My letter to the NY Times re: The Forgotten Principle of Federalism

Re: Consequences in a Fiscal Plan: Municipalities Fight Proposals to Tax Their Bond Interest

Dear Sirs:
There is another objection to taxing municipal bond interest that goes beyond one of class warfare ("the government forgoes about $32 billion a year in taxes") and stands upon the principle of federalism, a check upon the power of government every bit as important as the separation of powers. Or is this principle to be thrown aside, as have so many others, as a barrier to the desires of the all-powerful federal government?
Patrick Barron

The Real Role of a Central Bank--According to Silvio Berlusconi

From Open Europe news summary of December 19, 2012 (my highlight in red):

Berlusconi: Italy will be forced to leave the euro unless ECB starts printing moneyIn an interview on Italian public broadcaster Rai Uno yesterday, Silvio Berlusconi said, “Either Germany understands that the ECB must act as a real central bank, and therefore print money, or unfortunately we will be forced to leave the euro and return to our currency.” Meanwhile, Berlusconi’s party has asked to postpone the Italian general elections “by one or two weeks” – suggesting either 24 February or 3 March as possible dates. Separately, La Stampa reports that over the weekend, Mario Monti could officially endorse a group of centre parties which have pledged to continue with his agenda, rather than running himself.
ASCA Il Messaggero Corriere della Sera Corriere della Sera 2 Repubblica Repubblica 2 Rai Uno AGI Libero La Stampa Times: Emmott

So there we have it--the real roll of a central bank is to print money.

How Sovereign Debt Default Will Be Kicked a Little Further Down the Road

From Open Europe news summary of December 19, 2012:

Cyprus announced yesterday that it would not default on any payments as the pension funds for the public electricity and telecoms firms as well as the Ports Authority have agreed to provide the state with a cash injection to meet costs in December.Kathimerini

For many countries, robbing pension funds in order to avoid default will be more palatable than practicing sound budget discipline.

When the Laws of Economics Are Ignored

From today's Open Europe news summary:

Dutch daily Trouw has seen leaked European Commission and Court of Auditors documents it believes shows that "the Czech Republic is committing large scale fraud with EU subsidies", while "the European Court of Auditors has concluded in May that the Czech authorities have been lying to Brussels in a systemic way".
Trouw Elsevier

Common EU subsidies have created a "tragedy of the commons", whereby all EU members are encouraged to plunder the commonly owned resource (in this case "subsidies"). Charges of fraudulently trying to increase one's plunder simply ignore the power of economic law. The subsidies are there for the taking and, I would suspect, national governments encourage their bureaucrats to find creative ways to get more plunder. "Lying to Brussels in a systemic way" has been a common occurrence for years. For example, Greece was admitted to the EU after it falsely claimed its budget deficits met EU rules.

My letter to the Wall Street Journal re: You must dig deeper

Date: Tue, 18 Dec 2012 16:23:07 -0500

Re: How Big Deficits Became the Norm
 

"But the size and trajectory of the federal budget can be boiled down to three basics: the economy, spending and taxes. "

Dear Sirs:
Sorry, but your quote above does not dig deep enough. Deficits have become the norm, because the Fed monetizes the government's debt. The unholy alliance between governments and central banks is entirely responsible for out of control spending by governments and unprecedented budget deficits. Under sound money, a government must fund its operation either from taxes or honest borrowing in the bond market. This places a natural limit on government spending. But fiat money, issued by central banks and forced upon the people by legal tender laws, allows government to avoid either of these unpalatable measures and pretend as if reality does not exist. Government can spend as much fiat money as it desires. And (Oh My!) its desire is unlimited!

My letter to the NY times re: a Misleading Headline

To: letters@nytimes.com
Subject: Misleading Headline re: Shared Debt in Europe
Date: Sun, 9 Dec 2012 13:42:47 -0500

Re: New Report Opposes Shared Debt in Europe

Dear Sirs:
A careful reading of Herman von Rompuy's Towards a Genuine Economic and Monetary Union does not support your headline that his report opposes shared debt in Europe. The report is full of carefully chosen words that reveal the true goal--replacing national responsibility for financial affairs with a centralized and socialized European regime. Here are just a few quotes from the report that reveal that goal:

1. That the EU will have the ability for "targeted and flexible financial support" to EMU members.

2. That the EU will have the "fiscal capacity to improve the absorption of country-specific economic shocks, through an insurance system set up at the central level."

3. The Single Supervisory Mechanism (SSM) "will constitute a first step towards a financial market union" via the "ESM (European Stability Mechanism) direct bank recapitalization."

4. The report calls for "the responsibility of dealing with bank resolution...moved to the European level" and "based on an effective common backstop."

5. The single resolution mechanism would rely upon a "European Resolution Fund...funded through ex ante risked-based levees on all banks directly..."

6. The report wants a "central fiscal capacity" (This is code for direct taxation.)

7. The report wants "risk-sharing tools" and the "ability to borrow" to "promote structural reforms and for absorbing asymmetric shocks." ("Fiscal risk-sharing" is one of the report's "Guiding Principles".)

8. The report claims that centralized power is the only way to "avoid excessive divergences in competitiveness." (But the only way to achieve this goal would be to hobble the more competitive, which would benefit no one and harm everyone, because the more competitive provide more goods and services to the market.)

In its conclusion the report reveals its anti-democratic and anti-national government ideals by stating that "national parliaments are not in the best position to take it (common interests of the union) into account fully." So, rather than the report expressing opposition to shared debt, it is a guideline for moving step-by-step toward that very goal and beyond to total centralization of banking and finance through the socialization of risk.

Under Sound Money Everyone Understands Monetary Policy

Understanding today's convoluted domestic and international fiat monetary system frankly requires a great deal of time and study.  One must understand fractional reserve banking, which requires that one understand the concept of fractional reserves and the way this system affects the money supply.  One must go through several steps to how this forced money come into existence in the first place.

