Thursday, July 31, 2014

I'll punish you by starving myself!

A quote from one of the news summaries found on Open Europe today:
"Russia also announced a ban on some fruit and vegetables imports from Poland, and is considering expanding the ban to the entire EU."
I doubt that Putin will do without his fruits and vegetables and cares little for the plight of the common Russian citizen.  He must make his point and apparently this is the way he wants to make it.  Of course the US has "punished Cuba" for decades by denying American cigar smokers the pleasure of imbibing in the world's finest cigars.

Wednesday, July 30, 2014

Nothing has changed in over two hundred years


Just substitute "dollar" for "assignats".  Nothing has changed.


"Assignats.  Is a fleet to be fitted out?  Assignats.  If sixteen millions sterling of these assignats forced on the people leave the wants of the state as urgent as ever, Issue, says one, thirty millions sterling of assignats--says another, Issue fourscore millions more of assignats.  The only difference among their financial factions is on the greater or the lesser quantity of assignats to be imposed on the public sufferance.  They are all professors of assignats.  Even those whose natural good sense and knowledge of commerce, not obliterated by philosophy, furnish decisive arguments against this delusion, conclude their arguments by proposing the emission of assignats.  I suppose they must talk of assignats, as no other language would be understood.  All experience of their inefficacy does not in the least discourage them. Are the old assignats depreciated at market?  What is the remedy?  Issue newassignats.  The word is a trifle altered.  The Latin of your present doctors may be better than that of your old comedy; their wisdom and the variety of their resources are the same.  They have not more notes in their song than the cuckoo; though, far from the softness of that harbinger of summer and plenty, their voice is as harsh and as ominous as that of the raven."

Tuesday, July 29, 2014

Six Current Economic Myths and Realities

The following are six of the most prevalent economic myths that appear time and again in the mainstream media.  I will give a brief description of each and a brief description of the economic reality, as seen from an Austrian perspective.

Myth #1: Increased money leads to economic prosperity.

This Keynesian myth postulates that increasing aggregate demand through increasing the money supply will lead to more spending, higher employment, increased production, and a higher overall standard of living.

The reality is that an increase in money leads to malinvestment. The time structure of production is thrown into disequilibrium by encouraging investment in projects more remotely removed in time from final consumption.  There are insufficient resources in the economy for the profitable completion of all projects, since individual time preference is unchanged, meaning that there is no increase in savings.  When prices rise, due to this unchanged time preference, these projects will be liquidated, revealing the loss of capital.  Production will be lower than otherwise.  Unemployment will increase while workers adapt to economic reality.

Myth #2: Manipulating interest rates leads to economic prosperity.

This is a corollary of Myth #1 but deserves its own discussion.  In the Keynesian view lower interest rates always are beneficial; therefore, it is the proper role of the monetary authorities to drive down the interest rate via open market operations.

The reality is that interest rates are a product of the market, reflecting the interplay of the demand for loanable funds and the availability of loanable funds.  Historically high or low interest rates can have multiple causes, none of which are prima facie good or bad.  For example, rates can be high because entrepreneurs have highly profitable opportunities due to reduced regulation or a breakthrough in technology.  If time preference is unchanged and, therefore, savings is unchanged, the interest rate rises and allocates the scarce savings to the most highly desired ends.  Or, interest rates can be low due to a change in time preference that leads to increased savings.  If entrepreneurial opportunities are unchanged, interest rates will fall.  Likewise, demand for loans can be high while savings is high or vice versa.  Manipulating the interest rate truly is an act of fantasy by the monetary authorities, who believe that they can know the impact of billions of ever changing decisions affecting the supply of money and demand for money.

Myth #3: Lowering the foreign exchange rate of the currency, to give more local currency in exchange for foreign currency, will lead to an export driven economic recovery.

The reality is that no country can force another to subsidize its economy by manipulating its exchange rate.  Giving more local currency subsidizes foreign buyers in the near term, but it creates higher prices in the domestic economy later.  Early receivers of the new money--exporters, their employees, their suppliers, etc.--benefit by a transfer of wealth from later receivers of the new money.  But as the price level rises from the increase in the domestic money supply, the benefit to foreign buyers evaporates.  Then the exporters demand that the monetary authorities conduct another round of exchange rate interventions.  The big winners are foreign buyers.  Intermediate winners are exporters, but their advantage ends eventually.  The losers are non-exporters, especially retired people.

