Monday, September 5, 2022

Despite Their Hubris, Monetary Authorities Do Not Have Total Control

 

A new monetary age is coming and sooner than anyone thinks. Since 1971 the world's monetary system has been unanchored from anything of intrinsic value. In the fall of that year President Nixon took the US off what remained of the gold standard, called the gold exchange standard, in which foreign central banks could redeem dollars for America's gold reserves at $35 per ounce. The reason for Nixon's action was simple: the US had cheated. Dollars were supposed to be fully backed by gold, meaning that the US would not print more money than it had the ability to redeem in gold at $35 per ounce. In effect, the US counterfeited its own currency.

 

Ever since 1971 the world has been on a fiat monetary system, allowing the world's central banks to print as much currency as their profligate governments demanded. Today the dollar is worth only two cents of its 1971 gold value. ($35 per ounce of gold in 1971 divided by $1,749 per ounce of gold on August 29, 2022). One thing is certain, with greater and greater government deficits, funded by greater and greater amounts of fiat currency, the dollar will continue to lose purchasing power, perhaps falling to zero.

 

As the US government keeps spending, a milquetoast Fed creates even more dollars in order to prevent interest rates and/or taxes from skyrocketing, which would cause the stock market to implode. The consequences are only just emerging; i.e., higher prices. Nevertheless, we are told that our monetary masters have the authority to force us to use the dollar, despite its steady drop in purchasing power. Nothing can or will be done. The Fed controls the dollar. The Bank of England controls the Pound Sterling. The European Central Bank controls the euro, and so on. Or so it is claimed. But is that really true? It is the hubris of our monetary masters that they have total control over whatever fiat currency is made mandatory.

 

An Idea Whose Time Has Come

 

Victor Hugo wrote that "There is nothing more powerful than an idea whose time has come." In 1971 that idea was Keynesianism. Keynesian monetary theory gave central banks worldwide the philosophical endorsement to print money in order to prevent recessions and to contract money when the economy overheated (prices started to rise). It was oh so technical, modern, and reassuring to the public, who even today venerate our monetary masters at the Fed, the Bank of England, the European Central Bank, the Bank of Japan, etc. But that was then. This is now. Now all is not as it seems. There is a new idea whose time has come. Or, rather, it is an old idea that is making a comeback. That idea is sound, commodity based money that cannot be inflated.

 

Some nations, especially those outside the Western orbit, are starting to realize that their hoards of dollars, received in exchange for valuable goods, are shrinking in purchasing power at a faster and faster rate. The great con has been exposed. Many countries are not happy and want to do something about it. Herein lies a great lesson. The world is a very big place. One can happily live in this world only if he is honest, trustworthy, reliable, friendly, and doesn't meddle in the affairs of others. This lesson applies to nations as well as individuals. But the US has violated these time-honored traditions. It has debauched the dollar, the world's premier reserve currency for settling international trade. It has used the international settlement system (SWIFT) as a weapon to ostracize nations, such as Iran, that it does not like. It has confiscated assets held in the US that belong to others, most recently Russians. As a result, some nations are working to replace the dollar and the US controlled international settlement system with one of their own. It is not an easy task, but, as Victor Hugo pointed out, the idea of sound money and friendly, non-interventionist relations is taking hold and will not be turned back.

 

The Warning Signs of Change Are There to See

 

There are some warning signs. Some members of the Shanghai Cooperation Organization have been working on a new medium of exchange for settling international trade, bypassing the dollar. (See this article and this article) This money will contain a large gold content, making it difficult, if not impossible, to debase. The Russians and the Chinese are involved, of course, which is very important because both of these nations probably hold more actual gold specie than any Western nation, including the US. Significantly Saudi Arabia is considering joining. This is crucial, because since 1971 the Saudis have demanded that payment for oil be made in dollars only, creating the so-called petrodollar market. If the Saudis decided to accept a new SCO currency in addition to the dollar, demand for the dollar would drop. This would signal an end to the dollar as the world's preferred reserve currency and set off seismic financial shocks, especially in the US.

