Wednesday, November 28, 2018

My letter to the NY Times re: How to Eliminate Scandals Over Subsidies


Dear Sirs:
I have a sure fire way not only to minimize but completely eliminate scandals over government subsidies. Eliminate the subsidies!

You are welcome,

Patrick Barron

Monday, November 12, 2018

A friend asks why there have been no more Paul Volckers at the Fed

Dear XXXX,
You ask, where is a Volcker-like Fed chairman today? The answer is that no president would appoint one and no government really wants one! Governments want easy money and will appoint only a Fed chairman who will succumb to money printing. Frankly, I believe that it is impossible to make a fiat currency sound. Here's why:

  1. As I stated above, no government really wants sound money, because governments are the main beneficiary of easy money.
  2. No one who works in the Federal Reserve System, as did Paul Volcker for many, many years before becoming chairman, is a true proponent of sound money. If Volcker were honest and really wanted sound money, he would not work for the Fed. Volcker was president of the NY Fed. He knew how the system worked and would have quit if he truly didn't believe in it. In other words, anyone who works for the Fed is an inflationist. It's only a matter of degree. Volcker did print money, only he didn't print as much as either his predecessors or his successors.
  3. The political pressure to inflate is irresistible. No one can ignore it. Even if you or I were appointed Fed chairman, we would inflate. If we did not, we would be removed for some reason.
  4. If we really wanted sound money, we would abolish the Fed and force banks to abide by normal commercial law, which would require them to back their deposits with a commodity. Once an organization is given the power to inflate the currency, inflation is exactly what will happen. In other words, "A person or entity that CAN print money WILL print money." So don't give any person or entity the power to print money! It would require an act of Congress to eliminate the Fed anyway, which is not likely to happen.
  5. You ask why Paul Volcker didn't peg the dollar to gold at some higher level. The answer is that he had no power to do so, even if he wanted to do that. Furthermore, Volcker was not chairman in 1971, when Nixon took the US off the gold exchange standard. This act by Nixon just proves that the real power over the currency is political.
  6. My conclusion is that only political action can restore the dollar, not administrative action. In other words, the American people must want sound money. Barring a complete collapse of the dollar, as happened to the French assignat, this is not likely to happen.

Sunday, November 11, 2018

My letter to the NY Times: No Nation Can Harm Another Through Trade




There is nothing that another nation can do to harm another through trade. If a nation foolishly chooses to manipulate its currency to spur exports, it gifts goods to its trading partners. If it restricts imports to spur domestic industries, it harms its own citizens while leaving potential trading partners in the same position as before, which is NOT a definition of harm. The only policies that our government need adopt are unilateral free trade externally and laissez faire economics internally. Our motto should be "We will mind our own business and set a good example to others."

Friday, November 9, 2018

EU to the UK: We will not allow you to sell our citizens superior goods at bargain prices

From today's Open Europe news summary:
 
Ireland demands level playing field in any Brexit deal
Speaking at a meeting of the European People’s Party (EPP) in Helsinki yesterday, the Irish Taoiseach, Leo Varadkar, said that Ireland wants the future relationship between the EU and UK “to be as close as possible” but added that it “must provide a level playing field and the integrity of our single market must be upheld.”
Elsewhere, Reuters reports that the European Commission also stresses the importance of such a commitment, quoting one EU official explaining that “It is important that Britain would not undercut our own products on our own market in the all-UK Irish backstop.”
Meanwhile, Cabinet Brexiteers have reportedly warned Prime Minister Theresa May that obligations on a level playing field “would mean a single market through the backdoor.”
 
Here you have the EU position in a nutshell. The EU is to be a closed trading bloc in which its citizens will be forced to buy shoddy, overprices goods produced within the bloc. Why the rest of the sovereign nations of the EU have remained in this blatantly inhumane association for so long is mystifying, except that continental Europeans have experienced many centuries of governmental dictatorships under many forms rather than the Anglo-Saxon tradition of the common law and government being responsible to the people.

Wednesday, October 31, 2018

My letter to the NY Times re: Trump's Fracking Boom


Re: Trump fracking boom imperils landscape of the American West

Dear Sirs:
Thanks for the very informative and uplifting report of the success of increased drilling on federal lands. Frankly, I doubt that my conclusion is the one that you expected, but there is no hiding the fact that under President Trump the US is becoming a world energy powerhouse. Try as best they could, your reporters could not disguise the vast economic benefits to all parties from opening these sparsely populated lands to normal economic development. Sure, they tried to generate concern over the sage grouse population decline (thirty percent in the last two years), but they never connected the cause and effect dots between that decline and opening these areas to oil and gas development, perhaps because there is no connection. Even if there is a connection, surely the vast human benefits, well documented by your reporters, should ameliorate that concern to some extent. The only other attempt to generate the reader's outrage fell flat; i.e., that some of the drilling was "just east" of the Big Horn National Forest and "next to" Hovenweep National Monument. There will always be something that is "just east" or "next to" some already protected area. Of course, water is always a big issue in the West, but your reporters found no broad based concern by local landowners. Some were concerned and others were not. Let the locals figure it out.

Saturday, September 22, 2018

A Simple Example to Understand Seemingly Complex Economic Principles


Simple examples can be used to explain what seem at first glance to be complex economic principles. I'll use a hypothetical yet commonplace experience to explain how money may be used for only one of three purposes--it can be held/hoarded, saved/invested, or spent. Furthermore, my example will show that foregoing consumption--i.e., either holding or investing--is necessary for non-inflationary lending and that credit decisions must always be made by the entity taking the risk and especially not government. Here's the scenario:

Let's assume that my colleague and I go to McDonalds for lunch. When my colleague reaches for his wallet to pay for his five dollar Happy Meal, he finds that he left his wallet on his desk. I lend him the money and we have an enjoyable lunch. When we return to work, he repays the debt.

