Monday, October 4, 2021

Government Spending Cannot Stimulate the Economy


Government economic policy is completely backwards. We are told that massive deficit spending, interest rates driven to zero, and now higher taxes on the "rich" will bring the American economy out of the doldrums or whatever fake malady seems to be popular. It is hard to imagine an economy in the doldrums when unemployment, the scourge of mankind for decades, is so low that businesses cannot attract enough workers. That's number one; i.e., is the US economy really so bad? I admit that it always could be better, but we are not in the Great Depression of the 1930's in which one fourth of those seeking work could not find a job. At least not yet. Stay tuned though.


Stimulus Spending and the Cantillon Effect


But let's get back to the main point; i.e., that whether or not the US economy is underperforming, can government spending help? That has been the mantra since Keynesianism swept the economic and then government hallways shortly after World War II. So, we may ask ourselves, just how does government stimulus spending work? Well, from what I can conclude, the government sells its debt to the Fed (called monetizing the debt, which increases the monetary base), spends it on all kinds of programs, some (but not all) of us get more money in our pockets and spend it. So, we can see that, from government's perspective, spending is the key. More spending MUST mean that the economy is doing better. Keynesian economists call this increasing aggregate demand, just a fancy name for more spending.


The implied mechanism is that more spending via money created out of thin air somehow draws more goods out of hiding. Why these goods were hiding is not quite clear, except that aggregate demand was deemed to be too low. On the face of it, it appears logical. Let's say that you are the surprise inheritor of a great deal of money from a distant relative. Your personal lifestyle certainly will be stimulated. But let's consider the source of this windfall--your distant relative. He certainly did not print buckets of money that he left you in his will. Either he earned the money himself or inherited it from someone who did. In other words, the source of your new found wealth was previous production. You are the new owner of that wealth. Whether you produced it or someone else, you are the new owner of what Professor Frank Shostak calls "something for something". This is in contrast to receiving stimulus dollars printed by the government. Now you have received "something for nothing". It is pure monetary inflation without any previous production in exchange. Therefore, any stimulus in the form of increased spending is pure smoke and mirrors, masking capital decumulation. The result is rising prices, at a minimum, and possibly hyperinflation if carried too far.


But let me give you two thought experiments. For the first one, let's assume that you and some others are marooned on an uncharted island, similar to the plot of the hit TV comedy Gilligan's Island. The only resources you have are whatever washed ashore when your ship sank, whatever natural resources are at hand on the island, and whatever survival skills you possess. Now let's suppose that some large boxes wash ashore later. You rush to open them and find that they contain millions and millions of dollars in paper Federal Reserve notes. Not knowing when, or even if, you will be found, what good are these millions to you and your fellows? Do you all cheer, because now you all are rich? Since your most urgently desired goods certainly are not paper dollars, I doubt it. You all are left with the original resources--natural resources at hand, whatever goods were washed ashore earlier, and your survival skills. But, you may say, I do not live on an uncharted island. I certainly can spend the millions and enrich my life. OK, now let's assume that in the middle of the night Federal Reserve Chairman Jerome Powell wakes you and slides a suitcase with a million dollars in Federal Reserve notes under your bed. Wow! What would you do? You might spend a little time thinking how to spend the money, but sooner or later you will take your suitcase of money and start to spend. Then you are shocked to find out that Mr. Powell, like a magical Santa Claus, visited every one of America's three hundred plus citizens and gave everyone of them a suitcase with a million dollars in Federal Reserve notes, too. You find that all the luxury cars are gone from dealers' lots. When you enquire about ordering one, you find that the price has skyrocketed. When government engages in stimulus spending, the same thing happens only on a smaller scale. A fortunate few, mostly bankers and bond dealers, get the newly printed money first. They buy current goods at current prices. Good for them! But subsequent receivers of the new money find that prices have gone up and their newly acquired money really doesn't do them that much good. Then people much further down the line as recipients of the new money find that prices have gone up and their incomes haven't gone up nearly as much or not at all (think of retirees on fixed pensions). Rather than enticing production out of hiding, government stimulus spending has caused a transfer of wealth from the later receivers of new money to the earlier receivers of new money. This is know in economic circles as the Cantillon Effect.