 

But let us not discount the possibility that some currently friendly nation, such as Germany, might not seek an alternative to a steadily shrinking dollar. Currently the euro is legal tender in Germany, but many German economists are not happy with European Central Bank policies. The euro has been inflated as much as the dollar. This is anathema to Germans who understand how their country was destroyed by hyperinflation in the 1920's. Germany's federal government is the most fiscally responsible in the industrialized world. It is ludicrous that Germany's monetary system is run by inflationists at the European Central Bank. Germany needs its own currency. Were it to reinstate the deutschmark, the European Monetary System would collapse, and good riddance to it. Many European nations probably would choose to join a deutschmark zone. In the long run this would be beneficial to strengthening the dollar.

 

International Currency Competition Would Keep the Fed Honest

 

Foreign central banks would not need to hold as many dollars, most of which have been used to buy US Treasury debt. They will flow back into the US, exposing the current system's weakness; i.e., that US price inflation was kept in check only by world demand to hold dollars for international trade purposes. That need will diminish and foreign dollars will start entering the spending stream instead of being held as reserves. To stem the inevitable increase in prices the Fed must allow the interest rate to rise and the federal government must cut spending. Otherwise, the dollar's exchange rate with a new SCO currency or a new deutschmark will fall. The US would be unable to afford necessary imports. To prevent this disaster, the economy must be unshackled from needless regulation, taxes must be cut, the dollar must be made redeemable in gold, and, most importantly the federal government would have to cut spending. Otherwise the economy will not progress. It is important to remember that the federal government is a parasite on the economy. Every dollar that it cuts from its own spending frees resources for the real, private economy.

 

The long, steady march of the dollar to complete loss of purchasing power would be arrested. This is good news for Americans and all other holders of dollar reserves. What the public calls "inflation" would moderate. There would be a reassessment of US economic policy. For example, the green energy movement would be over. Wind and solar infrastructure would revert to niche markets at best. They were never capable of meeting America's energy needs. International interventionism would be over. The American people would finally see the full monetary cost of America's wars, which would  have to be supported by higher taxes. Reality would reassert itself. All this is very good news for the future of America, which henceforth must live within its own means and behave honorably with the world. I see nothing wrong with that prospect. The important point is that the current monetary expansion eventually will come to an end, one way or another. Various economists like Frederick Hayek and Herb Stein have said in one form or another: that which cannot go on forever will not go on forever. The sooner the US ends its monetary expansion of the dollar, the shorter will be the necessary period of economic adjustment.

 

Monday, August 22, 2022

Mandatory Vaccines vs. Logic and Kantian Ethics

 

The case in favor of mandatory vaccines rests upon faulty logic and violates ethical principles. A vaccinated person protects himself to the extent of the vaccine's capability, which may be close to one hundred percent, as in the case of polio and small pox vaccines, or much less, as in the case of the Covid 19 vaccines. One may take the vaccine and enjoy its full protection even if one is the only person so vaccinated. If everyone else takes the vaccine, one's protection is NOT increased. And if everyone else refuses to take the vaccine, one's protection is not diminished.

 

So, why insist that "society" must be allowed to force you to take a vaccine? If you refuse to take it, you are not a threat to anyone who does take it. And those like you who refuse to take it assume the risk.

 

One argument is that the more people who take the vaccine, the less chance the disease has to spread and, it is hoped, will die out before it has a chance to mutate to something else for which the current vaccine will not provide protection. This is what the epidemiologists call "herd immunity".

 

Kant's Humanity Principle

 

The problem with this argument is that it violates Emmanuel Kant's "Humanity Principle"; i.e., that man is an end in himself and may not be used solely as a means to some other end. The advocates of mandatory vaccine want to force individuals, against their will, to take a vaccine in order to protect unknown and perhaps nonexistent others for something that may or may not happen. Not only is this very thin soup indeed, and smacks of totalitarianism, but is a clear violation of Kantian ethics.

 

So, what's so important about Kantian ethics? Well, we see the problem all around us. It is so ubiquitous that that we take it for granted. The state has expanded from one organized for the  protection of life, liberty, and property to one of coercion to attain societal engineering on both a domestic and international scale. I refer to the warfare/welfare state. On the thinnest of pretenses man becomes cannon fodder for continuous wars, not to protect our lives, liberty, and property in the present, but as preventive wars to stop some supposed attack in the future. If we don't stop those terrible "fill-in-the-blank" over there, they will be at our doorstep as sure as night follows day, say the warmongers.

