave differently than the wealthy in the face of rising prices than those of higher income levels. (Michael 1979) This reality inside the US makes Caldwell’s views on family behavior in underdeveloped economies versus industrialized nations all the more understandable. In his theory of wealth flows, it was explained that parents in underdeveloped parts of the world would respond to their lack of labor productivity and purchasing power with a set of choices that was distinct from their counterparts in the industrialized nations of the world. He observed that because low-skilled labor and wages were attainable by young children, their parents would seek their income generating efforts to combat the family’s lack of wealth. With this reasoning, parents would not only expect their children to work at an early age, but they themselves would respond to these conditions by having even more children, thus increasing the fertility per female in the underdeveloped world. In addition, the US welfare system creates incentives for unwed mothers to have more children and not to educate them beyond their years of free public education. By funding higher education, children would begin represent a negative net income flow. Thus, unwed and poor mothers are presented with an incentive structure that encourages non-education and the immediate (though short-term) benefits of children working in low-skilled labor markets in order to contribute to increased family income. (Caldwell 1983)
When it comes to the middle-class and wealthy in the United States, declining fertility rates have not only been linked to the reasoning provided by family economists like Caldwell, but healthcare economists have weighed in as well. The Journal of Medical Economics contends that the delay in first marriage and family formation contributes to overall lifetime fertility decline. With the increase in age of first marriage, and subsequent first conception within marriage, fertility rates are lower among women who have their first child later in life. This observation may seem as obvious as it is trivial. However, if it is clear that economic realities impact physiological outcomes, it is easy to see why some would describe increasing prices and the subsequent loss of fertility as a public health concern. (Tannus and Dahan 2018, Sunderam et al. 2015)
Simply put, the literature demonstrates a chain of events where the increases in education costs and housing prices delay first marriage, first childbirth, and ultimately lead to diminished fertility. To quantify the decline in fertility in the US, the average number of children per woman has plummeted from 3.65 in 1960 to 1.84 in 2015. (FRED 2019) Further study on the connection between rising prices and falling fertility suggests that parents sense a moral obligation to refrain from having children during periods of money and credit expansion via central bank policy (Abo-Zaid 2013) In this line of reasoning, parents observe climbing prices and recognize that providing education, nutrition, and general care will be more difficult as they lose purchasing power. Furthermore, this loss of purchasing power leads many married couples to seek more than one income, making child-rearing more difficult as the couple demonstrates a subjective preference for time working over time spent raising children. Earlier literature defends a model where this outcome means that the children of these parents will decrease the next generation’s labor supply, driving output per capita higher for women who will then substitute child-bearing for income earning. (Galor and Weil 1996) This theoretical connection, however, has not been found robust by some (Jones et al. 2012) who assert that the same would be true for males whose greater earning power would enable women to resume more traditional child-rearing roles.
Innovative research from England and Wales has emerged as researchers have sought to distinguish between the fertility response to home price increases between renters and existing home owners. The findings are complementary to those in the US for renters as higher home prices deter would-be owners from having more children. This negative relationship between housing prices and fertility does not hold for British homeowners from 1995 to 2008. (Washbrook 2018) Although there is a positive relationship between home prices and fertility for homeowners, this effect was found to be temporary. This finding is not necessarily contrary to economic theory because homeowners believe they will acquire more wealth in the future through the sale of that home. It is plausible that this anticipated increase in wealth makes them feel as though they are able to support more children. This explanation of homeowner behavior is consistent with earlier studies in the US where renters have a 2.4 percent decline in fertility for every $10,000 in average home prices, while the homeowners respond with a 1 percent increase in fertility. (Dettling and Kearney 2011) If we use Becker’s reasoning to shed some light on this outcome, it is reasonable to posit that for renters, the cost a future home will be too great to afford the cost of the delivery and care of an additional child. However, the reasoning could be reversed for families who currently own a home. They may look at the potential proceeds of the sale of their home as being a greater financial benefit allowing them to have another child and perhaps the purchase of a new home with more space to accommodate those additional children.
It has been found that for East Asian families, the negative relationship between price increases and fertility are not only present but have even stronger effects than they do in the West. Japan has been at or below replacement rates since 1957. South Korea has experienced a rapid decline in fertility since the 1970s, and Taiwan’s fertility has reached an extremely low 0.9 children per mother in 2010. (Raymo et al. 2015) Once again, these lower lifetime fertility rates are associated with higher age for a mother’s first marriage and first birth, spurred by the high costs of education and housing. In fact, the average age of first delivery in Japan reached 29.3 years of age in 2010. In the same year, the mean age at first birth reached 30.1 in South Korea and 29.6 in Taiwan. Other literature on East Asia explicitly refers to Becker’s model of fertility behavior when studying the impact of housing prices in Hong Kong upon fertility rates from 1971 until 2005. (Yi and Zhang 2009) Using a cointegration analysis, researchers found that for every 1 percent increase in housing prices there was a statistically significant negative relationship in fertility rates of 0.45 percent. Further testing revealed that housing price inflation can account for about 65 percent of the fertility decrease in Hong Kong since the 1970s.
The general pattern of the literature paints a picture of middle-class and wealthy families in developed nations who reduce their fertility in response to rising costs of housing and education. In pre-modern economies as well as among the poor in developed nations with sizeable welfare states, the literature points to a pattern where parents increase their fertility rates in order to benefit from the net positive income that children can produce. This is especially the case in low-skilled labor markets within those nations. Parents in those situations will often remove their children from schooling as the opportunity costs to the family’s standard of living is too great. (Rosenzweig and Evenson 1977)
PRICE INCREASES AND FAMILY FAILURE When substantial price increases occur in the markets for goods and services demanded by married couples, the returns on staying married are diminished. This finding by Nunley and Zietz is clarified by observing the dramatic rise in the US new divorce rate through the 1960s and 1970s. When the stagflation era ended in the early 1980s, they find that a slowing of price level increases also contributed to a decline in the rate of new divorces which continued through 2005. (Nunley and Zeist 2012) The literature also shows that when unexpected macroeconomic shocks occur, changes such as increasing prices or increasing unemployment also produce higher rates of divorce. (Becker et al. 1977) The causal link between the rising price of consumption goods and divorce begins when spouses have to increase the quantity of labor supplied to maintain the same levels of spending and leisure as they had previously enjoyed. This then leads to a decrease in the time spent on leisure and household production, leading to relational tension and conflict. Since potential wage increases do not keep pace with price increases, there are worsening financial and relational returns on the marriage relationship. (Christiano et al. 2001)
Some literature has emphasized the increases in women’s educational attainment and their higher labor force participation rate as leading causes of increased US divorce rates in the 1960s and 70s, but these findings are not without controversy. (Lombardo 1999) This dispute arises because others have found that it is the higher divorce rate which drives an increase in the labor force participation rate among women who have already received higher amounts of education in the preceding decades. (Bremmer and Kesselring 2004, Spitze and South 1986, Mincer 1984) This approach suggests a feedback loop where more divorce leads to more female labor force participation, which leads to greater earning power, and eventually more divorce. Yet another explanation for the higher divorce rates in the 60s and 70s is that rising prices required both spouses to work outside the home. This macroeconomic shock required women to begin accelerating their entry into the workforce, which created the relational tensions already described. The resulting large-scale female entry into the workforce disrupted familial harmony, child-rearing patterns, and the domestic division of labor. This narrative is substantiated by Nunley and Zietz’s empirical methodology which produced results showing a positive relationship between inflation rates, nominal GDP growth rates, increasing amounts of women’s educational attainment, and divorce rates. (Nunley and Zietz 2012) However, this study does not establish links between those 3 determinants which leads to opportunities for further study. One important caveat to this explanation is that it does not include the liberalization of divorce laws. While some have suggested that this is a driving force in the high divorce rates, (Friedberg 1988) Nunley and Zietz exclude this variable due to the literature that shows that the advent of no-fault divorce law in the US has a small and short-lived positive impact on increasing divorce rates, but no impact on long-term frequency of divorce. (Wolfers 2006)
In the British context, the literature also seeks to establish the multivariate causes of divorce including the legal framework within the UK as well as macroeconomic triggers. The literature notes that when reforms in divorce law were introduced in the European context, divorce rates were already climbing and the supply of these reforms merely met the demands for innovation and lower costs for divorce. In other words, the reforms were a response to rather than a cause of rising divorce rates. (Becker 1993, Michael 1988) Over the course of the post WWII period, the UK has experienced similar trends in the divorce rates as those in the US. The British had rapid increases in rates of divorce in the 1960s and 70s and found that rates were lower from the rise of Thatcher onwards. (Smith 1997) In Britain, Smith reaches similar conclusions as Wolfers did in the US. While there is a positive correlation between divorce liberalization and the divorce rate, the correlation is weak and temporary. However, a lack of literature is clear in the case of identifying the impact of price increases on divorce rates in Great Britain. This lack of research may be the result of a lack of concern over the issue in general as societal values regarding divorce have moved from viewing divorce as a taboo to viewing it with indifference.
In the Middle East, the issue of divorce is hardly viewed lightly and is even considered a public health risk due to its negative impact on children and women. (Barikani et al. 2012) A significant body of research has come from Iran in recent years. When examining the causes for a rising divorce rate in the Islamic Republic, both women and men cite economic dependence upon other family members for maintaining an acceptable standard of living as a leading cause of divorce. Fifty eight percent of men seeking divorce in this literature cite economic dependency upon extended family members as a driving force in the dissolution of their marriages while 49 percent of women say the same. Furthermore, 53 percent of divorced females specifically cited their former husband’s inability to pay for the rising cost of living as a prominent factor in their divorces. Additional research from Iran indicates that from 2002 through 2010, Iran had reached the highest divorce rate in the Islamic world. Furthermore, the price of housing both for renters and owners was directly linked to marital tension and divorce. (Farzanegan and Gholipour 2015) In addition, rising unemployment rates and increases in both public and private spending on education were positively correlated to this change in divorce rates. In a unique urban setting, Tehran was found to have thousands of vacant investment residences thus reducing the supply and driving rental prices to very high levels. Farzanegan and Gholipour are careful to point out that when there are sudden and unexpected surges in housing prices, there are even stronger positive effects on the divorce rate. In an interesting note on education spending in Iran, these researchers explain (like Caldwell) that increasing prices for education also suggest lower fertility rates among married couples. The lower number of children in turn diminishes the social pressure for families to remain together. In other words, families with fewer children have a higher likelihood of divorce than those who have offspring.
A compelling cultural idiosyncrasy in Iran that has been shown to drive increasing divorce rates is the practice of ‘Mehrieh’ or a dowry. This payment is traditionally required to be delivered in gold coins. (Farzanegan and Gholipour 2018) The price of a gold as a reliable measure of a loss of overall purchasing power is one of the most commonly accepted premises in monetary economic theory. The Mehrieh asserts the legal right of the wife to request payment in gold jewelry or coin at the time of marriage or after the marriage has already begun. The ever-increasing nominal price of gold places great financial strain on the male partner, thus producing further marital tension. The existence of this arrangement has also been found to cause an increasing age of marriage formation by an average of 3 additional years from 1986–2011. The cultural purpose of the Mehrieh is to act as a form of self-insurance for the wife and her family. It us used to cushion the financial blow of a divorce in order to protect women from economic ruin after a divorce. The Mehrieh this lowers the cost of divorce for women, making it less likely that women will remain in tense marriages. In addition, young brides who are aware of the diminishing purchasing power of currency versus gold actually plan for an early divorce in order to collect the Mehrieh as an appreciating asset in order to facilitate their own independent living arrangement. Although this narrative may present a system of perverse incentives to the western mind, it does illustrate the similarity of effects on families due to falling purchasing power against real assets like gold or housing and the increasing divorce rates to match. (Conger et al. 1990, Jensen and Smith 1990, Amato and Beattie 2011, Harknett and Schneider 2012, Dehghanpisheh 2014)
Eastern Asia, like the Near East and West, has also experienced rising divorce rates and the literature points to similar causes as those in other parts of the world. The general literature surrounding East Asian marriage points out that marriage as an institution has become increasingly less attractive for both those who would be married and for those who are already in marriages and that macroeconomic factors play a significant in the decaying esteem of marriage. (Bumpass et al. 2009, Rindfuss et al. 2004) While many values of East Asian marriage remain intact, some researchers show that it has adopted western values as well. (Cai 2010, Thornton et al. 2012) In light of these changes, projections show that 20 percent of South Korean marriages are expected to fail by 2023. (Park and Raymo 2013) Nearly 1/3 of Japanese marriages are expected to end in divorce. (Raymo et al. 2004) One important contrast between those who divorce in East Asia is that divorce is clearly more prevalent among lower income couples than for higher income families. This narrative is similar to the one in Iran where young and relatively low-income families have difficulty affording suitable housing and the relational strain placed on marriages has a corrosive effect on their longevity. These lower income families are also less educated and as such researchers have shown that there is a strong negative relationship between education level (and thus earning and purchasing power) and divorce rates. (Chen 2012)
CONCLUSION Across the globe, family formation, fertility, and failure are all impacted by rising prices. In the US, the age of first marriage is higher than ever due to high education costs that are manifest in increasing debt loads for young adults. This reality means that their incomes are redirected to debt repayment, making already increasing housing prices even harder to afford. Throughout Europe and East Asia housing affordability is also leading young people to delay their first marriage as well. Across the globe, these increasing prices are making cohabitation more financially sensible than marriage.
The literature shows that fertility decisions are distorted in the developing world and for the poor in developed countries. A pattern emerges that when prices rise, parents have more children as they are viewed as adding to family assets. Families make these reproductive decisions and at later ages may pull children out of school due to their ability to earn incomes through their low-skilled labor in order to combat price increases. This keeps families from making investments towards their children’s education and eventually, a higher standard of living. Meantime, in the developed world, wealthier parents choose to have fewer children in response to increasing costs for housing and for educating their offspring. The body of literature concurs with much of Caldwell’s theory on intergenerational wealth flows.
Research from across the globe shows that when married couples are met with falling purchasing power, marital tensions rise. In the developed world these couples who face rising prices have less motivation to stay married as the average number of children is already relatively low. In the underdeveloped world, the literature shows that the relational tension brought on by rising prices is exacerbated by cultural expectations of male provision and extended family pressures. This is a recipe for higher divorce rates even among some of the most traditional societies.
All of these realities show a body of literature that affirm Kuyper’s vision of the family institution being under stress from man-made institutions such as central banks who produce debased currency and easy credit. This state of affairs leads to the detriment of families as they see the value of their savings and purchasing power evaporate for the things that are most important to maintaining a suitable standard of living. The literature described in this review paints a picture of the ‘deinstitutionalization’ of marriage and family that Cherlin described. In seeking a common thread among the erosion in the quantity and quality of marriages throughout the world, it is the loss of purchasing power brought on by central bank money supply inflation which drives people to avoid marriage across the world through delay, cohabitation and divorce. Children in poor nations suffer under inflation as well because their parents require them to work so that the family might survive. Meanwhile, in the developed world, children see less of their parents as two incomes are often necessary to make ends meet, while their parents’ marriages are under threat of divorce due to the relational and financial difficulties brought on by rising prices.
There is room in the body of literature for a stronger statement on the strength of the correlation between rising prices in the categories that are important to family formation. More work remains to establish how tuition rate increases in the US lead to higher ages of first marriage. There is also an opportunity to describe the distinctions between fertility decisions in the developed and developing economies of the world. Research could focus on price increases for childcare, education, food, energy, and housing for their impact on fertility rates in both types of economies. The literature on housing and gold prices increases and divorce has received a very promising set of studies from Iran and researchers could attempt the same type of examination in other nations as well. While several attempts have been made to describe liberal divorce laws and changing norms regarding sexuality and views on cohabitation there is also room for more specific links to discover which prices in the economy have the most powerful effect on marriages that end in divorce.
In the end, we observe that a divinely-created institution can have its definition and even its existence malformed and eventually crushed under the weight of man-made institutions like central banking cartels. This description of the deinstitutionalization of the family and marriage should warrant serious attention from Austro-libertarian thinkers. The simple reason for this is that marriage and family are distinctly non-state institutions that have always been capable of providing wealth, order, and continuity, within a framework of peaceful and voluntary cooperation. Therefore, family holds a unique place among institutions as a bulwark against the deleterious effects of the welfare state. As such, it is an institution worth defending and strengthening as the Austro-libertarian school aims to abolish man-made central banks and replace them with free-market money production and consumption.
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For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Jeff Deist joins David Gornoski to respond to billionaire hedge fund manager Ray Dalio's recent interview on 60 Minutes. Jeff discusses the self-serving nature of billionaires like Dalio's lamenting the "failings" of capitalism.
Nelson Nash is the developer of the Infinite Banking Concept (IBC), which uses properly designed whole life insurance policies as a cashflow management vehicle. Although Bob (along with Carlos Lara and David Stearns) has worked closely with Nelson over the years in building the Nelson Nash Institute, this interview focuses on some of Nelson’s charming stories about learning to fly and being mentored by FEE’s founder, Leonard Read. The conversation then turns to the pernicious role that commercial bankers have played in history, and how IBC allows individuals to secede from that evil system.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Jeff Deist joins Australian podcaster Stephan Livera (twitter) for an in-depth look at money in an era of crazed monetary policy.
They tackle how Austrian economics relates to cryptos, why gold still matters, how deflation and "hoarding" are healthy for an economy, and how any challenge to the central bank cartel could create a political upheaval far beyond banking and economics.
Professor Carmen Dorobăț grew up in Romania—too young to remember Ceaușescu, but deeply aware of what socialism did to her country. Fortunately, she discovered Ludwig von Mises during her university years and found her passion for economics. She joins Jeff Deist to discuss how Mises's work and legacy paved the way for her and an entire generation of younger scholars.
[Previously unpublished online; Faith and Freedom 1, no. 4 (March 1950).]
Citizens of the old Roman Empire distrusted paper currency and refused to accept anything but gold or silver coin as money. So the rulers found themselves barred from inflating the money supply by the unobtrusive method of printing additional currency.
But the Roman emperors soon discovered an ingenious device. They proceeded to call in the coins of the realm, ostensibly for repairs. Then, by various means, such as filing off small parts of the coins, or introducing cheaper alloys, they reduced the silver content of the money without changing its original face value. This devalution enabled them to add many more silver coins to the Roman money supply. The practice was started by Nero, and accelerated by his successors. By Diocletian's time, the denarius (standard silver coin) had been reduced to one-tenth of its former value.