A Four Point Plan from Forty Years Ago


So, what can government do, if anything, to aid the economy? I have four main points, all from the Republican platform of 1980. (These four points were articulated by Vice Presidential candidate George Herbert Walker Bush on the steps of the Capital Building in Springfield, IL in the summer of 1980. I was in attendance.)


·         Number one, return to sound money by freezing the money supply. That requires two reforms. First, do not increase the monetary base by selling government debt to the central bank. Government must spend only what it raises in taxes or obtains through honest borrowing in the bond market. Secondly, forbid the ability of banks to engage in credit expansion through fractional reserve banking, whereby banks themselves create money out of thin air when they increase lending.


·         Number two, cut government spending. Of course, this is exactly opposite of what government does today, but government spending is parasitical on the real economy. Government does not create goods and services itself. It can only hand out what it has taken from others. It is the private economy that brings people what they most urgently want, not what government thinks they want or what government wants them to have.


·         Number three, reduce regulations. The free market economy and the legal system are all that is needed to bring people what they most urgently want . Disputes are best resolved in the commercial and criminal justice systems.


·         Number four, once the budget is balanced, finally goes into surplus and the debt is slowly being reduced, government can begin to cut taxes. Tax reductions will take money from the destructive power of government spending and increase the capital accumulation power of the private sector. Since the money supply has remained the same, increased production will result in a slow and steady fall in prices, benefiting all levels of society. The cost of living will fall and the standard of living will rise.


The American people need to be told the truth. Government can help the economy only by protecting you and your property. A free market economy, limited government, and the rule of law are the keys to prosperity and peace.

The Greatest Threat to the US Is NOT What Most People Think


Here's a challenge for readers: Stop reading right now and write down at least five threats to the US. Rank them in order of most serious at the top. Ask family members or friends to help you. Then come back and read the rest of the article.

OK. Did you write them down? No cheating! I'll bet that most people wrote down some of the following:

1. China's growing military power.

2. Terrorist attacks emanating from "sanctuary countries" like Afghanistan.

3. Global warming/climate change causing rising ocean levels and massive flooding.

4. Pandemics.

5. Societal unrest of the right or the left political spectrum.

Am I right? Well, although all of the above may or may not be real threats, the most serious threat--i.e., the threat that is almost certain to happen and cause real, lasting damage--is excessive money printing by the Fed that causes a collapse of the dollar.

Money as an Indirect Medium of Exchange

Here's the short course in monetary theory. Money is a  medium of exchange. Its other functions--store of value and unit of account--are dependent upon its acceptance as a medium of exchange. A medium of exchange is something that people are willing to accept temporarily in order to exchange it later for something else. Therefore, we can add the adjective "indirect" to "medium of exchange". For example, I have apples and want a pair of shoes. I don't have to find a cobbler who just happens to want a lot of apples. I can sell my apples to a wholesaler or to a whole lot of retailers in exchange for money, which I then present to the cobbler, who surrenders the shoes. Now the cobbler, in turn, can shop for something other than apples.

No One Invented Money

But who invented money? Surprisingly, no one did. Through trial and error market participants used many things for money before settling on the most widely accepted commodity. From time immemorial that commodity has been gold and sometimes silver. But today, money is completely unhinged from any precious metal. It is produced in whatever quantities central bankers desire. Not surprisingly, central bankers believe that they are doing their job--adding enough liquidity to smooth the gears of progress. If only it were so!


Whereas gold and silver are part and parcel of the economy; thusly, representing a sound relationship (price) between itself and all goods, today's money is completely fiat. It can be produced in whatever quantities are desired, and--OH, MY--how the Fed does accommodate that endless desire. This means that the relationship between the dollar and all other goods is constantly changing. The dollar in your pocket or bank account deteriorates in its purchasing power for every dollar the Fed produces out of thin air, and the Fed has been producing dollars in unprecedented quantities. (For example, in January 2020 the monetary base was $3.4 trillion. Today it is over $6.0 trillion. That's a 43% increase in just twenty months. The components of the monetary base are cash and bank reserves held at the Fed that can be exchanged for cash.)

The Fed is not the first, nor I fear the last, entity to try its hand at alchemy; i.e., create something out of nothing. No previous attempts have succeeded. In fact, all have failed in spectacular fashion, even recently in Zimbabwe and Venezuela. But money printing out of thin air has been around a long time. Hyperinflation destroyed mighty Rome under Diocletian and the highly industrialized Weimar Republic of Germany shortly after World War One.