One must understand central bank open market operations (raise your hand if you even understand what these misleading words mean!).  Internationally, one must try to understand floating exchange rates, how they are manipulated by central banks, and the resulting impact on national economies.  For example, is it best for a country to drive down its exchange rate in relation to other currencies or do the opposite?

These issues are never understood by politician policy makers, who are among the most illiterate in economic matters, so monetary policy swings to and fro according to which economic group has temporary control over the levers of government central banks.

So Simple Even a Child Can Understand It

In a sound money environment there is little controversy.  Under sound money--in which money is a commodity (for discussion purposes let us assume it to be gold)--everyone understands monetary theory.  Whether it be an individual, a family, a corporation, or a nation...either one has money or one does not.  It really is as simple as that.  Even children learn the nature of money.  A child quickly learns that the things he wants cost money and either he has it or he does not.  If he does not, he quickly grasps that there are ways to get it.  He can ask his parents for an increase in his allowance.  Or he can earn the money he needs by doing chores around the house or for friends and neighbors.  He might be able to borrow the money for large purchases, promising to pay back his parents either from his future allowance or from anticipated future earnings from doing extra chores.  His parents can evaluate this loan request simply by calculating the likelihood that his allowance and chore income are sufficient.

How is this any different when applied to adults, companies, or nations?  In a sound money environment, they are the same.  One's parents earn what they spend on the family and may borrow from the bank to buy a home or a new car.  The lender will examine whether the parents' income is sufficient to pay back the loan.  If the family hits hard times, it may ask for assistance from relatives or a charity.  Companies have more means with which to fund their operations.  Stockholders provide the company with its initial capital.  Thereafter, when normal earnings are insufficient to fund desired expansion, the company can borrow against accounts receivables and inventories, both of which provide varying degrees of security for the lender.

So Simple Even a Politician Can Understand It

A national government's finances, under a sound money system, is no different than either a household or a company.  It needs to collect in taxes what it spends.  If it suffers a budget deficit, it can cut back spending, attempt to raise taxes, or borrow in the open market.  In a sound money environment, there is a limit to the amount of debt that even a nation can incur, due to the need to pay back the loan from future tax revenue.  If the market believes that this may not be forthcoming, the nation's credit rating may suffer and its borrowing costs will rise, perhaps to the point that the nation is completely shut out of the credit market.  But this is a good thing!  The market instills practical discipline that even a politician can understand!  Under sound money one does not need a special education to understand the monetary system.

Taking the process one step further, anyone can understand international monetary theory in a sound money environment.  The national currency is simply shorthand for a quantity of gold.  A US dollar may be defined as one thirty-fifth of an ounce of gold, and a British pound defined as roughly one seventh of an ounce of gold.  Exchange rates become mathematical ratios that do not vary.  So an American purchasing English goods would exchange his dollars for pounds at a ratio of five dollars per pound; i.e., one seventh of an ounce of gold (a pound) divided by one thirty-fifth of an ounce of gold (a dollar) equals five dollars to a pound.  Through the banking system the English exporter would demand gold from the issuer of dollars, whether it be from a central bank or private bank, at thirty-five dollars per ounce.  When a currency is simply a substitute for gold, either the issuer has gold with which to redeem its currency or it does not.

Money Issuers Subject to Normal Commercial and Criminal Law

When a nation overspends internationally, its gold reserves start to dwindle.  Money, which is backed one hundred percent by gold, becomes scarce domestically.  Domestic prices fall, triggering a rise in foreign demand for the nation's goods.  The process of gold depletion is halted and then reversed.  This is the classical "currency school" of international monetary theory.  I say it is no theory at all, but simply a description of how an unhampered international monetary system actually works.  Commercial banks present checks drawn on one another every day and the same process would exist for gold backed currencies.  If a bank issues more script than it can redeem for gold at the promised price, it is guilty of fraud.  Its officers and directors can be sued in court for any loss incurred by those who accepted the bank's script.  Furthermore, the officers and director could be prosecuted for the crime of fraud.  In other words, banking would be subject to normal commercial laws and bank officers and directors would be subject to normal criminal laws.

Good Money Drives Out Bad

The free market monetary system would drive bad money issuers out of the market.  Plus, bad money issuers would suffer the loss of both their personal finances and, in the case of outright fraud, loss of their personal freedom.  This would be a sobering incentive to deter criminals and attract only legitimate money issuers.  Money would be a bailment; i.e., property held for the benefit of another, which must be surrendered upon demand for redemption.  All around us exist analogous bailment examples of entrusting valuable goods to complete strangers.  We leave our cars with valets at parking garages, our clothing at neighborhood cleaners, our overcoats at coat checks everywhere, our luggage to the airlines, valuable merchandise to the Post Office and other shippers...fully expecting that our property will be returned to us...and it almost always is!  Likewise money issuers would thrive only when the public trusts their integrity, which would be enhanced by regular outside audits by respected firms of the existence of one hundred percent reserves to back the money issuer's script.  How different this would be from our present system in which the Fed will not allow an audit of its gold reserves even when held for the benefit of other central banks!  It is clear that in a free market monetary system such a policy would drive Federal Reserve Notes out of the market through lack of demand.  Even were the Fed to back its notes with its gold reserves, in a totally free market in which private banks could issue their own gold-backed script, the Fed would suffer from its past history of blatant money debasement and secrecy in it operations.  The market would prefer the money issued by a well respected private bank whose operations are transparent and subject to outside audit by respected accounting firms.

Conclusion

In a sound money environment everyone understands monetary theory.  Money is like any other desired commodity, except it is not consumed.  It is a medium of indirect exchange, which traders accept in order to exchange for something else at a later time.  This is easily understood, whether the trader is a child, a parent, a company, or a nation.  One either has money or one does not.  The money can be a money substitute, a bailment, with which one can demand the redemption of the real money--gold.  Money issuers must keep one hundred percent reserves against their money substitutes in order to abide by normal commercial and criminal law.  No special agencies or monetary authorities are necessary to make the system work.  The system emerges naturally and polices itself via the normal commercial and criminal legal system.

