Thursday, October 8, 2015

My letter to the WSJ re: Why is the Fed worried that inflation is too low?

Re: Fed's Rate Delay Spurred by Worry Over Low Inflation, Minutes Show

Dear Sirs:
Can anyone please explain why the Fed is worried that inflation is too LOW? Did no one at the Fed live through the high inflation years of the 1970's, which were caused by excessive money printing in the 1960's to fund LBJ's guns and butter policies? Inflation is the silent thief of the people's wealth. In a just world the Fed's very words would condemn it to charges of failure to safeguard the currency of the nation at the expense of the people.

Wednesday, October 7, 2015

My letter to the NY Times re: My advice to the ECB and the Fed

Re: Skepticism Prevails on Preventing Crisis

Dear Sirs:
Mr. Binyamin Appelbaum's report of the Fed's conference in Boston over the weekend perfectly illustrates our central bankers' incompetence. They wring their hands over what they do not know and beg the public to forgive them when the next financial crisis strikes, which surely it must. If the Fed wishes to prevent financial crises, it only needs to stop initiating them. The Fed's hubris that it can fathom the proper interest rate for our vast and complex economy must rank among the greatest fallacies of all time. The Fed sees the world through the completely discredited Keynesian lens which posits that aggregate demand--what the rest of us know simply as spending--is the path to prosperity. Anyone who believes this nonsense need ask himself why he has not liquidated his own savings on frivolous consumption and why the citizens of countries like Zimbabwe, Venezuela, and others are not as rich as Midas. Please allow me to answer Mr. Luc Laeven's question, posed to the conference attendees, to wit, "Do we have other policies?" Yes, Mr. Laeven, I do. Liquidate your central bank (the European Central Bank) and recommend similar action by the Fed. Scrap legal tender laws that prevent the market from choosing the best medium of indirect exchange. Outlaw fractional reserve banking as the fraud that it is. Subject banks to the same commercial code as all other businesses. There--problem solved! Now send everyone at the conference home to look for a real job.

Strict defense of private property solves the economic fact of resource scarcity

Scarcity of resources exists in many forms and is THE problem in economics. If resources were not scarce, there would be no need to economize. The existence of scarcity is true of all resources (time, human energy, natural resources, etc.) It is not intuitive that allowing scarce resources to be owned privately is the solution to this problem. Socialists would like to ignore this reality of scarcity and have all resources owned collectively for the common good. By contrast, we Austrians know that private property solves the economic fact and economic problem of scarcity, as I will now discuss.

A society which spurns private property and throws all resources open to those who wish to take them will quickly learn the terrible lesson of the tragedy of the commons; i.e., that commonly held resources will be plundered to extinction.

If society spurns allowing private ownership of resources, it must find some other means to prevent the tragedy of the commons, and historically the means chosen is the use of force. Throughout history most of mankind has been divided into a hierarchical system of masters and slaves with some graduations between the two extremes, such as priestly or aristocratic classes. The masters (pharaohs, emperors, kings, sultans, warlords, etc.) devised complex rules-based systems for resource distribution that ultimately depended upon pure terror for enforcement.

But this so-called solution to the problem of scarcity--restricting the people's liberty through the use of force--does not work. The gradual understanding of modern economics eventually ended thousands of years of subsistence existence for the masses in the West. Modern economics explained that without private ownership of resources, a man could not hold an ordinal preference. The term ordinal , of course, means that something is prioritize from highest to lowest. Without ordinal preferences, there is no rational means to economize for the betterment of society. In other words, the masters never really knew what to order the slaves to produce, what technical means to use, what alternative materials to use, the quality desired, or how much to produce. Thus, the Commissars of the Soviet Union ordered the production of inefficiently produced, shoddy goods. The Soviet empire collapsed, despite the fact that Russia is blessed with vast resources and an industrious population .

A second fatal problem with common ownership of all resources is that few such readily available, consumable resources actually exist. There are no resources on the planet that do not require at least a minimum of effort to transform into a consumable product. Even edible berries growing in the wild must be harvested, meaning that someone must transport himself to the berries' location and pull them from the bush at just the proper time. The cost of doing so is the value one places on forfeiting his leisure. Of course, other natural resources require much more effort to convert to consumable products, passing through uncountable stages of production. For example, timber and minerals must be extracted, harvested, etc. and then molded into something that can be consumed. Consider a hiker lost in the wild. It matters not at all to him that great stands of timber lie within easy reach or that valuable minerals lie under foot. These natural resources require great effort over very long time periods to be converted into something consumable, such as a shelter or gasoline. A lost hiker does not have the knowledge, time, or previously produced means to convert these basic resources into consumable products to ensure his survival. All this is far beyond anyone's autarkic abilities.

Now let us assume that someone did harvest trees by felling them, transporting them to a lumber mill, milling them, storing them in a ventilated and dry place for many months before kiln-drying them (all processes that are required to turn trees into useable lumber), advertising their availability to contractors, keeping sales records, sending out bills, collecting the bills, etc. only to have a socialist call him a plunderer and confiscate his lumber for free distribution to whomever the masters deemed to be politically advantageous to their continued privileged position. No one would ever harvest another tree. In other words, production of usable lumber would cease despite the fact that trees were readily available.

Now let us consider what would happen if the commissars did order slaves to harvest the trees. Great forests would be denuded in short order, because there would be no social mechanism to prevent what would amount to a tragedy of the commons by order of the state.