The US Is in Hyperinflation

Most of the public believes that hyperinflation is a complete collapse of money's purchasing power. But Alasdair Macleod of points out that the complete collapse of money is the result of hyperinflation. Macleod defines hyperinflation as the condition that exists when the only way for government to meet its budgetary promises is through printing ever increasing amounts of money, which reduces the purchasing power of money already in existence. The Biden administration projects that the 2022 year deficit will be $1.84 trillion. But the Congressional Budget Office projects that the deficit will be $3.4 trillion! Regardless of who is right and with promises of spending even more on welfare programs, clearly the US has no plans to reduce its budget deficit and end hyperinflation. When this fact becomes apparent to all holders of dollars, probably our foreign trading partners first, it will start an irreversible scramble to shed dollars for real goods. Regrettably there is nothing that can stop this from happening, because there is no political will and no public support to reduce government spending.

The only safe haven is in gold, and possibly silver, not ETF's (electronically traded funds) but the real stuff...specie. Gold always survives as the one medium of exchange that cannot be manufactured out of thin air. It has survived all attempts to make it either illegal or irrelevant. 'Nuf said.

A Natural Rights and Logic Approach to Pandemic Policy


Government officials at all levels--federal, state, and local--feel impelled to adopt some sort of pandemic policy, from outright lockdowns to mandates for wearing masks under certain circumstances. It all seems quite arbitrary, because it is! I contend that defending natural human rights and using logic can guide us to adopting a proper pandemic policy, even if that policy is to do nothing at all.


First of all, one must accept that the foundation of natural rights is the right to our own bodies. Many people reading this short article may agree with me at this point but will disagree with me as to where this leads via logic. Number one, if we own our own bodies, then no can tell us what to put in our bodies or, conversely, what NOT to put in our bodies. Many may agree that, if we own our own bodies, then no one can force us to "take the jab". OK. Now let's expand that to agreeing that no one can prevent us from putting whatever we want into our bodies, including additive drugs. I'm sure I lost a few supporters after this statement, but it is undeniable from the standpoint of the "we own our own bodies" principle.


Most objections to this hands off policy fall into two categories. One, that drug addicts will cause harm to others and, two, that drug addicts will cause our taxes to rise in order to support those who harm themselves and now must be "taken care of". I do not deny that drug addicts may cause harm to others, but they should be prosecuted for the harms they cause, just as we prosecute those who drive while intoxicated and cause harm to others. Being under the influence of a mind altering substance, whether alcohol or drugs, does not absolve anyone from paying society's proscribed penalty for the harm that one causes. Secondly, society should be under no obligation to provide drug and alcohol rehabilitation programs or to support those who now cannot care for themselves due to their self-inflicted harms. Sounds rather severe, doesn't it? But notice that I said that society should be under no obligation to provide such serves. I did not say that private individuals should not provide them voluntarily. But, you may counter, what if private individuals do not provide these services voluntarily? What now? Well, you have just answered your own question. If we will not provide a service voluntarily, what right does government have to force us to provide it? Who decides what government may force us to provide? If government is our servant and not our master, then it has no natural right to force us to provide for others against our will for any reason, whether it is from self harm due to drug addiction or because we must support some European style aristocratic class.


Now let us return to natural rights and the pandemic. Does government have a right to force businesses to close against their will and against the will of their customers? Of course not! The business owners and their patrons have internalized the risk and have chosen either to continue to patronize these businesses or not. But, you may say, doing so may cause the pandemic to spread. That may or may not be true, but it makes no difference. Avoiding patronizing businesses is your right, but you have no right to prohibit others from doing so, either from a logic or natural rights approach. If others internalize the risk and continue to patronize businesses, they do not harm those who do not continue to patronize businesses. How can they? If someone wants to reduce his own risk of infection, all he has to do is protect himself by staying home. He may not force others to do the same, because they cannot harm him if he stays home. This logic becomes even stronger, but is not necessarily required, if a vaccine become available. Now those who feared infection and now are vaccinated can patronize businesses and mingle with others without fear. The fact that others may not want to get vaccinated is no one else's business. We may look upon people who refused to be vaccinated, came down with Covid, and perhaps died as having exercised poor judgment, but that is their right. The argument that the unvaccinated spread the disease is of no relevancy either, because they spread it only to like minded, unvaccinated people.