The result was a steep rise in prices throughout the vast Roman empire. As has happened throughout history, the public indignantly accused merchants and speculators of causing the rise in prices. It was generally agreed that the only remedy was stringent maximum price controls by the government.
Accordingly, Emperor Diocletian, a "friend of the people," issued his famous Edict in 301 A.D. setting ceiling prices on all types of commodities, and maximum wages for all occupations. A few typical examples: Beans, crushed, 100 denarii; beans, uncrushed, 60 den.; beans, dried kidney, 100 den. Veterinary, for clipping hoofs, 6 den. per animal. Veterinary, for bleeding heads, 20 den. per animal. Writer, for best writing, 25 den. per 100 lines. Writer, for writing of the second quality, 20 den. per 100 lines.
Diocletian's proclamation introducing the Edict bears marked resemblance to modern exhortations:
We must check the limitless and furious avarice which with no thought for mankind hastens to its own gain. This avarice, with no thought of the common need, is ravaging the wealth of those in extremes of need. We — the protectors of the human race — have agreed that justice should intervene as arbiter, so that the solution which mankind itself could not supply might, by the remedies of our foresight, be applied to the general betterment of all.
In the markets, immoderate prices are so widespread that the uncurbed passion for gain is not lessened by abundant supplies. Men whose aim it always is to profit, to restrain general prosperity, men who individually abounding in great riches which could completely satisfy whole nations, try to capture smaller fortunes and strive after ruinous percentages. Concern for humanity in general persuades us to set a limit to the avarice of such men. Profiteers, covertly attacking the public welfare, are extorting prices from merchandise such that in a single purchase a soldier is deprived of his bonus and salary.
Therefore, we have decreed that there be established a maximum so that when the violence of high prices appears anywhere, avarice might be checked by the limits of our statute. To ensure adequate enforcement, anyone who shall violate this statute shall be subject to a capital penalty. The same penalty shall apply to one who in the desire to buy shall have conspired against the statute with the greed of the seller. Also subject to the death penalty is he who believes he must withdraw his goods from the general market because of this regulation.
We urge upon the loyalty of all that a law constituted for the public good may be observed with obedience and care.
If anyone could force people to trade at the ceiling prices, Diocletian was the man. Yet the absolute emperor of the civilized world, a veteran general with myriads of secret police at his command, was soon forced to surrender. After a short interval almost nothing was offered for sale, and there was a great scarcity of all goods.
Diocletian was obliged to repeal the price-fixing Edict. Prices were finally stabilized in 307 A.D. when the government stopped diluting the money supply.
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.
The Bank of England apparently wants to incorporate blockchain technology and cryptocurrencies into the central bankers’ tool kit.
Original article: The Blockchain Is a Tempting Target for Central Banks
The Labour Party wants the Bank of England to actively promote certain industries over others, not realizing that the Bank has already been doing this indirectly for decades. Original article: British Left Unveils Plan to "Weaponize" the Bank of England.
Even many libertarians dismiss gold and precious metals as irrelevant in the global monetary system. Ben Bernanke famously told Ron Paul that gold is a commodity, not money. So why do central banks still hold so much of it, Ron asked? Good question.
Ronni Stöferle from Incrementum AG joins Jeff Deist to talk about everything related to gold: why it's still money, how it might react to rising interest rates, why the IMF still worries about it, and why so much of it seems to be flowing from West to East. You won't want to miss his analysis of why gold and precious metals are complementary assets with respect to cryptocurrencies, and his call for both camps to join forces and promote Hayek's goal of denationalizing money.
Related: Ron Paul on the Dollar Dilemma.
Private Graduate Seminar. Recorded at the Mises Institute in Auburn, Alabama, on July 17, 2018.
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.
Caitlin Long recently joined us in San Francisco for an inside look at how blockchain technology might blow up the financial service and banking industries. This is a presentation you won't want to miss from someone at the cutting edge of both blockchain technology and the legal landscape surrounding it.
Per Bylund explains the many contributions of Jean-Baptiste Say (1767–1832), a precursor to the Austrian school of economics. Today, Say is most well known for his “law of markets” which is now referred to simply as “Say’s Law.” Often misstated as “supply creates its own demand,” the law is that we produce and supply to the market in order that we may demand other goods in exchange. Production, therefore, is an indirect means to attain the goods and services we desire to meet our needs.
Say also made contributions in the theory of money, including how it emerges spontaneously, and why the commodity serving as a medium of exchange needs characteristics of durability, divisibility, and high value per unit, with the choice of commodity should be left to consumer preferences. Other highlights include his distinction between banks of deposit and banks of circulation.
The Who Is? podcast is available on iTunes, Google Play, Stitcher, Soundcloud, and via RSS.
Nomi Prins is a Wall Street veteran and expert on central bank mischief. Her books All The President's Bankers and Collusion: How Central Bankers Rigged the World detail the cronyism and secret dealing of central banks, making the case against unchecked power in the hands of an elite class of bankers and their revolving-door clients at the Treasury and Fed. Recorded in Fort Worth, Texas, on 2 June 2018. Includes an introduction by Jeff Deist.
Danielle DiMartino Booth worked at New York investment houses before joining the Dallas Bank of the Federal Reserve. Her years working with (relative) Fed Hawk Richard Fisher led to the publication of Fed Up: An Insider's Take on Why the Federal Reserve is Bad for America, a full-throated expose of how the Fed benefits elites at the expense of ordinary people. Recorded in Fort Worth, Texas, on 2 June 2018. Includes an introduction by Jeff Deist.
Jeff Deist welcomes guests to the Mises Circle in Fort Worth: "Will the American Economy Survive in 2018?" Recorded in Fort Worth, Texas, on 2 June 2018. Includes an introduction by Ryan Griggs.
Danielle Booth, a veteran of the Dallas Fed and author of Fed Up: An Insider's Take on Why the Federal Reserve is Bad for America, joins the show to consider whether—or if—the Fed can ever return to "normal" monetary policy. Raising interest rates might slow or even crash equity markets, while causing US debt service to spike. But leaving rates low keeps the US economy in zombie status, punishing savers and preventing bad debt and malinvestment from clearing. It's a no-win situation for new Fed Chair Jay Powell.
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!
Caitlin Long discusses the blockchain's disruptive influence on our existing notions of money and wealth. Recorded in San Francisco, California, on 19 May 2018.
Patrick Byrne on how blockchain technology is a revolutionary force that will democratize stock markets and help secure property titles for un-banked people around the world.
At last month's Austrian Economics Research Conference, we were honored to be joined by Kevin Dowd, an Emeritus Professor of Economics at Nottingham University. Dowd presented a blistering critique of modern central bankers and their mania for monetary stimulus. In this excerpt from his talk, he explains how policies like negative interest rates not only reflect bad economic thinking, but also pose a danger to the civil liberties. What will the Fed and European Central Bank do next, if ersatz economic growth cools in a period of rising interest rates? Don't miss this masterful explanation of how central banks destabilize and distort every aspect of the economy.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
The Case for Gold covers the history of gold in the United States, explains that its breakdown was caused by governments, and explains the merit of having sound money: prices reflect market realities, government stays in check, and the people retain their freedom.
Narrated by Jim Vann.
Download the complete audio book (11 MP3 files) in one ZIP file here. This audiobook is also available on Soundcloud, Google Podcasts, and via RSS.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
Narrated by Jim Vann. Published in 1982, this is Ron Paul's revolutionary book on monetary reform.
Mises wrote this book for the ages, and it remains the most spirited, thorough, and scientifically rigorous treatise on money to ever appear. It made Mises's reputation across Europe and established him as the most important economist of his age.
Narrated by Jim Vann. The full text is available online here.
Download the complete audiobook (29 MP3 files) here. This audiobook is also available on Soundcloud, Apple Podcasts, Google Podcasts, and via RSS.
Professor Lucas Engelhardt, a popular lecturer at Mises University, joins Jeff Deist to discuss the monetary policy landscape. Janet Yellen makes jokes about $20 trillion in federal debt, but what about the trillions the Fed added to its own balance sheet since the Crash of '08? What will happen to the extraordinary amount of bank reserves parked in no-man's land, not being lent by banks? Can Mises's work help us understand what happens when the supply of money increases much faster than demand for it? How does new money and credit flow into the economy unevenly, benefiting those closest to the government and central bank troughs? And is there an ugly endgame scenario, where rapid asset price inflation (i.e. equity and real estate markets) devolves into rapid consumer price inflation?
The devaluationary spiral of the peso began with the fall in oil prices in mid-2014. At the time, the depreciation was easy to explain in terms of the deterioration of the balance of trade. With Mexico being a net oil-exporting country, the fall of oil prices meant a fall in the country’s foreign currency revenue. This situation explains the depreciation of the peso of mid-2014 and all of 2015.
In 2016 the situation gets complicatedThe victory of the Brexit referendum in June 2016 deteriorated expectations of the Mexican economy’s performance, lowering the price of the peso against the dollar.
Things got worse for the Mexican peso in November 2016, when Donald trump was elected as President of the United States. At the time, the pessimism that took hold of investors and speculation lead to a depreciated Mexican peso. As we explained in another article, the peso depreciated 14% in only three days after Trump’s victory.
Banxico reacted without success…With this scenario, the Bank of Mexico (Banxico) begun a series of efforts to try to defend the peso by raising the benchmark interest rate in 2016. The following graph shows the price of the peso against the dollar on the left axis; on the right it shows the reference interest rate of Banxico. Banxico practically doubled its reference rate between July 2016 and July 2017.
Graph 1:
Source: BanxicoTwo factors helping the peso in 2017In 2017, things seem to be different for the Mexican peso. Between January and July of 2017, the peso appreciated on average 17% against the dollar. What are the reasons for this behavior? There are at least two.
1.The pessimism caused by Trumps victory has considerably decreasedIf in November 2016, investors were nervous after Trumps victory: they anticipated an attack on NAFTA that would harm the Mexican market. On Wednesday, August 16 Canada, the US, and Mexico started renegotiating NAFTA.
Although there is much expectation for the results, most recognize that Mexico could gain from a NAFTA renegotiation. When the agreement was signed more than 20 years ago, the energy sector was controlled by the government. Since the energy reform by Peña Nieto, there have been proposals to integrate the energy market between the three countries.
This has reassured investors, and it is reflected in the peso’s price. Perhaps the speculative alarms launched the peso away from its “fundamental value” and today the markets reflect it with the peso’s appreciation
2.A weaker dollarIn 2017, the US dollar has weakened against other currencies. There was talk that the dollar traded at its lowest level against the euro in two years. However, the Bloomberg dollar spot index is a better indicator, since it compares the dollar against a basket of the world’s top ten most important currencies. Each currency in the basket and its weight are determined annually based on its share in international trade and its liquidity.
Graph 2:
In the graph we see how the dollar strengthened at the end of 2016, just after Trump’s victory and in subsequent months. When Trump announced major tax cuts, the optimist environment was reflected in a strong dollar. But the Republican’s failed attempt to dismantle the Affordable Care Act make a tax cut less likely.
What about Banxico’s efforts?We could debate whether or not the Mexican central bank has been a decisive factor in the recovery of the exchange rate. In general, as seen in graph 1, we see that Banxico’s efforts were considerable in terms of the increase in reference rates. However, even though interest rates increased, the peso continued its trend to depreciate.
It is also not a Banxico mandate to have a determined exchange rate. Banxico had in mind its inflation target, which for now should be its concern as we mentioned in our last quarterly report. At least we can say that Banxico protected itself and resisted an attack that seems to have ended for the moment.
Originally published by UFM Market Trends the Universidad Francisco Marroquin.
Growth in the supply of US dollars fell again in August, this time to a 108-month low of 4.2 percent. The last time the money supply grew at a smaller rate was during August 2008 — at a rate of 4.1 percent.
The money-supply metric used here — an "Austrian money supply" measure — is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.
The "Austrian" measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler's checks, and retail money funds).
M2 growth also slowed in August, falling to 5.3 percent, a 75-month low.
Money supply growth can often be a helpful measure of economic activity. During periods of economic boom, money supply tends to grow quickly as banks make more loans. Recessions, on the other hand, tend to be preceded by periods of falling money-supply growth.
Thanks to the intervention of central banks, of course, money supply growth in recent decades has never gone into negative territory.
Nevertheless, as we can see in the graph, significant dips in growth rates show up in years prior to a economic bust or financial crisis.
For insights into what's affecting money supply growth, we can look at loan activity, such as the Federal Reserve's measure of industrial and commercial loans.
In July of this year, growth rate in loans fell to a 75-month low, dropping to 1.5 percent. In August, loan growth rebounded slightly, climbing back to 2.1 percent. Loan growth has not been this weak since April of 2011, in the wake of the last financial crisis.
We find similar trends in real estate loans and in consumer loans, although not to the same extent.
The current subdued rates of growth in the money supply suggests an economy in which lenders are holding back somewhat on making new loans, which itself suggests a lack of reliable borrowers due to a lackluster overall economy. This assessment, of course, is reinforced by the Federal Reserve's clear reluctance to wind down it's huge portfolio, and to end its ongoing policy of low-interest rates — concerned that any additional tightening might lead to a recession. Growth in consumer loans hit a 27-month low in August, and real estate loans hit a 28-month low during the same period.
The primary purposes of the incorrectly named “unconventional monetary policies” are to debase the currency, stoke inflation, and make exports more competitive. Printing money aims to solve structural imbalances by making currencies weaker.
In this race to zero in global currency wars, central banks today are “printing” more than $200 billion per month despite that the financial crisis passed a long time ago.
Currency wars are those that no one admits to waging, but everyone wants to fight in secret. The goal is to promote exports at the expense of trading partners.
Reality shows currency wars do not work, as imports become more expensive and other open economies become more competitive through technology. But central banks still like weak currencies — they help to avoid hard reform choices and create a transfer of wealth from savers to debtors.
The Euro Rallies So how must the bureaucrats at the European Central Bank (ECB) feel when they see the euro rise against the U.S. dollar and all its main trading currencies by more than 12 percent in a year, despite all the talk about more easing? The ECB will keep buying 60 billion euro a month in bonds, maintain its zero interest-rate policy, and keep this “stimulus” as long as it takes, until inflation growth and GDP growth are stable.
Contrary to the wishes of the ECB, however, a strong euro is justified for several reasons. First, the European Union’s trade surplus is at record highs, and 75 percent of Eurozone trade happens between eurozone countries. Higher exports and the continued recovery of internal demand in European member countries strengthen the euro.
The third is the perception of weakness of the U.S. government and its inability to push through key reforms. This has weakened the dollar and by definition strengthened the other two large trading currencies, the euro and the Japanese yen.The second important factor is the relief rally after the French and Dutch elections. The fears of a euro breakup have been eliminated, or at least delayed, as pro-EU political parties won.
The Problems With a Strong Euro However, a strong euro has very significant implications for the EU economy and the ECB’s policy.
The strong euro puts exports to its main outside trading partners — the United States (20.8 percent of exports in 2016) and China (9.7 percent) — at risk. Despite the ECB’s extreme monetary policy and a euro trading almost at parity with the dollar, exports to non-EU countries have stalled since 2013. GDP growth estimates for 2018 are falling due to a lower contribution of net exports.
The currency also has a high impact on tax revenues in Europe. The correlation between the euro–dollar exchange rate and the earnings estimates of the largest multinationals represented in the Stoxx Europe 600 Index is very high.
According to our estimates, a 10 percent rise of the euro against the dollar is equivalent to an 8 percent drop in earnings and leads to lower corporate tax revenues. From an investment perspective, as earnings drop, the European stock market goes from being relatively cheaper to becoming more expensive.
Investors and economists need to pay attention to these factors. If the euro continues to strengthen, the EU economic recovery is at risk. So the eurozone is stuck between a rock and a hard place. It cannot stop the stimulus because deficit spending governments cannot live with higher financing costs, and increasing the stimulus to weaken the currency simply doesn’t work anymore.
The only way out is structural reforms, but most governments are afraid of them even in good times, let alone when the going gets tough.
Originally published by Epoch Times. Reprinted with permission.
Fed Vice Chair and Yellen ally Stanely Fischer announced his unexpected resignation today, citing “personal reasons.” His term as a Fed governor wasn’t to be over until 2020 and his vice chairmanship was to end June of next year.
Fischer was one of the three most important Fed members, the other two being Yellen herself and the New York Fed’s William Dudley. The WSJ reports:
Mr. Fischer came to the Fed in 2014 a luminary in central banking, having taught many leading policy makers during a more-than two decade career as a professor at the Massachusetts Institute of Technology specializing in international economics. His students included European Central Bank President Mario Draghi and former Fed Chairman Ben Bernanke.
Mr. Fischer also ran a central bank—the Bank of Israel—from 2005 to 2013, held a senior post at the International Monetary Fund and served as a Citigroup vice chairman.
In terms of the insider status of these central bankers, Mr. Fischer was “Mr. Establishment.” Well educated in the machinations of how to control an economy from the top, Fischer was an expert bureaucrat. On paper, Fischer was among the most qualified in the world to be tasked with impossible role of making us more prosperous by diktat.
In reality, Fischer, to the extent he had a marked influence on central bankers like Draghi, Bernanke, Yellen, and so many others, was a key player in the boom-and-bust system of modern monetary economics. Under his watch, we had two major and devastating recessions— the cause of which was not Fischer’s failure individually, but the inflationary framework that pervades them all.
Fischer was considered to have leaned “hawkish” by the financial press. In the old days of Paul Volcker, a hawk was one wary of dangers of rising inflation. This was juxtaposed to a dove, who would downplay the dangers of inflation and advise greater monetary expansion. But in the post-crisis era of the so-called “new normal,” where interest rates are to remain absurdly low and inflation must be targeted at 2%, the hawks have long gone extinct. Fischer was no hawk, he was a cheerleader of the quadrupling of the Fed’s balance sheet, an advocate of unprecedented credit creation, and a hater of sound money.
It remains to be seen where Fischer will go next. But his undying advocacy of the use of central banking to tinker with and manage the economy will live on.