 

Domestically we are used to pursue a theoretical ideal called the welfare state, where our property is confiscated in ever increasing amounts in order to uplift others. Most often the failure of these programs becomes prima facie reason to expand them, never to end them. The welfare state has pushed aside voluntary private charities and benevolent associations, who must continually show their financial supporters that they are effective and efficient in order to retain their voluntary funding. Such organizations do not violate Kantian ethics. Not so with government welfare, where the public are used as means and not ends.

 

The mandatory vaccinations are both illogical and ethical failures. But they are just one manifestation of a wide problem.

Diversity, Equity, and Inclusion Goals Are Illogical and Harmful

 

Does society really need and can it benefit from goals designed to achieve statistical "Diversity, Equity, and Inclusion" metrics? The answer, of course, is "no" on both counts; i.e., society neither needs these goals and cannot benefit from attempting to achieve these goals. There are two illogical assumptions embedded in the DEI movement.

 

Illogic assumption number one: If superficial characteristics really are meaningless, then those individuals who possess these characteristics do not need goals for them in order to be fully included in society. For example, I am certain that a person's eye color has no bearing upon one's ability to function fully in society; therefore, there is no need for a goal to ensure that individuals with all possible eye coloring are represented on an equitable basis in whatever enterprise is being measured. The same undoubtedly is true for height, hair color, and other random characteristics of birth.

 

Ah, but you may say, the very fact that people with noticeable characteristics are in fact underrepresented in desirable societal classes is prima facie evidence that dark forces are at work. And here we have the crux of the matter; i.e., that government coercion is needed to defeat these dark forces.

 

That claim leads us to illogic assumption number two: If superficial characteristics are meaningless, then those enterprises who discriminate based upon these meaningless characteristics will fail. Those who discriminate AGAINST people with certain personal characteristics discriminate in FAVOR of lesser talented people who do not possess these characteristics. The iron rule is that discrimination always has a flip side. If an enterprise refuses to include people with brown eyes, then it must discriminate in favor of lesser talented people with blue, green, or grey eyes. Since the pool of talented people is roughly the same for brown eyed people, then very talented brown eyed people will outperform their lesser talented blue, green, and grey eyed competitors. In an open society with free entry for competition, the cream will always rise to the top.

 

In conclusion, discrimination based on superficial characteristics, if it really does exist, is self-correcting in a free labor market. Any perceived statistical aberrations are meaningless or there are other explanations at work. Insisting on fighting unnecessary battles are extremely harmful to society for the simple reason that there is nothing that society can do. DEI warriors will be persecuting the innocent, exactly the type of injustice they wish to stop. My advice is this: Instead of searching for dragons to slay, just mind your own business and set a good example. You will be happier and you will accomplish more good for yourself and the society around you.

 

Sound Money Can Prevent What Representative Democracy Does Not

 

One of the arrogances of "Western" nations is that our way of life and our liberties are protected by periodic elections as required by constitutions, written (America) or not (Great Britain), containing bills of rights, etc. The people rule, it is claimed, and we get exactly what we want, even if those in the minority are unhappy with the result. Minorities can always become tomorrow's majority and institute alternative policies. Therefore, Western nations really cannot get into too much trouble, since everyone wants peace, freedom, and prosperity, even if we disagree on the proper route to take to get there.

 

But what if I told you that there was a fatal flaw embedded in the very structure of Western nations that undermined this view? What if we common citizens can vote, change leaders, change parties, and it's all meaningless? A good argument can be made that Ludwig von Mises believed exactly that and warned nations repeatedly in book after book to eliminate this fatal flaw or suffer complete societal collapse. Mises knew this could happen, because he had seen it happen first hand. He pleaded with the elected leaders of Austria, his beloved homeland, to take action in order to prevent what had happened in Weimar Germany.