Myth #4: Money expansion will not cause higher prices.

Currently the U.S. government is engaged in a propaganda campaign to convince us that it can both monetize the government's debt and engage in quantitative easing without causing a rising price level.

The reality is that there is no escaping the fundamentals of economic law in the monetary sphere.  Ludwig von Mises and many excellent Austrian economists since, such as Murray N. Rothbard, have explained that the relationship between an increase in money and an increase in the price level is not a mechanical one.  Nevertheless, even Mises explained that the basis of all monetary theory is the "Quantity Theory of Money", that states that there is a positive relationship between the money supply and the price level.  In other words, more money eventually leads to higher prices and vice versa.  What causes all the confusion is that the price level actually can fall even when the money supply expands, if all of the new money plus some of the existing money stock are hoarded.  Mises call this the first stage of the three stages of inflation.  The public expects prices to remain the same or even fall, so they do not increase their spending even when the money supply expands. Eventually, though, the public comes to understand that the money supply will keep increasing and that prices will not return to some previous golden age.  At this point the public will begin to increase spending to buy at lower prices today rather than higher prices tomorrow.  The price level will rise even if the money supply shrinks, because the public spends previously hoarded money faster.  This is Mises' phase two of inflation.  In the final stage money loses its value, as the public spends it as fast as possible.  This is Mises' stage three, the "crackup boom".

Myth #5: More, better, and more vigorously enforced regulations can prevent loan and investment losses.

The politicians and their regulatory agencies believe that prior monetary crises were caused by a combination of stupidity, greed, and criminality by bankers and sellers of investments.

The reality is that no army of regulators armed with the most modern analytical tools and the most powerful means of regulatory enforcement can prevent malinvestment from money supply expansion.  The monetary expansion encourages longer term projects for which the cost of money is a major factor in forecasting success.  But without an increase in real savings, insufficient resources will ensure that many of these projects will never earn a profit and must be liquidated.  Bank and investor losses are inescapable.

Myth #6: Government can prevent hyperinflation.

This is a corollary of Myth #4.  If our monetary masters believe that money expansion will not cause higher prices, then they believe that they can prevent hyperinflation; i.e., the total destruction of the monetary unit as a universal medium of exchange.

The reality is that hyperinflation is cause by a loss of confidence in the money unit, which the monetary authorities may be incapable of preventing.  Once the panic starts, the demand by the public to hold money falls to zero.  Prices skyrocket.  Even if the monetary authorities got religion at this point and froze the money supply, the panic will run its course.  No one will want to be the last holding worthless paper.  More likely, though, the monetary authorities will aid and abet the panic, even if unwittingly, due to political pressure to increase payments to powerful domestic constituencies, such as retirees, the military, the public safety sector, government contractors, etc.  This was the case in Revolutionary France, Weimar Germany, and modern day Zimbabwe.  The mindset of today's money masters seems little more advanced.

Conclusion


I encourage Austrian economists to point out these common myths whenever encountered.  I have had success writing letters-to-the-editor of major newspapers.  Their editors often seem genuinely pleased to receive a polite letter pointing out the Austrian view.  Perhaps it is simply  a case of controversy selling newspapers.  Furthermore, much business writing often has imbedded Keynesian assumptions that drive the narrative toward government intervention.  Most business reporters have no economic training, so Austrians should politely point out these errors, too.

I'm Shocked! Shocked!

From today's Open Europe news summary:

In its quarterly report, the Greek Parliament’s State Budget Office has warned that Greece will require a third bailout package to avoid a default, and that despite capital injections, the problems of the country’s banks has not been resolved yet, reports Kathimerini.
Greece will "need" a third bailout, and a fourth bailout, and a fifth bailout, ad infinitum until the EU has had enough.  As long as Greece can get more money from the EU, it will never adopt the reforms needed to stand on its own. Such are the wages of socialism everywhere, whether pertaining to the individual or entire nations.

Friday, July 25, 2014

Governments Collude to Fleece the World

Re: Luxembourg tax regime under siege

This recent article by Vanessa Houlder of the Financial Times, London, details the economic success that Luxembourg has enjoyed by keeping its business tax rates at a moderate level and the threat to that success from high tax governments colluding to force it to raise its rates.  Ms. Houlder seems to be carrying the water for the EU and the OECD in calling for "European governments to pull together and stamp out harmful tax competition."  Elsewhere Ms. Houlder reports that "the OECD is intent on closing loopholes" and wants to "stamp  out treaty shopping" by big, international companies who seek to avoid taxes.  Likewise, consumption taxes for Luxembourg citizens "are already set to rise."  The general tenor of the article is that governments have a right to collude to ensure that no company or individual can escape paying high taxes.

