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.

Tuesday, April 2, 2019

The Fed as Counterfeiter

Counterfeiting Money Is a Crime, Whether by the Fed or a Private Individual

A few years ago, shortly after the 2008 subprime lending disaster, the Fed sent a public relations team around the country to conduct supposedly "educational sessions" about how the Fed works and the wonderful things it does. The public was invited, and there was a question and answer session at the end of the presentation. One such session was held in Des Moines, Iowa. At the time I was teaching a course in Austrian economics at the University of Iowa, so I lusted at the prospect of hearing complete nonsense and having a shot at asking a question. I was not disappointed.

The educational part of the session lasted about an hour, and it became clear to me that the panel of four knew almost nothing about monetary theory. They may even have been hired especially for this grand tour, because all were relatively young, well scrubbed, and very personable--let's face it, not your typical Fed monetary policy wonks or bank examiners! The panelists discussed only one of the Fed's two remits--its remit to promote the economic advancement of the nation. Its other remit is to safeguard the monetary system. However, the panelists did touched upon the Fed's control of interest rates and ensuring that money continued to flow to housing and other high profile areas of the economy.

Finally, at the end of the presentation, those with questions were asked to form a queue and advance one at a time to a microphone. I was last in a line of about a dozen. Here's my recollection of what followed:

Me: You say that you (the Fed) have the power to increase the money supply. Is that right?

Fed: Yes.

Me: And you have indeed increased the money supply. Is that right?

Fed: Yes.

Me: And the money that you create was generated out of thin air. It wasn't there before, but it's there now. Is that right?

Fed (Getting nervous): Yes.

Me: And you say that creating this money out of thin air is beneficial to the economy. Is that right?

Fed (Now nervous as a cat on a hot tin roof): Yes.

Me: Then why do you prosecute counterfeiters?
(The audience, after a few seconds' delay,: Yeah, why DO you prosecute counterfeiters?)

Fed: This meeting is closed.

My point is that there is no difference in the economic consequences to society between the Fed creating money out of thin air and a counterfeiter doing the same thing. The difference is solely legal and one of scale. Private counterfeiters are punished, and rightly so, whereas the Fed is lauded for its actions.

Image result for Cartoon--counterfeiters

Counterfeiters are punished because printing money is the same thing as stealing. A counterfeiter does not print  money only to stuff it under his mattress in order to feel wealthy. He knows that he needs to pass his fake money on to someone else in exchange for some valuable good or service. In this recent Mises Wire article Professor Frank Shostak refers to such action as getting something for nothing. Richard Cantillon observed that the first receivers of the new money benefit at the expense of all subsequent receivers--the Cantillon Effect. In a recent Mises Wire article Dr. Carmen Elena Dorobat explained that the Cantillon Effect can extend internationally. Therefore, nations accepting dollars for payment in the later stages of fiat money expansion suffer a transfer of wealth to the early receivers of the new dollars, mostly the banks and their customers in the US.

Image result for Cartoon--counterfeiters

Some may respond that, "Yes, it is true that the government abrogates to itself and itself alone the power to print money out of thin air, but it abrogates many powers to itself and itself alone. The power to print money out of thin air is just one of them." Let's take two examples--the power to wage war and the power to force some to fund welfare for the benefit of others . The difference is one of ethics vs. consequences.

No civilized government allows its citizens on their own volition to kill foreigners. Yet in times of war government will order its citizens to kill foreigners and actually reward them--usually with honors rather than money--for doing so. Likewise no civilized government allows its citizens to decide for themselves that the wealthier members of society must pay the less fortunate. In other words you or I cannot approach a wealthy person and force him, at the point of a gun, to hand money over to some who are less wealthy. Society would collapse into a Hobbesian anarchy of a war of all against all.