The bottom line is this: Take whatever action you may think is suitable to your own circumstances and leave others to do the same. Let natural rights and logic guide your actions. Those fearful of mingling with others may stay home. Remember the wise words of my favorite philosopher, Yogi Berra: "If people don't want to go to the ballpark, no one's going to stop them."

Sunday, June 27, 2021

My letter to the Wall Street Journal--Save Us All From Bipartisanship


Dear Sirs:
Objecting to this boondoggle of a spending bill would NOT be a repudiation of real bipartisanship. First of all, one may challenge the merits of this bill; i.e., that America even needs an infrastructure bill at all. Is not all infrastructure owned by some entity, which should be responsible for its upkeep? Furthermore, if the bill really is considered to be essential spending, Congress has not considered how to pay for it. This new trillion dollars of spending will rely upon the Fed to monetize the debt, what the rest of know as printing money out of thin air. No other spending is being cut. Interest rates will be suppressed. Therefore, the bill will not be supported by real savings and will lead to higher prices, hurting all Americans. Calling the passage of this bill as a great example of bipartisanship merely illustrates the incompetence of those who vote for it and the shallow reporting of those who should know better.

My letter to the Wall Street Journal re: During Covid-19 Most Americans Got Richer--Especially the Rich

 Re: During Covid-19, Most Americans Got Richer--Especially the Rich

Dear Sirs:
I am aghast that the supposedly knowledgeable Wall Street Journal would print such economic drivel. Do you really want us to believe that the path to wealth is through destroying untold thousands of businesses, throwing millions of people out of work, and then showering the nation with helicopter money printed out of thin air? Did you get your start by advising the governments of Zimbabwe and Venezuela? Do you REALLY want us to believe this? Let me call your attention to just one monetary statistic. In March of 2020 M2 stood at $16 trillion. One year later it stood at $20 trillion. That's an increase in the broadest measure of the money supply of four trillion dollars in just one year. This money was printed out of thin air, just like the product of a common counterfeiter. And just like the effect of money printing by a common counterfeiter, it will NOT increase wealth overall. It will do nothing more than redistribute wealth in order to make the counterfeiter and his cronies wealthy by robbing everyone else. The longer-term effect will be to discourage real wealth creation.

Time for the writers of the great Wall Street Journal to publish their so-called analysis under the heading of fiction.

Thursday, June 17, 2021

An Antidote to Political Correctness in Schools


We've all heard about the newest insult to our lives and our children. I refer, of course, to the growing adoption of "Critical Race Theory" as part of public school curriculum. Why should we be surprised? Many of our top colleges have  been adopting what can only be called Marxist indoctrination of their students for many years. A friend recently sent me a letter written by a North Korean immigrant who attended Columbia University in New York City. This courageous young woman had escaped North Korea into China at great risk, crossed the Gobi Desert to Mongolia with the help of Christian missionaries, and eventually made her way to South Korea. She then came to America to attend what she thought was a great, prestigious school (Columbia University), only to discover that Columbia's political correctness was perhaps even worse than that of North Korea!


Her story of escape from brutal, communist repression is not unusual. Others have done the same. I did not find as unusual her shock at discovering the same, soul destroying repression on the campus of one of America's supposedly premier institutes of higher learning. What I did find as unusual was her acquiescence to the many insults she suffered at the hands of the administration, teachers, and some of their student sycophants. She admitted that she learned to keep her head down, not offer an opinion, and not fight back! I admire this young lady a lot, so I'm perplexed at her reaction. If she crossed the Gobi Desert in search of freedom, surely she can cross a Columbia University classroom and walk out the door.


The answer for combating political correctness and other insults in our public schools is to refuse to attend them. There is nothing more important than inculcating the proper values in the minds of our children at such an impressionable age. If your actions to stop political correctness and other insults in our schools fails, then all you have to do is leave. Yes! Pull your child from school and send him to another that does not teach this filth. If it's a university, all the easier! Don't send them your children and your money. There are thousands of colleges in America. Find one that teaches values that are important to you. If your child is still in the public school system, you may have to sacrifice, but the rewards are worth it. Pay for your child to attend a private school. If you can't find one, then home school your child. Yes, I know that may mean that you may have to alter your work hours or even quit your current job. But this should be easier now. Perhaps the one good thing that has come out of the Covid-19 pandemic is that employees and employers have found that many jobs can be done from home.