                                                                                                                                                                            

The Cause of Societal Collapse in Weimar Republic Germany

 

What happened in Weimar Germany--a real republic with democratic elections, by the way--was a test case that should not be ignored. The collapse of the German Weimar Republic led directly to the rise of National Socialism. The cause was unsound money; i.e., money printed (literally at the time) in such quantities that the Papiermark became worthless. Society was thrown into chaos. Germany had lost two million men in World War I out of a total population of sixty-eight million. The nation was one of widows, orphans, and the aged almost entirely dependent upon what savings they had accumulated. These savings became worthless. Widows became prostitutes, children became thieves, and aged parents committed suicide. One of the best descriptions of this disaster is Adam Fergusson's When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany. The book is not for the squeamish.

 

Mises wrote repeatedly that unsound money was just as important, perhaps more important, that the trappings of popular government. Perhaps his best known quote is found on page 455 in The Theory of Money and Credit:

 

"It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bill of rights."

 

Notice that Mises does not qualify the kind of governments that may succumb to the despotism of money printing. This is very important. All governments, democratic republics or totalitarian states, are susceptible to the despotism of money printing. Mises returns to this subject time and time again. Here is just one quote from Economic Policy, page 65.

 

"The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its main advantage. It is a form of protection against spendthrift governments."

 

A Budding Alternative to the Fiat Dollar

 

Iran, of all nations, recently accepted as a member of the Shanghai Cooperation Organization, has proposed that the organization establish a new currency in order to bypass the dollar for settling trade among its members. Alasdair Macleod has studied this process and written two learned articles, here and here, which refer to their progress. The key points:

 

"The Eurasian Economic Union (EAEU), consisting mainly of a central Asian subset of the Shanghai Cooperation Organisation (SCO) has announced plans for a trade settlement currency backed by a mixture of commodities and the currencies of member states."

 

"...a successful EAEU trade settlement currency can be extended from EAEU nations to both those in the wider SCO and the BRICS members not in the SCO. It could also be an acceptable replacement of the petrodollar for oil export payments to the Middle East."

 

 

The SCO members are negotiating over the new currency's structure, but the important point is that it will have a very large commodity-based component, including gold. The SCO's understanding of money is more in line with that of Ludwig von Mises, who defined money as the following on page 425 of his magnum opus Human Action:

 

"Under the gold standard gold is money and money is gold."

 

Sound Money Prevents War

 

Top among the most important reasons for sound money is that it militates against unnecessary wars. Wars are tremendously expensive, of course, and usually are undertaken only as a last resort or as a purely defensive action. But unsound money makes it appear, for awhile anyway, as if war is cost free. The US is the poster child for entering wars not as a last resort but for other reasons. When Eisenhower left office in early 1961, the US dollar was, well, as sound as a dollar. Eight years later, after Lyndon Johnson's "Guns and Butter" policy, the dollar's value was under threat, as the US's dwindling gold reserve amply illustrated. Two and a half years later, rather than end the Vietnam War and other Johnson-era welfare programs, Richard Nixon ended gold redemption by our trading partners. The war continued to its ignominious end. Had he done his duty the US would have remained on the gold standard and avoided other failed military adventures, a list so long that it is embarrassing to list them all.

 

Which Works Better--Gold or Representative Democracy?

 

In other words, gold would have done its primary duty; i.e., make the real cost of government spending perfectly clear so that people, through their elected representatives, can decide the extent of government spending. Instead, the complete absence of any kind of objective barometer of the real cost of government merely encouraged US neoconservatives to search the world for dragons to slay and, if dragons were hard to find, to convince the people that the dragons existed in places very far away--Libya, Iraq, Syria, Somalia, Afghanistan, Ukraine...have I missed any?--and were a threat to our way of life. Few, if any, of these failed adventures would have been undertaken had the US been on an enforceable gold standard.

 

Representative democracy is important, yes, but it does not prevent societal collapse from fiscal and monetary irresponsibility. Whereas, a gold standard dollar quickly shows the true cost of government and can prevent most follies. To put it bluntly, there are thousands of mothers who today would have their sons by their sides rather than a gold star in their windows.

