The Foundation of Peace and Free Trade

I added this comment to an excellent essay by CATO's Dan Griswold:

The U.S. should declare itself a free trade nation, regardless of the actions of other nations. As we become more prosperous, our example will do more for the free trade movement than all the international agreements and excellent essays, such as this one, combined.

There is another, more basic, reason for free trade. Frederic Bastiat explained in his 1850 book The Law that man is born free. He owns himself. He is not owned by any other men or by a government, because government is formed by free men and, as such, can do only what other free men can do...and enslave another is not one of those things. From this basic and unassailable tenet Bastiat explains the limits of government. Forbidding trade among men is not a legal power that can be exercised by a legally formed government.

My Letter to National Review--Let Big Government Collapse

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Let Big Government Collapse
Date: Sat, 18 Dec 2010 20:43:15 -0500

Dear Sirs:
After devouring your December 20th issue, it is almost impossible to come to any other conclusion than that Big Government is the enemy of the people everywhere. Jim Manzi's "Unbundle the Welfare State", Andrew Stuttaford's "PIIGS to the Slaughter", and "The Enemy Within" by Ian Murray and F. Vincent Vernuccio cannot help but list case after case of the immense damage done to the common man by Big Government. The answer is NOT to figure out how to save Big Government, but how to convince the common man that he can do better without Leviathan. The common man does not need government to provide him with a retirement income or healthcare, much less oversee the terms of his employment, the quality of his children's day care, and all the other preposterous so-called "services" that supposedly protect him from the normal vagaries of life. Let the whole corrupt house of cards collapse, along with government's bought-and-paid-for supporters, from the big banks to the public sector employees and to all those who get money from the government only because the government takes it from others at the point of a gun. Return government to the American Founders' ideal of limited government that protects our lives, liberties, and property. The free market and an honest court system will take care of all the rest.

Patrick Barron

Another Bad Idea

From today's Open Europe news summary:

German Finance Ministry outlines new eurozone bailout institution;

Euro must be based on “German stability interests” as concession for
support

Sueddeutsche reports that a leaked position paper has revealed that the German Finance Ministry has drawn up proposals for a new body, named the “European Stability and Growth Investment Fund”, to manage the permanent eurozone bailout fund planned for 2013, the European Stability Mechanism. If granted loans from the fund, countries would be required to provide 120% in collateral in the form of gold reserves, stakes in companies, or revenue rights, the newspaper said. The fund would also be able to buy existing European government bonds, freeing the ECB from this task.

Reuters quotes the Ministry’s paper saying that Germany will affirm its “national interest” rests in maintaining the single currency. The euro, however, must “orientate itself on German stability interests” as a “concession to Germany, as the largest economy in the euro zone, serving as an anchor of stability.” According to Sueddeutsche, the new fund would in principle have access to “unlimited refinancing” in order to secure the health of the single currency. The Ministry confirmed the existence of the paper but said it had not approved the proposal, nor had the German government.

To quote a portion of the above report, the "new fund would in principle have access to 'unlimited refinancing' in order to secure the health of the single currency." This just does not make any sense. Where will the fund get the Euros for this "unlimited refinancing"? It is obvious that the European Central Bank will print the money. This will in no way strengthen the Euro, but will debased it. Further down in the same news summary was a report that Bloomberg News was suing to obtain information that the Greek government had used derivatives and swaps to hide the magnitude of its real debt. We must remember that the fund would be lending not to owners with their own financial assets at stake but to politicians and bureaucrats temporarily placed in powerful offices. The primary goal of such people is to secure their own jobs and their own well-being by buying off powerful internal constituents. Finally, the very idea that Europe should bail out failing economies reveals a complete lack of understanding of the law of moral hazard and the real purpose of a market economy. Prosperity is NOT secured through taxing profitable enterprises--even if indirectly through currency debasement--in order to allow unprofitable enterprises to continue. This is a prescription for capital consumption on a massive scale, because politicians and bureaucrats will have no objective criteria to determine where the "unlimited refinancing" line can be drawn.


Patrick Barron

My Letter to the Wall Street Journal re: New Debit Card Rules

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Re: New Debit Card Rules
Date: Fri, 17 Dec 2010 08:27:20 -0500

Re: New Debit Card Rules

Dear Sirs:
The new debit card rules are nothing more than price fixing by government, with all the adverse consequences ignored as a matter of course--fewer merchants able to accept debit cards; fewer bank customers who qualifiy for debit cards; fewer debit card sales; and lower merchant profits. But the bigger question is this: Where in the Constitution lies the power of Congress to intevene in the relationship between merchants and their banks? The commerce clause? If this is the answer, then it is turning the commerce clause on its head, for the commerce clause was intended by our Founders to ensure free markets among the states.

Patrick Barron

My Letter to National Review re: The Welfare State

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Why Jim Manzi is Wrong about the Welfare State
Date: Tue, 14 Dec 2010 21:58:34 -0500

Dear Sirs:
Jim Manzi's fairly typical prescription for how to reign in the welfare state--Unbundle The Welfare State--will fail because his premise about man and government is wrong. Manzi says that some men demand government interventions to relieve them of their anxieties and that it is government's legitimate role to decide where to draw the line. It is clear that Mr. Manzi has not read Frederic Bastiat, who explains that welfare is both illegitimate and impractical. It is true that some men desire to plunder others, but government's endorsement of some form of "legitimate plunder" validates this essentially criminal demand rather than regulate it and make it harmless. As Bastiat explains in the first dozen or so pages of his classic The Law, all men are born free and have a legitimate right to defend themselves from the plunder of others. Since government is a product of cooperative men, it can have no other powers except those that these men possessed themselves. Since free men do not possess the legitimate power to plunder others, they cannot pass that power to government. Therefore, government welfare is illegitimate plunder. Furthermore, rather than mitigate some men's desire to live off the fruits of others' labors, government welfare exacerbates this human weakness of character and divides men rather than unite them. We can expect all welfare states to implode under their own self-contradictions, as the ranks of the plunders grow and those of their victims shrink.

Patrick Barron

Let the Revolution Begin in Ireland

The latest crisis in the European Union—the Irish financial crisis--is the result of the socialization of money, the Euro. The EU has been using the Euro as an enticement for bribing recalcitrant nations into accepting its top-down rule. If governments would not accept the EU’s harmonization policies of high taxes, high regulation of business, and high farm subsidies, they would not get funding at cheap European Central Bank prices. For governments addicted to deficit spending, this was an easy bribe to accept.

In an honest world, one in which money is sound and the rule of law governs commercial transactions, no government would be able to spend beyond its means. If a government threatened default, its bondholders would be able to take possession of assets, to the extent practicable, and then suffer losses. But there would be no bailout. For many years thereafter the government would be forced to live within its means, because its financial reputation would have been ruined. Of course, the very thought of a government being restrained by anything is anathema to modern Progressives, who view government action as the panacea to all of society’s ills. And nothing enables government action like money that can be manufactured in unlimited amounts, if one only adheres to the manufacturer’s demands.

The Irish people may not believe it, but temporarily staying on the Euro is the only thing standing between them and their government’s determination to spend the nation into bankruptcy. Leaving the EuroZone and returning to their own currency would mean hyperinflation and starvation. The Irish government would give in to the demands of powerful constituents that it shower the nation with enough new money to forestall the necessary economic correction. The money printing presses would be running full tilt.

But the Irish should not incur more Euro debt, no matter what terms are offered, for this merely makes the eventual day of reckoning even worse. No, better to face facts now and do what is right. Let the banks go bankrupt. Slash welfare spending. And, most importantly, free the Irish economy from all economic restrictions, even if it means ignoring EU mandates.

Staying on the Euro should be viewed as an intermediate step before returning to the gold standard. At least the Euro provides some restraint on money production, whereas there would be no restraint on punt (the former Irish currency) money production. But gold money is the sine qua non of fiscal discipline. It cannot be inflated and it cannot be destroyed. Governments must tax or borrow honestly for every expenditure. The people are in charge, for government must go to the people for funding rather than to the operators of the money printing press.

The Irish crisis is just the latest indication that the end of the era of fiat money is fast approaching. Despite the daily financial scares, this can be a good thing, for fiat money is the enemy of the peoples’ liberties everywhere. Let the revolution begin in Ireland.

My Letter to the WSJ re: "Africa needs aid, not flawed theories" by Bill Gates

Re: "Africa needs aid, not flawed theories" by Bill Gates

Dear Sirs:

Poor Bill Gates. He is finding that even he cannot put the entire continent of Africa on the dole; therefore, government--meaning the rest of us--must chip in. Nor can he stop global warming all by himself (or is it "climate change"?), therefore, the rest of us have to submit to top down restrictions. His evidence of the efficacy of such top down policies is "declining air-pollution emissions in the U.S. ...that...has come about because of government regulations based on publicly funded science..." Well, Mr. Gates can spend his vast wealth in any way he desires, but he will find few of us common folk who share his optimism that aid to Africa will cure what ails it or that reducing our standard of living will do anything except, well, reduce our standard of living. Africa needs capitalism; that is, free markets, private property, protection of such property from criminals in and out of government, entrepreneurs, and most of all freedom. Mr. Gates can help Africa most by building Microsoft plants and offices there, employing Africans in the digital economy and training them in the methods of successful business. This is Mr. Gates' expertise. Then a modern Africa will be able to afford clean water and clean air. And Africa and the rest of the capitalist world will easily adapt to whatever change Mother Nature throws at us.