See also:
"The Fed Wants to Test Drive Negative Interest Rates" by Joseph Salerno "Stanley Fischer's Eureka Moment" by C.Jay Engel
The Bank of International Settlements (BIS) has warned again of the collateral damages of extremely loose monetary policy. One of the biggest threats is the rise of “zombie companies.” Since the “recovery” started, zombie firms have increased from 7.5% to 10.5%. In Europe, Bof A estimates that about 9% of the largest companies could be categorized as “walking dead.”
What is a zombie company? It is — in the BIS definition — a listed firm, with ten years or more of existence, where the ratio of EBIT (earnings before interest and taxes) relative to interest expense is lower than one. In essence, a company that merely survives due to the constant refinancing of its debt and, despite re-structuring and low rates, is still unable to cover its interest expense with operating profits, let alone repay the principal.
This share of zombie firms can be perceived by some as “small.” At the end of the day, 10.5% means that 89.5% are not zombies. But that analysis would be too complacent. According to Moody’s and Standard and Poor’s, debt repayment capacity has broadly weakened globally despite ultra-low rates and ample liquidity. Furthermore, the BIS only analyses listed zombie companies, but in the OECD 90% of the companies are SMEs (Small and Medium Enterprises), and a large proportion of these smaller non-listed companies, are still loss-making. In the Eurozone, the ECB estimates that around 30% of SMEs are still in the red and the figures are smaller, but not massively dissimilar in the US, estimated at 20%, and the UK, close to 25%.
The rise of zombie companies is not a good thing. Some might say that at least these companies are still functioning, and jobs are kept alive, but the reality is that a growingly “zombified” economy is showing to reward the unproductive and tax the productive, creating a perverse incentive and protecting nothing in the long run. Companies that underperform get their debt refinanced over and over again, while growing and high productivity firms struggle to get access to credit. When cheap money ends, the first ones collapse and the second ones have not been allowed to thrive to offset the impact.
Low interest rates and high liquidity have not helped deleverage. Global debt has soared to 325% of GDP. Loose monetary policies have not helped clean overcapacity, and as such zombie companies perpetuate the glut in many sectors, driving down the growth in productivity and, despite historic low unemployment rates, we continue to see real wages stagnate.
The citizen does not benefit from the zombification of the economy. The citizen pays for it. How? With the destruction of savings through financial repression and the collapse of real wage growth. Savers pay for zombification, under the mirage that it “keeps” jobs.
Zombification does not boost job creation or buy time, it is a perverse incentive that delays the recovery. It is a transfer of wealth from savers and healthy companies to inefficient and obsolete businesses.
The longer it takes to clean the overcapacity — which stands above 20% in the OECD — and zombification of the economy, the worse the outcome will be. Because, when the placebo effect of monetary policy disappears, the domino of bankruptcies in companies that have been artificially kept alive will not be offset by the improvement in high added-value sectors. Policymakers have decided to penalize the high productivity sectors through taxation and subsidize the low productivity ones through monetary and fiscal policies. This is likely to create a vacuum effect when the bubble bursts.
The jobs and companies that they try to protect will disappear, and the impact on banks’ solvency and the real economy will be much worse.
Avoiding making hard decisions from a crisis created by excess and overcapacity ends up generating a much more negative effect afterward.
Reprinted with permission of the author. Daniel Lacalle has a PhD in Economics and is author of Escape from the Central Bank Trap, Life In The Financial Markets, and The Energy World Is Flat (Wiley).
There seems to be no shortage today of investors and pundits criticizing the market interventions of the world’s central banks. Monetary stimulus in the form of artificially low interest rates and bloated central bank balance sheets ($18.5 trillion, to be exact), the argument goes, have created another dangerous financial bubble (evidenced by ubiquitously bubbly stock market valuation ratios) that ultimately threatens the financial system yet again. The author shares wholeheartedly in this criticism.
The ethical problem is, where were these voices when this all started, with Greenspan in the 1990s and, more specifically, with Bernanke in 2008? The central bank critics today who were not critics of — and in most cases were even sympathetic to — the great bailouts and stimulus that started almost a decade ago have reserved their criticisms only for those interventions that appear to hurt their interests, as opposed to those that have helped them. After all, no one would disagree that bailouts and monetary stimulus got us out of the last financial crisis, but they also certainly got us to where we are today, vulnerable to another even bigger one.
We are so concerned about our friend the strung-out junkie, though we paid little mind when they were but a casual user. It is so easy to care when problems become obvious and critical, so hard when they are subtler and nascent. Artificial stimulus in an economy is the same: it is easily ignored as a problem in its infancy, but it always develops into a huge problem. Economies and markets are structurally altered and distorted by such stimulus, such that it cannot be removed without breaking those new structures. It must rather be ever increased, though even this will only delay an inevitable collapse.
It is just too easy in today’s investing environment, and even necessary for most participants, to sympathize with and even exploit central bank interventions. Doing otherwise creates an opportunity cost in one’s career and investments. But doing so puts one in the position of enabler to the economic system’s self-destructive dependence on artificial stimulus. One cannot be a part-time classical liberal, criticizing central planning only when it runs contrary to one’s interests. Indeed, this is the very problem of Socialism: there are winners and losers; the winners are in the here and now — the seen; the losers are in the future — the unseen. The winners don't complain, and the losers can‘t until it is too late.
But as the future becomes the here and now, the unseen becomes the seen, those who now think they are anticipating a problem and its cause, yet supported that same cause when they stood to benefit, must be seen for what they are: fellow travelers in the central planning ideology that grips today’s financial markets. They are too late.
The shock landslide defeat of PM Shinzo Abe’s Liberal Democratic Party (LDP) in the recent Tokyo metropolitan elections — and the triumph there of Tokyo Governor Koike’s new party (Tomin First) — has lit a faint hope that the radical Japanese monetary expansion policy could be on its way out. The flickering light though is not strong enough to soothe the mania in Japan’s carry trades and so the yen continued to slide in the aftermath of the elections. Between mid-June and early July the Japanese currency depreciated by some 5% against the US dollar and 10% against the euro.
The perception in currency markets is that Japan will not be embarking on monetary normalization this year or next, in contrast to Europe where ECB Chief Draghi has hinted that the train (to monetary normalization) will start next year, even though the journey promises to be very slow. The US train to normalization continues at a glacially slow pace including some periods of reverse movement. Moreover the monetary climate prior to the journey commencing is even more extreme in the case of Japan than in Europe or the US.
It was possible to imagine that the shock election setback for the LDP could have caused Shinzo Abe to withdraw support from his money-printer in chief, Bank of Japan governor Haruhiko Kuroda (whose term ends in April 2018), thereby signaling an early end to negative interest rates and quantitative easing. But markets in their wisdom have concluded this is not to be. Many elderly Japanese are pleased with their stock market and real estate gains even though they complain about negative interest rates and the threat of inflation. In any case it was young voters, responding to the stink of alleged corruption scandals, who turned out en masse for Governor Koike’s new party.
In fact, the widespread prediction is that PM Abe will nominate an even more radical monetary experimenter to the head of the Bank of Japan along with two deputy governors of similar persuasion. Some political pundits in Tokyo suggest that Shinzo Abe could yet face a challenge in an LDP leadership election in September 2018 and that ex-Defence Minister Shigeru Ishiba (also on the nationalist right of the party) could prevail. Ishiba-san would favor, some speculate, a return to monetary orthodoxy. But in market terms this is a long time ahead and much further monetary damage will have been done first.
Three Risks to the Current Easy-Money Orthodoxy Currency markets are not a one-way bet and there are three main risks confronting speculators on further yen depreciation.
First, Washington could yet get its trade and currency acts together (President Trump’s nominee for the role of Treasury Under-Secretary responsible for international affairs, David Malpass, has not yet been approved by Congress). The US would take aim at currency manipulation by Europe and Japan, now occurring under the camouflage of the global 2% inflation standard and deployment of non-conventional monetary policy tools. In particular the Bank of Japan’s policy of pegging long-term interest rates at barely zero is surely a means of keeping the yen cheap.
Second, the US economy could enter a growth cycle slowdown and even recession which in turn would narrow the yield gaps which draw capital out of Japan.
Third, the giant carry trades could suddenly go into reverse as global asset price inflation progresses toward its final deadly phase.
Booming carry trades are indeed a top symptom of asset price inflation. As income famine investors hunt for yield, or investors impressed by a series of capital gains become irrationally exuberant, they are unusually susceptible to speculative narratives, discarding normal healthy cynicism. These narratives justify risk-arbitrage positions implicit in all the various forms of carry trade (whether in search of premiums for exchange risk, or term risk, or credit risk, or illiquidity, or equity risk). Japan, due to the extent of monetary distortion there, has become the land of frenzied carry trading.
The Japanese War Against Deflation The natural rhythm of prices has been unusually strong in a downward direction in Japan, meaning that the central bank’s targeting of positive inflation creates powerful monetary disequilibrium. The entry of China into the global economy in the case of Japan has meant an integration process which brings persistent strong downward pressure on prices (and on wages via offshoring). Adding to this pressure has been the growth of the “irregular” labor market (temporary contracts as against lifetime employment). And if we consider the core zone of the Japanese economy around Tokyo, productivity growth and technological change have been bearing down on prices (these trends are not apparent in the national data due to the falling behind of regions distant from the capital).
In the age of Abenomics (starting in 2013) the Bank of Japan ramped up the inflation target to the global 2% level. Accordingly, the carry trades in their various forms have boomed. The speculative hypotheses to justify these have waxed and waned through time. Some market critics think the latest to be waning is the FANMGs (equities in Facebook, Apple, Netflix, Microsoft, and Google) into which Japanese investors have poured funds in many cases via so-called structured products (notes which are a hybrid between fixed-interest paper and a kicker in the form of pay-outs related to the performance of a given index or stock price, in effect an option-type product).
The popularity of certain investment tools adds to the momentum of carry trades in Japan. Market practitioners (including hosts of retail investors) study charts and the trend lines there; the trend is the friend, make no mistake, until the trend brakes. Under monetary stability the flaws of such tools would most likely remain contained. But in the vast domestic and global monetary disorder such as now exists and which fans irrationality Japanese carry-trades become even more prominent.
Shinzo Abe if he thinks about this, and he has praised repeatedly the booming Tokyo stock market, must doubtless hope that global asset price inflation including its Japanese component will remain in its present sweet phase through the elections next year, first for LDp President and then for the Lower House of the Diet (December).
On Tuesday, Fed Governor Lael Brainard downplayed past talk of numerous rate hikes from the federal reserve and suggested that he Fed may "not have much more" to do in terms of rate hikes. "In light of recent policy moves, I consider normalization of the federal funds rate to be well under way," Brainard said.
Today, speaking before Congress, Janet Yellen built upon Brainard's earlier comments, but simultaneously suggested that there will be "gradual rate hikes" over "the next few years," and hinting that many more rate hikes won't be necessary because "the neutral rate is low by historical standards."
Markets took this to mean — probably correctly — that the Fed is moving in a more dovish direction.
The "Neutral Rate" Canard Note that both announcements are based on the idea that the "neutral rate" is unusually low, so while a target rate of 1.5 percent may seem quite low by historical standards, it's not really low. It is near the neutral rate — also known as the "natural rate."
In other words, the "natural rate" has fallen below where it was in the past, so now, the interest rates we saw in the days of yore — those around 3 per cent or 5 percent — would today be much too high.
Bloomberg explained a bit more of the Fed's logic here last year:
When Fed Chair Janet Yellen wants to explain why the Fed is keeping rates so low, she cites the natural rate. At the press conference following the FOMC’s June meeting, she said the neutral interest rate—which is essentially synonymous with the natural rate—“is quite depressed by historical standards.” She added: “I think all of us are involved in a process of constantly reevaluating where is that neutral rate going.”
Politically speaking, identifying this "natural rate" as being very low allows the Fed to create the perception that its very-low target rates aren't really all that stimulative at all. They're practically neutral! Just look at the natural rate, they'll tell us.
The problem however, is that all good economic theory tells us that the Fed has no idea what the natural rate actually is. Earlier this year, Mark Spitznagel explained:
How do we even know what that neutral rate is? The neutral rate is, by its current definition, inherently unobservable, as there is no discovery process in short-term interest rates (and there hasn’t been for as long as any of us have been around). Central banks calculate the neutral rate based on their formulas and identifying assumptions about output gaps and what interest rates, according to those models, will close those gaps. Here we have an immense circularity problem: Policymakers think they know the neutral rate because the assumptions of their interventionist model that they impose on the data say so, not because they have any insight that the market would actually clear at that rate, sans intervention. There is an underlying assumption that “markets, left on their own, are wrong, while our model is right.” Moreover, they are using observable data as model inputs that are the result of interventions that are already in effect. There are no controlled experiments in economics. Only market participants, acting freely in borrowing and lending at whatever interest rates make sense for that borrowing and lending, can ever discover what the neutral rate should be.
Joseph Salerno explains this in even further detail in his article "The Fed and Bernanke Are Wrong About the Natural Interest Rate."
All this talk about the natural/neutral interest rate thus provides political cover for the Fed, and allows the FOMC to claim that they're using economic science in determining the "correct" target rate. In truth, the Fed has no idea what the natural rate is but is really just proceeding with great caution because the Fed's leadership knows that allowing interest rates to increase beyond the current low levels would upset the fragile economy.
The Fed's Balance Sheet Thus, the question of the target rate remains constantly in flux, just as the Fed would like to have it.
Equally amorphous is the question of reducing the Fed's balance sheet. This reduction, according to both Brainard and Yellen, will come "soon" (whatever that means). One thing we know for sure: it will take a while to implement:
Ms. Yellen told the House Financial Services Committee that unwinding a $4.5 trillion-plus balance sheet that includes $2.5 trillion in Treasuries and the rest in mortgage-backed securities will probably take until 2022 before it shrinks to pre-crisis levels. Fed officials have not decided yet on longer-term policy framework that will affect the size of reserves, she said.
This assumes, of course, there is no worsening in the economy between now and 2022, which is a tall order, to say the least.
Moreover, what are the details of how this balance-sheet wind-down will occur? It's a great mystery. Also mysterious is why, in an age of massive home price inflation, the Fed still isn't unloading those mortgage-backed securities.
All in all, there's extremely little to see here in Yellen's testimony. It's the usual routine: the economy is experiencing "moderate" growth. We'll raise rates — but not too much! We'll wind down the balance sheet "soon."
Meanwhile, the Fed continues to invent new explanations of why it needs to remain accommodative. The totally arbitrary 2-percent inflation target continues to serve as a justification for continued low rates. And, more recently, the "natural rate" explanation is starting to serve as a convenient excuse as well.
In December 2016, the National Bank of Ukraine (NBU) nationalized Ukraine’s largest private bank for what we now know was an incorrect understanding of the facts. It remains unclear who benefitted from this expropriation.
But it wasn’t just a misunderstanding. The nationalization of PrivatBank very likely was the result of a still-unexplained refusal by the NBU to accept the financial reality of the situation.
This extraordinary government takeover has made the banking and economic situation in Ukraine much worse rather than better, and is an almost classic case of government overreach.
The NBU’s inappropriate and unnecessary nationalization has hurt the Ukrainian economy, stolen millions from PrivatBank’s owners and is forcing Ukraine’s taxpayers to bear a substantial additional burden.
The NBU took its action in large part because of what it said was an unacceptable level of related-party loans: 90 percent or more was the number it frequently used.
But Ernst & Young, the global “Big Four” accounting firm the NBU hired to undertake an audit of PrivatBank at the end of 2016, said the actual level of related-party loans at PrivatBank was merely 4.7 percent.
And that very low level (an astounding almost 95 percent less than what the NBU used to justify its nationalization) is itself lower than the level of related-party loans reported a year earlier in a separate audit conducted by yet another Big Four firm: PWC.
Perhaps to protect itself from what will undoubtedly be withering criticism, the NBU is now considering suspending PWC from auditing Ukrainian banks, has accused one of the most renowned and highly esteemed auditors in the world of being “unprofessional,” and is at least hinting that its audits contributed to the situation.
The NBU has claimed that PrivatBank siphoned a majority of its equity to related party loans to enrich the bank’s shareholders. Operating activities show that the cash flow for 2016 was 21 billion Ukrainian hryvnia to client funds, but not to the issuance of loans to related parties.
Similarly, the NBU made an arbitrary, erroneous and harmful decision to regard PrivatBank’s collateral as unacceptable even though a significant amount of the loans that were classified as “impaired” should have been acceptable under IFRS standards.
But it’s not just the NBU’s decision to nationalize PrivatBank that’s questionable; serious issues have now been raised about the way the NBU carried out the nationalization once it decided to move forward.
The NBU’s capitalization of PrivatBank after the nationalization was a transfer of government bonds, rather than cash, that effectively was worthless.
Up to then, the NBU always required the valuation of collateral from independent appraisers so that its value would be recorded appropriately on the balance sheet. But, as E&Y stated in its 2016 audit report, ten days after the nationalization, there was a sudden increase of investments in government bonds that were never valued. Who will buy those bonds now?
But the biggest issue is why the NBU ever thought that government control through nationalization of Ukraine’s largest privately owned bank was appropriate in the first place. PrivatBank had a strong vote of confidence from its customers with 40 percent of the country’s private deposits and serving 44% of corporate clients. It had a strong positive track record of supporting Ukraine’s economy and creating jobs. And, as a report by E&Y (the auditors chosen by the NBU) subsequently confirmed, according to IFRS standards its financials were far stronger than the NBU was charging.
All of this makes the NBU’s nationalization of PrivatBank more of an unnecessary expropriation – a taking by the government – than a good banking practice. That is the textbook definition of a scandal.
[First published by Rare, July 1, 2017]
Speaking in London, Federal Reserve chair Janet Yellen Tuesday predicted that the “the system is much safer and much sounder” and explained that the Federal Reserve is prepared to deal with numerous enormous shocks to the economy.
In her conversation with Lord Nicholas Stern, Yellen also went on to list the reasons that, thanks to central bank intervention, there is unlikely to be another financial crisis “in our lifetimes.”
For those who have lived through more than one business cycle, however, alarm bells tend to go off every time an economist, central banker or high-ranking government official declares that there’s little to no danger of economic turmoil in the near future.
There is a long history of spectacularly bad predictions being made shortly before economic crises. Famously, shortly before the Crash of 1929 — one of the earlier crises that occurred on the Federal Reserve’s watch — Herbert Hoover proclaimed that “We in America today are nearer to the final triumph over poverty than ever before in the history of any land.” But, we certainly don’t have to go back that far.