Ethics vs. Consequences

Yet most of us accept, even if reluctantly, that government can force us to go to war and force us to pay taxes to fund welfare programs. The key is that government does not claim that the consequences are different; i.e., if Americans kill foreigners, the consequences are the same whether as a private citizens or as a soldier--foreigners die. Likewise, if as a private citizen I play Robin Hood and take from the rich and give to the poor, the consequences are the same if the government does it via taxes. But in the case of money printing out of thin air, the government claims that only good results accrue from its actions yet bad results accrue from private actions. Have you ever heard a government official claim that, yes, money printing does indeed cause misallocation of resources and, yes, it does indeed cause a net loss to society, but its actions are necessary in order to benefit...fill-in-the-blank? Of course not. One only hears how wonderful the Fed is that it has created money out of thin air in order to prime the economic pump, so to speak, or some such nonsense. The private counterfeiter steals from others for his own or his cohorts' benefit, but the Fed claims that it's absolutely similar actions have only good results for everyone in society.

Hiding the Truth with Statistics

The Fed tries to mask the wealth destructive effects of its money printing by focusing on the benefits accrued to some targeted economic sectors, such as housing. Statistics will show that the targeted beneficiary did in fact gain from monetary expansion. But the Fed ignores the cost to the rest of the economy, which is widespread and nearly impossible to measure. This is commonly referred to as concentration of benefit and dispersion of cost. One can quantify the former but not the latter. In reality no net wealth was created. In fact wealth was destroyed. Money printing disrupts the structure of production and causes malinvestment that  must eventually be liquidated and never recovered. In other words, the losers on aggregate lose more than the winners gain.

The Cantillon Effect and resultant temporary boom are apparent when the counterfeiter acts locally. He buys big, flashy cars and lives large until merchants realize that they have accepted phony money. They are the losers. Even if the counterfeiter's money is not detected but continues to pass from hand to hand the same as other legal tender, the structure of production will be permanently disrupted and capital will be consumed. Just remember Professor Shotak's lesson that, since counterfeiters get something for nothing, wealth will be consumed.

The pernicious effect of the local counterfeiter pales in comparison with the Fed. A local counterfeiter may be able to pass several thousand dollars or even a million dollars of phony money, but in the nineteen years from January 2000 to January 2019 the Fed has increased the monetary base,--bank reserves plus cash in circulation, over which the Fed has absolute control--from $0.591 trillion to $3.323 trillion. That's an increase of almost three trillion dollars! Yet the Fed tours the country touting its wonders to mostly fawning audiences...except perhaps in Des Moines, Iowa.

Wednesday, March 13, 2019

The Implications of a "Hard Brexit" on Britain

When Britons voted on June 23, 2016 on whether or not to leave the EU there was no discussion of a "hard or soft Brexit". These terms were invented after Brexit passed by a surprisingly large margin and the mostly anti-Brexit Tory Party government, especially its leadership, decided that it needed to negotiate the terms of leaving. Brexit supporters regard such terms as betraying the 2016 Brexit referendum itself. These 17.4 million Britons undoubtedly believed that Brexit would mean exactly that: Britain would no longer be governed by any EU laws, regulations, etc. Nevertheless, all that the world has heard since that day in June 2016 is a debate over the terms of leaving, with any so-called terms being labeled as a "soft Brexit" and leaving without any agreement as a "hard Brexit".

In a "hard Brexit" Britain just leaves and all EU regulations, etc. are null and void. Pretty clear cut. A "soft Brexit" can mean almost anything that is not a "hard Brexit"; i.e., Britain would agree to continue some or all of the manufacturing regulations, tariffs, and intergovernmental agreements, such as ceding jurisdiction to the European Court of Justice, that apply to EU countries. The list is almost endless and the time frame very nebulous, a perfect playground for those who wish to have a BRINO; i.e., Brexit In Name Only.

Parliament Must Act

It came as a surprise to this American, and probably many Britons as well, but experts in British constitutional law claim that only Parliament can actually take Britain out of the EU and only Parliament can decide under what terms, if any, it will do so. Of course, one of the terms of separation could be that there are no terms of separation--thus, a "hard Brexit"--and this paper will address the implications of such a development on Britain from four viewpoints: the likely effect on British imports, the likely effect on British exports, the likely effect on the City of London (the name refers not to a geographical/legal entity but to the financial firms that are headquartered there), and the likely effect on border control.

