Thursday, November 14, 2019

The Link Between Fiat Money and Socialism


The Hidden Link Between Fiat Money and the Increasing Appeal of Socialism Among the Young


For some time now I have been mulling over the possible causes of what seems to be an increase in the desire for socialism among the young. For someone of my generation (an early post war baby boomer), it is inexplicable. Socialism was at the heart of two of the most despised totalitarian regimes of the twentieth century: Nazi Germany and the Soviet Union. Both regimes murdered millions and enslaved hundreds of millions. Although the young may not wear swastikas or the hammer and sickle, they seem completely enamored of the policies that underpinned these regimes; i.e., more state control of the economy and our lives in order to achieve some vaguely stated paradise on earth.

The market economy of sound money vs. the political economy of fiat money

I suppose each generation feels that it understands reality to a better extent than the following generation, and I admit to this phenomenon. My early years were enjoyable, but there was no question that the purpose of one's youth was to prepare oneself for a life of economic challenge. In other words, my generation assumed that our primary goal was to figure out how we would integrate ourselves into the market economy. Oh, we did not espouse this goal in such terms. We simply said that we wanted to find jobs that both appealed to us and would pay our way in the world. Our success in life would depend upon finding our niche in the market economy of serving others. Our reward was a paycheck.

This visceral understanding of the way the world really works stands in stark contrast to the likes of the Extinction Rebellion movement. These young people have learned that there is an alternative means to success and one that does not involve meeting the legitimate needs of one's fellow men in the marketplace. It is the political process, whose underpinnings are fiat money printed in whatever quantities that are desired. Members of Extinction Rebellion are convinced that they KNOW that the world will end unless capitalism is replaced by socialism. Furthermore, they are convinced that socialism definitely can work, despite its unbroken history of failure.

What causes such seemingly unfounded confidence in socialism? In the aftermath of the Second World War Eric Hoffer wrote The True Believer in which he suggested that certain people are psychologically insecure and seek an all-encompassing world view to which they can dedicate themselves. These misfits (Hoffer's word) seek acceptance in a mass movement. Hoffer claimed that the nature of the mass movement did not matter as much as the fact that it offered a simple solution to all of life's challenges without further thought. In post war interviews, Nazi propagandists said that the easiest people to convert to the Nazi creed were communists. It was simply a matter of shirking off one totalitarian belief for another.


Unlimited money engenders the myth of unlimited real resources

The world was on a watered down version of a gold standard until 1971 when the US abandoned its solemn promise--the 1944 Bretton Woods Agreement-- to back the dollar with gold at $35 per ounce. Gold backing of a currency provided a solid intellectual foundation of reality that few even recognized existed within themselves; i.e., that we live in a world of scarcity and uncertainty. Furthermore, wealth has to be built. It cannot be conjured out of thin air, just as gold cannot be conjured out of thin air.

But fiat currency CAN be conjured out of thin air and in enormous amounts. The longer a fiat currency is the coin of the land, the more one is led to believe that nothing should be in short supply, since everything is bought with money and money need not be in short supply. The young, who know only unlimited fiat money, soon demand free healthcare and free higher education as a right. And why not? Unlimited money will pay for it. Into this never-never land comes demands for scrapping the fossil fuel underpinnings of our modern economy by youth who understand nothing of how an economy works. But, apparently one does not need to understand technical limitations, because there are no technical limitations. The "barbarous relic" (gold) had once limited the money supply and thusly seemed to limit the supply of vendible goods. Gold has been replaced by unlimited fiat money. Now it seems that unlimited aggregate demand can be funded by unlimited fiat money, leading to a world of plenty. Designer of the Bretton Woods Agreement Lord Keynes says so in this very insightful short video.

Fiat Money Turns the World Upside Down

The psychological impact of a lifetime within a fiat money economy cannot be overestimated. One's world is turned upside down.  For many of the young financial success becomes prima facie evidence of exploitation of the masses rather than something to be admired and to which one could aspire also. Rather than integrate oneself into the capitalist, market economy, one is better served by integrating oneself into any number of politically oriented pressure groups. Rather than helping others achieve their dreams, thereby helping oneself achieve one's own dreams, young people are more intent on thwarting others' dreams. The envious young attribute the success of others to crass money grubbing or outright theft. Such a view may palliate their own relative lack of success. But success of life is a relative term and riches are not guaranteed. However, with proper foresight, hard work, and plain old fashioned civility one can go a long way toward fulfilling one's dreams.  Contrast these eternal virtues with Extinction Rebellion's tactics of tying up foot, car, and rail traffic in London recently. In a capitalist, market economy one attempts to provide benefits to others, not hindrances to everyday life.