Patrick Barron

My Letter to the WSJ re: Behind Gold's New Glister

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Re: Behind Gold's New Glister
Date: Fri, 26 Nov 2010 10:20:58 -0500

Re: Behind Gold's New Glister

Dear Sirs:

GLD created a market for a product that was growing in demand. It is not true that it somehow created demand that was not there in the first place. It is evident to all that fiat monetary systems the world over are nearing the end of their usefulness, because governments have inflated their supply and are promising even more inflation. Thusly, the people are flocking to the one commodity that always retains it value--gold. It is important to remember that the so-called price of gold is nothing more than a relationship of a known commodity that cannot be inflated to something of absolutely no intrinsic value and which can be inflated to infinite amounts.

Patrick Barron

My letter to the Philadellphia Inquirer re: What would the founders do?

From: patrickbarron@msn.com
To: inquirer.letters@phillynews.com
Subject: Re: What would the founders do?
Date: Sun, 21 Nov 2010 11:13:34 -0500

Dear Sirs:
The headline of Stephan Salisbury's review of Jill Lepore's book about the Tea Party movement, titled The Whites of Their Eyes, asks the question "What would the founders do?". I think I know the answer. They would tell us to read the Constitution.

Sincerely,

Patrick Barron

My Letter to National Review re: "Red Scare" by Kevin D. Williamson

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Re: Red Scare by Kevin D. Williamson
Date: Fri, 12 Nov 2010 09:08:03 -0500

Re: Red Scare, by Kevin D. Williamson

Dear Sirs:
Many thanks to Kevin D. Williamson for his eye-opening and sober assessment of the Chinese economy and our government's fatuous policy of using China as the all-purpose whipping boy for problems of our own making. A common theme that ran through Mr. Williamson's essay is the harm done to ordinary people in every country by their governments' incessant economic interventions. Economics knows no political borders--a little understood rule of life that bears much repeating. It makes absolutely no economic difference if a product I buy is manufactured by my next door neighbor or a Chinaman. We both benefit from the exchange of my money for his good or service and do so at no cost to anyone else. No nation is somehow better off when other nations suffer economic disruptions. It is not true that Americans were better off at the end of WWII because our manufacturing base was undamaged by war while much of the rest of the industrialized world lay in smoking ruins. We enjoy a much higher standard of living by the spread of the specialization of labor which has occurred in the world since then. The only thing standing in the way of an even higher standard of living for all men everywhere is the foolish idea that economic gains for citizens of some nations come at the expense of others. Mr. Williamson is right to warn us that the policies that flow from this false view of the world can "lead to a trade war--or a war war." Instead of brow-beating our G-20 trading partners into agreeing to some new mercantilist agreement that will stifle trade with monetary and capital controls, the U.S. should renew its dedication to free-market capitalism.

Patrick Barron

Stable Money Required for Economic Progress

It now seems certain that the Fed will embark upon a new, second round of money expansion, called Quantitative Easing, or QE2 for short. During QE1 the Fed expanded its balance sheet by roughly $1.7 trillion by purchasing assets, mostly government bonds, in order to lower interest rates and spur economic recovery. At least this was the Fed’s goal. It did lower the interest rate for short term rates to as close to zero as can be expected; now it will target longer term rates by offering a higher price for these instruments, thusly, driving down their interest rate. The Fed fears deflation, which it defines as a general decrease in prices, and is on record as desiring to instill at least a two-percent inflation rate, which it defines as a general increase in prices. The Fed policy makers believe that a two-percent inflation rate is what is necessary for the American economy to achieve full employment, which is one of the Fed’s overall policy goals. The other policy goal is stable prices. In typical government Newspeak the Fed boldfacedly asserts that a two-percent increase in prices is the same as stable prices. I guess it all depends upon one’s definition of “stable”.

There is little doubt that the Fed will be just as successful in driving down long-term rates as it has been in driving down short-term rates, but neither of these actions will help the economy. On the contrary, these actions will harm the economy. What the Fed should pursue exclusively is a stable supply of money, which is not the same as stable prices. The Fed should cease its sales and purchases of assets. Furthermore, it should end its interference into any money markets, such as the Federal Funds market for overnight sales and purchases of bank reserves. In other words, the Fed should stand aside as an active participant in the nation’s economy and act solely as a protector of the supply of money.

In the interest of space and the reader’s patience, I will explain very briefly why a stable money supply is desirable.

Money is a universally accepted medium of indirect exchange, meaning that people hold money only in order to expend it at some later time for a good or services that they really desire. (It is not true that people have an unlimited desire for money; they have an unlimited desire for the things that money will purchase.) As such, the relative demand for goods and services is expressed in terms of money, the universally accepted medium of exchange. But the exchange ratio between money and all individual goods is constantly in flux. Some goods become cheaper as their supply expands and/or demand for them drops. The opposite is true when a good’s money price rises. In an expanding economy, there is a general tendency for most goods to fall in terms of money, as long as the supply of money is held stable. There is no adverse economic consequence to such a situation; that is, in an environment of generally falling prices businesses will make money, pay back loans, and expand operations. It is not true that falling prices are a mark of a failing economy.

In order to keep prices from falling in a generally expanding economy that produces more goods and services, the supply of money must increase. This happened in the 1920’s and led to the 1929 stock market crash. As Murray N. Rothbard explains in America’s Great Depression, the 1920’s were a period of rapid productivity increases due to such factors as the expansion of the nation’s electrical grid and the introduction of the assembly line. But the barely decade-old Fed--which was under the sway of Irving Fisher, a very influential economist who held that price stability was important--increased the money supply throughout the decade to offset the tendency of prices to fall.

This interference in monetary affairs sent false price signals to entrepreneurs that more resources were available for long-term investment than really was the case. The structure of production was altered in such a way that not all enterprises could be completed profitably. The nation was not saving as much as the lower interest rate would suggest. The Fed had enticed businessmen to begin investments that were contrary to the wishes of the consumer as expressed by his real spending patterns. He wasn’t saving enough. Eventually the reality of the situation became apparent and the stock market crashed. But rather than allow the economy to shed the malinvestment, the government undertook a decade’s long experiment in even more intervention in a futile attempt to rekindle the false boom. Only the exigencies of World War II convinced government to end the worst of the Hoover/New Deal policies in order to ramp up war production.

So, we see that it was fiat money expansion that caused the stock market to crash at the end of the 1920’s. The general price level had indeed remained stable throughout the Roaring Twenties, but we now know that it should have fallen. A generally falling price level would have prevented the malinvestment of business, for interest rates would have reflected the true state of the cost of savings for long term capital investment. The structure of production would not have been skewed, which later required its wholesale liquidation.

Today’s Fed is contemplating inflicting an even worse situation on the nation—a positive inflation rate. By driving down long term rates it hopes to entice businessmen to alter the structure of production in favor of longer-term investments. At the same time it is trying to spur consumer spending. These are completely contradictory goals and cannot both be achieved. If the consumer spends more, he saves less. In a free market, this will drive up interest rates to reflect the consumer’s preference for goods in the immediate term rather than in the long term. If the consumer saved more, the additional supply of funds would drive down the interest rate and make longer term capital investment feasible. We cannot have it both ways. Furthermore, the Fed does not know the proper level of interest rates, because it cannot possibly know the consumer’s propensity to spend and save…nor need it know. If the Fed does its only job properly, which is keeping the money supply stable, the aggregate actions of all consumers will determine the interest rates for all maturities.

In conclusion, the Fed should not pursue any interest rate strategy. Rather, it should keep the money supply stable so that the market will allocate savings to establish the structure of production in accordance with the desires of the consumer. But current Fed policy is a replay of its own failed strategy of the 1920’s and ‘30’s, except it is a policy on steroids. The result will be more malinvestment, more bankruptcies, more unemployment, and general impoverishment of the nation.

My Letter to National Review re: The Bender is Over

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Why "The Bender Is Over"
Date: Fri, 29 Oct 2010 14:10:04 -0400

Re: The Bender is Over, by Ramesh Ponnuru and Richard Lowry

Dear Sirs:
As much as I enjoyed and appreciated Messrs Ponnuru and Lowry's political insight into the president's falling ratings, I kept waiting for something of more substance to explain the phenomenon beyond "the public really is more conservative that we all thought". Why is the public more conservative than we all thought? I think the answer is clear--socialism just doesn't work and everyone knows it. The lesson of the fall of the Soviet empire has not been lost on free peoples everywhere, especially in the U.S. We just won't fall for the shyster's line anymore that we all can live at one another's expense.

Patrick Barron

My Letter to the WSJ re: A Carpenter With Only One Tool

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Carpenter with only one tool
Date: Wed, 27 Oct 2010 15:51:21 -0400

Re: Fed Gears Up for Stimulus

Dear Sirs:
The Fed is like the carpenter with only one tool, a hammer, who sees every problem as needing a good pounding. The Fed's only tool is the monetary printing press, so it sees every economic problem as a lack of money. According to your report, "The Fed's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates." This statement, which undoubtedly is true, illustrates perfectly the Fed's chief policy error. It has no regard for the role that savings plays in an economy. It is savings that the economy needs in order to rebuild the malinvestment of the lost decade of this new millennium. Savings is the fuel of capital investment. Without savings a modern economy will fail to replenish its capital stock. Ours is being consumed in an orgy of wasted government stimulus spending. Already the poor saver is getting next to nothing for his money, and Bernanke would drive him completely out of the market. If he succeeds, and it seems likely that he will, our economy will resemble that of Argentina in a few years--a once prosperous country driven to default, hyperinflation, widespread poverty, and political tyranny.