The Effect on British Imports

The current government has been exploring the possibility of dropping all import tariffs to zero except on  "sensitive industries". This would be very good for consumers, because the EU imposes tariffs on almost all imports from nations not in the EU itself. Most notably in its attempt to insulate inefficient European farms from worldwide competition, the EU imposes onerous tariffs on non-EU agricultural products via the Common Agricultural Policy (CAP). Eliminating these and many other tariffs would significantly lower the cost of living for the British people. The success of Brexit may depend entirely on whether Britain does in fact eliminate tariffs on most goods. It is a golden opportunity. The EU itself is very export oriented, so it is unlikely that it would impose any restrictions on member countries selling goods to Britain. So far so good!

The Effect on British Exports

Exports are another matter entirely. No longer in the tariff free customs union, it is assumed that the EU would impose tariffs on British products as it does on any other non-EU country, raising their cost to EU buyers, which one must assume would result in fewer British sales. The real harm would not fall on British exporters but on Britain's EU customers, who now are forcibly prohibited from buying British goods at the previously advantageous price. On the other hand since it no longer must meet onerous EU manufacturing regulations, British industry might enjoy lower manufacturing costs which would enable it to sell more to non-EU countries. Although it might take time for Britain to develop new markets for its goods, some countries, led by the U.S. itself, have stated that they are ready to sign free trade agreements with Britain as soon as it leaves the EU.

The Effect on the City of London

The City of London is a massive global hub. Its banking and insurance companies are dominant in the EU and likely to remain so for reasons of depth of market knowledge and a high reputation for honesty and fair dealing. Although some companies have moved some operations to Frankfurt, it is unclear if these moves are significant in number and may be simply part of normal market flux. The same fears about the fate of the City were raised when Britain secured an opt-out from the 1992 Maastricht Treaty which formally created the euro. Unless the EU imposes some special tax or regulation prohibiting EU members from utilizing London firms, it is unlikely that the City will be much affected by a "hard Brexit".

The Effect on Controlling borders

Uncontrolled illegal Immigration into the EU became a key issue for passing the Brexit referendum. There had been much concern for decades over loss of British sovereignty to unelected bureaucrats in Brussels and the economic cost of belonging to a closed customs union with high tariffs and onerous regulations, but the movement to leave came to a head over border controls or lack thereof. One of the four pillars of the EU is freedom of movement of people within the EU. (The other three were freedom of movement for goods, services, and capital.) Illegal immigration came to a head following the crisis of refugees from the Arab world. Once inside the EU, these refugees could migrate anywhere within the bloc, including Britain, raising the cost of providing social services and disrupting settled life. Britain was not the only EU country that opposed this unforeseen migration. In fact immigration control may yet break apart the EU, as the elite in Brussels insist that every EU country not only accept a dictated number of refugees but also that every country then allow refugees to migrate freely within the EU. A "hard Brexit" would remove the requirement that Britain accept more refugees than it believes it can assimilate. Uncontrolled border crossings would end as modest checkpoints are reinstated.

 A separate border issue pertains to the relationship between Northern Ireland and the Republic of Ireland over goods. Northern Ireland is part of the United Kingdom of Great Britain and Northern Ireland and there has been much concern over continuing the free flow of goods into and out of the Republic of Ireland. This seems to be much ado about little. Most probably goods to and from the Republic of Ireland would be subject to random checks with very little hindrance on trade. The EU has lobbied for an "Irish backstop", whereby Northern Ireland would remain in the EU for some period of time. Naturally this has incensed loyal British subjects, especially in Northern Ireland, and has almost no chance of being part of a "soft Brexit" deal.