 

But wait! There's more!, as the late night TV salesmen of tchotchkes for the gullible used to say. Printing money out of thin air causes multiple adverse effects, but most are delayed somewhat. Higher prices. The Boom/Bust Credit Cycle. Resource misallocation. Plus many more, and all leading to a lower standard of living. But a sound money standard reveals the sacrifices that the public must make to fund more government spending. Taxes must be raised, borrowing increased, or other programs defunded. These adverse consequences happen almost immediately and are visible to all. If the public thinks that the war or other spending program is necessary, then the government will get its approval. But, really!, how many ordinary people can even find the location on a map of our many wars of the last sixty years or understand and support boondoggle spending programs that never die and, most often, get increased funding?

 

The worst spending programs in the past few years were the so-called "stimulus checks". Even died-in-the-wool big spenders would question the rationale of taxing the public in order to send them checks, minus the government's bureaucratic handling fee, of course. Ladies and gentlemen, this makes no sense and under a sound money environment would never happen. Yet our federal government sent out three of them! And now our rulers are trying to convince us that increasing the money supply to fund all these fiascos had nothing to do with higher prices and shortages. Sure. But then again, those late night TV salesmen like Ron Popeil sold lots of Vegematics!

Thursday, August 11, 2022

An Opportunity for Real Change in Britain

 

In a few days the British Conservative Party will select a new prime minister from within its ranks. The new PM will have a short-lived opportunity to select new ministers. But more importantly, due to the inevitable adverse consequences of a decade and a half of unprecedented money printing, little real action to complete the promise of Brexit, and war in Ukraine, the new PM can select ministers pledged to sound money, a rational and pro-growth tax policy, free markets, limited government, and a non-interventionist foreign policy.

 

 

Sound Money

 

In perhaps an apocryphal story, it is held that Ludwig von Mises was once asked what one reform he would select if allowed only one. He quickly answered...return to sound money. By sound money, Mises meant a money not controlled by government but rather by the market. Without a doubt the market would choose a commodity based money, most likely gold. Sound money would force government to live within its means. Under a sound money regime, it becomes clear that every pound or shilling spent by government comes directly from the people. Government spending reduces private spending pound-for-pound. The so-called "spending multiplier" by which one pound of government spending increases total spending by multiples of that amount is a complete fallacy.

 

New taxes will always be unpopular and rightly so. Increase in government borrowing can only happen by pre-empting private borrowing, via higher interest rates, which is recessionary by its very nature. It is natural and good that government must overcome the public's reluctance for new taxes and more government debt in order to increase spending. Government must justify their increased spending plans to the people. By the same token, government spending cuts will mean that the public will have more to spend themselves.

 

 

A Rational Tax Policy

Like the need for sound money, the need for a sound taxation policy is one of the most important, yet least understood, aspects of government. Even the current debate between the final two Prime Ministerial contenders, who of all people should be better briefed, reveals a profound confusion that exemplifies Frederic Bastiat’s distinction between what is seen and what is not seen.

Every time one of them declares an intention to cut, say, corporation tax and, more recently, even income tax, the predictable counterblast is “but that will cost the Exchequer ‘£x billion’ per annum and will mortgage our children’s future, creating ‘£y billion’ of additional borrowing that will take ‘z years’ to repay. The nation can’t live on credit-card economics! I will first address the problem of inflation, and only then cut taxes – that’s the responsible approach!”

These emotive responses perfectly illustrate Bastiat’s  “what is seen” – but it completely misses the vast potential increase in tax revenues that might flow from a lower rate. What is not seen is the effect of international tax competitiveness on the number of businesses that will register their residence in the UK because it has a comparatively low rate of corporation tax – witness Ireland, which has a corporate tax rate of only 12.5%, compared with the USA rate of 21%.

Consequently, what is not seen is the gain to the exchequer of welcoming thriving, profitable companies into the UK, rather than the converse - losing UK businesses to jurisdictions with lower tax rates.

Also “not seen” is the economic benefit that will flow from the presence in this country of thousands of employees and their families. Because it is not seen, it is also unquantifiable – but what is certain is that we shall see supply-side net economic growth. The “tone” will have been established – and the direction of travel is bound to be positive. It will result in a bigger pie – not a bigger slice of a diminishing pie.  

What is seen is always limited – such as revenue from new tariffs on imports – while ignoring the harmful market distortions and negative price impacts that impinge directly and indirectly on the cost of living. There are important lessons here.