Indeed, in the late 1990s, it became nearly routine to hear economists announce that “the internet changes everything” and “the business cycle is dead.”
Economist Rudi Dornbusch — a close associate of current Fed vice chair Stanley Fischer — even wrote a July 1998 column in the Wall Street Journal titled “Growth Forever.” Dornbusch concluded that the possibility of an imminent recession “is remote” and the country “will not see a recession for years to come.” So sure of the benefits of the “new economy” was Dornbusch, in fact, that he declared, “This expansion will run forever.”
Then came the dot-com bust of 2001. After that came a short expansion from 2002 to 2007. After that came the Great Recession.
Meanwhile, from 2000 to 2015, according to the federal government’s data, real median household income was flat. Only over the past two years have we seen any of that expansion that many were venturing to say was permanent back in the late 1990s.
Economists and policymakers were no more insightful when examining the possibility of a new crisis post-2007.
In 2005, for example, Milton Friedman could have been paraphrasing Yellen’s Tuesday comments when he concluded that “the stability of the economy is greater than it has ever been in our history. We really are in remarkable shape.” Friedman went on to give Alan Greenspan credit for the expansion.
In early 2007, Ben Bernanke predicted, “We’ll see some strengthening in the economy sometime during the middle of the new year.”
As late of mid-2007, Bernanke was downplaying any problems associated with the sub-prime housing market, allaying any fears of a bubble or bust and claiming, “I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened [i.e, enormous home price growth during the housing bubble] is supported by the strength of the economy.”
If housing bubbles do prove to be a problem, Bernanke concluded, it’s “mostly a localized problem and not something that’s going to affect the national economy.”
The US would officially begin to contract in December 2007, followed by a financial crisis the following autumn.
Even on the eve of the crisis — in September 2008 — John McCain announced that “the fundamentals of our economy are strong.”
A year later, the unemployment rate would reach 10 percent, foreclosure rates were surging and total employment would collapse from 116 million to 107 million. Employment would not return to pre-crisis levels until late 2013.
Millions of workers would need to change careers, be retrained, scratch for other forms of income to avoid foreclosure or eviction and put off retirement indefinitely. The economy was so weak for so long, in fact, that the Fed felt it necessary to keep the key target interest rate near zero for seven years to add “stimulus.”
Of course, just because Janet Yellen says the economy won’t experience a crisis anytime soon doesn’t mean a crisis is imminent. A truly strong economy isn’t going to be “jinxed” by a declaration that things are fine. On the other hand, given the record of eminent economists and Fed board members in the past, Yellen’s predictions are hardly anything that should inspire confidence.
Janet Yellen finally did it, mark the date June 27, 2017. Something all modern Federal Reserve chairs do: open mouth, insert foot. Tuesday in London Ms. Yellen announced the end of financial panics...well...at least while she’s alive.
"Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be," Yellen said.
She follows in the footsteps of two great Fed Chair prognosticators
In 2002 Alan Greenspan said,
The ongoing strength in the housing market has raised concerns about the possible emergence of a bubble in home prices. However, the analogy often made to the building and bursting of a stock price bubble is imperfect. First, unlike in the stock market, sales in the real estate market incur substantial transactions costs and, when most homes are sold, the seller must physically move out. Doing so often entails significant financial and emotional costs and is an obvious impediment to stimulating a bubble through speculative trading in homes. us, while stock market turnover is more than percent annually, the turnover of home ownership is less than percent annually— scarcely tinder for speculative conflagration. Second, arbitrage opportunities are much more limited in housing markets than in securities markets. A home in Portland, Oregon is not a close substitute for a home in Portland, Maine, and the “national” housing market is better understood as a collection of small, local housing markets. Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole.
When Federal Reserve Chairman Ben Bernanke was questioned in 2005 about whether house prices might be getting ahead of the fundamentals, he replied:
Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.
Also in 2005.
House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.
Later that same year
With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.
Then in 2006
Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.
February 2007
Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.
March 2007
At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.
May 2007
All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.
October 2007
It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.
June 2008
The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.
July 2008
The GSEs are adequately capitalized. They are in no danger of failing.
December 2010
I wish I'd been omniscient and seen the crisis coming.
For the past several weeks, a dark and uneasy atmosphere has been hanging heavily over the British political landscape. In addition to the four major terrorist attacks on British soil since March, the 2017 general election highlighted growing public anger with the complacent, non-ideological, and seemingly uncontested reign of Prime Minister Theresa May. Not only has May all but purged libertarian and free market ideas from the Conservative Party, but she also conducted one of the most staggeringly inept election campaigns in recent memory, with a series of policy announcements directly before the election which were wildly unpopular, strategically insane, and practically worthless in the face of the country’s major problems. All this led to an election where, had the various progressive parties gained just 6,379 additional votes overall, the most extreme far-left Labour Party in a generation would have been able to form a new coalition government. This would have left Britain with a prime minister who has publicly defended the failing socialist policies of Venezuela and referred to the terrorist group Hezbollah as his “friends.”
A Labour Party victory would have brought the British economy under the control of a Marxist, and policing, immigration, and national security in the hands of a woman who once argued on national TV that Chairman Mao “did more good than harm.” The tense national mood was crystallised when, on June 14th, a 220-foot tall public housing apartment block in West London was engulfed in an inferno that lasted over 24 hours. This apparently random tragedy is estimated to have led to the deaths of 79 of London’s lowest-income residents, with many more having been left homeless during a record-breaking heat wave, in the heart of one of the city’s wealthiest boroughs. The perceived lack of government concern for the disaster and its victims led to widespread speculation that the capital was on the verge of descending into riot.
It was to this backdrop of anger and uncertainty that Bank of England governor Mark Carney delivered his annual speech to financial leaders at London’s Mansion House this month, initially scheduled for the day after the Grenfell Tower fire. With the exception of the rescheduling of the speech however, Carney wasted no time in harnessing the national mood toward his own ends; a tactic which he has become quite accustomed to in recent months. The BoE governor made no secret of his opposition to Brexit in the run-up to last year’s referendum, supposedly on the grounds that it would cause a recession, and was equally outspoken when it came time to take the credit for the fact that that recession never arrived. However, with public opinion now seeming to be turning against Theresa May’s Brexit government, Carney’s Mansion House speech twisted the knife by emphasising at its outset that (to paraphrase the BBC’s account) Brexit is making people poorer, because Brexit is causing inflation.
Unfortunately for Britain’s ‘impartial’ state-funded news service, this is flatly incorrect. Real incomes have not in fact fallen, but rather have merely slowed somewhat in the rate at which they are continuing to increase, a fact which even Carney conceded in his speech. This obvious mistake would tend to suggest one of two things: either that the BBC’s economics editor Kamal Ahmed simply does not understand the difference between a weakening in the rate of growth and a decrease in absolute terms, or that he is using license fee payers’ own money to misrepresent the facts to them in the pursuit of his political agenda. Sadly, for a man of Ahmed’s education it is difficult to extend to him the courtesy of assuming the former.
In any case, it is true that British real incomes have slowed in their rate of increase since Brexit, largely due to the weakening of sterling since the referendum, and consequent inflation of consumer prices. Offloading of sterling on the foreign exchange markets has often been vaguely attributed to a decrease in business confidence since the Brexit result, and consequent decrease in demand to hold sterling reserves for the purposes of investing in the UK and purchasing pound-denominated assets. The decline in the value of the currency has tended to make imported goods more expensive for British consumers, leading to such harsh — indeed, almost unbearable — deprivations as the recent decrease in the weight of the beloved Toblerone chocolate bars.
It has rarely even been suggested, however, that the Bank of England’s own post-Brexit emergency policies — committing to £70 billion of new quantitative easing and suddenly pushing interest rates down to historic lows — could be the true source of the devaluation of the pound. Yet every piece of evidence has continued to support this basic economic insight, shown no more starkly than by the plummeting value of sterling in the immediate aftermath of Carney’s speech, in which he confirmed that the Bank’s printing presses would continue to run at full speed.
One might hope that Carney is merely oblivious to the impacts of his own actions; after all, what person would not prefer to have a harmless simpleton in charge of British monetary policy, rather than an ‘expert’ in the jumble of scientistic obscurantism that is modern mainstream economics? Sadly, however, it is far more likely that Carney is all too aware of the instability that exists in the fundamentals of the British (and world) economy, even as the shaky recovery from the Great Recession appears to continue. Given the Bank of England governor’s power to lower interest rates and expand the money supply at will, Carney finds himself in the comfortable position of being able to kill two birds with one stone: papering over the cracks in the economy and impelling the elected government into ‘softening’ Brexit, both by recourse to the printing press. The idea that a central bank could unilaterally cause price inflation, then publicly blame that inflation on a political outcome it opposed in order to pressure the government and undermine the will of the voters, bespeaks the dangerous extent of the power wielded by such seemingly arcane and insipid institutions. Yet for as long as that power is allowed to continue existing, concentrated in the hands of central bankers, who amongst them could resist such temptation?
George Pickering is a Fellow in Residence at the Mises Institute this summer, and is a student of economic history at the London School of Economics.
You do not need to be a financial market wizard to see that especially bond markets have reached bubble territory: bond prices have become artificially inflated by central banks' unprecedented monetary policies. For instance, the price-earnings-ratio for the US 10-year Treasury yield stands around 44, while the equivalent for the euro zone trades at 85. In other words, the investor has to wait 44 years (and 85 years, respectively) to recover the bonds' purchasing price through coupon payments.
Meanwhile, however, the US Federal Reserve (Fed) keeps bringing up its borrowing rate; and even the European Central Bank (ECB) is now toying with the idea of putting an end to its expansionary policy sooner rather or later. Most notably, however, US long-term rates have come down since the end of 2016, despite the Fed raising its short-term interest rate. How come?
Presumably, investors seem to expect that the Fed might not hike interest rates much further, and/or that higher short-term interest rates will prove to be short-lived, to be reversed quite quickly. In any case, bond markets do not seem to expect interest rates to go back to normal levels — that is toward pre-crisis levels — anytime soon. Several reasons could be responsible for such an expectation.
First and foremost, the US economy appears to be addicted to cheap money. The latest economic recovery has been orchestrated, in particular, through a hefty dose of easy monetary policy. It is therefore fair to assume that market agents will have a hard time coping with higher interest rates. For instance, corporations, consumers, and mortgage borrowers, in general, will face higher credit costs and a less favorable access to funding if and when interest rates edge higher.
In particular, higher interest rates could send the inflated prices of stocks, bonds, and housing southward. For instance, expected future cash flows would be discounted at a higher interest rate, deflating their present values and thus market prices. The deflation of asset markets would hit borrowers hard: Their asset values would nosedive, while nominal debt would remain unchanged so that equity capital is wiped out — a scenario most investors might assume to be undesirable from the viewpoint of central banks.
Moreover, the yield curve has become flatter and flatter in recent years. This, in turn, suggests that banks' profit opportunities from lending have been shrinking, potentially dampening the inflow of new credit into the economic system. A further decline of the yield spread could bring real trouble: In the past, a flat or even inverted yield curve has been accompanied by a significant economic downturn or even a stock market crash.
That said, investors might expect that central banks find it hard to bring interest rates back up, especially back to a level where real interest rates are positive. This holds true for the Fed as well as for all other central banks, including the ECB. This is because the monetary policy of increasing borrowing rates by a significant margin would most likely prick the “Super-Bubble” which has been inflated and nurtured by central banks’ monetary policies over the last decades.
However, it wouldn’t be surprising if, again, central banks, the monopolist producers of fiat money, turn out to be the major course of trouble. After many years of exceptionally low interest rates, central banks may well underestimate the disruptive consequences an increase in borrowing rates has on growth, employment, and the entire fiat money system. In any case, the artificial boom created by central banks must at some point turn into bust, as the Austrian business cycle theory informs us.
The boom turns into bust either by central banks taking away the punchbowl of low interest rates and generous liquidity generation; or the commercial banks, in view of financially overstretched borrowers, stop extending credit; or ever greater quantities of fiat money need be issued by central banks to keep the boom going, inflating prices so that ultimately people start fleeing out of cash. In such an extreme case, the demand for money collapses, and then a Super-Super-Bubble pops.
In this context, it is interesting to see that the price of Bitcoin has been skyrocketing in recent years. There are certainly several reasons for this. One reason is undoubtedly the fact that the cyber unit offers a potential “escape route” from fiat money. Bitcoin (and other cyber units as well) might well be seen, and increasingly so, as a “safe haven” in future times of trouble. And there will be for sure new waves of trouble going forward — whether central banks will tighten interest rates or not.
As alternatives to fiat money become increasingly accepted, positive spill-over effects can be expected for gold. Gold has always been the monetary prototype of a “safe haven.” It may be increasingly in demand for its store of value function going forward and, by making use of the blockchain, even as a digitalized means of payment representing a claim on physical gold. Once the Super-Bubble pops, we will see for sure what people demand as the ultimate means of payment: gold or cyber units, or both.
The results of the UK elections are unquestionably negative for the economy, bad for investment, bad for the pound, and for a swift Brexit resolution.
The UK economy has performed exceptionally well in the past years, even after the Brexit referendum. So well, that international agencies such as the IMF or the OECD had to completely reverse their negative expectations for the economy of a “Yes” vote.
The problem is that we have focused on the positive — the fact that doomsayers were wrong — without analysing the negatives — the impact on potential growth and increase in investments. The Bank of England had to increase its growth estimates for 2017 to 1.7% and 1.3% for 2018. However, the uncertainty of a hung parliament, a weak government unable to negotiate Brexit from a position of strength, and the ongoing weakness of the pound may continue to erode growth potential, gross capital formation, and economic agents’ investment and hiring decisions.
It is extremely unlikely that Brexit will be reversed. It is, however, very likely, that negotiations will be more difficult and longer.
The UK is a very dynamic economy, and its companies have enormous strengths, with a thriving export sector and global multinationals. These will continue to benefit from a weak currency, but internal demand and the large surplus of service exports may suffer from the uncertain process of an even more complex Brexit.
As such, it is likely that we will not see a major impact in the growth prospects of the economy due to the benefits of a global and strong external sector, which benefits more from solid high-margin products and competitive technology than from weak currencies, but internal demand challenges will likely have an impact on consumption, hiring and wages.
It is no surprise, then, that the FTSE will continue to rise. It is fundamentally composed of diversified international companies. The impact of uncertainty may weigh on banks, consumer stocks and those with a large proportion of sales in the UK. However, the FTSE is more impacted by estimates of the global economy and energy-commodity prices. It is an index with almost 30% of sales in foreign currency.
The pound weakness may continue, also because the BoE is unlikely to take any measures to defend the currency.
As for bonds, extended QE means that sovereign bond yields will remain depressed, while solid corporate earnings and good balance sheets will support a more than adequate demand for corporate bonds. A clear indicator in the wake of the UK election this month has been that yields are still contained in all the different indices.
Clearly, investors will have to pay attention to guidance and cash flow generation of companies, but I would imagine that the forthcoming uncertainty will likely have an impact on a potential growth that should be well above EU or US figures, but will not.
Being complacent about average growth and acceptable macro figures cannot disguise the fact that the UK could and should grow well above its comparable economies and that the Bank of England is keeping an uncomfortably aggressive quantitative easing program that will leave it without tools in case of a change of economic cycle that is now more likely than before.
Reprinted with permission of the author. Daniel Lacalle has a PhD in Economics and is author of Escape from the Central Bank Trap, Life In The Financial Markets, and The Energy World Is Flat (Wiley).
The attacks on physical cash from a phalanx of economists, central bankers, commercial banks, and politicians have not diminished in recent years. On the contrary, in the face of the worldwide increase in terror attacks, particularly in Europe, and ongoing pressure on public budgets, the cash ban issue is increasingly dragged into the spotlight.
In a highly-recommended study entitled “Cash, Freedom and Crime. Use and Impact of Cash in a World Going Digital,” Deutsche Bank Research demolishes numerous popular myths surrounding cash, inter alia in the context of crime and terrorism. Without cash there are no longer bank robberies at gun point, instead there are now electronic bank robberies. Fraud involving credit cards and ATM cards is massively increasing in Sweden, the country considered the pioneer of the cashless society. The argument that adopting a cashless payment system would facilitate the fight against terrorism doesn't hold water either:
As regards terrorism in Europe, an analysis of 40 jihadist attacks in the past 20 years shows that most funding came from delinquents’ own funds and 75% of the attacks cost in total less than USD 10,000 to carry out — sums that will hardly raise suspicions even if paid by card.
Moreover, many terrorists, particularly if they are prepared to risk their own death, won't be deterred by prohibitions, just as stricter gun laws have no impact on people who must use unregistered weapons for their crimes. Often, they are unable to get hold of a weapon by legal means anyway if they have a criminal record. Planned terror attacks are as a rule characterized by a meticulous and careful approach. At best a cash ban might make financing of terrorism more difficult (even that is doubtful), but at the price of subjecting the law-abiding peaceful population at large to even more intrusive surveillance.
Legislators have passed additional regulations in the past 12 months which at least restrict the use of cash; bans of high-denomination banknotes (e.g., the 500 euro note) and (lower) thresholds for legal cash payments. There are however also technological developments that are significantly reducing the transaction costs of cashless payments and are therefore making cash comparatively unattractive.
In Sweden, an app called “Swish” introduced by the country's leading banks has revolutionized cashless payments. To this point, the app has been downloaded 5.5 million times. In the Scandinavian country only 2% of all payments are settled in cash these days.
Sweden's central bank expects that this percentage will decline by another three-quarters to 0.5% by the end of the decade. 900 of the 1,600 bank branch offices in the country no longer have any cash in store.