Find a way. Do not feel that you have no choice but to subject your child to racism, Marxism, or anti-Americanism. WALK!

Tuesday, June 1, 2021

Government as the Ultimate Cause of the Tragedy of the Commons


A good definition of the Tragedy of the Commons is that "Resources that are un-owned and/or un-ownable will be plundered to extinction". Consider the fishes of the seas, especially those that migrate such as whales or may be found beyond any nation's territory waters. No one owns them and it may be impossible to own them. Therefore, fishermen are incentivized to take them before other fishermen take them. Over fishing results. Catches shrink. The size of the fish shrink. Treaties among fishing nations may mitigate the problem, as long as all sign the treaty and poachers are controlled.


In nineteenth century America it has been estimated that hunters killed forty million buffalo and trappers took two hundred million beaver. The buffalo were hunted almost to extinction, and some scientists claim that the water shortage and erosion problems of the American West are a result of the over-trapping of beaver, nature's premier water conservationist.


Privately owned resources are capitalized, ending their plunder


A solution to the problem lies in private ownership of the resource. Private owners manage natural resources to maintain their capital value. Scientists and economists have pointed out that the annual and apparently never-ending forest fires of the American West are partly due to the fact that they occur on government owned land. But government ownership is not the same as private ownership. Government has little incentive to protect the trees in order to harvest them over long periods of time. Governments' main objective seems to be simply fighting forest fires once they have begun, a policy that doesn't seem to have worked very well. Radical environmentalists would not tolerate selling the land and forests to private companies. A pity, because that is exactly what would stop their destruction.


Notice that the main problem that results from the tragedy of the commons is that of resource depletion. It is true that the first to grab the resource benefits, but this is a one-time grab. Privately owned forests, fisheries, oil wells, copper mines, fertile farm land, etc. will yield their bounty to perpetuity; whereas, a plunderer leaves nothing for the future. In other words, plunderers eat the seed corn.


This describes the state of government today. Through its money printing monopoly, government has the ability to plunder resources without limit, leaving nothing for future growth. Austrian economists call this high time preference, as opposed to low time preference. Those with high time preference prefer the satisfaction of short term wants at the expense of long term wants. The ant vs. the grasshopper fable is the perfect illustration of the principle. The ant works hard to save for the future, while the grasshopper plays in the summer sun. But the ant has food and shelter through the coming winter, while the grasshopper freezes and starves. Politicians have high time preference, because they occupy their positions of power for a limited time. They have constituents and supporters to placate. They want action and they want it now. Free fill-in-the blank.


The Soviet Union was the poster child of this syndrome. Prior to the Russian revolution of 1917, Russia was a highly industrialized nation that was a worthy competitor in world markets. After the revolution, it embarked on a one-time grab of all the nation's resources as it attempted to impose a completely socialist, state directed economic model. Within a few years the Russian people were starving. Only Western aid, the sale of its vast natural resources, and the plunder of Eastern European nations after the Second World War allowed the Soviet Union to survive as long as it did. When asked if the US would help restore the Russian economy after the fall of communism, President George H. W. Bush insightfully said that there was not enough capital in the entire world to do that.


The solution is gold, but the temptation for plunder is too great


Under a gold standard government cannot spend more than it taxes and borrows honestly in the bond market. Gold is a finite medium of exchange, perfectly suited for trading finite goods and services. But government can manufacture fiat money in unlimited amounts. So we have finite resources exchanged by fiat money with no limit. The temptation for government to use this power to accomplish its high time preference goals is too great for the politician/grasshoppers to ignore. Thus, all economies are being plundered by the ultimate expression of the tragedy of the commons--fiat money in the hands of profligate governments. There seems to be nothing that can prevent the disaster, since every citizen benefits is some way from government spending and no one is willing to give up his handout. In fact, the demand for more handouts keeps increasing.


Conclusion: Consumer spending consumes capital


In conclusion, we may say that the real tragedy of the commons is not that the plundered resources are claimed by a minority, but that the resources can never be capitalized to provide benefits into perpetuity. Government may plunder an economy only once. Western economies have a lot of accumulated capital resources, so it may seem that multi-trillion dollar budgets and deficits are sustainable. But they are not. What Keynesians call a post-Covid boom, due primarily to pent up consumer spending fueled by helicopter money, probably is capital decumulation. We are eating our seed corn. Fun, fun, fun...while it lasts.