This is the system that government does not want us to have, because it provides no special favors for enhancing state power.  Sound money shackles the government to the will of the people and not vice versa.  As Ludwig von Mises stated in The Theory of Money and Credit:

" It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments.  Ideologically it belongs in the same class with political constitutions and bills of rights."

My letter to the NY Times re: The Fallacy of Government's Approach to Healthcare Cost Control

From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: The Fallacy of Government's Approach to Healthcare Cost Control
Date: Thu, 6 Dec 2012 14:55:33 -0500

Re: Hospitals Face Pressure to Avert Readmissions

Dear Sir:
Because the individual has significant control over his own health, treatment for ill health is not suitable for insurance. Insurance is suitable only for those classes of events that are beyond our own control. Such insurance usually contains clauses in the contract that deny payment in the event that the individual himself was the cause of the insured event. For example, life insurance does not pay if one takes one's own life. Fire insurance does not pay if one burns down one's own insured property. But, no one can control where or when a tornado will strike, so damage from a tornado is an insurable event.

Medicare's preposterous rules that hold healthcare providers responsible for the demand for service by individuals fails on many levels but mainly it fails to recognize that individuals have great control over their own health. To compound this intellectual error, Medicare deigns to saddle the healthcare provider with this responsibility, when healthcare providers are consulted only AFTER one becomes ill. The provider has no control over the events that led up to the loss of health or the severity of the problem before being consulted, has no control over the frequency with which the patient will return for further treatments, and has almost no control over whether or not the patient adheres to the provider's recommended treatment regimen. This is especially difficult when lifestyle issues are involved, such as eating and smoking habits or drug and alcohol consumption.

Furthermore, I find it ironic that government demands to pay for a vital service and then tries to find ways to deny that service to the public or force some other entity to pay.

My letter to the NY Times re: Youth Unemployment in France Can Be Cured

From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: Youth Unemployment in France Can Be Cured
Date: Tue, 4 Dec 2012 13:05:06 -0500

Young, Educated and Jobless in France

This excellent article implies that the current phenomenon of high levels of youth unemployment in France is a special case and that future generations will find work in their chosen field. But what is France doing that will bring about that happy result? Very little. It is no secret to anyone, including the French, why there is so much youth unemployment. The government has caused massive disequilibria in the labor market by its anti-business and pro-union laws that, among other things, make it difficult to hire full time workers and impossible to fire them. Furthermore, the French system of subsidized higher education produces people with the wrong skills. To top it off, the French welfare system allows the young to remain unemployed and not train for the blue collar jobs that are going begging. So, the answer is clear--liberalize the labor market, reduce government subsidies to higher education, and reduce unemployment welfare payments. In other words, get government out of the labor market.

Cut Spending to Avoid the Fiscal Cliff

The goal of the current debate over the so-called "fiscal cliff" has been mischaracterized by the Democrats as one of how best to shrink the federal budget DEFICIT.  Republicans should take the offensive and re-characterize the debate as one over the size of the federal budget itself.  The real problem is that the federal government spends too much, not that its receipts fall shockingly short of its expenditures.  The deficit debate is used by the Democrats to justify higher taxes, whereas the size of the budget itself should be the issue.

Excessive and unconstitutional spending is the cause of our economic problems and not the solution via so-called "stimulus" spending which produces a phony "multiplier effect".  Not only is there no stimulus and no multiplier effect to government spending, the opposite is the case.  Government spending is not a free good, but comes at the expense of the private economy, which is the real economy.  The more government spends, the poorer we become.

If government expenditures really did stimulate the economy and produce a multiplier effect, then there would be no need for taxation.  As Edmund Contoski states in his new book The Impending Monetary Revolution, The Dollar and Gold, "If the multiplier really were larger than 1.0, the GDP would rise even more than the rise in government spending!"  But as Mr. Contoski shows through both sound theory and by referencing many well regarded empirical studies, government spending actually causes the economy to shrink.  This stands to reason due to the coercive nature of government spending.  Whereas private spending is always a win-win transaction--meaning that both parties fully expect to improve their economic situation, otherwise there would be no transaction--government spending is win-lose, meaning that government coercively takes from some and gives to others.  Of course, the recipients are better off, but only at the expense of others.  And since neither party engages in the transaction freely, the net benefit cannot be anything other than negative.  Rather than individuals carefully choosing what transactions to enter, government presumes to do it for them.  There is no way that even the beneficiaries of the spending are fully satisfied and, of course, those who pay gain absolutely nothing.

So, the Republicans should stand firm that spending must be cut...and not just the rate of spending increases, but an actual cut in 2013.  The Republicans control the House of Representatives, where all spending bills must originate.  Therefore, although the Republicans may not have the votes to extend expiring tax cuts, they can stop all spending.  This is a powerful weapon, and it should be used.  It is high time for the Republican Party to take a principled stand against the socialist policies that are destroying our nation.  Congressmen must take seriously their oath to defend the Constitution.  Nowhere in its enumerated powers, as specified in article one, section eight, does our Constitution give any authorization for the vast majority of our government's expenditures.  Congressional Republicans should stand firmly on the bedrock of the Constitution, knowing that it is both their legal and economically principled thing to do, and our nation will be saved.

The real cause of higher worker pay

From the November 19, 2012 Open Europe news summary:

During a radio interview with Europe 1, French Industry Minister Arnaud Montebourg said that Germany “should raise its salaries” to drive growth, and also asked Germany “to provide social security worthy of its name in a number of sectors”.
La Tribune

The idea that paying people more will increase demand and solve all our problems was refuted conclusively over 150 years ago by the classical economists, but that doesn't keep today's ignorant politicians from thinking that they have stumbled upon the idea for the first time.  This is nothing more than believing that paying someone to buy your product will make you wealthy, a truly irrational idea.  On the contrary, higher pay is a result of only one thing--higher productivity of labor.  And higher productivity of labor is the result of only one thing--more capital per worker.  And more capital is the result of only one thing--savings.  We cannot spend ourselves into prosperity, but we can SAVE ourselves into prosperity, economic self-sufficiency, and economic security.