 Other state interventions contribute to the lack of civility, such as higher minimum wage laws that prevent the young from getting that first, even though low paying, job. A job...any job...teaches us so much about work place expectations other than performing the stated tasks--showing up on time, dressing properly, being pleasant to customers and fellow employees, willingness to assist in tasks, especially unpleasant ones, that may not be one's own, etc. But little can match fiat money for undermining the very fabric of the social order. With more money seemingly available at the click of a computer button, only an Ebenezer Scrooge would deny funding the latest demand. But that is the very reason that fiat money is so subversive to the social order. In a sound money economy any new spending program can be funded only by an increase in taxes, an increase in debt, or by cutting existing funding. There is a real cost to each of these options. There is a real cost to printing money, too, but the cost is hidden. One does not see malinvestment at the time of money printing. Price increases are delayed and uneven, due to the Cantillon Effect whereby the early receivers of new money are able to purchase goods and services at existing prices. Later receivers or those who do not receive the new money at all suffer higher prices and a reduction in their standard of living. Even then most people do not link higher retail prices with a previous expansion of the money supply.

It would be hard to invent a more effective method for the destruction of modern society. As Pogo would say, "We have met the enemy and he is us."

Saturday, September 28, 2019

My letter to the NY Times re: Why Not Allow School Choice Regardless of Outcomes?


Dear Sirs:
In his excellent review of Robert Pondiscio's How the Other Half Learns: Equality, Excellence, and the Battle Over School Choice Dale Russakoff seems to assume that parents should be allowed to send their children to a charter school only if that school performs better than the public school. The author, Mr. Pondiscio, had immersed himself for a year in Success Academy, a charter school in New York City whose students consistently outperformed public school students in standardized tests. Mr. Pondiscio found that it was the parents who really made the difference. Success Academy vetted parents who would work with their children and ensure that homework got done, etc. This is hardly surprising. Nevertheless, the implication seems to be that we really don't need charter schools, because the children of such responsible parents would do just as well anywhere. But why must a charter school prove that it is superior? Why can't parents simply be allowed to choose their children's schools, even if the children attending alternate schools perform less well on standardized tests? Despite the fact that parents may choose a school for reasons other than high student performance on test scores--proximity to home, friends of the children attending there, better nonacademic environment, better sports opportunities, etc.--no one seems to consider the freedom and choice of parents and their children. In other words, it's really none of society's business where or why parents send their children to the school of their choice.

Tuesday, September 17, 2019

Is There an Economic Justification for Tariffs?


A tariff is a tax on imports that is used to satisfy a policy goal. Before the federal income tax became law in 1913, the US federal government was funded almost entirely by tariffs and excise taxes. An excise tax is a tax on a good that is produced in the US. The best example of a current excise tax is the federal tax on gasoline. The most infamous excise tax was the tax on whiskey in the early days of the republic that resulted in the Whiskey Rebellion, centered in western Pennsylvania. The tax on whiskey was so unpopular that even George Washington couldn't enforce it. The tax was rescinded very quickly and the federal government collected zero revenue.

As a source of federal income, tariffs are a cipher compared to the federal income tax. Today tariffs are used as policy tools. There are two competing schools of economic thought, and tariffs are justified under one of these schools of thought and not the other.

Macroeconomics

John Maynard Keynes (1883-1946)is considered the father of macroeconomics, the school of thought under which tariffs are just another government policy tool. His most influential book was The General Theory of Employment, Interest and Money, published in 1936 at the height of the Great Depression. Keynes called for massive government intervention into the economy, guided by his main conclusion that the world suffered from a "lack of aggregate demand" that would be cured only by government spending. The explosion of war production in the Second World War seemed to validate Keynes' ideas. During the war the entire world went off the gold standard. All governments printed money, unbacked by gold, and all governments took direct control of their respective economies. The general consensus by the public was that if government can direct a vast expansion of war goods, it should be able to direct a vast expansion of consumer goods in peacetime. Unemployment could be eliminated as all manner of capital and consumer goods would flow from the nations' factories just as had tanks, warplanes, and all other war goods. Furthermore, there was no need to fear deficit spending. In fact it was incumbent upon government to deficit spend whenever the economy seemed to be slowing down.