Patrick Barron

My Letter to the WSJ re: A Madman Wants to Rebalance the World's Economy

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: A Madman Thinks He Can Rebalance the World's Economy
Date: Fri, 22 Oct 2010 15:40:12 -0400

re: Geithner's Goal: Rebalance the World's Economy

Dear Sirs:
Interviewing Timorthy Geithner must be a frightening experience, for it must soon become apparent that the man is stark raving mad. The very idea that he and his fellow bureaucrats in other countries believe that they can fathom the essence of the world's economy, decide which countries should be allowed to grow and to what extent, decide the statistical measures that would indicate which countries' growth rates are sustainable and which are not is patently preposterous. Countries which adopt capitalism and grant basic political and economic freedoms, most importantly the protection of property rights, will grow much faster than those who adopt less favorable policies. Would Mr. Geithner and his fellow madmen deem these countries to be pariahs and erect trade and capital barriers to prevent them from becoming more prosperous? Apparently the success of a free people would be an embarrassment to big government madmen such as Mr. Geithner; therefore, the rest of the world must mobilize to stop them.


Patrick Barron

My Letter to the WSJ re: China Raises Interest Rates

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Re: China Raises Interest Rates
Date: Tue, 19 Oct 2010 09:23:57 -0400

Re: China Raises Interest Rates

Dear Sirs:
Economic data from China is always suspect. I doubt that China's inflation rate, as measured by its CPI, is below 4% as officially reported. By holding its currency cheap China has subsidized its export industries at the expense of higher prices in the rest of its economy. This classic mercantilist policy was bound to fail. If the Bank of China ceased its currency interventions, there is little doubt that China's interest rates would go much higher, causing a necessary restructuring of China's economy and an end to price and asset inflation. This move is always resisted by powerful interests who have become rich due only to government manipulation of the currency and other interventions. It is the same everywhere in the world. The first nations to abandon mercantilism will reap the gains of capital inflows. It appears that China has learned this lesson.


Patrick Barron

My Letter to the WSJ re: The Myth of Full Employment via Money Expansion

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
CC: jon.hilsenrath@wsj.com
Subject: The Myth of Full Employment via Money Expansion
Date: Fri, 15 Oct 2010 10:42:33 -0400

Dear Sirs:
Fed Chairman Ben Bernanke is confused about the money supply, the price level, and the benefits of manipulating both to achieve full employment. In his speech at the "Low-Inflation Environment Conference", he states that it is the Fed's intention to promote price stability and full employment via a two percent general price inflation rate. So, which does he want--price stability or two percent price inflation? And how exactly will either promote full employment? The simple and well-know "rule of 70" reminds us that prices will double in the number of years equal to 70 divided by the inflation rate. So at a two percent price inflation rate, the price level will double in thirty-five years. That is hardly price stability. Plus, the only way the general price level could remain the same in a growing economy is for the money supply to increase in proportion to the increase in production, causing repeated boom/bust business cycles. In a stable money environment prices would fall as production increases, a boon to every level of society. Sixty years ago the great German economist Wilhelm Ropke demolished the fallacy that full employment could be achieved via money expansion. I suggest to your readers his excellent essay on the subject, "The Economics of Full Employment", found in The Critics of Keynesian Economics.

Patrick Barron

My Letter to the WSJ re: Dollar Slide

From: patrickbarron@msn.com
To: andrewj.johnson@dowjones.com; wsj.ltrs@wsj.com
Subject: Dollar slide caused by stimulus
Date: Thu, 14 Oct 2010 15:39:02 -0400

Dear Mr. Johnson,
You led your article today about the dollar slide with this statement:


"The dollar fell sharply against a range of currencies Thursday as prospects for Asian economic growth contrasted with the likely need for more stimulus in the U.S."

The U.S. does not need more stimulus. It needs more savings. Stimulus merely consumes capital and puts the U.S. further into debt, contributing to the dollar's slide. Let me recommend that you acquaint yourself with the Austrian school of economics. Go to www.mises.org and search on monetary policy to learn how markets really work. As Ludwig von Mise wrote many decades ago, all exchange rates are set in the market by the relative purchasing power of the respective currencies. The dollar's purchasing power is being eroded with the threat--no, let us say "promise"--of further erosions. This threat to the U.S. economy is as serious as it is unnecessary.

Patrick Barron

The Special Importance of Austrian Economics to Young People

As faculty advisor to the “Students for Austrian Economics” club at the University of Iowa, I was asked to speak to the group about the importance of Austrian economics in the world today and why it is especially important to young people. I was flattered by this request, because I admire the courage of the members of this group who stand against most of what they hear every day about how the world works. But I was also challenged to state clearly something that I had not considered for some time. Although I read Austrian economics almost exclusively, I had not thought much about why I read it—to me it was self-evidently true. Therefore, I found it a challenge to state the case for Austrian economics to members of the club who might not be as devoted to the discipline as I am and who desire to be convinced.

Road Map for Government Policy

First of all, Austrian economics is important to everyone, not just young people, because it provides a road map for government policy. Wrong government policy can destroy nations and entire civilizations. I fear that we are on the path to just such destruction right now. But why I think this does require some basic understanding of just what Austrian economics is.

I prefer the definition of my friend Michael McKay, host of the weekly radio show Radio Free Market. Michael begins each of his shows with the statement that “Austrian economics is 'reality’ economics and reality is not optional”. There are two main elements of Austrian economics that make it real—its placement in the social sciences rather than the natural sciences and its emphasis on micro as opposed to macro analysis. Ludwig von Mises’ last book, The Ultimate Foundation of Economic Science, explained the proper place of economics in the social sciences, relying upon deduction from the rock solid foundation of irrefutable truths. Because we are dealing with man and his preferences, economics is not a natural science with its reliance upon empirical observation to discover natural laws from which to develop mathematical predictions of economic outcomes.

For example, we cannot with any certainty state that the recession will come to an end X number of months after the Fed injects Y amount of money into the system. But that is exactly what other economic disciplines, primarily Keynesianism, purport to be able to do. Austrian economics tells us is that increases in the money supply will debase all money currently in the hands of the public, reducing money’s purchasing power and redistributing the ownership of wealth assets. This is not a theory based upon empirical observation, but an economic truth deduced from irrefutable maxims.

This is important, because so much misguided policy flows from this very basic misunderstanding, and we are witnessing it right now. As Ludwig von Mises stresses in chapter 17 of Human Action, “catallactic precision cannot be applied to historical problems” and that “attempts to measure economic magnitudes are based on entirely fallacious assumptions and display ignorance of the fundamental principles both of economics and of history.” Massive spending and monetary pump priming have not gotten the desired results that the current batch of Keynesian economists desired, so they are poised to engage in an even more radical step called quantitative easing. Quantitative easing just means that since the interest rate cannot be driven any lower than zero, the central bank must simply print money and give it to the government to spend as it pleases. And, since the Keynesians in government believe that economics is a natural science, they will point to their own meaningless statistics to rationalize their actions.

Spending Does Not Equal Prosperity

Nowhere is this dichotomy between Keynesians and Austrians more apparent than in how each school of economic thought would measure economic success. For example, we are constantly told by our government that the recession technically ended last year, because GNP stopped shrinking. Here is the great macro vs. micro approach. Whereas Austrians take the individual as the object of analysis, Keynesians place emphasis on GNP. And they measure GNP by total spending in the economy. Now let’s just look at this for a moment. For the Keynesians spending is the be all and end all. As long as people are spending, then they must be buying something that someone produces. Therefore, Keynesians equate spending with prosperity. If people reduce their spending and increase their savings, GNP will fall. When this happens, government spending must increase to replace private sector slack. Taken a step further, government spending can spur an economy to new heights, if private spending is not positive enough. Now isn’t this a wonderful theory--that government can spend the nation into prosperity? Unfortunately this isn’t working very well.

Austrians would not place any emphasis on total GNP, because spending does not equal prosperity. If a man spends a great deal, we may conclude that he earns a lot or it may just be that he is spending profligately. The latest spending craze in housing is an excellent example. Housing sales skyrocketed for years, but it turns out that many of these sales were to people who really could not afford to purchase them. They lost their homes when the bubble burst, which was a direct result of government making it appear as if more people could afford homes that was actually the case. Spending did increase, for awhile anyway, but it could not be sustained. Reality was not optional, after all.

By contrast the Austrians place all economic analysis on the individual, not society as a whole. The economy is just the aggregation of all individual decisions, so once you understand how individual men act you will understand how to make an economy work better. For example, Austrians place more emphasis on freeing man from the straightjacket of government taxes and regulations that prevent him from freely cooperating with other men in order to achieve his goals. Other men are seeking the same cooperation of him, so their mutual cooperation creates winners all around. Each expects to improve his situation. If we look only at what man spends, we really do not know whether he is creating wealth or consuming it.