Denmark Repeals Its "Fat Tax" for the Wrong Reasons

This article from Denmark is typical of one that can be found daily illustrating the many ways that governments everywhere intervene into our lives.  It is interesting that there is no mention in the article about personal freedom.  The "fat tax" will be repealed (only to be replaced by something else) due to the complaints of producers in Denmark.  The personal freedom of Danes to consume the foods they prefer is never discussed and, apparently, was never considered by Denmark's legislative elite.

Merkel's Fiscal Union Plan Will Not Work

Re: Merkel's sovereignty remedy

Excellent article, although I do not agree with the author's conclusion, to wit:

"The upshot of the euro crisis will be some kind of fiscal union, but what fiscal union means is not clear. Germany believes it means sending tax inspectors to Thessaloniki. Brussels believes it means sending cheques to Thessaloniki."

A fiscal union (Merkel's plan) means loss of sovereignty (thus the title of the article). Yet no country in Europe will accept outsiders dictating its budget. The alternative program of making all Europe responsible for the bailouts of sovereign governments is coming to an end. The circle cannot be squared, thus exposing the internal dichotomies of the common currency project. It rewarded irresponsible countries and, eventually, the few responsible ones rebelled. The solution is NOT to kick Greece or any of the other countries in crisis out of the eurozone; the solution is for Germany to leave the eurozone, reinstate the deutsche mark, and tie it to gold. This would cause of cascade of similar moves all over the world and bring an end to ever increasing sovereign debt. Debt could be increased only by voluntary purchases by real investors with the own, private real money, not by involuntary purchases by taxpayers with fiat money produced out of thin air.

My letter to National Review Magazine re: What Crimes Are "Hiding in Plain Sight" Today?

Re: "The Court Predator" by Mark Steyn

Dear Sirs:
Mark Steyn makes clear--and, I am certain, the British police will discover--that Jimmy Savile's criminal pedophilia was well known to British media elite for decades. I ask you, what monstrous crimes are "hiding in plain sight" right now...celebrated, in fact, by the mainstream media and academia? Here's a hint--the criminal bosses are named Bernanke, King, and Draghi. That's right...our central bankers are as celebrated for their crimes as was Jimmy Savile. It is right before our eyes. All central bankers blatantly admit that it is their policy to debase the value of the money currently held by the people. They blatantly announce targets of two percent debasement. Bernanke will continue his debasement crimes until unemployment drops to a level that he personally approves, whatever that may be and whenever that may occur...if ever. Draghi will debase the money held by citizens of the eurozone in order that the Greeks may enjoy the ephemeral benefits of the unsustainable welfare state. (Well, it is sustainable as long as Draghi will print euros and give them to the Greek government.) There may come a glorious time when these criminals will be sitting in the dock, wearing headsets, and listening to the roll call of their crimes, much as the post war generation saw the trials of the Nazis at Nuremberg. Will we give any credence to their defense that they were only following Keynesian theory?

Patrick I. Barron

Germany Must Repatriate ALL of Its Gold

The Greatest Threat to Worldwide Prosperity

The greatest threat to worldwide prosperity is the collapse of what remains of free market capitalism.  Not war.  Not depletion of scarce natural resources.  Not environmental degradation.  Not global warming (or is it "climate change" now?)  No, the greatest threat to worldwide prosperity is the complete collapse of what little remains of free market capitalism.  Throughout the world, and not just in totalitarian countries, the state has been advancing at the expense of economic liberty.  The indispensible tool that enables the modern state to usurp our liberties is its access to unlimited amounts of fiat money controlled by central banks; i.e., the unholy alliance of the state with the central bank.

Fiat money expansion has made the advance of statism possible through its ability to thwart the wishes of the people as the final arbiters of state spending.  The state can obtain an almost limitless amount of fiat money from its central bank.  It need not increase taxes or borrow honestly in the bond market, so it need not fear a tax revolt or high interest rates respectively.  All it needs to do is convince the central bank to buy its debt.  The state then takes control over more and more resources, squandering them on war and welfare, depriving the free market economy of its capital base.  Once the capital base has been depleted, the economy will go into a steady decline.

The poster child of this phenomenon is the (former) Soviet Union.  Yes, total collapse is a real possibility--for us too.  The Russian people may have believed that economic decline would reach a plateau, stop, and then reverse.  As explained in stark terms by Dr. Yuri Maltsev, former economic advisor to Mikhail Gorbachev, in Requiem for Marx, the Soviet economy deteriorated into one of subsistence.  The capital base of Russia had been destroyed, and collapse soon followed.

The monetary printing press is seen as an alternative to saving and investing as the means to grow the capital base.  Monetary stimulus attempts to generate economic recovery mainly through exports.

If a nation can increase its exports, so the logic goes, it can increase employment, pay off debts, etc.  So, rather than properly reforming the economy, monetary authorities engage in a destructive "race to the bottom" through competitive debasement of their currencies.  First one country then another intervenes into its own currency markets to cheapen its currency against all others.  But currency devaluation will not work, as explained in this article.

What is desperately needed is for one country to break from this failing and ultimately disastrous model of fiat money expansion and its horrific effects.  This one country must be in a special position whereby it is readily apparent that it is being harmed by currency debasement over which it has no control.  Fortunately for the world there exists such a country--Germany.

The Intolerable Monetary Position of Germany Creates a Unique Opportunity

Germany is the fourth largest economy in the world, behind only the US, China, and Japan.  Amazingly, it does not control its own money supply, because it is a member of the European Monetary Union (EMU), composed of seventeen nations using a common currency--the euro.  Each member, regardless of size, has an equal vote over monetary policy, administered by the European Central Bank (ECB).  Increasingly Germany's is the lone voice for monetary restraint--recently it was outvoted sixteen to one over an ECB plan to print euros in greater numbers in order to bail out bankrupt members of the EMU.  This is a situation that would be intolerable for any other country; however, due to Germany's history, it is reluctant to be seen as "anti-Europe" and instead has tried to work within the EMU framework to force bankrupt countries to reform their economies.  But this is a hopeless exercise, as explained by Dr. Philipp Bagus of King Juan Carlos University, Madrid in his brilliant book Tragedy of the Euro.  All the benefits flow to the irresponsible countries, so there is little incentive and no enforcement mechanism for meaningful reform.  Therefore, in a previous essay your authors have called for Germany to leave the EMU, reinstate the deutsche mark, and anchor it to gold.