The academic debate continues unabated. A paper that has recently triggered intense debate is the IMF working paper “The Macroeconomics of De-Cashing,” which was published in March 2017. Its author Alexei Kireyev examines the possible macroeconomic consequences of abolishing cash. His central conclusions are:
A cashless payment system would make the monetary policy transmission mechanism more efficient, as there would be very little or no cash available anymore. In particular, it would become possible to implement negative interest rates on a broad front, in order to boost consumption.Since a decline in cash holdings would go hand in hand with an increase in demand deposits at banks, the banking sector would be able to extend more loans. That would lower the level of interest rates and boost economic growth.A sudden increase in the demand for cash is a sign of an imminently impending financial crisis. Shortly before the collapse of Lehman Brothers in September 2008, demand for cash currency increased significantly. That was a sign that bank customers increasingly lost confidence in the solvency and liquidity of commercial banks. This warning signal would no longer be available if cash were abolished.A cashless economy makes tax collection easier, as the example of Sweden illustrates. Regardless of a superficially balanced approach in large parts of the text, the article clearly evinces an underlying bias toward supporting the abolition of cash. Several arguments in the paper are fallacious and represent little more than intellectual kowtowing to the prevailing zeitgeist. Thus a cashless economy is supposedly going to improve “financial inclusiveness” — as every citizen and economic actor would be forced to open a bank account; it would reduce illegal immigration — as employment of illegal immigrants would become more difficult; and it would help protect the environment — because the production of paper or polymers for banknotes has a greater impact on the environment than electronic money.
Whether the given objective of fighting crime and black markets can be realized by banning cash remains a highly controversial issue. Thus, Professor Friedrich Schneider, one of the most renowned experts in the areas shadow economy and tax evasion, shows that a cash ban would reduce illicit employment be a mere 10% and organized crime by less than 5%.
The paper's conclusions ultimately read like a political manual for the abolition of cash by means of salami tactics. In other words, to prevent the population from getting alarmed, it is to be weaned off cash in tolerable doses through a piecemeal approach. Economic incentives for cashless payments are to be put in place, i.e., specifically, fees for cash payments are supposed to be introduced or raised. In our assessment, the most important point though concerns the notion that “de-cashing” would be “critical for the efficiency” of a negative interest rate policy.
Unsurprisingly, central banks are reluctant to claim credit for inflation. In their latest bulletin, the European Central Bank (ECB) published the graph below explaining what causes inflation.
See the problem? Neither the money supply nor the ECB are mentioned. While there are many factors that influence the purchasing power of money, inflation is still inherently a monetary phenomenon and the role central banks play simply can’t be ignored.
Instead, the ECB prefers to do what all central banks did just before the 2009 great recession: blame inflation on rising food and energy prices. But large central banks like the ECB have a strong and disproportionate effect on energy prices, as predicted by Austrian business cycle theory. The rise in oil prices in 2007, for example, was triggered by the end of the euphoric monetary boom initiated by the Fed and the ECB in the years prior. As investment in energy production was fueled, in part, by credit expansion instead of real savings. The quantity of producer’s goods — or at least of some of them — revealed themselves to be insufficient to complete the plans of entrepreneurs, thus generating a sharp increase in their prices.
Therefore the ECB has some responsibility in the so-called external drivers of inflation.
Another problem worth noting is that the ECB seems eager to revive the old myth of cost push inflation. The author of the ECB bulletin writes that: "Domestic price pressures result mainly from wage and price-setting behaviour, which is closely linked to the domestic business cycle."
But it is the values of the first order goods which are imputed back to productive factors, rather than the other way around. As Henry Hazlitt puts it:
The other rival theory is that inflation and the rise of prices are caused by higher wage demands — by a “cost push.” But this theory reverses cause and effect. “Costs” are prices. An increase in wages above marginal productivity, if it were not preceded, accompanied, or quickly followed by an increase in the supply of money, would not cause inflation; it would merely cause unemployment. It is not true, as so often assumed, that a wage increase in a given firm or industry can be simply “added on to the price.” Without an increased money supply, prices cannot be raised without reducing demand and sales, and hence production and employment. We can stop the “cost push” if we halt the increase in the money supply and repeal the labor laws that confer irresponsible private powers on union leaders.
With a constant demand for money, it is possible for some prices to go up but it is impossible for all prices to go up. For all prices to go up, a central bank must exist and pump more money into the economy. If, in a free market, the cost for oil increases because of an increase in demand, whether foreign or domestic, other prices, ceteris paribus, must fall.
Of course, the ECB is right to argue that global commodity prices affect the domestic price level. Nonetheless, the bulletin deliberately understates the impact the ECB has on the movement of prices. To simply chalk it up to international pressure will, for sure, become a handy justification for the ECB if they fail to maintain inflation under 2%.
But don’t be fooled, central banks, not oil, are responsible for the debasement of the currency.
Arguments for a "rules based" Fed are gaining momentum on both the political Left and Right — and even among some libertarians. Would the adoption of ideas like NGDP targeting and the "Taylor Rule" really make the Fed less dangerous? Would they be an improvement on the Fed's current discretionary approach? Can monetary "rules" really contain booms and busts, or would Yellen and company simply break them at the first sign of the next crash? Professor Peter Klein joins Jeff for a discussion.
Read Rothbard's What Has Government Done to Our Money? here.
Mario Draghi has again missed an exceptional opportunity to adjust monetary policy. By ignoring the huge risks that are being created from the brutal inflation of financial assets, saying that “there are no signs of a bubble,” the European Central Bank (ECB) remains adamantly focused on creating inflation by decree, denying the effects of technology, demography, and overcapacity.
“No signs of bubble”? I’ll show you some of them myself.
The percentage of debt of major countries “bought” by the ECB: Germany, 17%, France 14%, Italy 12%, and Spain 16%. In all cases, in 2016 and 2015 the ECB was the largest buyer of said countries’ net emissions. Ask yourself a question: On the day the ECB stops buying, which of you would buy peripheral or European bonds at these prices? Clearly, the first sign of a bubble is the absence of demand in the secondary that offsets the impact of the ECB. It indicates that the current price is simply unacceptable in an open market, even if the recovery is confirmed, especially because rates do not even reflect a minimum real return, being below inflation.
European Union high-yield bonds are trading at record-low yields despite the fact that cash generation and debt repayment capacity, according to Moody’s and Fitch, have not improved significantly.European largest stocks (Eurostoxx 50) trade at 20x PE and 8.3x EV/EBITDA despite eight years of flat earnings and downgrades, which have only just recently reversed.Infrastructure deals’ multiples have increased five-fold in three years to an astonishing average of 16-19x EBITDA.Excess liquidity in the euro zone already reaches 1.2 trillion euros. It has multiplied by almost seven since the “stimulus” program was launched. Anything for Inflation There is a problem in the huge amount of assets bought by the ECB, whose balance sheet already exceeds 25% of the European Union’s GDP. At the beginning of the repurchase program, it could be argued that risky assets, especially sovereign bonds, could have been cheap or under-valued because of the risk of break-up of the euro and overall negative sentiment. However, that statement cannot be made today, with bond yields at historic lows and debt levels at historic highs. Monetary policy is a perverse incentive to spend more and add more debt.
Of course, what the ECB expects is the arrival of the inflation mantra, that mirage that deficit states yearn for and no consumer has ever wanted.
But the search for inflation by decree meets the pitfall of reality. The positive disinflation that technological advances generate adds to the logical change of consumption patterns due to aging of the population and the elephant in the room: The European Union has never had a problem of lack of investment, but of excess spending on dozens of industrial and infrastructure plans that have left behind some positive effects, but — due to excess — greater debt and overcapacity .
Now that prices are moderating again with the dilution of the base effect, the opportunity to moderate this unnecessary monetary stimulus is lost. As I explained at CNBC on May 29, the supposed positive effects of the buyback program cannot make us ignore the accumulation of risk in sovereign and corporate bonds and the dangerous impact on the financial sector.
Draghi, at Least, Warns The president of the ECB does not stop alerting governments about the importance of reforms to drive growth, lower taxes and reduced imbalances, but no one hears. When Draghi warns banks of their weaknesses, they don’t listen either. When he reminds deficit spending governments that monetary policy has an expiration date, they look the other way. It’s party time .
Monetary policy is “like Coca-Cola,” said Jens Weidmann , president of the Bundesbank. A drink that stimulates, but has too much sugar and no real healing qualities.
The problem of losing this opportunity to moderate monetary policy is that it is highly unlikely that the necessary measures will be taken to correct excesses when they are no longer a debate of economic analyst, but evident to all citizens. Because then, the central bank will be afraid of a financial market correction, after a bubble inflated by its policies.
European governments make a huge mistake thinking that prosperity is going to be generated from debt and not from savings. But they make an even bigger mistake if they think that by perpetuating the imbalances, they will prevent a crisis.
At the press conference, Draghi said that “nobody knows when or where the next crisis will come: the only sure thing is that it will come.”
What Draghi did not explain is that the artificial creation of money without support, well above real economic growth, is always behind those crises. But that is another problem, that will be dealt with by the next president of the Central Bank, who will offer the “new” solution … Yes, you have guessed it: Cut rates and increase liquidity.
Reprinted with permission of the author. Daniel Lacalle has a PhD in Economics and is author of Escape from the Central Bank Trap, Life In The Financial Markets, and The Energy World Is Flat (Wiley).
The ECB's regular policy statement was announced today by President Mario Draghi and it was the typical central banking balance beam act of self-congratulation for the strong economy coupled with the conditional warning that was inflation was too low. This way, everyone should be thrilled that the economy is strong and yet the central planners don't have to cut back on the monetary addiction.
It is assumed, of course, that unless the economy is experiencing 2% inflation rates (as calculated by their own statistical reference points), there's still lots of printing work to be done. Deflation is to them the Great Enemy to be slaughtered.
But since it's been nearly a decade of loose monetary policy in one way or another, and progress needs to be shown to justify their careers, they emphasize that the economy doesn't per se need more stimulus. To satisfy both the need for more money creation and the bank's trustworthiness, the ECB's statement dropped reference to future interest rate cuts while at the same time refusing to slow the current pace of stimulus.
These miniscule changes in their posturing is supposed to be of great importance, a sign that the Planners really know what they are doing; they are fine tuning and perfecting the European economy.
But it's all hogwash. They don't know how to run an economy. They only know how to put on a great performance and create money with which to prop up assets and governments around the Eurozone. The game, as it always seems to do, goes on.
Greece is on the hook for a €7 billion debt repayment in July, but may not be prepared to meet the obligation. If Europe doesn't agree to come to an alternative agreement, the IMF may step in and bail them out again. This, according to the New York Times, which writes:
As the International Monetary Fund approaches the seventh anniversary of the contentious Greek bailout, it is torn over whether to commit new loans to a nearly bankrupt Greece.
The fund has been criticized for overcommitting financial resources to the European debt crisis.
Yet the I.M.F. has an obligation to lend to countries that are in financial need as well as to safeguard global financial stability.
Ostensibly, the role of the IMF is to safeguard global financial stability and it therefore would rather continue to throw money into the black hole of Greece than let it default. What this amounts to economically is a grand case of wealthier governments propping up overly indebted poorer countries against any standard of financial prudence. And since no government acquires its wealth in the first place, the IMF acts as a mechanism of wealth transfer. As the New York Times observes:
For example, the €30 billion the fund lent to Greece in 2010 was 30 times more than the sum of Greece’s financial contribution to the fund as a member, which is called a quota. The loan is one of the largest in the history of the fund, which was formed in 1944.
Of course, this money above and beyond Greece's own "quota" came from the taxpayers of other countries, who don't get any benefit at all out of the IMF's wealth transfer scam. As we near Greece's repayment date, we are going to get nothing from the press about the Western taxpayers on the hook for the Greece bailout — and neither are we going to hear anything about the creation of debt by central banks which makes these debt crises a reality in the first place. Instead, we are going to get a surface debate about whether Europe or the IMF should compromise over Greece's dire and never ending problem.
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.
Sometimes, when central bankers talk, they reveal within the very same discussion a sign of complete obliviousness. The ECB's Peter Praet recently gave an overview of monetary policy and price stability. By way of reminder, price stability refers to the central bank's efforts to keep the prices we pay from dropping lower. This would be terrible.
In his overview, he describes what preceded the 2008 crisis with this:
In 2008 the global economy faced a calamity unparalleled since the Second World War. The crisis had been preceded by a mood of over-optimism in several advanced economies. Expectations about future income were at odds with slowing underlying growth, giving rise to an "expectations gap". In the euro area, expectations were reinforced by a revived sense of economic prosperity that was associated with the introduction of monetary union. Firms were borrowing against their future income expectations in some countries; households and governments were doing likewise in other countries.
So the problem, in Praet's view, was too much borrowing/spending based on unrealistic expectations. Then everything turned and there was too much debt and balance sheets everywhere were severely damaged. Following this, the recession reared its ugly head.
Now, consider how Praet describes the central bank's "success:"
Our measures are working their way through the financial system and have led to a major easing of financing conditions for euro area firms and households, benefited credit creation and contributed to a more robust and sustained economic recovery.
Monetary policy is playing a central role in supporting consumption: lower interest rates are ensuring favourable borrowing conditions and encouraging households to bring forward durable consumption as well as firms' investment. Consumption of durable goods has rebounded in recent years, and especially in countries where credit was previously very tight.
The relation between what was described as the problem and what is being offered as proof of success is clear to anyone who is not a professional monetary bureaucrat. They recreated the problem and claimed it as a trophy of achievement!
This is quintessential central banker. They don't see a monetary problem until it punches them in the face.
With the Fed continuing to portray a "hawkish" message, focused on three or four 2017 rate hikes, the ECB is too having to decide whether their easing policy should be cut back. The Fed began its tapering of (official) QE years ago and is therefore now onto rate hikes and balance sheet efforts. The ECB, however, is still heavily in asset-purchasing mode.
In a recent interview with the the Wall Street Journal, Dutch central bank governor Klaas Knot, made it clear: Euro area interest rate hikes are not going to take place until the asset purchase program has been brought to a close.
Knot:
The question you raise is about rates. Our forward guidance is pretty clear on this front. It states that we will first end the net purchase phase of the asset purchases, and only then begin to lift off interest rates. That forward guidance reflects also the experience that other central banks like the Federal Reserve and the Bank of England have gained in this context. There is a certain logic, I would say, in that sequence, a logic that also applies to the eurozone. So for the moment I don’t see a need to revisit that logic.
In other words, the ECB is much further behind the Fed on the path toward interest rate "normalization." Normalization, of course, being a misleading code word for slightly tinkering with an interest rate target that is basically economically meaningless.
Knot continues with the classic central banker position of [my paraphrase] "everything is great, but we need more inflation." It's the balance of making sure everyone knows the swell job the bankers are doing, but at the same time that their heroic efforts are still needed.
When asked how close they were to completely halting the purchase of assets, Knot merely replied: "we'll simply have to see where the situation is." That is, they really don't know. At the same time, Knot claims that "what we have to do is be as predictable as possible." If this seems to be confused sentiment, Knot also says: "I don't want to express myself in absolute terms." Obviously.
What has been dubbed "FedSpeak" is simply "Central Bank speak." Central bankers all over the world don't know what's going on, they don't know how to steer an economy. No one does, of course, as only the market actions of individuals can reveal the price of money and the proper allocation of capital. But instead of letting go, they try to appear knowledgeable and perfectly in control.
The problem is, few actually believe them anymore, despite the tremendous efforts of financial media.
In an essay on Edmund Burke's view of the nature of government, Murray Rothbard quoted him as saying:
In vain you tell me that Artificial Government is good, but that I fall out only with the Abuse. The Thing! The Thing itself is the Abuse!"
Our complaint isn't just with "abuse of the system," it is with the system itself! The system is the abuse. Everything else is a symptom, a surface issue.
When BOE Governor Mark Carney spoke on various banking sector abuses at the Banking Standards Board Panel, he misses the entire point. The title of the speech is “Worthy of trust? Law, ethics and culture in banking” and he is concerned that such abuses have produced a "crisis of legitimacy."
"This immense progress has been overshadowed by a crisis of legitimacy. A series of scandals ranging from mis-selling to manipulation have undermined trust in banking, the financial system, and, to some degree, markets themselves."
Bad behaviour went unchecked, proliferated and eventually became the norm.
What can we say? When you place one institution in charge of the entire monetary sector within a given economy, abuses should hardly be a surprise. But rather than questioning the government-granted monopoly, the outlawing of free competition in money and banking, Carney and others of the Bureaucratic persuasion can see only one solution: more regulations and more oversight. He states:
Changes to incentives, new codes and a clearer mapping of responsibilities will all help improve conduct and lay the groundwork for better culture.
We are seeking to raise expectations and norms by using a combination of hard and soft law, with much of the latter developed by the private sector.
They are trying to address various manipulations in the foreign exchange markets, interest rate controversies, and crony business relationships. But how could any of these things be a problem if central banks were not granted exclusive legal control over money and interest rates in the first place? These crony relationships and backroom deals are merely symptomatic of the mandated existence of these monopoly banking institutions.
More laws which aim to stem abuses of the system presuppose that the system itself is ethically pure. Opponents of central banking should not be mere opponents of abuses, but opponents of central banking itself!
Carney characterizes himself as wanting to issue a hard crack down on the "bad apples," but the solution should simply be to eradicate any possibility of these bad apples getting these positions in the first place. How can a bad apple fill a bureaucratic position that does not exist?
The supply of US dollars has slowed during early 2017 with February's year-over-year percentage increase hitting a 17-month low of 7.7 percent. Monthly year-over-year growth rates in the money supply have been falling each month since October.
Over the past eight months or so, money supply growth rates have become somewhat volatile with the growth rate surging from 6.7 percent in late 2017 up to 11.3 percent by late 2016, and down again to under 8 percent by February of this year.
This recent period of volatility comes after a long period of relatively sedate and consistent growth in the money supply through most of 2013, 2014, and 2015.
The "Austrian" money supply measure (AMS) used here is a measure of the money supply pioneered by Murray Rothbard and Joseph Salerno and is designed to provide a better measure than M2. The Mises Institute now offers regular updates on this metric and its growth.
The "Austrian" measure of the money supply differs from M2 in that it includes treasury deposits at the Fed (and excludes short time deposits, traveler's checks, and retail money funds).
Since 2014, money supply growth has ranged from about 7 percent to 8.5 percent. In October of last year, money supply growth hit a seven-year low of 6.8 percent, although this proved not to be an indication of any new trend.
February's drop to a 7.7 percent year-over-year growth rate shows a return to the sort of growth that has been common in recent years.