Proper harvesting of timber requires that its value be capitalized

Capitalization of timber requires that it be privately owned in order that its worth can take its proper place in the ordinal hierarchy of preferences. The consequences of ignoring this fact of economic science is most evident today in China's ghost cities, where resources, both natural and human, have been expended for no  observable benefit except to advance the careers of politicians who can claim to have met the requirements of the latest Five Year Plan.

The opposite case of resource waste comes from special interest groups who capture the political (police) apparatus of the state and prohibit exploitation of resources by private individuals. In the name of protecting  Mother Gaia from being plundered, modern environmentalists have convinced the political class that most progress is unsustainable, dangerous to our health, or any number of other specious claims. Society is prevented from benefiting from their conversion to consumable products. Private ownership insures that resources will never be plundered to extinction, because their value will have been capitalized. The process of determining a resource's capitalized value is impossible absent free market capitalism with strict defenses of property rights.

Despite both the theoretical and empirical evidence to the contrary, socialists tell us the opposite; i.e., that state ownership of all resources will prevent their plunder and ensure prosperity for all. As Ludwig von Mises explained, socialism is not an alternative economic system of production. It is a system of consumption only, and a system of economic ignorance and economic plunder.

Friday, September 25, 2015

Three questions for Andrew Haldane, chief economist for the Bank of England

Re: From ZIRP TO NIRP by Alasdair Macleod

1. What exactly is wrong with price deflation?

2. In a world of increasing productivity, are not lower prices inevitable?

3. Are not lower prices beneficial, in that all society enjoys an increasing standard of living on the same money income?

Monday, September 21, 2015

The problem with the "real bills" doctrine

Re: Free banking vs.the real bills doctrine

I wrote the letter below to Don Boudreaux of Cafe Hayek. Under the real bills doctrine, banks would be allowed to create demand deposits backed by promissory notes and not reserves. Those who adhere to this doctrine, such as Mr. White, author of the above essay, believe that money backed by "real bills" is superior to money backed only fractionally by reserves. I make the point that both fractional reserve banking and real bills adherents are advocates of the same fraud: i.e., that bankers' demand deposits are NOT backed by reserves but by debt that may or may not be collectible. PB

Dear Don,
What free banking advocates such as Mr. White are really saying is that a free banker operating under the real-bills doctrine must be careful not to perpetrate too much fraud and catch the attention of the public, who will make a run upon his bank. The point is not what the banker wants but what the recipient of the banker's supposedly demand note believes that he has. A banker's demand note promises the holder that it may be exchanged for real reserves that constitute a final claim upon money; i.e., gold, silver, or even Federal Reserve Notes. This is my main problem with those who claim that they would not be alarmed if their banker engaged modestly in fractional reserve banking. The account holder is passing a check to someone who has no way of knowing that he is receiving a check that is backed only fractionally by reserves. In other words, he is the victim of fraud. Under Rothbard's two bank system--the Deposit Bank and the Loan Bank--only the Loan banker would purchase commercial credits, because there is the possibility that the commercial credit may fail.


Patrick Barron

Sunday, September 6, 2015

My letter to the Philadelphia Inquirer re: the crude oil export ban

Dear Sirs:
The answer to your headline question on the front of Sunday's business section is self-evident. The crude oil export ban cannot be justified on any economic or moral basis. It is an economic myth that there can be rational economic calculation under socialism and that private property may be violated to achieve a more important common good. First the economic calculation myth. Over one hundred years ago in Economic Calculation in the Socialist Commonwealth, Ludwig von Mises proved that private property is required for rational economic decision-making. Only owners of private property can hold rational preferences of how best to manage resources. One hardly needs to point out that appointed bureaucrats and elected officials are NOT owners of the property that they presumptuously deign to control for some more altruist purpose. Without true preferences derived from ownership, the titular managers of resources would  not know what to produce, how much to produce, what quality to produce, or what factors to use in the production process. As for the moral basis, in section 27 of his Second Treatise of Civil Government, John Locke explained that property accrues legally to "he who hath mixed his labor with, and joined to it something that is his own, and therefore makes it his property." Austrian economists have labelled this the homesteading principle. Thereafter homesteaded property may be transferred only via social cooperation under the free market. All else is theft.

The owners, workers, and paid lobbyists of those American refineries who wish to maintain the crude oil export ban seek to employ the police power of the state to prevent consumers from improving their standard of living by purchasing similar goods from foreigners at lower prices. The weakness and vapidity of their argument is evident in their admission that American oil can be transported to foreign refineries, repatriated in the form of refined products, and still sold at lower prices on the US  market. Why must Americans be held hostage to inefficient, high cost domestic producers?

Thursday, September 3, 2015

My letter to the NY Times re: New icebreakers to the Arctic for what purpose?

Re: Obama Calls for More Coast Guard Icebreakers to Gain Foothold in Arctic

Dear Sirs:
President Obama's call for Congress to fund new icebreakers for the Arctic is troubling. Whereas, most nations of the world see the receding icecap as an opportunity to gain cheaper access to previously inaccessible natural resources and/or a shorter path to markets, President Obama worries about endangering the environment. In other words, most of nations want to build a better world for mankind, whereas President Obama wants to prevent anyone from doing so. A true statesman would see that the real threat to the Arctic comes from the lack of an international agreement over who may claim what resources. The Austrian economists have long had the answer. Property rights attach to those who "mix their labor" with the previously unused resource. It does not matter to the people of the world whether an American, a Russian, or an international consortium obtains title to resources that they secure as long as these resources are brought to market.