Tuesday, November 30, 2010

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.

Saturday, November 27, 2010

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

Friday, November 26, 2010

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

Sunday, November 21, 2010

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.


Patrick Barron

Friday, November 12, 2010

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

Wednesday, November 3, 2010

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.

Monday, November 1, 2010

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