Justice, Law, and Inalienable Rights

But Austrian economics is important for much deeper reasons. Whereas all other economic schools of thought are willing to sacrifice some members of society or citizens of other countries for supposed economic gains, Austrian economics emphasizes the importance of law, justice, and God-given inalienable rights that accrue to each and every individual. These are not a hindrance to economic progress but are part and parcel of economic progress. Not only does Austrian economics focuses on the welfare of the individual, it holds the life, liberty, and property of all individuals sacrosanct. Although few today openly call for persecuting minorities, most economic schools of thought denigrate the importance of private property. Some even openly support confiscating the property of the rich for redistribution to the poor. Austrians place property rights as an extension of individual rights, for without property man cannot survive. Thus, Austrian economics promotes not just a higher standard of living but it does so by holding the individual as an inviolate entity whose rights precede those of society and the state. This has further implications for international peace, for Austrian economics asserts that economic science does not end at political borders. The benefits of free exchange can and should extend to the entire world, spreading peace and prosperity instead of war and poverty. At no time since the end of the Second World War have governments expressed such outright hatred of foreigners and attempt to blame them for all economic ills. Even this week our own Secretary of the Treasury Timothy Geithner fanned the flames of international ill will by blaming our current economic woes on the Chinese. This is as preposterous economically as it is dangerous politically. This is a prime example of how an economic theory can lead nations to war—if a government really believes that Chinese economic policies are harmful to us, it will feel justified to protect us. When goods stop crossing borders, armies will. As Ludwig von Mises states in chapter nine of Human Action, it is the autarkic policies of hegemonic states that are the main cause of war.

The Young Can Free Themselves from Entrenched Ideas

We now conclude with why Austrian economics is so important for young people. The current Keynesian system has created an entrenched class who will never admit the limitations of their fervently held ideas, because they benefit from them. The government is a revolving door of Wall Street bankers, environmental activists, union supporters, and others dependent upon government interventions. They will never give up their power and their privileges. Therefore, it is up to a new generation who is not yet tainted by the corruption of government to “stand up for freedom”, as Michael McKay always ends his Radio Free Market show. Austrian economics provides the analytical tools to expose the reality of a corrupt system in which the few gain at the expense of the many. The young have a choice. They can join the corrupt system or they can throw it out. Will they choose peace and prosperity, or will they choose poverty and war?

My Letter to the Wall Street Journal re: Geithner Takes Aim at China Policy

Re: Geithner Takes Aim at China Policy

Dear Sirs:
The Geithner speech is nonsense on two levels. Number one, and most importantly, if a country holds its currency cheap, it is subsidizing the living standards of its trading partners. If the Chinese are foolish enough to subsidize our lifestyle--which, by the way, they have been doing for some time now--then why would we desire that they stop? Secondly, the logic of his argument is childish. If we think China's monetary policy is wrong, why are we encouraged to do the same thing? (I can just hear Mrs. Geithner asking her little boy Timothy why he jumped in the mud puddle...and little Timothy telling his mother that he did it because his friend did it.)

No country can force another country to pay its bills or cause another country to have higher unemployment. The most damage that a country can do to another is indirectly--by adopting policies that reduce its contribution to the world economy. For example, the world is worse off because Cuba is a communist country and does not produce goods for the world market.

Patrick Barron

My Letter to National Review re: Acting White

From: patrickbarron@msn.com
To: submissions@nationalreview.com; letters@nationalreview.com
Subject: Letter to National Review--"Moot Causes" needs one more step
Date: Mon, 4 Oct 2010 13:04:59 -0400

Dear Sirs:
A college professor friend of mine says that you need to ask "Why" at least five times to arrive at the root cause of something. Such is the case of "Moot Causes", Roger Clegg's review of Stuart Buck's book Acting White: The Ironic Legacy of Desegregation. Mr. Clegg lays the problem of "black students' rejection of academic achievement" at the high level of out-of-wedlock births--70%!--and the lack of a male role model in the lives of children. This undoubtedly has merit. But what is the cause of all those out-of-wedlock births? I believe the answer is economic regulation and the welfare state. Economic regulation has priced unskilled labor out of the market; there is no "first rung on the ladder" of the job market for many urban poor. But welfare entitlements prevent the outright destitution that would be the result of this market intervention. The result is the deplorable spectacle of multi-generational welfare dependency, crime, and other societal pathologies. End economic regulation AND welfare. Those on welfare will have the job opportunities they need, and, once again, school will be seen as the necessary preparation for a life of work rather than a prison to which one is sent by the truant officer.


Patrick Barron

Letter to National Review re: Bank of America, by Kevin D. Williamson

From: patrickbarron@msn.com
To: submissions@nationalreview.com; letters@nationalreview.com
Subject: Re: Bank of America by Kevin D. Williamson
Date: Tue, 28 Sep 2010 09:57:11 -0400

Dear Sirs:
Among many of Kevin D. Williamson's excellent and pointed comments about Obama's new "infrastructure bank" is this one: "...the Fed...whose managers pay the very highest prices for the very worst assets...". Mr. Williamson then exposes the bizarre world of government earmarks for projects that no one would fund if asked to do so privately. And herein lies the main problem--where does the Fed get all that money for its bloated balance sheet of dubious assets and where does the government get all that money for its new infrastructure bank? Well, it manufactures it out of thin air; in other words, it counterfeits it. The government commands real, scarce resources with non-scarce, fiat money. It has found the Midas touch, at least for awhile. But each expansion of the money supply reduces the purchasing power of money already in circulation in addition to causing structural dislocations, such as the housing bubble. Unchecked expansion of fiat money is undermining our economy and is the greatest threat to our nation today. Bizarre spending is merely a symptom of the disease.

Patrick Barron

Only a 132 Year Payback for the All-Electric Car!

There are few examples where government interference in the economy is more pervasive than energy. Now, the term energy encompasses a plethora of technologies, and each attracts the gimlet eye of Big Brother. In recent years environmental groups have been very successful in insinuating themselves into the halls of government so that today there is a revolving door between government and the environmental movement just like the revolving door between the government and other key industries, such as banking and the military-industrial complex. Government would have us believe that a new regulation is the result of some great, objective, and careful investigation. But mostly these regulations and spending programs are foisted upon us by the people who only yesterday were nothing more than lobbyists for some fervently held cause. There has been no new data, but yesterday’s lobbyist today carries the mantle of great authority and prestige as a high level government bureaucrat.

We economists call such lobbying “rent seeking” and those who engage in it as “rent seekers”. Rather than seeking the cooperation of other men in the free market, a rent seeker lobbies government to impose some special privilege. The cost of the rent seeker’s efforts is greatly reduced, because he need convince only a few elected officials or government bureaucrats rather than the entire market. His job is made all the easier by the knowledge that the elected official or government bureaucrat can grant the privilege with no cost to himself. And when a rent seeker gets a job in government itself, well, the fox is in the henhouse. Officials move billions of dollars and coerce millions of people with no responsibility whatsoever. If a program fails to achieve its grand design, no government official suffers the consequences. Furthermore, failed regulations are seldom repealed, because, despite the net burden to the economy, a few new constituents do benefit and lobby mightily to keep them in place.

A Revolving Door Lobbyist for the All-Electric Car

Such is the case as recently reported by the Associated Press in regard to a lobbyist for an all-electric car.
"Leading the Charge” glorifies Mr. David Sandalow, a U.S. Department of Energy assistant secretary and an avid advocate for the all-electric car. He has converted his Toyota Prius Hybrid into a plug-in hybrid at the cost of $9,000. Now Mr. Sandalow can recharge his car’s battery from his home electrical outlet. Unmodified hybrid cars recharge their batteries only while operating on their gasoline powered engines.

Mr. Sandalow is very proud that his daily five mile commute (a ten mile round trip) can be accomplished with a need for a gasoline refueling stop only "about once every month or two". Nevertheless his car needs to recharge after only 30 miles of travel, so he advocates that the government pursue developing a battery that will allow 100 miles between rechargings. The government itself estimates the cost of such a battery at around $33,000 per battery. (How the government knows this when no such battery yet exists was left unclear.) The article reassures us that government tax credits and stimulus funds will reduce the cost to the consumer to around $10,000 per battery. (But we Austrian economists know that government subsidies do not lower costs; they only change who pays. So it is disingenuous to say that government subsidies will lower the cost of such a battery.) Mr. Sandalow estimates that his electricity cost is equivalent to buying gasoline at $.75 per gallon.

Recoup Your Investment in Only 132 Years!

One does not need to be a Brookings Institute scholar like Mr. Sandalow, specializing in “oil dependence, electric vehicles, and climate change”, to see why no one will willingly purchase an all-electric car, much less the one million that President Obama wants on the nation’s highways in five years. (Call me cynical, but this number does not sound as if it were the result of a scientific analysis either.) First of all the cost of anything is that which is foregone by the purchase. In other words, when we buy something, we cannot spend this money on other things. That is what our cost is. In the case of Mr. Sandalow, his $9,000 investment cost him 3,000 gallons of gasoline at the current price of roughly $3 per gallon. Assuming Mr. Sandalow's Toyota Prius gets only 20 miles per gallon, he could have driven his car for 60,000 miles. Since his commute is 10 miles per day, Mr. Sandalow's conversion cost is the amount of gasoline he could have purchased to drive to work for 22.7 years. But that is not the only cost; the cost of electricity, which Mr. Sandalow estimates to be the equivalence of $.75 per gallon gasoline, has yet to be considered. This expense adds an additional $2,250 to his commute. (60,000 miles divided by 20 miles per gallon times $.75 = $2,250) Stated another way, he could have purchased another 750 gallons of gasoline and commuted to work for another 5.7 years, or 28.4 years total.