Recent variations in growth rates in AMS — compared to M2 — is being driven partly by historically large increases and decreases in treasury deposits at the Fed. The federal government has become increasingly liquid in recent years, with unusually large amounts of spend-ready dollars available. Looking at total deposits at the fed, for example, we can see that until recently, totals had reached well beyond what has been seen in the past:
As of February there were 269 billion dollars in deposits at the Fed, which is a decrease of 1.7 percent from February 2016. Deposits nevertheless remain at a relatively high level. This follows a long period of sizable increases in Treasury deposits which can be seen in the graph below:
Since December, however, treasury deposits began to fall quickly, and if we look at a similar measure that is available weekly — namely, "Deposits at the Federal Reserve other than reserve balances" — we find that totals have dropped to their lowest point in a year:
This appears to have affected our overall measure of money supply and is helping to push down money supply growth.
What have treasury deposits been disappearing so quickly? David Stockman theorizes it is the result of political posturing.
ECB Executive Board member Peter Praet recently gave a speech in Brussels. The underlying theme captures the convenient positioning of world central banks. They want to be seen as saviors of collapsing financial markets, but neither the cause of the instability nor the continued struggle for economic growth. From the speech:
Faced with a prolonged crisis, the ECB's unconventional policy measures have been essential to provide additional accommodation to the economy and prevent a self-sustaining fall in inflation — and they have been a clear success. Easier credit conditions have fed into a domestic demand-led recovery that has spread across countries and sectors. The economic outlook today is now better than it has been for many years.
And yet, as he admits, the ECB has been in crisis mode since 2008. So they want appreciation for bringing forth recovery, but want the world to look elsewhere for the reason why these economies aren't self-sustainable. He even blames the crisis in the first place, not on central bank activity from 2000–2007 but on the masses themselves!
The first [cause of the crisis] was the bout of over-optimistic expectations which took hold in several advanced economies in the pre-crisis years, reinforced in the euro area by a renewed sense of security and economic prosperity following the launch of monetary union. Despite slowing potential growth, agents in a number of economies overestimated their future income and borrowed against it, accumulating excessive debt. In some countries this over-leveraging was centred [sic] on firms, in other countries on households and in others still on the state.
Well, one might ask where this "excessive debt" came from. Does it not come from central bank policy? What Harry Browne once noted of governments equally applies to central banks: "Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, 'See, if it weren't for the government, you wouldn't be able to walk.'"
One of the consequences of living in an unfree world is the aggravating subjection to condescending Official Narratives. It's not just that our Monetary Saviors get to make money supply and interest rates decisions on our behalf, it's also that we are being saved from our own over exuberant actions. We ruin the economy, and then we get pulled from our own fires. And the bureaucrats hardly get a thank you!
Now, unfortunately, the end of their blessed interventionism is not on the horizon. Praet expresses with disapproval that inflation rates are still too low:
Given the softness of underlying inflation, however, we cannot yet be sufficiently confident that inflation will converge to levels consistent with our aim in a durable manner. Inflation dynamics also remain reliant on the present, very substantial degree of monetary accommodation, so they have not yet become self-sustained.
Indeed, because what we all hope for is a sustainable trend of rising costs for goods and services. This is what keeps the central bankers up at night. Central bankers are not yet satisfied with what they've done to us. And so they march on. What would we do without them?
We previously mentioned the budding struggle between the Yellen and Trump factions relating to the strength of the dollar and monetary and fiscal policies. It is the monetary status quo versus the populist rhetoric, and the showdown is worldwide. CNBC:
The European Central Bank (ECB) is faced with an unprecedented political challenge this year as key member states prepare to elect new leaders, though not everyone is convinced the central bank has the tools necessary to weather a populist storm.
The CNBC story goes on to explain that the ECB's Mario "whatever it takes" Draghi has unleashed a monetarily "nuclear" option to save the eurozone from the brink of a debt-laden collapse. They've been in crisis mode for four years.
But if the populists take control in France and Marine Le Pen renegotiates their EU membership, another Brexit-Trump moment of official challenge to the monetary establishment would be dealt. And indeed, Maria Demertzis tells CNBC that such victory and challenge to the EU would result in monetary fallout:
"The ECB has several lines of defense if there is a surprise result in the elections this year but if Le Pen is to announce, as she promised, she is going to hold a referendum to quit the EU then I don't see the ECB granting any lines of defense to try and help."
The financial markets worldwide depend heavily on the central bankers giving it all they've got in regards to "accommodative" policies. If the populists continue their success, and the ECB begins to slowdown its monetary efforts in stubborn response, who knows what might happen to the fragile bubbles around the globe.
Central bankers pride themselves in their ability to prop up markets. But regular people just don't care. In fact, worldwide they are boiling mad at the loss of their purchasing power and savings, coupled with their staggering debt levels. They aren't impressed by the self-congratulatory nature of Professional Economists.
And these economists and the bureaucrats they justify didn't even see the populist revolt looming. But now it's here. The showdown builds.
The recent news in the Bitcoin world is China's building attempt to regulate and oversee its use to a point where it is rendered nearly useless for Chinese consumers. They've realized that they can't truly kill it per se, but they can regulate the exchanges to a point where they can effectively stymie ts attractiveness.
Bitcoin, whether one considers it sound money or not, is a challenge to the established system monopolized by central banks everywhere. The War on Cash narrative fits in with the reality that central banks and governing authorities feel a need to address the lack of control and centralization in the currency world. Just as Bitcoin challenges the use of government protected clearing systems, so cash allows some inkling of freedom by consumers to withdraw from central-bank-driven monetary insanity.
It is no surprise that monetary bureaucrats worldwide have all but declared war on these "alternatives." It's all about control — about knowing what everyone is up to at all times. Instead of allowing the individuals to choose on the market, central bankers are all over the budding technology. They want to both challenge the existence of alternatives (Bitcoin) and embrace the technology behind it.
The New York Times observes, creepily:
For the central banks, the promise of the technology is that it would allow them to track every pound or renminbi on every step of its travels through the financial system in real time — something that is impossible now. The goal would be to make the financial system more transparent, fast, efficient and secure.
Indeed, while declaring war on Bitcoin itself, we discover that Chinese banks are experimenting with their own central-bank-approved version of a purely digital currency:
The digital currency, known to the broader world as “ChinaCoin,” but officially referred to inside China as digital renminbi, or RMB, was developed by the PBOC in partnership with other private and public entities.
Eventually, Chinese authorities hope digital RMB will help the government strengthen oversight of the country’s banks, while helping to prevent financial crime.
It's not really about fighting crime and promoting stability. It's about total financial domination. Even at the Federal Reserve, Lael Brainard, the Fed governor who oversees new technology, is behind the trend:
We are paying close attention to distributed ledger technology, or blockchain, recognizing this may represent the most significant development in many years in payments, clearing and settlement," Ms. Brainard said.
And Janet Yellen too:
A week before Ms. Brainard of the Fed gave her speech on distributed ledgers, the chairwoman of the Fed, Janet L. Yellen, was asked about the technology at a congressional hearing. She said that “innovation using these technologies could be extremely helpful and bring benefits to society.”
Benefits to society, of course, refers to the benefits to the central bankers and the various cronies who leech on to the monopolization of money and banking. The reality is that any benefits brought on by these centralizations of budding technology is strictly reserved for the crony financial establishment, and it is the poor suckers on main street that will pay the price.
How can liberty-minded Americans move toward more freedom in our lifetime? This panel discussion features Nomi Prins, Albert Lu, and Chris Casey. Recorded in San Diego, California, on 25 February 2017.
Well that was fast. Yesterday we observed the silliness of Fed president Kaplan's idea that it was consumers that were going to push GDP up over 2%. Today, we learn the following (source):
Turning to spending and income, personal consumption expenditures could muster only a 0.2 percent gain, 1 tenth below the Econoday consensus in a marginal gain that belies the enormous strength underway in consumer confidence. And when adjusted for inflation, spending fell 0.3 percent for the largest drop since September 2009.
There goes the consumer-led GDP hopes. In response, the Atlanta Fed's GDPNow model dipped hard: from a 2.5% forecast to a 1.8%.
Just yesterday, the Fed was referring to a "surprisingly strong economy" which was used as support for interest rate hikes "sooner than later." So much for that. Further against the strong economy theme is the fact that, while GDP forecasts for first quarter 2017 were above 3% due to construction data forecasts, today's construction numbers actually fell 1%!
Let's summarize: the GDP rate was supposed to grow due to consumer spending, which came in much lower than expected. Meanwhile, the GDP forecasts had been higher in the first place due to construction forecasts, which today came in much lower as well.
But we're all supposed to scratch our heads and fathom what would we do without the Fed at the helm?
Includes an introduction by Jeff Deist. Recorded in San Diego, California, on 25 February 2017.
Minouche Shafik of the Bank of England recently spoke to the Oxford Union in defense of the monetary Experts. The “Experts,” she pointed out, “have come in for a great deal of criticism of late.” She suggests this phenomenon may have something to do with the 2008 financial crisis. She also mentions various currency manipulation and interest rate scandals as possible motivations for public outrage. We applaud her keen insight.
However, she warns, it was due to the Experts that we have “gained about 20 years of life expectancy since 1950,” essentially eradicated polio, seen massive increases in world incomes, experienced a plunge in global poverty, and so on. She also brings up sanitation, roads, and education. Thus, it shouldn’t be surprising that so many decisions have been delegated to experts. Even Caesar (that bastion of freedom) turned to the experts to help him manage the empire.
More specifically to monetary problems, we learn that governments have created independent central banks full of Experts to decide on monetary policy. This was to protect the monetary policy decision making from the influence of politics. Politicians couldn’t adequately run an effective monetary system, so they outsourced it to the Experts. Seriously.
Of course, there’s no mention of how the “experts” got it wrong in 2008, or why we should keep trusting them. We do get some dismissal that the whole thing was a simple “failure of collective imagination of many bright people… to understand the risks to the system.” Presumably, these “bright people” are the experts and one wonders how self-blinded they are to overlook the fact that they caused the very risks they don’t even understand!
The lesson we simpletons are to take from all this is that the experts have everything under control. They are the ones “who sift through all the information and make informed judgments," according to Shafik. We just need to trust them, to keep the faith. Sort of like one of those “let go and let God” kind of things, except the god in this case would be the Experts.
Now, if the reader thinks referring to this special class of officials as “The Experts” is a little creepy, the entire tone of the speech reads the same. She has a self-labeled “agenda” to communicate and speak to the frustrations of the masses in a way that will make them more trusting of what the experts have in store. On one hand, it's the same ancient need of the regime to maintain control via propaganda. But on a more optimistic note, perhaps these speeches are signs of a concerned regime that is aware of an angry populace.
We don't want their expertise, thank you very much. In the words of Mises:
There is no other planning for freedom and general welfare than to let the market system work. There is no other means to attain full employment, rising real wage rates and a high standard of living for the common man than private initiative and free enterprise.
In our last update on money supply — using the "Austrian" measure of money supply developed by Murray Rothbard and Joseph Salerno — we found that money supply growth hit a 46-month high of 11.2 percent in October.
Growth has moderated since then, however, with year-over-year growth in US dollars dropping to 10.3 percent in November and 8.8 percent in December.
This change somewhat follows a change in M2 over the same time period as M2 growth hit a multi-year high of 7.5 percent in October, but fell to 7.3 percent and 7.0 percent in November and December, respectively.
The Rothbard-Salerno measure of money supply tends to see bigger swings than M2, and in this case the bigger swing is due partially to continued changes in US Treasury deposits at the Fed, which is not included in M2. In October and November, these deposits hit new highs unprecedented in scope, with total growth in October topping 500 percent. As described by the Atlanta Fed, "These deposits are roughly akin to the Treasury's checking account, which is to say the amount held in the account is determined by the Department of the Treasury based on its needs."
During the 2008-2009 period of historically large stimulus spending, Treasury deposits reached unprecedented growth levels. In late 2016, we saw some of the highest growth levels seen since 2008-2009, and this has helped to drive up money supply totals.
With the Trump administration's focus on fiscal policy stimulus — including large increases in military and infrastructure spending (plus the proposed border wall) Treasury spending looks to increase again the near future, and this would likely contribute to ongoing increases in money totals.
What is the significance of this in relation to the business cycle?
Historically, periods of significant decline in the money supply have preceded periods of economic recession. This was the case in the period before the 1990-1991 recession, the 2001-2002 recession, and the 2008-2009 recession. with money supply growth at or above 8 percent right now, however, this does not point to a recession in the immediate future. As with any economic indicator, however, it's impossible to guess when the current trend may substantially change.
2017 is off with a drab whisper as the FOMC, as expected, kept the Fed Funds rate target unchanged at .5-.75%. Further, there was no mention of the alleged three 2017 hikes, which “experts” might consider as to be a dovish move.
The press release was optimistic about the economy and cited a strengthening labor market, economic expansion, and consumer sentiment. Perhaps they haven’t seen the delicate fourth quarter GDP numbers?
One of the themes of 2017 is the issue of the Fed Balance Sheet and whether the Fed is going to be talking up some sort of effort toward shrinking it. On this front, we read:
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way.
Because the Fed would likely begin balance sheet changes by halting — or at least slowing down — the amount of “reinvestments,” this statement is indicating that it has no actual plans to address the balance sheet in the foreseeable future. Go figure. But the statement also emphasizes that addressing the balance sheet won’t take place if the Fed Funds rate normalization process is much further down the road.
This, coupled with the decisions to not touch the Fed Funds target and not even mention 2017 rate hikes indicates that the balance sheet topic probably won’t be seriously discussed for some time. Of course, touching the balance sheet is something the Fed is quite fearful of. Pricking the bubble is a massive no-no that the bureaucrats in every position in Washington want to avoid like the plague.
The FOMC (non)decision is typical of what we have come to expect from the Fed. They pretend they are optimistic about the economy, while at the same time bend over backward to not upset those who depend on such radically “loose monetary policy.”
It’s the most damaging and devastating example of “kicking the can down the road” that the world has ever seen. But those in power and their lobbyists are addicted to easy money. And so they keep it flowing and never look back.
Now that the Fed has slightly upped its Fed Funds rate target twice, there is talk of a much more ominous issue: shrinking the balance sheet. Late last year, St. Louis Fed president James Bullard affirmed that 2017 “possibly might be a good time to play that card.”
What that would entail, of course, is reversing the years of a ballooning balance sheet by selling the securities that it previously attained. In selling assets, the Fed sops up bank reserves and they can no longer be used in the economy.
The entire economy — as well as the so-called recovery — since the Fed began it’s unprecedented asset purchase has been a giant mirage. It rests on the band-aid of financial moves from the Fed that papers over the reality of the situation. The problem with band-aids (monetary expansion) in our context is that no one notices the rot underneath (the destruction of real capital).
If the band-aid is ripped off, the underlying reality is exposed. There is some worry that “the market” will respond poorly. Indeed! Why? Because the whole reason that “the market” has achieved new heights over the years is because it knew the Fed was there to backstop losses and buy assets! Reversing this trend doesn’t create a new crisis, it allows — finally — the healthy correction to complete itself.
It is for this reason that the Fed and the Official Economists want to delay this as long as possible. Hence, in his most recent post, Ben Bernanke urges extreme “patience” [sic for “I hope we never have to do this”] in addressing the size of the balance sheet.
Bernanke had “indicated in testimony in 2013 that the FOMC was considering slowing asset purchases” and this resulted in the so-called “taper tantrum” in which the financial markets roared in disapproval. As Bernanke recalls, “FOMC members pushed back” against the idea that all this talk meant rates were going to rise. In other words, the market threw a fit at the possibility to lessen cheap money and the FOMC rushed in to promise open spigots.
With all the talk in Fed circles of “avoiding [market] disruptions” in the fake quest to shrink the balance sheet it appears to be a brewing financial theme without much substance. Just as the Fed undertook a 7 year narrative of raising the Fed Funds rate, it may take the entire Trump era to “talk about” shrinking the balance sheet.
We've all heard about negative interest rates, but we may not really understand them-- either conceptually or in terms of bond markets. Here to explain is our returning guest Dr. Patrick Barron, a longtime professor in the graduate school of banking at the University of Wisconsin.
How and why would interest rates ever be negative, when everyone prefers current consumption to future consumption? Can the "natural" or market rate of interest ever be negative? What going on in Europe that would make negative-rate government and corporate bonds attractive to investors? Will the ECB be forced to raise rates back into positive territory if Janet Yellen continues to raise the Fed Funds Rate here in the US? And will Congress resist steady rate hikes that could radically spike its annual budget outlay for debt service?
Our guest this weekend is Nomi Prins, a prolific writer and speaker on the subjects of central banking, financial markets, and Wall Street cronyism. She is a former managing director at Goldman Sachs and Bear Stearns, but left investment banking to speak out against what she perceives as global financial malfeasance by commercial, investment, and central banks. Nomi is a dedicated progressive who supported Bernie Sanders, but she's also a harsh critic of the Fed and sympathetic to Austrian depictions of malinvestment and artificially-created bubbles.
Nomi and Jeff discuss the role of central banks in creating an unworthy financial elite, the revolving door between the Treasury Department, the Fed, and banks like Goldman Sachs, how the Fed is necessarily and unavoidably political, how central banks historically have financed interventionist wars, and how the Fed could be the great populist issue that further unravels the Left/Right paradigm.
Learn more about Nomi at NomiPrins.com.
Concrete Economics: The Hamilton Approach to Economic Growth and PolicyStephen S. Cohen and J. Bradford DeLongHarvard Business Press Review, 2016xi + 223 pages
Cohen and DeLong are well-known economists, but they indict their fellow economists for an overemphasis on theory. Away with models that have little relation to reality, our authors say. Instead, we need to graph a simple lesson about the source of America's prosperous economy.
What is this simple lesson? “In successful economies, economic policy has been pragmatic, not ideological. And so it has been in the United States. From its very beginning, the United States again and again enacted policies to shift its economy onto a new growth direction. … These redirections have been big. And they have been collective choices. … Government signaled the direction, cleared the way, set up the path, and, where needed, provided the means. And then the entrepreneurs rushed in, innovated, took risks, profited, and expanded that new direction in ways that had not and could not have been foreseen.”
The heroic leaders include, first and foremost, Alexander Hamilton; Hamilton’s nineteenth-century successors, who continued his high tariff policies; Teddy Roosevelt and FDR; and Dwight Eisenhower. Hamilton, a “major economic theorist,” favored “high tariffs, high spending on infrastructure, assumption of the states’ debts by the federal government [and] a central bank.” The rationale for this ambitious program was to reshape the economy “to promote industry … the aim was not to shift the new and fragile economy to its comparative advantage, but rather to shift that comparative advantage.”