Most recently there have been calls within Germany to repatriate substantial gold reserves held overseas.  The Bundestag--federal Germany's legislature and, as such, representing all diverse elements and factions in the country--is the impetuous behind this movement.  The Bundesbank, Germany's still extant central bank, has agreed to repatriate about one-tenth of its vast overseas gold deposits over the next three years.

But this is inadequate for the real task at hand.  Germany must repatriate ALL of its gold.  There is only one reason that a central bank would wish to repatriate its gold--to serve as reserves in a gold backed monetary system.  The market must be assured that the gold actually exists, that it is under the total control of its rightful owner, and that it is not leased or part of a swap arrangement.  Furthermore, the central bank must be willing to honor demands to deliver gold in the quantity specified in exchange for its paper money certificates and the commercial bank book entry deposits.

Delivery of Gold upon Demand is Crucial

If Germany is to back the deutsche mark with its own gold, markets must be certain that the Bundesbank can and will deliver the gold upon demand.  For under a gold-backed system the gold IS the money.  The pieces of paper that people carry in their wallets and keep in cookie jars and the book entry receipts at commercial banks are not money per se--these are money substitutes that can be exchanged for real money...gold.  The central bank can meet this requirement only if it has absolute control over its gold.

The Bundesbank has significant portions of its overseas gold deposits at the Federal Reserve Bank in New York and the Bank of England in London.   At one time it may have made sense to deposit gold in these countries in order to protect it from the possibility that the Red Army would overrun Germany.  Fortunately that threat is no more.  But the Federal Reserve Bank has been very circumspect about displaying Germany's gold to its rightful owners.  Now, I ask you, is this not very suspicious behavior?  Why would the Fed refuse to show the actual gold to Germany or any other nation with gold deposits?  The reason usually given is one of security, but what does the Fed think is going to happen? Does it think that armed robbers will be able to abscond with some bars?  This is preposterous!  The gold is the property of Germany.  Germany should insist on viewing its gold, counting its gold, testing its gold for fineness, and making quick arrangements for moving its gold to its own vaults in Germany.

Let Justice Be Done...

Either the gold is all there, and rumors to the contrary are baseless, or some portion of the gold is not there or is encumbered in some way.  If the former, all is well.  If the latter, then let's learn about it now, so that we can stop any further theft and so that we can establish a financial crimes tribunal to try all who had a part in the theft.  If that means prosecuting central bank officials in the US and/or the UK, so be it.  If that means that the exchange rates for the dollar and/or the pound sterling fall in relation to other currencies, so be it.

Let's learn the truth, whatever that may be, so we can get on with the important work of placing the world's finances on the solid foundation of sound money and not on promises of confidence men.  Let us adopt the Latin legal concept fiat justitia ruat caelum, "Let justice be done though the heavens fall", and not lose sight of the goal of saving what remains of free market capitalism and beginning the difficult process of restoring our liberties.

 

A Golden Deutsch Mark as Catalyst for Ending Fiat Money Tyranny

In his recent Mises Daily Article "Fool's Gold Standards" John P. Cochran warns his readers against accepting any monetary reform less than that of money created by the free market.  Therefore, he felt it necessary to criticize our previous Mises Daily Article "A Golden Opportunity" in which we advised Germany to leave the European Monetary Union, reinstate the deutsche mark, and tie it to gold.  Although he admits that our "recommendation may be a step in the right direction, ...it leaves Germany with a central bank and a discretionary monetary policy".  That it does...for now.  In no way was our essay intended to imply that central bank control of gold backed money was the point at which we desired monetary reform to cease.  As Austrian economists we fully understand and support the goal of full monetary freedom of the marketplace as that which best advances liberty, prosperity, and peace.  The question becomes, how will we achieve it?

We believe that Germany is in a unique position to end the destructive forces of fiat monetary expansion that seem to gain new impetus every day.  That is number one.  Before we can have the perfect money, we must have a better money, and Germany is in a position to show us the way.  All of us who desire liberty, prosperity, and peace should ask Germany to seize this opportunity to stop what surely will destroy free market capitalism.  By reinstating the deutsche mark and tying it to its vast gold holdings, Germany can be the catalyst that creates a cascade of similar virtuous acts that will lead eventually to full monetary freedom and all that that will bring.

Consider the likely consequences of the world's fourth largest economy establishing a one hundred percent gold backed currency.  This currency would dominate world trade, because all trading nations would desire to denominate their exchanges in the soundest money available.  For awhile at least, that would be the deutsche mark.  Demand would drop for the currencies of all other nations unless and until these countries did the same thing.  A virtuous cycle would ensue as first one then another country linked its currency to gold.  The country with the most to lose would be the United States, whose dollar currently is preferred for international trade.  But as demand increased first for the deutsche mark and later for the currencies of other nations who followed Germany's example, demand for the dollar would fall and prices would rise precipitously in the United States as countries no longer found it advantageous to hold dollars abroad.  At this point the US would be forced to return to gold.  In our opinion nothing less will bring the world's superpower to its senses; i.e., the US will NOT voluntarily adopt gold, because it benefits the most from the current, inflationary system.  However, if the major trading nations of the world adopt gold backed currencies, even the US will be forced by the market to do so.

But this is not the end.  Once the peoples of the world see the advantages to using gold money, they would begin to understand that central banks are not required to perform the money function at all.  Why couldn't Hong Kong Singapore Bank, Citibank, Barclays, Deutsche Bank, or any of a number of well respected international private banks do the same?  These international banks are more nimble than any ossified government bank to meet the needs of business and finance.  Furthermore, these international banks are more trustworthy than national central banks, which tend to operate in great secrecy in order to hide the risk they are taking with our money.  Private banks would have to answer to stockholders employing their own independent auditors.