(By the way, there is nothing special about needing to fill up only once every month or two. Mr. Sandalow commutes for only 220 miles per month (10 miles per day times 22 work days per month). There is not a car in America that will not go further than that on a tank of gasoline. As coincidence would have it, my wife commutes ten miles per day to work in her SUV. She gets 16 miles per gallon in town. So she burns just shy of 14 gallons of gasoline per month commuting to work, well within her tank’s 25 gallon capacity.)

Now let’s move on to the $33,000 battery. Hold onto your hats! At $3 per gallon, Mr. Sandalow could have purchased 11,000 gallons of gasoline and driven his Toyota Prius for 220,000 miles. But, again, he would have had to buy electricity at the equivalence of $.75 per gallon, which would have cost him another $8,250. With this additional money he could have driven another 55,000 miles, or 275,000 miles total. This would allow our intrepid energy saver to drive to work for 104 years. (Of course, this cost assumes that one $33,000 battery will last for that many miles. If two batteries are required, you can double the cost and the years required to break even.)

So, by converting his car to a plug-in hybrid for $9,000, buying a yet-to-be produced 100 mile range battery for $33,000, and buying electricity for the equivalence of $.75 per gallon of gasoline, Mr. Sandalow could have purchased enough $3 per gallon gasoline to enable him to drive to work for 132 years!

Trust Only the Free Market

In conclusion, I have looked at the all-electric car calculation only from the side of the consumer. I have not touched upon the nation’s capacity to generate enough electricity to recharge those one million batteries so desired by President Obama. And one can merely speculate on whether producing this additional amount of electricity will cause more smokestack pollution than the tailpipe pollution it supposedly will prevent. Certainly this is not a debate in which Austrians would engage. As Ludwig von Mises makes clear in Human Action, chapter 8, the only basis of economic calculation is money prices via a free market. This does not mean that unlimited pollution from power plants or automobile tailpipes is permissible. Property rights and one’s health may not be abridged by another’s pollution. But it does mean that a basis already exists for deciding upon the wisdom of an all-electric car—the free market. Each man strives to improve his own condition by seeking the cooperation of others. Entrepreneurs who believe in the all-electric car are free to invest their own money and lobby investor capitalists for more. But right now the all-electric car appears to be a black hole for wasting more taxpayer money. We must disabuse ourselves of the propensity to believe that anything can be accomplished as long as government throws enough money at it. We have been down this road before with the fast breeder nuclear reactor that was supposed to produce more fuel than it consumed. Billions was wasted. We seem to be doing the same thing today with wind and solar power, too. There may be an economically rational niche for these energy technologies, but only the free market will give us the answer.

My Letter to the Philadelphia Inquirer re: the all-electric car

From: patrickbarron@msn.com
To: inquirer.letters@phillynews.com
Subject: "Do the Math" to Reveal Faulty Logic behind the Electric Car
Date: Sun, 5 Sep 2010 10:10:17 -0400

Re: "Leading the Charge", Business Section for Saturday, September 4, 2010

Dear Sirs:
One need only a grade school knowledge of mathematics to understand why the electric car is not commercially feasible at this time. Take your article, Leading the Charge, about Mr. David Sandalow, a U.S. Department of Energy assistant secretary and an avid advocate for the all-electric car. He has converted his Toyota Prius into an all-electric car at the cost of $9,000. He travels five miles to work each day (a ten mile round trip) and needs to refuel only "about once every month or two", but his car needs to recharge after only 30 miles of travel. He estimates that his electricity cost is equivalent to buying gasoline at $.75 per gallon. He is enthusiastic in advocating that the government pursue developing a battery that will allow 100 miles between rechargings. The cost of such a battery is estimated by the government to be around $33,000 per battery. (Government subsidies do not lower costs; they only change who pays. So it is disingenuous to say that government subsidies will lower the cost of such a battery.)

OK, let's do the math, and one does not need to be a Brookings Institute scholar like Mr. Sandalow, specializing in energy, to see why no one will willingly purchase an all-electric car. First of all the cost of anything is that which is foregone by the purchase. In other words, when we buy something, we do not spend this money on other things. That is what our cost is. In the case of Mr. Sandalow, his $9,000 investment cost him 3,000 gallons of gasoline at the current price of roughly $3 per gallon. Assuming Mr. Sandalow's Toyota Prius gets only 20 miles per gallon, he could have driven his car for 60,000 miles. Since his commute is 10 miles per day, Mr. Sandalow's conversion cost is the amount of gasoline he could have purchased to drive to work for 22.7 years. But, Mr. Sandalow's electric cost of $.75 per gallon has yet to be considered. This expense adds an additional $2,250 to his commute. Stated another way, he could have purchased another 750 gallons of gasoline and commuted to work for another 5.7 years, or 28.4 years total.

Now lets move on to the $33,000 battery. Hold onto your hats! At $3 per gallon, Mr. Sandalow could have purchased 11,000 gallons of gasoline and driven his Toyota Prius for 220,000 miles. But, again, he would have had to buy electricity at the equivalence of $.75 per gallon, which would have cost him another $8,250. With this additional money he could have driven another 55,000 miles, or 275,000 miles total. Of course, this cost assumes that one $33,000 battery will last for that many miles.

Now, how many want to buy an all-electric car? If you raised your hand, please return your grade school diploma.


Patrick Barron

Predicting the Price Level

A key disagreement between the Austrian economists and Keynesian economists is over the consequences of expanding the money supply. Keynesians claim that increasing the money supply will cause a beneficial increase in economic activity, whereas Austrians claim that increases in the money supply cause all manner of bad consequences, one of which is the lowering of the purchasing power of all money currently in circulation. The most visible sign of such loss of purchasing power is a general rise in the price level. Therefore, it is important that the Austrians answer the Keynesians who say that the Austrian monetary theory is wrong, because the government’s pump priming, trillion dollar stimulus spending and the Fed’s massive asset purchases have not caused runaway price inflation. In this essay I will answer this criticism by explaining the fundamental forces at work to explain the relationship between the money supply and the price level and the forces of government intervention that make short term price level predictions impossible.

The Quantity Theory of Money

At the foundation of our understanding of money and prices resides the quantity theory of money. At this most basic level it is axiomatic that the price level is the intersection of the quantity of goods for sale on the market and the amount of money available to purchase these goods. Prices can rise for only two reasons. One, the quantity of money rises faster than the quantity of goods for sale. Two, the quantity of goods for sale drops faster than the quantity of money. Of course the reverse is true about a falling price level. Prices can fall for only two reasons. One, the quantity of money falls faster than the quantity of goods for sale. Two, the quantity of goods rises faster than the quantity of money.

Let’s use a simple example. Assume that there is only one commodity for sale in the economy. One hundred units of this commodity are produced. The money supply consists of one thousand units of currency; we’ll use dollars as our money supply unit. The only price that will clear the market of all goods offered for sale is ten dollars per unit. ($1,000 divided by 100 units) Let us suppose that there is a production improvement that allows the market to produce two hundred units of the same commodity. Then the market-clearing price will be five dollars per unit. ($1,000 divided by 200 units) Likewise, let us assume that the money supply increases to two thousand dollars while the ability of the market to produce goods remains the same at one hundred units. Then the market-clearing price will be twenty dollars per unit. ($2,000 divided by 100 units) From this simple example one can clearly see that, if we admit that the U.S. economy produced more goods today than it did twenty years ago, then the primary reason that prices have not fallen is that the money supply increased concomitantly. Likewise, if prices are higher now than they were twenty years ago and real economic output is essentially the same, then the culprit must be an increase in the money supply. But most of us grant that the U.S. economy produces more “stuff” than twenty years ago. So if the price level is higher, the only explanation is an increase in the money supply. Had the money supply remained stable, the only way that the market could have cleared the larger supply of goods would have been for prices to fall.

(Since 1990 M2 has increased by a factor of 2.62 while nominal GNP has increased by 2.57, which leads one to the conclusion that the economy has not really grown at all in terms of real goods and services in two decades. All of the increase in GNP can be attributed to higher nominal prices caused by an increase in the money supply.)


The Three Uses of Money

The quantity theory of money is at the foundation of understanding money and prices, and it does explain long-term trends. But other factors operating within this foundational theory determine market prices in the short-term. One of those factors is an explanation of the purposes to which money can be used.

There are three and only three uses for money—to hold (hoard), spend, and invest. Of the three, only the combined size of the spend-and-invest components determines the price level; i.e., spending and investing are those components of the money supply that are brought to market to purchase goods available for sale. As the total quantity of spending and investing increase in relation to the quantity of goods and services brought to market, prices will increase. If either or both of these components decrease, prices will decrease. Importantly, if the money supply increases and all of the increase goes into hoarding, the price level will remain the same.

Suppose that the Fed printed enough paper money to give everyone in America one million dollars. Since there are 300 million Americans, the money supply would increase by 300 trillion dollars! Surely that would trigger higher prices! But let us also assume that every American took the money and placed it under his mattress. He did not spend one cent. What would happen? Well, the money supply would increase by 300 trillion dollars, but the price level would remain the same. All the new money would have gone into hoarding and would have no impact on prices.

An Ever-Changing Money Supply

So far our discussion of how money affects prices assumes that there is no intervention by an outside, coercive agent that attempts to manipulate both the total size of the money supply and the three uses of money. Unfortunately that is not the case. The government intervenes regularly and inconsistently in monetary matters, making it almost impossible to point to one or two factors that will have the most impact on prices.

