Friday, December 21, 2012

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

Thursday, December 20, 2012

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".
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.

Tuesday, December 18, 2012

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!

Monday, December 10, 2012

My letter to the NY times re: a Misleading Headline

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.

Saturday, December 8, 2012

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.


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."

Thursday, December 6, 2012

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

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.

Tuesday, December 4, 2012

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

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.