Governments try to make a virtue out of doing something for which they would prosecute private companies, namely price fixing via a closed cartel. They wish to trap capital and profits behind a fa├žade of legality and will bully any country, especially a small country, into adopting their confiscatory tax regime that is the foundation of their bloated and inefficient welfare states.  They want to prevent Microsoft and Amazon, for example, from escaping their clutches just as the former communist countries of the Warsaw Pact tried every means possible to prevent their citizens from fleeing to the West.  The US is part of this government led conspiracy.  Recently it pressured Switzerland to reveal the names of American holders of Swiss bank accounts in their search for assets to plunder on behalf of the American welfare/warfare state.  Naturally, these governments use propaganda to incite the masses to start a new class war.

But if competition is right and proper for companies and forming a cartel for the purpose of holding prices high is not only illegal but also immoral, why is government itself exempt?  No one since FDR's socialist brain trust would accept the argument from the private sector that a cartel enforced price uniformity was needed in order to establish a level playing field, yet tax uniformity is lauded by governments and their main stream media lackeys. Surely, cartels, especially those enforced by law, create huge inefficiencies in the delivery of services.  This must be one of the causes to which former member of the European Parliament Godfrey Bloom was alluding when he constantly questioned the unconscionable perks and benefits of European Union civil servants and their constant demand for even more.  Without tax competition what is there to enforce spending discipline by government?  Nothing.

Wednesday, July 23, 2014

From the "You can't make this stuff up" department

Re: EU threatens Germany with fine for running too large a surplus

Ambrose Evans-Pritchard of the Daily Telegraph reports that the International Monetary Fund is criticizing Germany for running too large a trade surplus with the other European Monetary Union states (those EU members who also use the euro).  Apparently the surplus violates EU law and requires that Germany pay a 2.4 billion euro fine.  The economic geniuses at the IMF claim that Germany's trade surplus is "economically destructive" in that it harms weaker EMU states who suffer a "liquidity trap", meaning that they cannot debase their  currencies to spur exports (they use the common currency, the euro, you see). The IMF admits that Germany has achieved its trade surplus in large part by holding down wages, something that the weaker EMU states refuse to attempt for fear of the dreaded "deflationary trap". How keeping wages in line with real demand is a trap goes unexplained by the IMF.

The reality is that only Germany has displayed cost discipline, whereas other EMU states want to borrow, print, and inflate their way out of difficulty rather than confront radical unions about getting wages in line with demand.  As long as we are discussing reality rather than economic phantoms, the reality is that the European Central Bank itself aids and abets Germany's surplus by allowing the deficit nations to borrow newly printed euros to support their failing welfare states. The fact that this action violates the Maastricht Treaty, which established the EMU, is ignored by ECB bureaucrats because it does not allow room for Keynesian monetary stimulus.

Germany has fought the ECB for years over its faithlessness in honoring solemnly negotiated treaties that enticed Germany to scrap its greatest post war achievement--the beloved deutsche mark. It is past time to bring it back.

Monday, July 21, 2014

My letter to the Financial Times, London re: Eurozone needs quantitative easing


Re: Eurozone needs quantitative easing

Dear Sirs:
All the so-called benefits that you expect the eurozone countries to derive from a European Central Bank program of quantitative easing are myths.  Myth number one: QE will spur an economy to greater production.  Reality: QE will cause dislocations in the time structure of production, causing malinvestment mostly in longer term projects for which insufficient resources exist for successful and profitable completion, leading to capital decumulation and lower production.  Myth number two: QE will weaken the euro against other currencies and lead to an export driven recovery.  Reality: There is no way that an economic zone can force other economic zones to fund one's own recovery. Debasing one's own currency merely gives a bargain to foreign buyers, for which they should be very grateful, and transfers wealth within one's own currency zone from the non-export industries to export industries.   Myth number three: Higher prices (what you erroneously call "inflation") will lead to economic prosperity.  Reality: Higher prices will impoverish the masses of the people by forcing them to pay more for the necessities of life.