The most important interventionist governmental body is the Federal Reserve Bank, our central bank, which almost always attempts to expand the money supply. It “adds liquidity”, mostly by increasing bank excess reserves. Right behind the Fed is the Treasury Department, which spends the money. Both attempt in various ways to stimulate the economy by ensuring that any increases in money go into the spending and investing buckets and not into the holding/hoarding bucket. Currently the Fed and the government want all of the money to go into the spending bucket exclusively, so that the GDP numbers will rise. You see, the government measures the size of our economy by how much we spend, so it tries to manipulate this number in a variety of ways. The “cash for clunkers” program is a case in point. If nothing else causes one to question this whole paradigm, the government’s claim that destroying still useful, but older vehicles adds to our economic well being should end such naiveté.


It is beyond the scope of this article to explain the many ways that the Fed increases excess reserves and the effect this increase can have over time on the size of the money supply. Let us just say that although the Fed has less than perfect control over the money supply in the short run (and the short run can be years long), it is the size of total reserves and the reserve requirements that establish the outside parameters of the money supply. Typically bank excess reserves are around only $2 billion or less, not a great deal in an economy the size of ours. As of July 28, 2010 bank excess reserves stood at $1.012 trillion dollars! Since we have a fractional reserve banking system, the potential exists for banks to expand our money supply by many multiples of these excess reserves.

Conflicting Government Interventions

But it gets even more complicated! While one department of the Fed tries to expand the money supply, there is another whose actions prevent it—the bank examining force. As the left hand of the Fed hands out reserves to all comers, the right hand ensures that those reserves will not be converted into money via lending. In fact the right hand of the Fed--and other bank regulatory agencies, such as the FDIC--currently exercise a deflationary impact on the money supply. These agencies are forcing banks to charge off suspect loans against capital. When a bank’s capital ratio falls below that required by bank regulations, the bank has only two choices. It can attempt to raise capital, a difficult thing to do these days, or it can reduce the size of its balance sheet by reducing loans outstanding. Loan reduction has a deflationary effect on the money supply.

Add to this structural issue the fact that there really aren’t many good loans out there, which would create new money as desired by the Fed’s left hand, and you can see why all that additional liquidity has yet to reach its potential as the basis of new money. The key word here is “yet”. The potential for a massive increase in the money supply exists, however.

The Risk of Hyperinflation

Now we get a glimpse of what has been happening. The Fed has been adding liquidity mostly in the form of excess reserves. As yet these excess reserves have not been employed by the banking system to support an increase in the money supply via new lending...the bank examining force has blocked this route. The money that has found its way into peoples’ pockets has stayed in peoples’ pockets--it has been hoarded. There is no way to predict the end to hoarding, the end to bank recapitalization, and the end to bank loan problems. But when these deflationary factors do end, American prices will rise as the hoarded money and the increased money created by increased lending flow into spending and/or investing. At that point we will enter what Ludwig von Mises called the “danger zone”. No one will wish to hold depreciating dollars; they will be spent as rapidly as possible, creating the real possibility of what Mises called the “crack-up boom”. Despite the tough talk by Fed Chairman Bernanke, the Fed will be powerless to prevent this debacle. Money will become worthless.

My Letter to the WSJ re: Russia Bans Grain Exports

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Russia Bans Grain Exports
Date: Fri, 6 Aug 2010 08:05:33 -0400

Re: Russia Bans Grain Exports

Dear Sirs:
Russia is suffering from excessive heat and wildfires. So President Putin has banned the export of grain and has set up an emergency relief fund of $1.2 billion for farmers. These measures usually meet with approval by those unfamiliar with economics. But President Putin's arbitrary decisions overrule the wishes of millions of Russians. If Russians want more grain, they can divert their spending from less important choices. But they will have less money with which to do so, because President Putin also has confiscated it for handouts to farmers. The market is far superior in reacting to natural disasters than arbitrary government edits. Yet politicians must grandstand, so they wave their hands and pass laws to convince the public that they can make it all better. We saw this farce in spades five years ago when Hurricane Katrina hit New Orleans and the Gulf coast.

Patrick Barron

My Letter to the Financial Times re: France Preventing Outsourcing by State Industries

From: patrickbarron@msn.com
To: letters.editor@ft.com
Subject: Re: France to reign in state-backed groups
Date: Thu, 5 Aug 2010 19:09:25 -0400

Re: France to rein in state-backed groups

Dear Sir:
By prohibiting state-backed companies from seeking the lowest cost and/or best quality factors of production, the French economy will revert, by just that much, to a lower production possibility frontier. This process will create an economic cancer in the French economy, because these industries will require higher and higher levels of subsidies, robbing other, more entrepreneurial businesses of life-giving capital. This is just another obstacle placed on the French economy by its Mercantilist-style governmental policies.

Patrick Barron

My Letter to the WSJ re: Geithner Pushes Tax Boost for the Wealthy

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Geithner Pushes Tax Boost for the Wealthy
Date: Thu, 5 Aug 2010 08:20:00 -0400

Re: Geithner Pushes Tax Boost for the Wealthy

Dear Sirs:
By defending increasing taxes on the wealthy, Treasury Secretary Geithner honestly reveals three things about this administration that the American people should know. One, that this administration wants more of the peoples' money; two, that the administration knows that the only place to get it is by taking more of the money from the nation's most productive people (that's why they are paid more); and, three, that the administration believes that savings is bad for the economy. Seldom has a high administrative official been so revealing about the vast chasm that exists between those who must work for a living and those who live as parasites off the fruits of others' labor.

Patrick Barron

Understanding the Relationship between Money and the Price Level

One of the conundrums of current economic life is why the increase in the money supply had not caused runaway price inflation. Furthermore, the federal government has run a one-trillion-dollar deficit this year, with promises of more for several more years, while at the same time interest rates have fallen to unprecedented low levels. Both of these phenomena seem to violate economic law. Shouldn’t more money drive up prices? And shouldn’t government’s massive borrowings cause interest rates to rise? Yet prices for most goods have remained stable and the interest rate is at historic lows. Has all economic law been shown to be fallacious?

In this essay I will explain the fundamental forces at work to explain the relationship between the money supply and the price level, which will, coincidentally, help to explain the low rate of interest. There is no violation of economic law. The seeming anomalies stem from the fundamental error of placing economics within the realm of the physical sciences and not in the realm of the social sciences. The view of economics as a physical science leads one to the conclusion that economics is mechanical and can be explained by formulas; whereas understanding economics as a social science leads one to understand that human volition cannot be predicted or reduced to mathematical formula with substantive and temporal exactness.

The Quantity Theory of Money

At the foundation of our understanding of money and prices resides the quantity theory of money. At this most basic level it is axiomatic that the price level is the intersection of the quantity of goods for sale on the market and the amount of money available to purchase these goods. Prices can rise for only two reasons. One, the quantity of money rises faster than the quantity of goods for sale. Two, the quantity of goods for sale drops faster than the quantity of money. Of course the reverse is true about a falling price level. Prices can fall for only two reasons. One, the quantity of money falls faster than the quantity of goods for sale. Two, the quantity of goods rises faster than the quantity of money.

Let’s use a simple example. Assume that there is only one commodity for sale in the economy. One hundred units of this commodity are produced. The money supply consists of one thousand units of currency; we’ll use dollars as our money supply unit. The only price that will clear the market of all goods offered for sale is ten dollars per unit. ($1,000 divided by 100 units) Let us suppose that there is a production improvement that allows the market to produce two hundred units of the same commodity. Then the market-clearing price will be five dollars per unit. ($1,000 divided by 200 units) Likewise, let us assume that the money supply increases to two thousand dollars while the ability of the market to produce goods remains the same at one hundred units. Then the market-clearing price will be twenty dollars per unit. ($2,000 divided by 100 units) From this simple example one can clearly see that, if we admit that the U.S. economy produced more goods today than it did twenty years ago, then the primary reason that prices have not fallen is that the money supply increased concomitantly. If the money supply had remained stable, the only way that the market could have cleared the supply of goods for sale would have been for prices to fall. Since most price statistics show that prices have not fallen and in fact have risen somewhat, then the only explanation is that the money supply increased.

(Although the quantity theory of money knows no definitive author and has been known for centuries, Professor George Reisman has written extensively on the subject. I recommend pages 505 and 506 of his magnum opus Capitalism for a brief explanation. Then the reader can continue elsewhere in this magnificent book for further and more detailed discussion of money, prices, and production.)

There Are Only Three Uses of Money

Yet my illustration above and recent experience seem to make a mockery of economic science. I had said that economics was not a physical science, and yet I used mathematics to illustrate my point. Is not mathematics a physical science? Furthermore, my illustration would predict that prices must rise when the money supply increases, and yet in recent months the money supply HAS increased and prices have not followed. Should we discard the quantity theory of money? No. The theory is at the foundation of understanding money and prices and it does explain long-term trends. (Since 1990 M2 has increased by a factor of 2.62 while nominal GNP has increased by 2.57, which leads one to the conclusion that the economy has not really grown at all in terms of real goods and services in two decades. All of the increase GNP can be attributed to higher nominal prices caused by an increase in the money supply.) But other factors operating within this foundational theory determine market prices in the short-term.