Consider how religious toleration arose in the West, first as an expediency by princes who vied for power with the Catholic Church.  Different religions were established and protected by the state.  But over time, religious tolerance came to be seen as a good in itself.  Today we accept religious tolerance in the West as a universal given, yet it is a relatively recent phenomenon.

It is in this vein that we recommend that Germany end the tyranny of the inflationary euro and adopt a golden deutsche mark.  Such a courageous yet self-protective action will lead to a u-turn in monetary policy, away from monetary destruction and toward better and better money everywhere.

My letter to the NY Times re: The Fallacy of Tariffs

Re: Solar Tariffs Upheld, but May Not Help in US

Dear Sirs:
Diane Cardwell's explanation of the failure of US tariffs on Chinese solar panels to protect American producers illustrates the fallacy both of subsidies to gain market share and tariffs as retaliatory measures to protect domestic industries. Neither work. The Chinese people themselves pay the full cost of subsidizing solar panels, and now they find that they have wasted capital on a vast scale--Ms. Cardwell reports that worldwide productive facilities have been over-built by 133%! Furthermore, the tariffs designed to punish the Chinese are easily skirted by moving different stages of production to non-tariff countries. The loser is the solar panel buyer in the US, who must pay 10 to 15 percent more for these panels that are needlessly transported from country to country in order to avoid the letter of the tariff law. The US is NOT harmed by foreign subsidies. We get bargains. Why can't anyone understand this basic logic?

Patrick I. Barron

My letter to the NY Times re: No research necessary to disprove tax report

 

From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: No research necessary to disprove tax report
Date: Mon, 5 Nov 2012 16:53:35 -0500

Re: Tax Report Withdrawn at Request of G.O.P.

Dear Sirs:
The question of whether higher taxes will or will not affect economic growth is not one to be answered by reference to an examination of historical experience but rather solely to the principles of deductive rational thought. Economic science is a deductive social science based upon irrefutable maxims; it is not an inductive natural science. No evidence can disprove the deduction that an economy will grow faster when taxes are lower. Economic growth is based upon an extention of the division of labor that occurs only when the number of people in an economic area expands and/or more capital is applied per capita to the production process. Capital accumulation occurs only from savings. Since taxes reduce the amount of savings, capital accumulation will be retarded and economic growth reduced below the level that would have been the case otherwise.

Another indication that the Bundestag is beginning to assert its constitutinal authority

From today's Open Europe news summary:

A report by the Research Services of the German Bundestag has concluded that ECB involvement in a new write-down of Greek debt would constitute monetary state financing and thus be in breach of EU Treaties, reports Die Welt.Welt

Someone in Germany must take the lead in stopping the inflation monster that is the euro. Perhaps the Bundestag will take the lead. This latest statement coincides with a call last week by the Bundestag for the Bundesbank, the German central bank, to audit its gold reserves held in overseas vaults.

Failing to Understand the Moral Hazard Monster

Sheila Bair was chairman of the FDIC from June 2006 to July 2011.  Her memoirs, Bull by the Horn: Fighting to Save Main Street from Wall Street and Wall Street from Itself, is a fascinating and sometimes frustrating glimpse into the mind of a career bureaucrat.  She recounts myriad meetings and battles with fellow regulators, of which there are way too many, American bankers and foreign central bankers.  Needless to say, Ms. Bair portrays herself as the blameless, honest bureaucrat who foresaw the coming crisis and fought, as the title implies, to save both Main Street and Wall Street.

People write memoirs mostly out of hubris.  Do we really care what Ms. Bair thought as she entered rooms full of powerful people?  Ms. Bair certainly thinks we do.  The tenor of the book has a touchy-feely tone to it that may interest some, but I found it to be distracting and rather annoying.  But this is a minor quibble compared to my main complaint about the book, which is that it tells me something frightening about people who have way too much power over us.  And that something is that they have no insight into the nature of the system in which they operate and, therefore, they cannot accomplish their mission of making banking safe and affordable for all.  Let me elaborate.

 

The Hubris of the Bank Regulator

 Ms. Bair does indeed understand certain fundamentals about our banking system, but she understands nothing about the monetary system upon whose foundation it rests.  She gives the lay reader a very nice explanation of fractional reserve banking.  She explains that a bank deposit is really a loan to the banker and that the banker does not keep anywhere near sufficient reserves to honor demands for repayment from all but a small fraction of his depositors.  That is the purported purpose of the Federal Reserve Bank; i.e., to lend to the banker when his depositors withdraw their funds in such amounts that the banker's liquid funds are depleted.  The banker has borrowed short and lent long.  This Ms. Bair fully understands and she supports the Fed's role as lender of last resort.

She also understands that the agency that she led, the  Federal Deposit Insurance Corporation, causes moral hazard.  (To my delight she actually used and explained the term!)  Ms. Bair explains that, because bankers know that the FDIC will pay off their depositors in the event of excessive losses, bankers engage in more risky lending.  Riskier lending gives the bankers bigger profits, IF the loans are repaid.  If not, bankers can tap the FDIC.  This arrangement, whereby the banker gets all the profit from successful ventures but does not suffer all the loss if unsuccessful, creates classic moral hazard, whereby the risky venture is encouraged rather than discouraged.  But Ms. Bair feels that, although moral hazard is a problem, it is manageable.  She believes that regulators like herself can ensure that bankers do not engage in risky lending.  And this, my friends, is the heart of her hubris--that she is capable of preventing the very moral hazard that her agency helps make possible.