 

Free Markets

 

The examples of the failure of government run programs is there for anyone who is not an ideologue to see. Just this past week, the Financial Times reported that the government may halt all increases in new housing in the London area due to the lack of adequate capacity in the power grid. In other words, Britain's publicly owned and operated power system is not producing enough electricity. A top to bottom privatization of not only power generation but fuel sources is required. Scrap regulations on all sources of energy including nuclear and fossil fuels. Nuclear power is one of the safest and lowest cost sources of power available. Its higher costs are completely the result of unnecessary regulation that, frankly, seems intended to end nuclear power completely. Britain has been a leader in nuclear power technology for over half a century. All its important warships and submarines run on nuclear power, and hardly anyone thinks a thing about it.

 

Britain has been a fossil fuel giant since the eighteenth century. Coal made the industrial revolution possible. North Sea oil has never met its full potential. There is no reason that Britain need import fuel, unless it can be purchased more cheaply elsewhere, such as the Middle East or even, dare we say the word, Russia.

 

 

Limited Government

 

Limited government means two things--limited government involvement in the economy and limited spending. The two go hand-in-hand. An additional benefit is that limited spending can be funded out of lower taxes. The British legal system, based upon the common law, is all that is required for the smooth regulation of economic matters. For example, fraud and contract law are well defined in the British legal system for the smooth regulation of commercial life. Tort law regulates harms actually inflicted, making product liability laws, for example, unnecessary. Just as a better mousetrap drives less effective ones from the market, better and cheaper products drive less effective and more expensive ones from the market, making product regulation completely unnecessary. A better template than the unitary state is the Swiss principle of subsidiarity. Switzerland is a multi-ethnic land, making a one-size-fits-all government impractical. Therefore, government is pushed down to the lowest governmental level possible wherever practical, and it turns out that much of day-to-day practical government can be handled at local levels where the people really do have a voice. Britain should try this approach

 

The National Health Service is a disgrace on almost any objective basis of functional and cost-effective analysis, and it's getting worse rather than better. End taxpayer support and put a fee-for-service price on its operation, forcing it to compete with private healthcare providers.

 

Needless to say, there is no room for EU regulations, quotas, etc. in a sovereign country ruled by common law with limited government. Only Brexit supporters should be considered for ministerial jobs.

 

 

A Non-interventionist Foreign Policy

 

The war in Ukraine has illustrated how nations can be dragged into war when their own national interest has not been threatened. NATO expanded eastward after the fall of the Berlin wall three decades ago, until it ran into real opposition in the form of Russia. There was no need for this expansion and there is no need for Britain to be involved in Ukraine in any way. The war there has taken on a life of its own and only a strong leader with a dedicated cabinet of peace minded ministers will be able to dislodge Britain from this conflict and prevent Britain from being dragged into similar conflicts, such as the new dispute between Serbia and Kosovo. Instead of taking sides in purely local conflicts, Britain should do all it can to create a new Concert of Europe. This will require real statesmanship. Britain can and should lead the way. A truly sovereign Britain can defend itself when its real interests are threatened. Armed neutrality requires a strong national defense and a non-interventionist foreign policy. The emphasis is on "defense" and "non-intervention". A good maxim to follow is "Mind your own business and set a good example".

 

 

Tuesday, July 26, 2022

The Future of the Dollar Is Bleak

 

From an Austrian school of economics perspective the dollar is weak and growing more so every day, despite the fact that it is gaining against other currencies on an exchange rate model. There are some specific causes of this phenomenon, but the important point is that the dollar has been inflated massively and will continue to lose purchasing power against real goods and services, what the public and the press mislabel as inflation. The dollar's purchasing power will deteriorate at an ever-faster rate, primarily due to the Fed continuing to print dollars to fund the federal government's deficit spending and to spur the economy through monetary means. As Alasdair Macleod of GoldMoney.com has pointed out, the dollar already exhibits hyperinflation characteristics, because the federal government cannot fund its debt without the Fed's cooperation in monetizing it. Therefore, eventually the public will understand that the dollars in wallets and bank accounts will fall toward worthlessness and will begin to shed dollars in favor of real goods. Since the US monetary authorities are died-in-the-wool Keynesians and completely clueless to both history and sound economic and monetary theory, there is no hope for changing this outlook.