Hamilton’s policy is open to an obvious objection, but Cohen and DeLong stand ready with an answer. The objection is that free trade benefits everyone engaged in it. If, by contrast, the government picks “winners,” such as industries it wishes to support, there will be losers as well. If so, do we not have here a case in which the value preferences of the policymakers have been substituted for the freely expressed wishes of the consumers?
The authors answer in this way: “The textbooks tell us that the operations of a free trade system produce a positive sum game: all sides gain. But in industries of substantial economies of scale, of learning and spillovers, there is a major zero-sum element to the outcome. Few governments, if any, place the welfare of the rest of the world above that of their own citizens — my gain can well be your loss. … In terms of the structure of production and employment, the gain of one side comes at the expense of the other side, unless … the other side (in this case, the United States) can move its resources and people into still higher-value-added activities, industries of the high-value future.”
This response blatantly begs the question. Of course, they are right that if an industry subsidized by the government drives out of business a competing industry from another country, the subsidized industry benefits and the losing industry suffers. It hardly follows from this, though, that a free trade policy puts the welfare of the world above that of its own citizens. Why do the losses to the unprotected industry outweigh the gains of consumers in one’s own country now able to buy products more cheaply from the foreign firm? Of course, if one assumes that a prosperous economy must be heavily industrialized, our question can be answered; but this is just what is at issue. Why not let the balance between industry and non-industrial products be settled by the freely expressed wishes of consumers?
Cohen and DeLong cannot yet be forced from the field of battle. They say about the “East Asian Model,” “The objective was to steer investment into industries that would pay off over the long run. It is not to direct resources into industries that earn the largest immediate profits for businesses at some set of [Adam] Smithian free-market prices. The object is to direct resources to industries that will pay off in terms of economic development.”
Is not the far-seeing state able to see into the future better than businessmen, heedless of the long run out of avidity for current profits? Readers more skeptical of the state than the authors will be pardoned for doubting the matter, all the more so when the authors themselves acknowledge problems with their scheme: “Can such policies go wrong? Yes. Can such policies produce horrible economic disasters? In many cases they have.”
Further, even if the state spotters of future trends “get it right,” from the viewpoint of the industrial policy our authors favor, the fundamental question recurs. Why should the balance between current production and production for the future be set by anything other than the decisions of the consumers? Why is a greater emphasis on the future than consumers wish somehow “better”? The authors suggest that if the economy grows fast enough, sacrifices of present consumption will be repaid by higher consumption in the future. Even if they are right, though, who are they to say that the sacrifices are worth it? Once more, Cohen and DeLong substitute without basis their own value judgments for those of the free-market consumers.
I suspect that the authors, if they deigned to read these remarks, would respond with derision: “Raise all the free-market purist points you want. What we propose works!” They say, “What we do know is that since the days of Hamilton, it is a fact that America’s successful economic policy has been pragmatic, not ideological. It has been concrete, not abstract.”
America, under the high tariff pro-industrial policy the authors support, became the most prosperous economy in the world; and the success of state-directed economies in China and East Asia adds further evidence. Is it not simply obstinate to deny this?
This argument is vulnerable at two points. The first of these will be familiar to any reader of Bastiat and Hazlitt. Granted that the American economy has attained great prosperity, how do we know that prosperity would not have been even greater under the laissez-faire regime our authors disdain? Must we not examine “what is unseen,” as well as “what is seen,” as Bastiat long ago noted?
Have we been too hasty in this response? The authors might be taken to answer us in this way: “The United States had every chance of sharing what W. Arthur Lewis called the economies of temperate European settlement. These other countries — Australia, Argentina, Canada, and even the Ukraine — became in the nineteenth century great granaries and ranches for industrial Europe. But none of these developed the industrial base to become fully first-class balanced economies in the late nineteenth century. … When commodity price trends turned against them, they lost relative ground. By contrast, the twentieth century became an American century precisely because America by 1880 was not a gigantic Australia.”
Here once more our authors have begged the question. They assume that, in the absence of “industrial policy,” the United States would have been a largely agricultural country. Why think this?
The doubt here is more than an abstract possibility, of the sort Cohen and DeLong view with contempt; and this raises the second line of attack that may be directed against their “it works” argument. There is little reason to think that Hamiltonian policies led to American prosperity. True enough, tariffs were often high, and nineteenth-century governments favored internal improvements. But tariffs were virtually the only source of government revenue, and the size and scope of government was minuscule in comparison to today’s bloated state. Why not ascribe the success of the American economy to the relative freedom of the economy rather than to industrial policy? Appeal to the “concrete” avails nothing; facts without theory are blind. The question becomes all the more pressing when one considers that the authors count as a case of successful state intervention the government’s making land available through the Homestead Act of 1862. The fact that the government made it very easy to acquire title, rather than selling land by auction to the highest bidder, is somehow counted as a triumph for state policy. If one is going to call a way of privatizing land an instance of state oversight of the economy, the case for state control of the economy is readily made. To readers who do not share the biases of Cohen and DeLong, though, their procedure will seem akin to calling white black.
David Gordon is Senior Fellow at the Mises Institute, and editor of The Mises Review. Contact: email.
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.
The Mises Institute hosts the first ever live episode of the Contra Krugman Show.
How does Paul Krugman, the New York Times's resident Keynesian and patron saint of leftwing economics, get everything so completely wrong? Bob Murphy and Tom Woods not only have a great time skewering Krugman, but also teach you how to refute the economic fallacies that so many of your family and friends fall for.
Recorded at Seattle's historic Town Hall on 21 May 2016. Includes an introduction by Betsy Hansen, opening remarks by Bob Murphy (2:41), The Contra Krugman Show (9:45), and closing remarks by Tom Woods (41:12) and Jeff Deist (50:21).
Special thanks to the Harvey Allison family for making this event possible.
In December, the Fed hiked its target for the federal funds rate, which is the interest rate banks charge each other for overnight loans of reserves. Since 2008 the Fed’s target for the Fed Funds Rate had been a range of 0 percent – 0.25 percent (or what is referred to as zero to 25 “basis points”). But last month they moved that target range up to 0.25 – 0.50 percent. Ending a seven-year period of effectively zero percent interest rates.
From our vantage point, we already see carnage in the financial markets, with the worst opening week in US history. This of course lines up neatly with standard Austrian business cycle theory, which says that the central bank can give an appearance of prosperity for a while with cheap credit, but that this only sets the economy up for a crash once rates begin rising.
However, there is something new in the present cycle. The Fed is trying to raise rates while simultaneously maintaining its bloated balance sheet. It is attempting to pull off a magic trick whereby it can keep all of the “benefits” of its earlier rounds of monetary expansion (i.e., “quantitative easing” or “QE”) while removing the artificial stimulus of ultra-low interest rates. As we’ll see, this attempt will not end well, for the Fed officials or for the rest of us. In the meantime, Ben Bernanke will look on with concern, writing the occasional blog post and perhaps giving a speech about poor Janet Yellen’s tough predicament.
Austrian Business Cycle TheoryOne of the seminal contributions of Ludwig von Mises was what he called the circulation credit theory of the trade cycle. In our times, we simply call it Austrian business cycle theory, sometimes abbreviated as ABCT. The Misesian theory was subsequently elaborated by Friedrich Hayek, and it was partly for this work that Hayek won the Nobel Prize in 1974.
In the Mises/Hayek view, interest rates are market prices that perform a definite social function. They communicate vital information about consumer preferences regarding the timing of consumption. Entrepreneurs must decide which projects to start, and they can be of varying length. Intuitively, a high interest rate is a signal that consumers are “impatient,” meaning that entrepreneurs should not tie resources up in long projects unless there are large gains to be had in output from the delay. On the other hand, a low interest rate reduces the penalty on longer investments, and thus acts as a green light to tie capital up in lengthy projects.
So long as the interest rate is set by genuine market forces, it gives the correct guidance to entrepreneurs. If consumers are willing to defer immediate gratification, they save large amounts of their income, and this pushes down interest rates. The high savings frees up real resources from current consumption — things like restaurants and movie theaters — and allows more factories and oil wells to be developed.
However, if the interest rate drops not because of genuine saving, but instead because the central bank electronically buys assets with money created “out of thin air,” then entrepreneurs are given a false signal. They go ahead and take out loans at the artificially cheap rate, but now society embarks on an unsustainable trajectory. It is physically impossible for all of the entrepreneurs to complete the long-term projects they begin.
In the beginning, the unsustainable expansion appears prosperous. Every industry is growing, trying to bid away workers and other resources from each other. Wages and commodity prices shoot up; unemployment and spare capacity drop. The economy is humming, and the citizens are happy.
Yet it all must come crashing down. In a typical cycle, price inflation eventually rises to the level that the banks become nervous. They halt their credit expansion, allowing interest rates to start rising to a more correct level. The tightening in the credit markets causes pain initially for the most leveraged operations, but gradually more and more businesses are in trouble. A wave of layoffs ensues, with large numbers of entrepreneurs suddenly realizing they were too ambitious. The painful “bust,” or recession, sets in.
This Time Is Different (Sort of)Since the financial crisis of 2008, the stock market’s surges have coincided with rounds of QE, and the market has faltered whenever the expansion came to a temporary halt. The sharp sell-off in August 2015 occurred when investors thought the first rate hike was imminent (it had been scheduled for September 2015). That particular hike was postponed, but after it went into effect in December, we soon saw the market tank to 2014 levels.
As we would expect in times of Fed tightening, the official monetary base has fallen sharply in recent months, but this doesn’t mean that the Fed is selling off assets (as it would in a textbook tightening cycle). Indeed the Fed’s assets have been constant since the end of the so-called taper in late 2014.
This is unusual since the monetary base and the Fed’s total assets typically move in tandem. Yet since late 2014, there have been three major drops in the monetary base that occurred while the Fed was dutifully rolling over its holdings of mortgage-backed securities and Treasuries, keeping its total assets at a steady level.
The explanation is that the Fed has been testing out new techniques to temporarily suck reserves out of the banking system, while not reducing its total asset holdings.
Meanwhile, the Fed in December bumped up the interest rate that it pays to commercial banks for keeping their reserves parked at the Fed. I like to describe this policy as the Fed paying banks to not make loans to their customers.
What Does It All Mean?So why is the Fed trying to tighten the money supply without selling off assets as it has done in the past? It boils down to this: In order to bail out the commercial and investment banks — at least the ones who were in good standing with DC officials —as well as greasing the wheels for the federal government to run trillion-dollar deficits, the Federal Reserve in late 2008 began buying trillions of dollars worth of Treasury debt and mortgage-backed securities (MBS). This flooded the banking system with trillions of dollars of reserves, and went hand in hand with a collapse of short-term interest rates to basically zero percent.
Now, the Fed wants to begin raising rates (albeit modestly), but it doesn’t want to sell off its Treasury or MBS holdings, for fear that this would cause a spike in Uncle Sam’s borrowing costs and/or crash the housing sector. So the Fed has increased the amount that it is paying commercial banks to keep their reserves with the Fed (rather than lending them out to customers), and — for those institutions that are not legally eligible for such a policy — the Fed is effectively paying to borrow the reserves itself. By adjusting the interest rate the Fed pays on such transactions, the Fed can move the floor on all interest rates up. No institution would lend to a private sector party at less than it can get from the Fed, since the Fed can create dollars at will and is thus the safest place to park or lend reserves.
We thus have the worst of both worlds. We still get the economic effects of “tighter monetary policy,” because the price of credit is rising as it would in a normal Fed tightening. Yet we don’t get the benefit of a smaller Fed footprint and a return of assets to the private sector. Instead, the US taxpayer is ultimately paying subsidies to lending institutions to induce them to charge more for loans, while the big banks and Treasury still benefit from the effective bailout they’ve been getting for years.
It Can’t LastWill the Fed be able to keep the game going? In a word, no. We’ve already seen that even the tiniest of interest rate hikes has gone hand in hand with a huge drop in the markets. Furthermore, the Fed’s subsidies to the banks are now on the order of $11 billion annually, but if they want to raise the fed funds rate to, say, 2 percent, then the annual payment would swell to more than $40 billion. That is “real money” in the sense that the Fed’s excess earnings would otherwise be remitted to the Treasury. Therefore, for a given level of federal spending and tax receipts, increased payments to the bankers implies an increased federal budget deficit.
Janet Yellen and her colleagues are stuck with a giant asset bubble that her predecessor inflated. If they begin another round of asset purchases, they might postpone the crash, but only by making the subsequent reckoning that much more painful.
You don’t make the country richer by printing money out of thin air, especially when you then give it to the government and Wall Street. The Fed’s magic trick of raising interest rates without selling assets can’t evade that basic reality.
Mises Institute: What prompted you to write In Defense of Deflation?
Philipp Bagus: One reason is that there was simply no complete treatment of deflation. The other reason is that the fear of deflation has brought disastrous consequences for our economies. This is so because the alleged threat of deflation is used to justify the production of new money. Central bankers argue today that if they do not engage in quantitative easing and other unconventional policies, our economies will slide into a recession and a price deflation. And, implicitly, price deflation is portrayed as something horrible. It is so widely regarded as horrible, in fact, that anti-deflationists do not even think it necessary to prove their claims and analyze the phenomenon systematically. Therefore, I thought it useful to analyze deflation.
MI: You note in your book that deflation is a neglected topic in economics textbooks. Why do you think this is, and what is the most misunderstood aspect of deflation?
PB: One reason is that we have lived after World War II in a world of continuous price inflation. Therefore, textbooks dedicate much time to price inflation but not to price deflation. Deflation simply hasn’t been a common experience in recent decades. And again, there remains the prevailing idea that deflation is self-evidently bad.
The most misunderstood aspect of deflation is probably that price deflation is not a general economic problem. Falling prices merely lead to redistribution. Sellers lose and buyers win.
But, we are all buyers (of goods and services) and sellers (of goods and labor services). Companies also buy factors of production and sell products. So price deflation per se is not harmful to all, but only to those whose selling prices fall faster than their buying prices. Yet, the selling prices of some are the buying prices of the other side of the exchange. So when there are people who lose, then there are necessarily people who win. The selling prices fall slower than the buying prices.
It is also true that debtors lose in a price deflation. But the purchasing power that debtors lose, creditors win. And if a company goes bankrupt due to its nominal fixed debt, the creditor takes over the assets and may continue production, if the business is in principle viable and only went down due to its debt. This change in ownership does not disturb the productive potential of the economy (i.e., factories and machines do not disappear). Thus, price deflation is no general economic problem, but it leads to a redistribution.
Price deflation that is caused by the government may, of course, be considered to be harmful on moral grounds. This is not the case for price deflation that occurs on a free market or is a market reaction to government intervention.
MI: What are the policy implications of this? How does this mixture of winners and losers cause so much fear of deflation among policymakers?
PB: The policy implication is that one should not listen to people who argue that you need inflationary monetary policy to prevent price deflation at all costs because deflation is the end of the world.
Inflation will itself cause a redistribution in favor of the first receivers of the new money, it will distort relative prices, benefit debtors, prop up malinvestments, and potentially finance even new distortions and bubbles. It is completely understandable that those who benefit from inflation are spreading myths about the evils of deflation.
Who benefits from continued inflation? Well, the political and business elites. The biggest debtor in our economies is the state. Also many business elites are highly indebted. They would lose out in a scenario with price deflation. Therefore, they portray it as a general problem, even though credits would benefit from deflation. And as a policy remedy, the anti-deflationists argue in favor of the production of new money of which they, the government, the financial industry, and other business elites, will be the first recipients. In other words, these elites benefit from the creation of new money — which they can spend before prices adjust upward — at the expense of those who only receive the money after price inflation has already occurred.
MI: So why do so many economists blame deflation for the depressions of the past?
PB: Many economists are empiricists. So they look at history and come up with conclusions. They see that during the Great Depression a very strong economic downturn was accompanied by deflation. Then they think that it was the deflation that caused the downturn or made it stronger.
Keynesians also think that a recession occurs due to a collapse in aggregate demand. They do not understand that people produce in order to demand. So there can be no general overproduction. If not everything produced is demanded, the structure of supply must be adapted to the demand. And here price deflation or monetary deflation may speed up the readjustment of the structure of production by liquidating malinvestment and shifting resources faster into projects that produce goods and services which consumers demand more urgently.
MI: Can we point to deflationary periods where there was an increase in the standard of living?
PB: Of course. During the nineteenth century in many countries we observed falling prices caused by strong economic growth. In the book, I analyze in detail the United States from 1865 to 1896. During this period the US experienced thirty years of falling prices and a strong increase in the standard of living at the same time. In fact, the natural result of economic growth is that prices tend to fall and the population enjoys the increase in production in form of lower prices. Something we observe today in the technology sector.
MI: In your book, you quote influential economist Brad DeLong who observed that declines in prices once seemed to be extremely unlikely. But now it seems more likely. Why do you think that is? In other words, why are inflation numbers nowadays coming in so far below those 2 percent targets set by central banks?
PB: There has been a deleveraging by the financial sector. The credit contraction exerts a downward pressure on prices. But there is also economic growth, not only in developing countries but also in Western economies where entrepreneurs after the crisis adapted the structure of production.
During the period 1980s and 1990s, the desirability of the “independence from politics” of central banks became almost an article of faith among mainstream macroeconomists and those operating in financial markets. This development was driven by two factors: academic research on central banking; and the personality cults that grew up around the two Fed Chairmen during this period, Paul Volcker and Alan Greenspan.
In the decade leading up to the financial crisis, the intellectual climate was such that anyone suggesting that the Fed have its independence curtailed or even abrogated by Congress would have been considered beyond the pale of rational, let alone scholarly, discussion. However, as the painful and protracted recovery from the Great Recession has dragged on, the Fed’s independence of “politics,” i.e., of legislative oversight and constraint, has begun to be challenged even by economists and financial pundits.
Few of the recent proposals to curb the Fed’s independence mentioned envision fundamental institutional reform of the way in which base money is supplied under our current fiat-dollar regime.
One such reform would involve wresting control of the money supply away from the unelected technocrats at the Fed and returning it to Congress and the Treasury. In fact this reform was put forward during the controversy over raising the debt ceiling in 2013.