A lay person reading Ms. Bair's book would get the following impression of our banking system.  Left to their own devices--that is, when lightly regulated--bankers will pillage the economy for their own benefit.  Their depositors will not care, because the FDIC guarantees almost all deposits.  To prevent reckless lending, bankers must adhere to very strict rules of what kinds of products they can offer, the extent to which these products are booked, the prices they charge for their products, the disclosures that must accompany their offerings, etc.  In other words, bankers are portrayed as modern Genghis Khans that must be reined in by the likes of Sheila Bair not only to protect the public but to protect the bankers from themselves.  The entire book is based upon this chain of logic.  But nowhere does Ms. Bair explain how bankers are legally able to pillage an economy and why they do not go to jail for doing so.  As I will explain in more detail below, it is the failure of the state's legal system to protect private property combined with monetary intervention by the state chartered central bank that is at the heart of the problem.  Again, Ms. Bair sees the symptom but does not understand the nature of the banking business in our modern fiat money monetary system.

The Incremental Steps that Feed the Moral Hazard Monster

 Although Ms. Bair states that she recognizes that deposit insurance carries with it a moral hazard component, she does not mention the number one reason that turned what she considers to be manageable moral hazard into a moral hazard monster--monetary expansion engineered by the Federal Reserve.  But monetary expansion by the Fed is just the final link in the incremental chain of government failures and interventions that have led to greater and greater misallocation of resources through moral hazard.  It all started with fractional reserve banking.

 The oldest banking crises are linked to the banker's issuance of uncovered money certificates.  Here the banker violates his contract to redeem ALL demand deposits for the monetary metal, gold or silver.  Instead, he lends out a greater and greater percentage of his demand deposits, retaining a smaller and smaller fraction of the monetary metal to honor daily withdrawal demands.  The subsequent economic booms and busts can be ascribed directly to the state's failure to prosecute fractional reserve banking as a crime, with the banker's personal assets at risk as compensation to his creditors for contract violation in addition to personal imprisonment for the crime of committing fraud.  However, the booms and busts experienced through the centuries were relatively mild and self-correcting by modern terms.  The banker who engaged in excessive fractional reserve lending was brought to heel by his fellow bankers through the mechanism of the clearinghouse, in which the banker had to honor checks drawn upon his bank for which he had insufficient liquid funds, and ultimately by his customers who "ran to the bank" and demanded specie redemption.

 In an attempt to square the circle and retain the lucrative practice of fractional reserve banking without suffering bankruptcy through demands for specie redemption, the central bank was born as lender of last resort.  Initially that function of the central banker was to be rare and short lived.  The great English intellectual Walter Bagehot advised the Bank of England to, "Lend freely at a high rate on good collateral."  The borrowing bank would survive, but it would learn its lesson.  Furthermore, in the era during which precious metals were the ultimate medium of exchange, the central bank itself had to take care that it did not run out of specie.  Therefore, it did lend cautiously, at high rates, and on good collateral.  The crown helped out by granting the central bank the sole authority of note issuance, thereby increasing demand for its notes.  If the crisis persisted, the crown would allow the central bank to suspend specie redemption until it became more liquid.

The next step along the road to greater and greater malinvestment via moral hazard was the practice of the central bank to engage in interest rate manipulation via open market operations to lower the market rate of interest.  It buys assets to pump more reserves into the banking system.  This added more thrust to the moral hazard induced boom, which led to even greater busts.  Finally, as the banks suffered devastating runs upon specie, the state first suspended specie redemption and then ultimately instituted deposit insurance.  This is the point at which Ms. Bair picks up her narrative.  True to her bureaucratic background and a good example of Public Choice theory, Ms. Bair insists that deposit insurance is absolutely necessary to prevent bank runs.  Because the common man is not capable of judging the safety and soundness of his bank, at the first whiff of a problem, he will withdraw his funds and bring the bank to its knees.  Deposit insurance allays this concern for the depositor.  But Ms. Bair fails to understand that deposit insurance is just one more intervention designed to cure a problem caused by previous interventions.  This phenomenon was well understood by Ludwig von Mises.

The Moral Hazard Monster Is Unleashed

 So, we have arrived at the great day in which the depositor need not take care that his bank is solvent, government turns a blind eye to the fraud of fractional reserve banking, and the central bank can pump unlimited amounts of fiat money reserves into the banking system upon which can be pyramided greater and greater credit booms.  Needless to say, all this is lost on Ms. Bair.  She touches only upon the symptoms of the real problem.  The behavior that she describes with disgust--the bailouts of Wall Street and the neglect of Main Street, the robo-signing scandals, etc.--are the inevitable result of an ever increasing attempt to perpetuate a boom that was never supported by the underlying savings of the economy.  Moral hazard became a monster--there was money to be made and no power on earth was going to stop the boom once initiated.  The economy was said to be in a new paradigm, a new era of permanent prosperity in which everyone could own the home of their dreams.  In this Never Never Land mindset it was not unusual to grant a loan to someone who did not have the income to support the purchase of his McMansion, because the home could ALWAYS be sold for more than the purchase price.  The bank would be made whole and the borrower most likely would walk away with money in his pocket.

Ms. Bair does recognize that her institution--the FDIC--is exposed to losses beyond its resources should the boom turn to bust.  Her answer is to make the banks pay for their own future losses via higher capital requirements, a battle that she fought her entire tenure at the FDIC.  Ms. Bair's campaign for higher capital standards will slow down the boom, for no matter what the level of excess reserves (currently a whopping $1.5 trillion!), the banks cannot increase loans outstanding if they are under-capitalized.

 (Loans are funded by money created out of thin air; i.e., when the bank books a loan, it credits the borrower's checking account.  This inflates the bank's balance sheet and, concomitantly, reduces its capital ratio.)

But, the inflationist pressures in favor of more lending will not be held back very long.  The Fed itself can simply lend long term to the banks and allow them to count these loans as capital.  The Fed has not been deterred by the legality of its actions so far--lending massive amounts to European banks, for example--so don't think it might not happen.