It is not hard to see why Keynes' main thesis was seized upon by politicians and their like-minded economists. Over the years government direction of economic affairs has become so engrained in all major economies that we don't even realize that there might be a legitimate and superior alternative. We'll never know whether Keynes himself would have endorsed all that now is called macroeconomics, because he died shortly after the end of the war.

Macroeconomics has certain characteristics. It relies upon statistics to measure whether and to what extent interventions are needed and whether, once initiated, they are achieving government policy. This assumes that economists fully understand which lever to pull on the great economic machine, for macroeconomists view the economy as a machine. Macroeconomists have coined a name for their machine-like model: econometrics. When an economy appears to fall short of econometric expectations, it is merely a matter of adding a little monetary oil here or requiring that businesses comply with some new regulation there and, bingo!, the economy is humming along again! How do we know? Because the statistics that government attempts to move are going in the proper direction!

Some typical tariff policy goals are helping producers (think... steel and/or automobile companies), helping labor (think... lumberjacks), or achieving a favorable balance of payments (think...China buys as much or more from the US as the US buys from China).

Methodological Individualism

But there is another school of economic thought in which tariffs have no role. This school of thought is at least several hundred years old rather than a mere three quarters of a century old as is macroeconomics. This school of thought is the antithesis of macroeconomics. Its technical name is methodological individualism, but for our purposes we'll just call it microeconomics. This school of thought emphasizes that the goal of all economic life is satisfaction of the individual, not some large group, and especially not producers. Furthermore, unlike macroeconomics, statistics play no role, since it is impossible to quantify an individual's satisfaction. Satisfaction is subjective, not objective.

There is no single founder of methodological individualism, but Immanuel Kant (1724-1804) provided two wonderful maxims upon which microeconomics stands: the categorical imperative and the humanity formula. The former maxim states that for something to be ethically valid it must be binding always and everywhere regardless of one's inclination. An example of a violation of the categorical imperative is the government's claim that its central bank's money printing powers are justified as good for the economy. If that were so, then you and I should be allowed to print money! But, alas, counterfeiting is a crime, unless committed by the government's central bank. The humanity formula states that man is an end and can never be used as a means to an end. The most egregious violation of this maxim is slavery, where it is obvious that some men are used as means to satisfy other men's ends. But there are many such violations all around us. For example, tariffs on foreign steel benefit some men--US steel companies and their employees--at the expense of everyone else.

The Law of Comparative Advantage

Methodological individualism exposes other macroeconomic fallacies. I'll discuss just a few. David Ricardo (1772-1823) explained that trade is founded on the Law of Comparative Advantage; i.e., that trade expands the specialization of labor to minimize one's opportunity costs. For example, it makes no sense for basketball star Michael Jordan to skip a few games in order to paint his living room. His opportunity cost would be very high; i.e., he would forgo the opportunity to earn vastly more money by playing basketball than by saving the cost of paying someone to paint his living room. The law of comparative advantage extends infinitely, from the individual to the family to the neighborhood, etc. to cover the entire world. Political boundaries are irrelevant.

Say's Law

Macroeconomics' invention of "lack of aggregate demand" attempts to deny the validity of Say's Law or the Law of Markets. Jean Baptiste Say (1767-1832) most clearly explained that supply must precede consumption. In other words, inherent in supply is the wherewithal for consumption. Think of an Iowa farmer who gazes over his vast corn crop. The farmer sees the wherewithal for satisfying all his many needs. He will exchange his corn crop for a widely accepted medium of indirect exchange, money, in order to purchase all the necessities of life. If his crop failed, he would face dire straits. Printing money and giving it to him, as advocated by macroeconomists, merely debases the medium of exchange and causes higher prices for the rest of society, a violation of Kant's humanity formula.

The Unseen

Frederic Bastiat (1801-1850) pointed out what should be obvious to all; i.e., that state directing of resources may indeed cause certain "seen" statistics to go in the desired direction, but these same resources could have been directed to any number of more highly desired ends. These ends may be less than they would have been absent the state direction of resources. Furthermore, there may be ends that never were realized at all. In other words, if we are forced to pay more for something simply because it is "made in America", we will have less money for satisfying other desires. Bastiat's famous essay "That Which Is Seen, and That Which Is Not Seen" was a devastating attack upon Mercantilist direction of the French economy.