It is important to note that this blueprint for monetary reform closely approximates — in its fundamentals if not in its aim or sophistication — the monetary and fiscal framework that Milton Friedman proposed in 1948. The monetary component of the proposal focused on eliminating “both the private creation or destruction of money and the discretionary control of the quantity of money by central-bank authority.” The first goal would be attained by implementing Henry Simon’s “Chicago Plan” for 100 percent reserve banking. Friedman maintained that the second objective could be achieved by eliminating the issue of interest-bearing government securities to the public, thereby restricting the financing of government spending to taxation and money creation. Thus, as Friedman pointed out: “Deficits or surpluses in the government budget would be reflected dollar for dollar in changes in the quantity of money; and, conversely, the quantity of money would change only as a result of deficits or surpluses.”
A common objection to such a proposal is that if money were under the control of the Treasury, monetary policy would become a political football and inflation would run rampant. But how much more inflationary would monetary policy become than it is right now? The unaccountable bureaucrats at the Fed have fastened on the US economy a regime of zero interest rates, quantitative easing, and the targeting of a real variable (the unemployment rate) using nominal variables. The latter is a reversion to stone-age Keynesianism. Indeed, current Fed policy has enabled a fiscal policy of high deficits and rapidly mounting national debt, anyway.
An Austrian View of Money, Taxation, and SpendingLet us grant for the sake of argument that congressional control of monetary policy alters the mix of financing government spending toward less taxation and more deficits financed by money creation. From the point of view of Austrian public finance theory, the method of governmental “revenue extraction” does not matter nearly as much as the total amount extracted. For all government spending drains resources from productive uses in the private economy and squanders them on the wasteful spending of politicians and bureaucrats on their favored projects and constituencies. Government spending is either consumption spending that directly satisfies the preferences of members of the political establishment or it is investment in waste assets because it is not based on the profit and capital-value calculations that guide the decisions of private entrepreneurs and capitalists. It is in effect a redistribution of income and resources from the productive to the unproductive, from the “taxpayers” to the “tax-consumers.”
The total amount of government spending is therefore what Murray Rothbard called “government depredation on the private product.” For Austrian economists, then, the method of financing government depredation — whether it be taxation, borrowing from the public, or money creation — is of secondary importance. Thus, at a given level of government spending, siphoning off resources from the private economy via deficits financed by money creation is no worse than extracting them through taxation. Indeed inflationary finance may even be preferable to taxation because the threat of physical coercion implicit in taxation has a detrimental effect on the direct utility of private individuals that goes beyond the expropriation of their income.
Needless to say, from the point of view of consumer welfare and economic efficiency, a smaller government budget financed by money creation is preferable to a larger budget that is in balance. Obviously, legislative control of the fiat money supply is far from the ideal monetary system, and my sole purpose here is to suggest a politically feasible solution to the urgent problem of arbitrary power exercised by a clique of Federal bureaucrats.
The desideratum of the Austrian political economist with classical-liberal or libertarian leanings involves the complete separation of government and money through the establishment of a commodity money like gold (or silver), the supply of which is determined exclusively by market forces. Nonetheless, there is great merit in replacing the opaque and pseudo-scientific control of “the money supply process” by entrenched Fed employees and officials with overtly political control of money by elected officials and partisan administration appointees. There are a number of benefits of stripping the Fed of its quasi-independent status and transforming it into a handmaiden of the Treasury, as the American Monetary Institute (AMI) and early Friedmanite reform programs call for.
How It Would WorkFirst, money would be created in a transparent manner that is understandable to the public at large. The Treasury would simply send an administrative order to the Fed to credit its checking account with the sum of money needed to pay the government’s bills that are not covered by tax revenues. Now, formally, this order may be called a “Treasury bond,” but it would not be a bond in the economic sense because it would not be exchanged in financial markets. Nor would the “interest” that the Treasury may pay on these pseudo-bonds really be interest because it would not be determined by supply and demand on financial markets. Rather it would be a payment to reimburse the administrative costs of the Fed and its amount would be completely controlled by the Treasury. It thus becomes evident to the public that every increase in the money supply engineered by the Treasury benefits the specific individuals and firms receiving government checks. The new money is being created from nothing to purchase military aircraft from Boeing, to subsidize agribusiness giant Monsanto, to bail out General Motors, etc.
This contrasts with the arcane process by which money is now created, which involves the Treasury issuing debt that is purchased by private entities, mainly banks and other financial institutions, and then eventually repurchased by the Fed via open market operations. In this way the Fed circuitously “monetizes the debt” and expands the money supply while distorting interest rates in the bargain. Invisible to the layperson is the fact that twenty or so privileged Wall Street (and foreign) banks and financial institutions — so-called “primary dealers” — that sell bonds to the Fed profit immensely from the money creation process. Also benefiting from the newly created reserves are the commercial banks’ business clients who borrow the money at reduced interest rates and spend it to appropriate extra resources before prices have begun to rise.
Furthermore, under this plan, the Fed would no longer function as a discretionary lender (bailer-outer) of last resort, a role that infects the entire financial system with pandemic moral hazard. No longer would the Fed be able to surreptitiously, arbitrarily, and without democratic oversight or accountability bail out all kinds of financial institutions in the United States as well as foreign countries. First of all there would be no need to bail out pure depository institutions because all such institutions would hold 100 percent reserves. But, second, even if purely financial (non-money-issuing) institutions were in danger of failing, the decisions to bail them out would be made by an openly partisan Treasury under the watchful eye of the congressional opposition and in full view of the public. With the Fed neutered and unable to leap to their rescue at the first sign of distress and with their appeals for bailouts subject to full scrutiny by a skeptical congress and public, financial institutions would run their affairs much more prudently.
Interviewed by Jay Taylor, Dr. Mark Thornton gives his views on the presidential candidates and the problems with their economic policies. They also discuss trade agreements and the effects of negative interest rates overseas.
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.
In the view of John Tamny — an editor at Forbes and RealClearMarkets — economics as it is usually studied and taught in universities is unnecessarily complicated. The basic truths of economics are simple and require no difficult mathematics to understand. Readers will be reminded of Hazlitt’s great Economics in One Lesson.
Entrepreneurs vs. BureaucratsThe book is animated by a controlling vision. A successful economy depends on innovative entrepreneurs who are willing to take large risks in return for the chance at great profits. It is essential to prosperity not to hamper the efforts of these entrepreneurs through governmental efforts to tax and regulate the economy. Tamny illustrates his thesis with many stories about famous persons, as the subtitle of the book suggests.
The government, Tamny emphasizes, produces nothing on its own. It operates by taking resources away from the productive. To the objection that the government may itself use money it takes in taxes for purposes beneficial to the economy, Tamny answers that people successful in business are highly likely to be better judges of what is beneficial than bureaucrats in the government. If the bureaucrats were better able to discern profit-making opportunities, they themselves would be entrepreneurs. High level bureaucrats may earn substantial salaries, but the wealth of those in business is far greater. “If you’re so smart, why are you a bureaucrat?”
To this, one can imagine someone objecting: Even if it is right that successful entrepreneurs will raise economic productivity, does this not bring with it a great danger? What about inequality? What if the successful entrepreneurs do so well that they accumulate vastly more wealth than others? Thomas Piketty has notoriously made much of this point; but Tamny has an effective and simple answer to it. Great accumulations of wealth are desirable: the rich will invest their money, and everyone will benefit. “When the rich ‘hoard’ their wealth, it is loaned to those who need money for cars, clothes, and college tuition, not to mention the next generation of Bill Gateses, full of ideas but in need of the capital that will abound if some of society’s richest keep their wealth intact so it can pass to future generations.”
If high investment is the key to prosperity, the capital gains tax is especially to be deplored. “Investors who might risk their capital in the private sector know they might lose it all, and they face a 20 percent tax on whatever return they do get on their investment. Those same investors have the option of buying government bonds, and, though the returns are small, they’re reliable and, in the case of municipal bonds, tax-free. ... Our tax code ... puts entrepreneurs at an enormous disadvantage when they compete with the government for investors.”
Taxation is of course not the only way the government hampers the free market. Attempts by government to regulate the economy face exactly the problem that Tamny finds with taxation. Antitrust laws, for example, purport to prevent companies from gaining monopoly control of important commodities; but are not those on the scene better qualified than government “experts” to assess whether market conditions make mergers desirable? Once more, it is entrepreneurs, not government officials, who are skilled at anticipating future demand. “Mergers are ultimately about survival. Companies must adjust to an uncertain future business climate, and restraining the ability of larger businesses to act in the best interests of shareholders is counter-productive. Antitrust regulation does not foster competition so much as it reduces successful companies to sitting ducks.”
“Capitalist Societies Can Rebound from Anything”We have so far omitted a key part of Tamny’s argument. Skilled entrepreneurs succeed, but many in business fail. The market operates by sorting out of the successful from the failures by the test of profitability. Given this fact, it is as essential that the failures be allowed to fail as it is that those who succeed be allowed to keep their profits. Attempts to prop up failures disable the market.
This vital point can be used to answer a common objection to free trade. Many people object to free trade because, in some cases, foreign competition drives domestic companies out of business, causing unemployment. To the response that expanded trade creates jobs elsewhere in the economy, the reply oft en given is, what about the workers who do lose their jobs? They are often unable to secure new jobs as good as those they had previously. The fact that others are better off is small solace to them.
Tamny’s account of the way the free market works makes it impossible to accept the objection just given. “In a free economy, capital migrates to talented entrepreneurs eager to pursue profitable opportunities. Innovations like the automobile, computer, and online retail services destroy jobs, but the process leads to better, higher-paying jobs ... to create jobs in abundance, we must allow the free marketplace to regularly annihilate them.” Tamny acknowledges that “the progress of job creation through job destruction does not make losing your jobless agonizing. ... Yet getting laid off is not cause for despair. Good often comes from losing your job.” Workers, like capitalists, need to be alert to new opportunities.
In a manner showing great insight, Tamny applies the point about falling businesses to the financial crisis of 2008. According to Ben Bernanke, Timothy Geithner, and many others, only the massive bailouts of financial institutions in response to the collapse of the housing market saved the economy from disaster. Tamny reverses this contention. It was essential to the proper working of the market to allow the businesses that had acted recklessly to fail. Had this been done, the economy could have quickly readjusted. “Capitalist societies can rebound from anything. In particular, they can bounce back from bank failures that do not exterminate human capital or destroy their infrastructure. An interfering government is the only barrier to any society’s revival, and that is why the global economy cratered amid all the government intervention in 2008.”
Gold, Money, and the StateSo far there has been little reason to dissent from the author’s principal arguments. In monetary theory though, he makes what seems to me an incorrect claim; but fortunately, his main policy prescription can be restated in a better way. Tamny rightly calls for sound money. He rejects as misguided inflationary efforts to reduce our “unfavorable” balance of trade. As he points out, a trade deficit is not at all to be feared. “All trade balances. Trade ‘deficits’ with producers from near and far away are the rewards for everyone’s productivity.”
So far, so good; but he errs when he compares the dollar to a measuring rod that must not change. “Just as the foot is never long or short, money should be neither strong nor weak. The foot is a standardized tool to measure actual things, and money should have the same constancy.” What is his argument for this view? As he points out, people want money, not for its own sake, but in order to purchase goods and services. (We set aside a few exceptions.) He thinks that from this fact, if the government follows the proper policy, the value of money can be kept constant. Relative prices of goods and services will change, to reflect changes in their supply and demand. Money can then serve as a measuring rod, to enable people to assess these changes in relative prices. It does not follow, though, that because money is demanded as a means to get other things, there is no independent demand for money at all. In the free market, money is a commodity whose price can change.
Even if Tamny is wrong on this point, though, his main message can be salvaged. It is entirely desirable that the monetary commodity be one unlikely to be subject to substantial fluctuations in price. The gold standard abundantly meets this requirement, and this gives Tamny all that he can reasonably want. To speak of measuring rods merely darkens counsel, as Mises long ago pointed out. “Although it is usual to speak of money as a measure of value and prices, the notion is entirely fallacious. So long as the subjective theory of value is accepted, this question of measurement cannot arise.” (Mises, Theory of Money and Credit, chapter 2.)
The book’s many insights far exceed in importance this disagreement about money as a measure of value. Popular Economics is an outstanding book that, if read widely, will greatly improve public understanding of basic economic truths.
Central banks — and central bankers — are in uncharted waters. They don't know how to create economic growth, they don't know how to fight the great bogeyman of deflation, and they don't know how — or if — they'll ever be able to return to a time of "normal" monetary policy. Their pretense of knowledge, of being able to effectively control currencies used by billions of people, is coming to an end.
But it's not just an academic issue — all of us are affected by the possibility of negative interest rates, prohibitions on cash, and bank bail-ins. Will you be able to get cash out of your bank or money market account if the economy suffers another crash like 2008? Will governments force us into cashless, digital-only payment systems, tracking our every purchase and creating black markets in the process? Will you have to pay your bank, in the form of negative interest rates, for the privilege of holding your money? And will your deposits take a haircut if your bank suffers losses from its bad loans?
Jeff joins Jay Taylor on his radio show to discuss how both central banks and commercial banks are poised to change your life in some very unpleasant ways.
If you thought negative interest rates were as bad as it could get with central banks, you might be in for a surprise. Central banks have been so spectacularly unsuccessful with their accommodative monetary policies that they are discussing pulling out all the stops to get the results they want. They fail to realize that the reason prices aren’t rising is because they really want and need to fall. Bad debts weren’t liquidated during the last financial crisis, the debtors were merely bailed out. Overpriced assets weren’t allowed to be reduced in price. Central banks pumped trillions of dollars into the economy to attempt to paper over the recession. Market forces want to drive prices down, while central banks attempt to prop them up. So what to do when central banks aren’t getting their way?
Central bankers may very well recommend price controls in an attempt to “jolt the economy out of its doldrums.” Of course, economies don’t go into doldrums and they can’t be jolted out of them. Recessions are not something endemic to the economy but are rather the result of central bank monetary intervention. Because central banks refuse to acknowledge their culpability for causing recessions, their methods for responding to recessions end up being more of the same thing that caused them in the first place: monetary easing. And now that those methods are proving ineffective, more drastic measures might be on the way. Remember that the last time all-out wage and price controls were implemented in the United States was in the early 1970s, also a time of great monetary turmoil. In fact, the price controls were instituted by President Nixon at the same time as he closed the gold window in 1971.
As Ludwig von Mises pointed out many decades ago, once you begin to institute price controls, you inevitably lead to socialism.
It must add to the first decree concerning only the price of milk a second decree fixing the prices of the factors of production necessary for the production of milk at such a low rate that the marginal producers of milk will no longer suffer losses and will therefore abstain from restricting output. But then the same story repeats itself on a remoter plane. The supply of the factors of production required for the production of milk drops, and again the government is back where it started. If it does not want to admit defeat and to abstain from any meddling with prices, it must push further and fix the prices of those factors of production which are needed for the production of the factors necessary for the production of milk. Thus the government is forced to go further and further, fixing step by step the prices of all consumers’ goods and of all factors of production — both human, i.e., labor, and material — and to order every entrepreneur and every worker to continue work at these prices and wages.
That is why no one should be surprised that the governments of Japan, Europe, and the United States might resort to price controls to try to achieve what monetary policy could not. It follows logically, after all, since central bankers are in the price-setting and price control game to begin with. The interest rates that central bankers target or set are themselves prices, prices of money being loaned overnight or of money being deposited with the central bank. The aim of targeting or setting those interest rates is to influence interest rates and prices in the broader economy. So if that limited price-fixing doesn’t work, governments will expand their efforts to fix even more prices. It may not come directly, at least at first, but rather through some sort of incentivization. Pressure may be brought to bear to raise wages, using tax policy as either a carrot or a stick. The aim and the effect, though, will be to move prices to where the government thinks they ought to be, not what the market can actually bear.
If price controls are in fact enacted, it will make it all the more obvious that economic planning on the parts of central banks and governments must be firmly opposed. It will separate the wheat from the chaff, those who actually support economic freedom from those who are willing to rationalize central planning. Anyone who claims to stand for free markets, free trade, and limited government but who attempts to defend the existence or importance of the Federal Reserve or central banking is a liar. Either you support free markets and freedom of pricing or you support central bank price-fixing and creeping socialism. There is no third way or middle road — socialism and the free market are mutually incompatible. A little bit of socialism in the form of price-fixing is like a little bit of gangrene, if left unchecked it will eventually infect and kill the whole. Now that governments and central banks may endorse further price controls as a remedy, the monetary policy facade has been torn away to reveal the reality that it is just another tool that leads to intensified central planning. Will enough people rise to the occasion to oppose further transgressions against monetary and economic freedom, or will they shrug their shoulders as our society continues to slouch toward socialism?
Quarterly Journal of Austrian Economics 18, no. 4 (Winter 2015): 578–583
Based on his doctoral thesis directed by Jörg Guido Hülsmann (who also wrote the foreword to the book), German economist Eduard Braun's Finance Behind the Veil of Money aims to show how money affects our financial decisions. The reader will notice that Braun approaches this goal from a different angle of most Austrian-school economists. Instead of looking at how money and credit affect interest rates and propagate an Austrian business cycle, Braun focuses on the “subsistence fund.” Largely jettisoned from modern Austrian business cycle theory, in a way Finance Behind the Veil of Money picks up where Richard Strigl left off with his Capital and Production (1934).
In expounding an updated theory of the definition and role of the subsistence fund, Braun rewards the reader for the time dedicated to reading the book. This time is not insubstantial. At 342 pages, the book is neither concise nor easy reading. It is heavy, dense, technical and littered with citations. The publisher’s exclusive use of endnotes makes the going tougher yet, as the reader constantly finds himself flipping pages to find out to whom Braun is attributing a concept, to what era the idea belongs or, indeed, since Braun uncovers the changing thoughts of several authors over their lifetimes, to what specific work of an author he is referring.
Earlier this week, Jeff joined Dennis Tubbergen of Everything Financial Radio to talk Austrian economics and the bizarre world of negative interest rates.
Jeff explains how the unprecedented actions of central bankers have helped sparked renewed interest in Austrian economics around the world, as Keynesian orthodoxy spirals into endless rounds of demand-side monetary stimulus. Can the Fed, the ECB, the BOJ, and other central banks keep this up indefinitely? Can central bankers rebut Mises, Rothbard, and Hayek, who understood that a sound economy must be grounded in savings and investment? And, should negative interest rates be viewed as a form of insurance?
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