Conclusion: the Moral Hazard Monster Devours Capital

Nevertheless, the laws of economics always prevail.  The progressive political systems of the world and their number one tool for expanding state power and realizing heaven on earth, the central banks, have created a moral hazard monster, not a slightly misbehaving pet.  The monster started as comparatively mild and self-correcting boom/bust cycles caused by fractional reserve banking.  He grew from a child to a juvenile delinquent by feeding on central bank lender of last resort money, first at penalty rates then at below market rates.  Now he is an angry, steroid packed adult Godzilla gorging himself on unlimited fiat money reserves created by oh so willing central bankers.  There is nothing that can stop him...not higher capital requirements for banks and especially not Ms. Bair's favorite cure--tougher regulation.  The Fed's Quantitative Easing Forever policy will lead to a worse recession than the one that began in 2007.  Malinvestment is being piled on top of previous malinvestment.  If fiat money credit expansion caused the 2007 Great Recession, then the Fed's program of Quantitative Easing Forever cannot be the cure.  On the contrary, it is breeding even greater malinvestment.  The world needs real reform: an end to fractional reserve banking (prosecuted as a financial crime), the liquidation of both central banks and deposit insurance, and the end to legal tender laws.  The moral hazard monster must be destroyed or all society is at risk.

My letter to the NY Times re: How France Can Restore Competitiveness

Re: French Socialists, Under Fire, Display a Lack of Fraternite

Dear Sirs:
There are only two ways to improve competitiveness. One, work longer. But France chooses not to adopt this option. Two, extend the division of labor. This one has several components. The division of labor can be extended by increasing the number of people participating in the economic unit. France could lower trade barriers to accept lower cost goods produced by workers in other countries, for example. Or it could reduce labor laws that cause unemployment, such as minimum wage laws. Also, the division of labor can be extended by adding more capital per capita, making each worker more productive. Capital accumulation requires a prior act of saving; therefore, anything that reduces savings should be eliminated, such as taxes and monetary stimulus programs that debasement the currency.

Patrick Barron

At least Draghi is being honest, but I have a question...

From today's Open Europe news summary (my highlight in red):

In an interview with Der Spiegel, ECB President Mario Draghi said that he was “fully in favour” of German Finance Minister Wolfgang Schäuble’s proposals for a eurozone currency commissioner. Draghi added, "I am certain, if we want to re-establish trust in the euro zone, countries must pass a part of their sovereignty to the European level."
Reuters


At least Draghi is being honest. But the people should ask themselves what benefit will be gained by passing some of their democratic sovereignty to a non-elected group of bureaucrats. They also should ask themselves how unelected EU bureaucrats would be any different from unelected Nazi or Soviet bureaucrats. I am not being facetious. Is this why we fought WWII and stood guard at the borders of freedom for decades during the Cold War?

My letter to the NY Times re: Why Devaluation Is NOT the Answer to the Euro-Debt Crisis

Re: Euro Survives, But Future Is in Doubt, by Floyd Norris

Dear Sirs:
Mr. Norris makes many good points about the euro-debt crisis; however, like many other pundits he assumes that currency devaluation is a "normal prescription for countries in financial distress...exports surge and imports plunge.". As I explained in more detail in my essay titled "Value in Devaluation?", the benefits to exporters from devaluation are paid entirely by the citizens of the country using the now-devalued currency. Exports increase, but only because foreign importers get a subsidized bargain. The rest of society finds that necessary imports are more expensive, which, pari passu, means that the cost of living increases. Therefore, currency devaluation is an unjust transfer of wealth, engineered by the state. The Irish example of painful labor reform, which Mr. Norris reports as successful but too costly, is the only real, long term solution.
Patrick Barron

My letter to the NY Times re: No, it's NOT a better way

Re: Better Ways to Deal with China

Dear Sirs:
Eduardo Porter's recommendations for "dealing with our trade deficit with China"--a multilateral approach using carrots and sticks--assumes that China's manipulation of its currency causes harm to its trading partners. It does not. The sole harm is to its own citizens, who pay for the manipulation in the form of higher prices. China's trading partners get bargains. Mr. Porter's mercantilist philosophy was disproven first by the classical economists and later by the Austrian school economists. Nevertheless, this upside down thinking--in which a weaker currency is deemed to be "better" than a stronger one--has been embraced by exporters, who lobby politicians to intervene to help them make more sales. Since inflation is a delayed phenomenon and its source is poorly understood, the gullible public buys into the fallacy that getting a bargain from an overseas supplier is bad for them.

Patrick Barron

A Pox on Both Your Houses--my comments in the Daily Iowan

Re: Obama Criticizes Romney Plan

See my comments at the end of the Daily Iowan report. Unfortunately, neither candidate is discussing reality, which is that they have no way to make the economy do their bidding other than by restricting the freedom of others.

My letter to the NY Times re: Free Speech Under Attack Once Again

Re: Amid Barrage of Attack Ads, Considering Tighter Rules

Dear Sirs:
Free speech is constantly under attack by incumbents of all stripes. After all it was John McCain, a Republican, and Russ Feingold, a Democrat, whose names are synonymous with one of the worst pieces of legislation ever to restrict the common citizen's ability to speak his mind--the so-called "Bipartisan Campaign Reform Act of 2002". Now incumbent Republican Dan Lungren of California feels that his now sensitive feelings as a self-important elected official are being abused by so-called negative/attack ads; therefore, he is gathering support for further restrictions on free speech. If he can't stand the heat, get out of the kitchen, as President Harry Truman would admonish.

Patrick Barron

My letter to the NY Times re: the real lesson from the 1987 stock market crash

Re: A Lesson From 1987,Unlearned by Wall St.

Dear Sirs:
Mr. Norris' discussion of the role played by the then novice use of high speed computer trading in the 1987 stock market crash is merely a side show to the real unlearned lesson. The real unlearned lesson of the 1987 crash was the role played by the Greenspan Fed, which pumped massive amounts of liquidity into the market, short circuiting the cleansing process, and reigniting the inflationary bubble. This became the template of central bank policy everywhere--whenever the stock market gets jittery, lower the interest rate by any means possible to prevent stock prices from falling. The result has been ever shorter and more extreme boom/bust cycles, with higher and higher injections of fiat money producing less and less result. The U.S. and most of the world has built an unsustainable capital structure that is completely out of tune with the wishes of those who provide the financing--the savers. It is this mismatch of savings with investment that eventually will cause a collapse that no amount of fiat monetary injections can stop.