What economic lessons that can be learned from this simple story?

1. Expanding the money supply is NOT required in order to increase lending.

When I gave my colleague five dollars, total loans in the economy expanded yet the money supply remained unchanged. Upon returning to work, my colleague retrieved his wallet off his desk and repaid his loan. At that point loans in the economy fell by five dollars yet the money supply remained unchanged. Therefore it is a fallacy that expanding the money supply is necessary in order to increase lending.

2. A prior act of foregoing consumption IS required to expand loans.

Let's expand somewhat on our previous example. Where did I get the five dollars that I lent to my colleague? I had to have foregone previous consumption in order to have this amount available to lend to my colleague. Fortunately for my colleague I did not consume all that I could have.

3. The holder or hoarder of money does not harm the economy.

The act of carrying that extra five dollars in my wallet can be characterized as holding or hoarding. Hoarding is not the same as investing. Had I invested my money I would not have had the additional five dollars in my wallet. Instead the five dollars would have gone into some production process that would yield increased benefits later in time. Instead I desired the flexibility to spend the money for some unforeseen purpose. Lucky for my colleague that I didn't spend it on some frivolity or invest it in longer term production. Instead I hoarded five dollars and was able to lend it to him in order to purchase his lunch. Although the term hoarding is often used disparagingly, one can see that it serves a useful, economic and social purpose.

4. Money cannot be used at the same time for more than one of three purposes.

I had a choice of what to do with my unspent (unconsumed) five dollars. I could have carried it in my wallet, an act of holding or hoarding in order to take advantage of unforeseen circumstances. Or I could have invested in production, such as lend it to my son to buy gasoline for his summer lawn mowing business. Or I could have spent it on consumption, perhaps upgrading from a five dollar Happy Meal to a Big Mac, super sized fries, and a milk shake. Of course had I invested it or spent it, I would not have had money to lend to my colleague for lunch. The important point is that I could not do both hoard the money and invest it and/or spent it. Furthermore, we can see that there is no room in our simple example for a "multiplier effect" that emanates from the lending process, as is claimed by those who defend fractional reserve banking. I could lend the money only once.

5. The lender of money assumes the risk of non-repayment.

There was little possibility that my colleague would not repay his loan to me. However, I doubt that I would have lent my five dollars to just anyone who happened to be in McDonalds at the same time as we were. Let's assume that the person on front of me had been a stranger and not my colleague. I probably would not have lent him the money, despite the probability that he was a good credit risk. The important point is that I would not have known him.  "Know your borrower" is rule number one in banking. The age old truism is still valid that good character is the best trait in a borrower. I would have known the character of my colleague but not that of a total stranger.

Yet much borrowing (and resultant defalcations) on loans today are made by giant firms based upon numerical credit scores. The lender never meets his borrower. The loan production offices that generate the loans applications do not know their applicants. Many of these loans are then sold to a government owned entity, such as Fannie Mae or Freddie Mac.

Furthermore, lending also has become a tinder box of political risk. For example, the infamous Community Reinvestment Act requires banks to make loans that do not meet their lending criteria. If the borrower and his property reside in an arbitrarily and ill-defined underserved area, the bank must lower its credit standards. The result is higher loan losses. We would not desire a government mandate that I be allowed to loan my colleague five dollars to pay for his lunch at McDonalds only if I also lend five dollars to complete strangers.

 We must look askance also at outright loans by government or government loan guarantees to politically connected borrowers. We taxpayers are the true holders of the loan and will suffer if the loan is not repaid. The Export-Import Bank is a prime example. We taxpayers are on the hook for non-payment of government loans to foreigners so that they can buy the products of politically connected groups. It's simple corruption disguised as a legitimate banking function. It would be absurd for the government to design a program to lend money only to people who desired to buy lunch at McDonalds in order to help the world's largest fast food chain maintain its sales in a highly competitive environment. It is no different just because the program helps foreigners buy American products. In both cases the real lender is the American taxpayer.

Conclusion

Simple examples from everyday life help us clarify our thinking about what at first appear to be highly complex economic problems.

Tuesday, August 14, 2018

My letter to the NY Times re: Typical Keynesian Whitewash


Dear Sirs:
Fareed Zakaria's review of the Adam Tooze book Crashed: How a Decade of Financial Crises Changed the World is a typical Keynesian whitewash of a deeply flawed monetary and regulatory system. Like Tooze, Zakaria sees the Federal Reserve Bank as the hero in "saving the financial system" that was going into free fall in 2008. But why was it going into free fall, and was the Fed's massive, multi-trillion dollar bailout really the answer? To agree with Tooze and Zakaria is to condone monetary counterfeiting pre-2008 and even more monetary counterfeiting thereafter. One of the prime purposes of sound, as opposed to fiat, money is to allocate scarce resources. The Keynesians do not admit that resources are scarce. They equate the medium of exchange, in this case fiat dollars, with real capital. Yes, fiat dollars can be increased to unlimited amounts at the click of a Federal Reserve Bank computer, but real resources and real capital must be accumulated by hard-working people. Zakaria and Tooze--and the rest of the Keynesian dominated Main Stream Media like the New York Times--fail spectacularly to understand the distinction.