Conclusion

Tariffs cannot be justified by methodological individualism. They are a political policy tool within macroeconomics. The net adverse consequences of tariffs are understood by those economists who think of tariffs' logical results of over longer time frames and over the entire economy rather than the short term impact on cherry-picked statistics to favor politically connected pressure groups. It is the difference between freedom and tyranny.

Tuesday, July 2, 2019

Wrong Approach to a "No Deal Brexit"

From today's Open Europe news summary:

Chancellor: No Deal Brexit would eliminate Treasury’s fiscal reserves

The Chancellor of the Exchequer, Philip Hammond, warned yesterday, “The ‘fiscal firepower’ we have built up in case of a No Deal Brexit will only be available if we leave with an orderly transition. If not, it will all be needed to plug a hole a No Deal Brexit will make in the public finances.” This comes after both Conservative Party leadership contenders, Jeremy Hunt and Boris Johnson, promised in the last few days to use some of the £26.6bn allocated for a No Deal Brexit in the last budget for additional public spending.
Open Europe’s Henry Newman told BBC Radio London yesterday, “The Chancellor has kept a fiscal headroom… in the event of No Deal, but it will be up to the next Chancellor to decide how they balance the books. In a No Deal scenario, it will always be open to the Government to fund emergency spending through borrowing.”
Source: Guardian
It seems that governments everywhere just cannot rid themselves of the fallacy that increased government spending is the panacea to all political problems. Rather than increase spending in the case of a No Deal Brexit, the UK should slash government spending, scrap counterproductive regulations on business, and adopt unilateral free trade. In other words, GET GOVERNMENT OUT OF THE WAY. Then British business can adopt quickly to the new economic reality. The cost of living will fall, benefiting every British citizen. Such a policy would send a powerful and hopeful message to EU skeptics in the rest of Europe and hasten the EU's demise. The EU is nothing more than a backdoor method to turn all of Europe into a socialist command economy.

Thursday, June 13, 2019

The Necessary and Inevitable Recession to Come




Perhaps the most destructive premise of modern, mainstream economics is that a central bank-induced monetary/credit expansion can cause an economy to grow without adverse consequences. Let's be perfectly clear from the start...this policy has been tried by many central banks many times and all such attempts have led to economic disaster. The latest victims are the poor citizens of Venezuela, a once prosperous nation. Furthermore, we Austrian economists have sound economic science to explain why it must be so, despite the fervently held wishes of mainstream economists, politicians, and the public at large.

Born of Depression Era Keynesian economic theory which elevated "aggregate demand" as the driving force of an economy, central banks have constructed a fallacious model of how an economy works. Repeated failures of this model have served only to embolden them to double down and double down again and again, driving interest rates in some countries below zero in order to force the world to conform to their religiously-held theory. The simplest explanation of this theory is that counterfeiting money will cause people to spend and it is a dearth of spending that holds back prosperity. If people won't spend enough themselves, then it is incumbent upon government to do it for them by paying people the equivalence of digging holes in the ground and filling them back up. No, I am not making this up. Keynes himself said it! (Book 3, Chapter 10, Section 6 pg.129 "The General Theory..")

The theory of lack of aggregate demand fails to recognize two essential facets of how an economy really works. The first is that production MUST precede consumption. In other words, we cannot consume what we have not first produced, and one's production constitutes one's demand either through direct or indirect exchange. This is the essence of Say's Law, which Keynes unsuccessfully attempted to refute in developing his theory of an economy driven not by production but by aggregate demand. The second is that the structure of production is determined by time preference. Sounds complicated, doesn't it? Well, it is simplicity itself. The structure of production is merely all the intermediate steps that constitute production. There are fewer steps taking  less overall time in an economy with a high time preference, meaning that people wish to spend most of their production borne income in the short term. Likewise there are more steps taking more overall time in an economy with a low time preference, meaning that people wish to save more of their current income in order to have more in the future.