 

One would assume that the world is headed for disaster, but that would not be entirely correct. There is a new international currency in the works, sponsored by the Shanghai Cooperative Organization, sponsored by Russia, China, India, Pakistan, and other Asian nations. The new currency will be backed by commodities, including gold. It will be used first of all for settling international trade among its members. Be prepared for more countries to join this new group. Also be prepared for the Western press to paint the SCO and its new currency in the worst possible light, as if the members of this group were waging economic war on the West. Such is not the case. These countries are just wiser than the West. They have seen currencies collapse and know the chaos that ensues. Of course, it would be possible for the West to tie its currencies to commodities, as these nations are doing, but there is little hope of that happening. Our economic gurus will use the police power of the state to prevent the public from using this new currency.

 

At the current time the only safe haven is gold. Not electronically traded gold funds (ETF's), which are not fully backed by specie, but the real stuff. Gold is money. All the rest are currencies that may or may not be redeemable in real specie, i.e., gold. As the lapdog of the federal government, despite its claim to policy independence, the Fed will not use its very substantial gold holdings to back the dollar. To do so would be to expose the federal government's budget deficit and debt to reality. Without the Fed's debt monetization services, the interest rate required to fund the deficit would drive out all other borrowing, public and private. The federal government cannot balance its books without cutting entitlements, primarily Social Security and Medicare, or its military empire. Its current debt would be valued at less than junk bond status.

 

This is the reality of the future demise of the dollar. I wish it were not so.

Thursday, July 21, 2022

The Fallacy of Calls for "A Manhattan Project" to Solve National Economic Challenges

 

The World War II project to build an atomic bomb is seen by many as a template for government action to solve what appear to be national economic problems beyond the scope of private enterprise. The analogy fails on several levels.

 

First of all, the analogy fails in the sense that the Manhattan Project was not an economic problem per se. It was a military development and procurement problem. There was, and still is, no commercial demand for a weapon of mass destruction.

 

Secondly, there is a difference between very large commercial projects and very large government projects. As Ludwig von Mises explained in his first great book Economic Calculation in the Socialist Commonwealth, economic calculation is possible only with private ownership of the means of production. Government does not own means of production in the true, private sense of the term. It uses only resources that it has confiscated from the private economy.

 

Because government is not a private entity with resources it has acquired through cooperative exchange, it is missing the vital link of capitalist entrepreneurship and the concomitant hierarchy of ordinal preferences from which economic calculation flows. In other words, government managers would not know which projects to pursue nor which factors of production to use.

 

For example, should government engage in a vast project for national energy self-sufficiency? If so, should it build wind and solar farms, or should it expand nuclear power or even fossil fuels? If government pursues all the above, in what proportions should it invest? An equal amount of money to wind, solar, nuclear, natural gas, coal, and perhaps geothermal, hydroelectric, or some other source? Without private ownership of the means of production, there can be no rational answer and no true economic answer.

 

A further and even more basic problem arises regarding whether or not government should seek any economic goals at all other than allowing the people to make private decisions with minimal regulatory encumbrances. Government managers have no special insight into the future of markets. In fact they have little reason to labor to do so. As a result we see government managers squandering vast amounts of public money on completely wasteful projects like wind and solar energy fields. They pursue their own private preferences just as Public Choice Theory predicts. They are not subjected to the discipline of the market and owners who demand a return on their investments.

 

In Conclusion, Expect the Worst

 

In conclusion I fear that the US and other Western governments are poised to waste vast amounts of money pursuing completely fruitless projects. The Ukraine War has disrupted economies and seems to justify government intervention to "fix" the most visible adverse consequence--skyrocketing energy and food prices. The West seems determined to keep in place its economic sanctions on Russia. Rather than adding insult to injury by implementing a "Manhattan Project" for energy and food, the Western economies should deregulate these markets and reduce taxes. Since deregulation and lower taxes require less management and enforcement, governments who desire to appear to be "doing something" about problems they had a good deal in causing can be expected to make things even worse. You heard it here first.