A Positive Conclusion

In conclusion the effect of a "hard Brexit" on Britain itself should be overwhelmingly positive, especially if Britain does in fact remove all tariffs and conclude free trade pacts with the rest of the world fairly quickly. Naturally my advice to Britain is to unilaterally remove all tariffs on all goods, including "sensitive industries". Free trade deals then become irrelevant. Britain could lead the way in showing the world the benefits of unilateral free trade, just as it did in the nineteenth century with the abolition of the Corn Laws. Perhaps this outcome is what the EU fears the most, because it would call into question the benefit of belonging to a closed customs union and would spell the end of the EU itself.

Sunday, March 3, 2019

My letter to the NY Times re: Taxing both workers and robots out of existence

Re: Don't Fight the Robots, Tax Them, by Eduardo Porter

Dear Sirs:
I suppose we should be pleased that Mr. Porter is a Luddite-lite; i.e., he doesn't want to smash new machinery out of existence but use the tax code to accomplish the same thing. Mr. Porter seems most concerned that government will lose payroll tax revenue, should machines replace workers. (I'll leave it for another day to remind everyone that workers will not be completely eliminated. Rather they will be re-employed making...wait for it...robots!) Mr. Porter claims that avoiding a payroll tax is the same as getting a tax subsidy, and that's where the interesting bit of twisted logic appears. According to Mr. Porter's logic, the bigger the payroll tax the bigger the supposed subsidy for robots. Therefore, logic requires that every increase in the payroll tax be accompanied by an increase in the robot tax. Nice little circular argument, isn't it, for ever greater taxes on both people and robots. Unfortunately, should government adopt Mr. Porter's tax regime, society will find that it gets neither workers nor robots.

Friday, March 1, 2019

My letter to the NY Times re: "Then Came the Global Financial Crisis"

Dear Sirs:
Reading Mr. Irwin's Doctor Strangelove-esque article about whether or not deficits really matter, I was struck by this sentence, which was a paragraph in itself in the middle of his article:

"Then came the global financial crisis."

Mr. Irwin treats the 2008/9 crisis as if it were an asteroid--completely random, unexpected, unpredictable, and beyond human volition. It was none of this. The global financial crisis was caused in large part by fiat money credit expansion, the very role of which Mr. Irwin's article attempts to investigate. Interest rates were suppressed in the early 2000's and continue to this day. The bitter fruits of this practice are inevitable.

Wednesday, February 27, 2019

My letter to the NY Times re: Ireland needs free trade, too

Dear Sirs:
This phrase in Mr. de Freytas-Tamura's article about Irish concern over Brexit should be instructive to Irish statesmen:

"But food producers worry most that if Britain crashes out of Europe, it would open itself to cheaper goods from countries outside the European Union, making Irish firms even less competitive."

Perhaps Ireland should open itself to "cheaper goods from countries outside the European Union", too. Oops, I forgot...since the EU imposes very high tariffs on food stuffs from outside the EU, the only way the Irish could have access to cheaper food stuffs would be to leave the EU and reduce its tariffs. Not a bad idea, really.

Sunday, February 24, 2019

My letter to the NY Times re: Increasing the Minimum Wage Will Increase Unemployment

Re: Dollars on the Margin by Matthew Desmond

Dears Sirs:
Has Mr. Desmond, author of "Dollars on the Margin", never heard of the "Marginal Productivity of Labor"? How about the "Laws of Supply and Demand"? No? Well, let me explain. If the productivity of one's labor is less than the government's arbitrarily mandated wage that businesses must pay for that labor, unemployment will result. Otherwise, capital will be consumed until the business goes bankrupt. If a price control, such as a minimum wage, is set at too high a level, demand for labor will fall and unemployment will rise. I am surprised that the supposedly knowledgeable editors at the New York Times printed an article that extols the benefits to raising the minimum wage without at least pointing out the probability of these outcomes. Sure, if one is lucky enough to keep one's job, one lives a better life, as illustrated by the minimum wage workers that Mr. Desmond found. But Mr. Desmond failed to find two groups of minimum wage workers--those who lost their jobs due to the increase in the minimum wage and those who never got jobs in the first place.