 A simple example is that one must plant seeds in order to grow vegetables for current consumption. (Please keep in mind that what I describe is applicable for all types and levels of production.)The steps in this process are the saving of seed from previous crops, the tilling of the soil, the planting of the seeds, the watering and perhaps fertilizing of the seeds, the spraying or covering of the young plants from the predations of birds, insects, and bacteria. You get the idea. The "structure" is the steps and the amount of production that is involved in each step. In a high time preference economy in which people wish to consume almost all of their crop production, saving more seed is a waste of resources. Likewise, producing more fertilizer than is necessary for the size of the crop is also a waste of resources. Time preference is the underlying guide. However, if people are more future oriented, they will save more from current production in order to plant more crops; they will clear and till more land with the extra seeds; they will buy more fertilizer, etc. The increase in crop yields spurs a new level of production in the preservation of excess production for future consumption. The refraining from current consumption--i.e., savings--is what funds this increase in the new level of production. The preservation process takes more time, but in the end there is more to consume in the future, especially in cases of future crop failure. Think of the children's story of the ant and the grasshopper.

Keynes thought that an economy could bypass the savings process and substitute an increase in the medium of exchange for real savings. The obvious flaw in this argument is that counterfeit money is not a substitute for saving real, fungible production. Counterfeit money is simply a watered down medium of exchange. Think of the old adage of watering down the soup when uninvited guests show up for dinner. The cook can serve more bowls of soup, but the nutritional value per bowl is less.

But monetary/credit expansion does more than just reduce the value of each monetary unit. Because the counterfeit money appears no different than existing money, entrepreneurs are fooled into believing that something real has been set aside and that people have chosen a lower time preference. With a lower interest rate level their plans for expansion appear to be achievable. Canning and/or freeze-drying facilities, for example, are constructed over a longer period of time in anticipation of an increase in sales of vegetables that may be consumed much later. Eventually the entrepreneurs realize that no such longer-term demand really exists. They have wasted time and capital, neither of which may be recovered. The workers who left jobs in businesses that served the higher time preference economy for higher paying jobs in the vegetable preservation plants must find new work. This takes time, and the ranks of the unemployed grow until the economy has once again achieved a structure of production more in tune with the people's higher time preference. Businesses lose money; the owners may even go bankrupt. Stock prices collapse. Banks may fail. Such a transition is called the recession. It is inevitable and unavoidable.

Yet it is highly likely--in fact it is almost a certainty--that central banks will fight the latest economic slowdown with the same old money printing and lowering of the interest rate. This was the conclusion drawn by Thorsten Polleit in his latest essay, published on Mises Wire: The Fed Has No Choice But to Return to Ultra-Low Interest Rates. The Keynesians at the Fed are baffled that the world won't conform to their religiously held theory of aggregate demand. Their theory is a straightjacket from which they cannot escape intellectually. Unfortunately we all will pay the price.

Monday, June 3, 2019

My letter to the WSJ re: Fed Policy Is Based on Fallacious Economic Science


Dear Sirs:
I am speechless about the inanity of the Fed's policy of actually desiring to destroy the purchasing power of the dollar. This mind boggling view of the world is based on the fallacious Keynesian theory of aggregate demand that emerged during the world wide depression of the 1930's. It is nothing more than claiming that counterfeiting money and showering it on politically connected groups will spur economy prosperity. Has anyone at the Fed looked at Zimbabwe, Venezuela, or (the poster child of all government money printing) Germany's Weimar Republic that so destroyed German civil society that the people turned to Hitler in desperation?

Monday, May 13, 2019

My letter to the WSJ re: Inflation is NOT rising prices


Dear Sirs:
What the WSJ and every mainstream economist in the nation refers to as "inflation" is merely an increase in prices. The only true inflation is inflation of the money supply. The Fed has absolute control over the monetary base; i.e., cash--wherever held, such as banks, or our wallets and cookie jars--plus bank reserve balance, which can be converted to cash. In our fractional reserve banking system the money supply is influenced more by bank lending, which creates money out of thin air. The Fed has much less control over this part of the money supply. At present, the banking system is awash in excess reserves; therefore, the banks, theoretically, could increase the money supply by vast amounts and the Fed could do very little about it. We Austrian school economists regard fractional banking as fraudulent and should be made illegal. Banking should be divided into two parts, deposit banking--with one hundred percent reserve backing--and loan banking, much like today's merchant banking. In such as system, assuming that the Fed either was not allowed to manipulate reserves or the Fed was scrapped and the nation returned to a gold standard, there would be no inflation and no credit/business cycle. We would have sound money and sound banking. There would be no need for the Fed, the FDIC, or any banking regulation. Banking would be subject to normal commercial law.