There are three and only three uses for money—to hold (hoard), spend, and invest. Of the three, only the size of the spend-and-invest components determine the price level; i.e., spending and investing are those components of the money supply that are brought to market to purchase goods available for sale. As the total quantity of spending and investing increase in relation to the quantity of goods and services brought to market, prices will increase. If either or both of these components decrease, prices will decrease. Furthermore, if the money supply increases—that is, the total of all three uses increases—and all of the increase goes into hoarding, the price level will remain the same.

(As is the case with the quantity theory of money, the concept that there are only three uses of money was not discovered by any single economist, but I refer the reader to chapter seven of Hans-Hermann Hoppe’s The Economics and Ethics of Private Property for an excellent discussion of the subject.)

Here is an example that I use in my Austrian economics class at the University of Iowa: Suppose that the Fed printed enough paper money to give everyone in America one million dollars. Since there are 300 million Americans, the money supply would increase by 300 trillion dollars! Surely that would trigger higher prices! But let us also assume that every American took the money and placed it under his mattress. He did not spend one cent. What would happen? Well, the money supply would increase by 300 trillion dollars, but the price level would remain the same. All the new money would have gone into hoarding and would have no impact on prices.

Now we get a glimpse of what has been happening for several years. Central banks around the world have been printing money, but most of this money has been hoarded. When governments spend money without first borrowing it from the existing monetary stock or taxing it from the citizenry, the new spending eventually goes into bank reserves. Since the banks have not increased lending, the money supply has not increased. As of July 28, 2010 bank excess reserves stood at $1.012 trillion dollars. This is a form of money hoarding. Another form of money hoarding is the buying of sovereign debt. For example, the U.S. government has sold hundreds of billions of dollars of debt to our trading partners. This happens when foreigners foolishly believe that running large trade surpluses is somehow a national advantage. But Frederic Bastiat exploded this fallacy over a century and a half ago in his essay Government. By holding its currency cheap in order to export goods, a country impoverishes itself by shipping useful goods in exchange for depreciating paper money. Since these foreign governments have no use, so far, for American products, they buy U.S. Treasury debt in order to “park” the money until some future date. This, too, is a form of hoarding, because the money does not finance spending and/or investing.

The End to Hoarding

There is no way to predict the end to hoarding, but when it comes American prices will rise: the hoarded money will flow into spending and/or investing. At some point the hoarded money will burn a hole in peoples’ pockets. The first holders of large amounts of American money will be able to exchange their dollars for goods, services, and assets at today’s prices. But as this hoarded money flows into spending and investing, prices will start to rise. Other holders of hoarded U.S. dollars will realize that nothing can stop the depreciation of the dollar, as illustrated by relentless price increases. Now we will enter what Ludwig von Mises called the “danger zone”. Even if the central banks try to stop the flow of hoarded funds into spending and investing, they will be unsuccessful because market psychology has changed. No one will wish to hold depreciating dollars; they will be spent as rapidly as possible, creating the real possibility of what Mises called the “crack-up boom”. Money becomes worthless.

Just as the psychology of today’s market mitigates holding dollars, once the floodgates have been opened the psychology of the market will reverse. In The Mystery of Banking Murray N. Rothbard explained that market psychology can change very slowly, as in America for the first two decades after World War II, or very rapidly, as in Germany after World War I, where in 1923 the world witnessed the worst crack-up boom ever to appear in a modern, industrial nation. Germany recovered only when it exchanged the old mark for the new Rentenmark at one trillion old marks for each new Rentenmark and the Reichsbank pledged to hold the supply of Rentenmarks stable. When the Reichsbank kept its word gradually the people regained confidence in their currency. But the damage had been done. The resources of the middle class had been wiped out, and, more importantly, the German peoples’ confidence in social institutions had been shattered, opening the door to the demagoguery of National Socialism.

It Can’t Happen Here

Americans are no less ruled by the iron laws of economics than are other, less fortunate peoples. Never in the history of the world has so dominant a world power engaged in such massive money debasement. The trillions of dollars held around the world represent claims upon the productive sector of the U.S. economy that simply cannot be met--at least not at today’s prices. The German hyperinflation of 1923 wiped out the German government’s war reparation debt, but at the stupendous price of ushering in the fascists. Likewise, the U.S. could technically pay its national debt by so devaluing the dollar that it effectively robs dollar holders of their good faith claims upon American resources. I would remind xenophobic Americans, who may believe that robbing foreigners is of no concern, that Americans hold dollar claims, too, and would suffer just as much, if not more.

At the present time there is no better market alternative to holding American dollars. All currencies are fiat currencies, managed by the whim of politicians buying votes with more entitlements. But forces are building to end American hegemony in monetary affairs. The Chinese, the Indians, the Arabs, and the Russians are floating rumors of issuing a gold-backed currency, and the market always rewards a better product. It would be the greatest tragedy to befall this nation, if our foolish government destroyed our currency at the height of our productive capacity, making indirect, peaceful, cooperative exchange an impossibility. It can happen here!

My Letter to National Review re: Two Excellent Book Reviews

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Two Excellent Book Reviews
Date: Sun, 25 Jul 2010 08:15:10 -0400

Dear Sirs:
Congratulations on the two excellent book reviews in your August 2nd issue--James V. DeLong's review of The Next American Civil War by Lee Harris and Travis Kavulla's review of Prairie Republic by Jon K. Lauck. It isn't possible for most of us to read all the wonderful and important books that are written each year, so we must rely upon book reviews to distill the essence of these books, which your reviewers did so well. I was especially glad to see Mr. DeLong's defense of the Tea Party criticism of today's political class--Mr. Harris's "meritocrats". Most of the people in this class do not attain their power by merit but by rent seeking. They join the ruling class at low levels, adopt the arrogant outlook of the class and advance through the ranks through Soviet-style internal alliances. These people seldom are capable of earning a living in the private sector that comes close to their remuneration via government jobs and/or organizations that feed off of government grants. And herein lies the problem. Although the meritocrats may be a small percentage of our population, they buy the tacit support of the vast majority of Americans through their welfare and subsidy programs. For example, few Americans are willing to scrap Social Security despite the fact that it is nothing more than a government-mandated Ponzi scheme that will either fail or bankrupt the nation. Even our supposedly-independent farmers are little more than agents of the government, deriving much of their annual income through incomprehensible (to the rest of us) farm subsidy programs. The entire ethanol and wind power industries are completely dependent upon government subsidies. We are becoming a nation of pickpockets--all standing in a circle picking the pocket of the person in front of us...and who will be the first to cry "Stop"?

Patrick Barron

My Letter to National Review re: Discrimination

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Re: Discrimination in Public Accommodations
Date: Thu, 22 Jul 2010 15:24:35 -0400

Dear Sirs:
In his letter published in the August 2nd, 2010 edition Mr. Ken Jansen states that there is a "public accommodations principle" that requires Somali taxi drivers to pick up passengers who they find to be objectionable and that "we rightfully forbid many forms of discrimination". In a rhetorical slight of hand Mr. Jansen states that these taxi drivers should "get out of the public accommodation business." But the taxi drivers are not in the public accommodation business; they are in the taxi business. They have invested significant time and money in their businesses and have every right to defend their lives and property from those whom they deem objectionable. As a more powerful example, Mr. Jansen cites laws against discrimination in hotel accommodations. What Mr. Jansen overlooks in both cases is the sanctity of property rights and that failing to offer a service or buy a service does not cause anyone harm. The fact that I buy my groceries from A instead of B does not mean that I have harmed B. Likewise, by refusing to sell a product that I own to A and not B, no matter how objectionable the reason, causes no harm to B. Real harm is physical harm; but there is no physical harm in refusing to act in a manner that "society" dictates. In a truly free society, a business owner who discriminates for reasons that society finds objectionable would find his business in decline. My wife still refuses to eat at Denny's due to media reports years ago, whether true or not, that some restaurants discriminated on the basis of race. Our modern theory of justice has been so perverted that property rights are deemed to disappear as soon as one offers a product or service for sale. This is not justice but tyranny.

Patrick Barron

REAL FINANCIAL REFORM

So Congress has finally passed its much-anticipated reform of the financial system. Like all modern pieces of legislation, it supposedly fixes a problem created by the free market but it actually is a problem that government itself caused. Its main tenets are pure demagoguery and would have the public believe that bankers are brainless. For instance, it proclaims that lenders must do sufficient due diligence to satisfy regulators that the borrower can pay back the loan. Wow! Now, who in the banking industry would ever have thought of that?

There is not sufficient space in an essay of this kind to explain all the easily identifiable adverse consequences let alone the likely unintended adverse consequences of this horrible legislation. Instead I will explain what real financial reform would look like. Now if you show this essay to most politicians or government bureaucrats, make sure they are sitting down, because my reform relies entirely upon the free market. Government’s role is restricted solely to the defense of property rights.

End Fractional Reserve Banking

Fractional reserve banking is the underlying problem. By allowing banks to hold fractional reserves, rather than requiring 100% reserves, more than one person has claim upon the same asset. Since the claims are identical--both owners hold dollars that must be honored “for all debts public and private”, according to our legal tender laws--eventually the market recognizes that there are not enough resources to complete the entrepreneurial projects that were started by the initial and sustained injection of new fiduciary media. This is the nickel explanation of the boom/bust business cycle. So, number one, the government must prohibit and prosecute the fraud of fractional reserve banking. This means that the only way the money supply can grow is by way of the entrepreneurial production of more standard money; i.e., gold or silver.

Deposit Banks and Loan Banks

A common confusion that emanates from our current fractional reserve banking system, especially with the Fed as lender of last resort and the FDIC as guarantor of bank deposits, is how banks would be able to loan money at all if required to maintain 100% reserves on one’s deposit. How can they lend out the money without committing fraud? Murray N. Rothbard offers the simplest explanation in The Mystery of Banking. Divide banking into deposit banks and loan banks. Only deposit banks must maintain 100% reserves.

Here’s how I explain it to my students at the University of Iowa. Suppose that over the summer each one of them earns money and places it in the deposit bank. Since the deposit bank must keep 100% reserves, there is no way that the bank can earn money to cover its operating expenses except by charging fees for its services. After a few weeks the student has built up a balance in his deposit account that exceeds his immediate spending needs. In other words, he has accumulated enough that he can SAVE in order to spend at some later time. Therefore, he writes a check against his deposit account and gives it to a loan banker. The deposit will carry a maturity date, exactly like today’s certificates of deposit. Next the loan banker will seek worthy borrowers for our student’s money. If the student wanted to give the banker his money for a short period of time, say three months, the banker would seek borrowers who wished to finance inventory accumulation or accounts receivable financing, for example, which liquidate fairly quickly. If the student felt that he could invest his savings for a much longer period of time in order to earn a higher rate of interest, he might buy a five-year certificate of deposit. Then the banker would find borrowing needs that correspond to this time frame, perhaps financing the construction of a factory. The interest rate is the mechanism that regulates the loan market. If depositors are short term oriented, businessmen cannot finance long term projects. If the depositors are more long term oriented, then these projects may become financially sound. In Austrian economics we call the depositor’s relative orientation to the shorter or longer term as his “time preference”.

The Impossibility of a Boom/Bust Business Cycle

Notice that no matter what the depositor’s time preference he gives up his ability to spend for some defined period of time. His standard money has been moved from his deposit bank to the loan bank for further transfer to a borrower. Eventually the borrower pays back the loan and the loan bank has funds to honor the depositor’s matured time deposit. At no time was more than one person claiming the right to spend the money; therefore, there is no way that two people can claim the same physical asset. No projects will be started for which there are inadequate resources for their completion. A boom/bust business cycle is impossible under such circumstances.

The Role of the Loan Banker’s Capital Account

Notice that the depositor understands perfectly that his savings is at risk. If he did not wish to risk his savings, he could hold standard money certificates (paper claims upon real money—gold or silver—held in the banker’s vault), a book entry on the deposit banker’s records—a checking account--, or the physical gold or silver itself. As long as the government prosecutes fractional reserve banking as fraud, there is no risk that the depositor will lose his money, because he holds an audited claim upon the physical money itself. But what about the saver who deposits his money with the loan banker? What guarantee does he have that he will get his money back, with interest, when the time deposit matures? This is where the banker’s capital account and, just as importantly, his reputation for probity enter the picture.

The higher the percentage of the loan banker’s capital account to his loans outstanding, the safer are his depositors’ funds. The safest loan bank would be one in which the banker’s capital account EXCEEDS his deposit obligations. Let us assume that Mr. Rockefeller capitalizes his new loan bank with $10 million and will accept savings deposits up to only $5 million. Let us assume that Mr. Rockefeller invests his $10 million in very safe short term Treasury bills. He accepts $5 million from savers and finds borrowers who will pay enough to cover Mr. Rockefeller’s interest expense to his depositors, his operating expenses, and a small provision for future loan losses. The excess of his interest revenue, obtained from his borrowers, over these three expense categories is his profit. One can see that, even if he lost all $5 million of his depositors’ money, his capital account will cover the loss by a factor of two! As time goes by and the market realizes that Mr. Rockefeller is a good banker, who suffers very few loan losses, they will be willing to accept that the capital account may be a smaller percentage of the loans outstanding. Mr. Rockefeller may accept (and the public will decide to deposit) MORE than his capital account can cover. This is NOT fractional reserve banking, since there still is only one claim upon each dollar. But let us say that Mr. Rockefeller now takes deposits up to $20 million. Now he can suffer a loss of half of his loans and still be able to meet his depositors’ claims out of his $10 million capital account.

One can see that the interest rate offered by Mr. Rockefeller and accepted by his depositors will be influenced by how safe is Mr. Rockefeller’s bank, as exemplified by his capital account and his history of sound lending. The market will have room for many lenders, each with varying percentages of capital to loans and different histories of banking success. Poorly capitalized loan banks with bad loan histories will fail to attract depositors and will be taken over by better bankers. Since there is nothing to trigger the destructive boom/bust business cycle, bad loans will be very few and loan banking will be safer than our current FDIC insured system, in which moral hazard has been institutionalized by bailouts of failed Go-Go, risky bankers.

This is not to say that a bank could not suffer loan losses in excess of its capital account, but there would be no systematic reason for widespread bank failures, as is the case now with inflationary fractional reserve banking. The unprofitable bank would attempt to liquidate before running its capital account dry; therefore, it probably would still meet its depositors’ matured time deposit claims. In other words, loan bankers might go out of business but most likely they would pay off their depositors out of what remained of their capital accounts before closing their doors. They would act out of simple self-interest to preserve as much of their capital as possible.

The only role for government in such a free market banking system is to ensure that deposit banks do not violate their requirement to keep 100% reserves. Government would have no role whatsoever in regulating or examining the loan banks. The army of regulators armed with thousands of pages of regulations would not be needed…the free market would regulate banking the same way it regulates the availability and price of any other product. The era of the boom/bust business cycle would be a thing of the past. The only barrier to this simple, common sense, free market system is the hubris of government that it can regulate banking better than the unhampered forces of the free market.

My Letter to National Review re: State Capitalism

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: State Capitalism
Date: Wed, 14 Jul 2010 11:10:40 -0400

Re: Perils of State Capitalism

Dear Sirs:
In Mr. Gordon G. Chang's excellent review of The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer, Mr. Chang points out that state capitalism weakens markets.

"They (the despots and dictators) can, for instance, buy off elites by granting them monopolies and placate populations with the prosperity this system can generate. By bending markets, however, rulers ultimately make them less efficient. Over time, state-capitalist systems erode."

A better explanation is that by "bending markets" the authoritarian governments consumer capital or, at a minimum, prevent its accumulation even to the small extent needed to maintain the current capital base. For awhile an economy can display the appearance of prosperity as capital is spent on bailing out unprofitable businesses and sustaining those industries, like housing, that are already over-built. This is the destructive Keynesian prescription adopted by all the world's leading governments right now in their misguided attempt to "stimulate" the economy out of recession. But economies cannot be stimulated out of recession; they must liquidate the previous malinvestment and replenish the capital base upon which to build a new, true recovery. This requires savings--so spending must be reduced, not increased. Reduced spending will result in lower prices, the dreaded "deflation" that governments under the spell of Keynes vow to fight. But deflation is part of the cure--the inflationary bubble has burst and good riddance to it. The world's economies will not recover until governments cease their fruitless interventions.

Patrick Barron

My Letter to National Review re: The Real Cause of the Business Cycle

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Roubini's Reputation and the Real Cause of the Business Cycle
Date: Fri, 9 Jul 2010 13:27:00 -0400

Re: The Real Cause of the Business Cycle

Dear Sirs:
In his review of "Crisis Economics" by Nouriel Roubini and Stephen Mihm, Mr. David M. Smick calls Mr. Roubini a "media superstar" for his 2006 claim that the U.S. was in a housing bubble. If one goes to Mises.com and searches on "housing bubble", one will find over 1,200 entries, many of which go back to 2003. Austrian economists have been right about this crisis from the beginning, because they understand the true nature of the business cycle, so ably explained by Professor Gary Wolfram elsewhere in the same NR issue. (See "Your Money Back") According to Mr. Smick's review, Mr. Roubini claims that "Crises--unsustainable booms...are hard-wired into the capitalist genome." Wrong. The boom/bust business cycle is caused by an extension of bank credit not backed by real savings. Banks are tempted to extend credit in an unsustainable manner due to their right to engage in fractional reserve banking. This is the primary source of the boom. In the nineteenth century two crucial court cases in England gave banks unprecedented legal protections. British courts ruled that bank demand deposits were loans and not bailments. In other words, the banker was not required to keep standard money in his vaults equal to the amount of money entrusted to him by his depositors. Unlike a grain elevator operator, for example, the banker could lend out his customers' demand deposits for his own benefit, meaning that there can be two or more claims upon the same money. Of course this is the very definition of fraud, but the British courts ruled otherwise, and the American courts followed British precedence. Although fractional reserve banking may be legal it is not immune to the law of economics, which punish bankers for making loans with demand deposits and not savings deposits. As Michael McKay explains in his wonderful little book, "Secrets About Money that Put You at Risk", it is as if the bank creates multiple owners of the same horse, who may have no conflict until they decide to have a horse race. The real problem is one of a violation of property rights, which is not just a legal problem but also an economic one. Expansion of the money supply not backed by a commodity creates claims upon existing property for which no one has given consideration. It is theft through the banking system, and eventually it becomes apparent that there are not enough resources to honor all the claims. This is the beginning of the bust phase, and attempts to keep the bubble inflated are futile and cause even more damage. Therefore, don't expect a recovery until the government stops manufacturing claims via its inflation machine par excellence; i. e., the Fed.

Patrick Barron