Thursday, January 31, 2013

Failing to Consider the Unintended Consequences

Re: Now you can sue over flight delays in Europe

This is just another governmental intervention that fails to consider the unintended consequences of fining airlines for flight delays. Now there will be an additional incentive to fly aircraft that have mechanical problems or push pilots to fly beyond crew rest requirements. When money is on the line, not only for the airline but for the crew also, the grey areas will be decided in favor of taking the bird into the skies. The market is sufficient to weed out inefficient air carriers.

Free Trade Does NOT Require More Rules and Obligations

My comment on this Open Europe blog:

Patrick Barron said...
The French charge the British with the crime of desiring a larger free market but one without additional rules and obligations. If this is the charge, then there truly is a fundamental difference of opinion. Why does trading freely with more people in more countries require that the traders bail one another out of financial jams? As an American I desire to trade freely with my neighbor Mexico, for example, but I feel no obligation to bail Mexico out of its financial messes. This strikes at the heart of the matter. The UK can achieve everything it desires by leaving the EU and declaring itself a free trade nation. That means that the UK would NOT require reciprocal free trade agreements in order to allow goods from other countries to be brought into Britain duty free.

Wednesday, January 30, 2013

My letter to the Wall Street Journal re: Phony Fed Profits

Re: Fed Risks Losses from Bonds

Dear Ms. Mcgrane and Mr. Hilsenrath,
With all due respect, you really don't understand that the current so-called Fed profit from bonds is just funny money anyway. The Fed buys a government bond and places it in its portfolio. The interest that it gets is well in excess of its rather modest operating expenses, so it sends the so-called profits back to the Treasury. But where did the Treasury get the money to pay the interest? From the Fed itself through monetizing even more government debt! So the Fed creates the money out of thin air that it calls profits and remits to the Treasury. Nice work, if you can get it, I suppose....

Tuesday, January 29, 2013

My letter to the NY Times re: Why Republican leadership may lay out a "softer track" for the party

Dear Sirs:
Your article on the rise of Representative Eric Cantor states that he embodies the Republican Party's proposed "softer track" to gain electoral support. This raises the question of why it appears that a party cannot succeed with the electorate by stating the obvious fact that federal government spending is out of control and must be reduced. The answer appears on the same day in this article about the Fed's asset buying program. The Fed has made it clear that it can and will create $85 billion of new base money per month until unemployment falls below its desired benchmark. No one asks where the Fed will get this money, because everyone knows that the Fed can create unlimited amounts out of thin air. Since the electorate believes that Fed asset buying proves that there is no barrier to government spending, why should it vote for a party that will limit spending in any way? But we Austrian economists warn that the laws of economic science have not been suspended. New money cannot escape the law of diminishing marginal utility; i.e., new money causes the purchasing power of existing money to fall. Another word for this process is "theft".

Sunday, January 27, 2013

My letter to the Wall Street Journal re: Money is the most debauched measurement of value

Re: Bill Gates on the Importance of Good Measurement

Dear Sirs:
The most important measurement device for all members of society is that provided by its money. Money is involved in at least one half of every financial transaction; sometime it is involved in both halves, as in insurance contracts. But what happens when the value of money is debauched? When governments and central banks print money, they invoke the law of diminishing marginal utility, making all money currently extant in the market worth less. But how much less? And what can we do about it, when money is fungible? This is a worldwide crime.

Thursday, January 24, 2013

Weidmann's Criticism of Japan is a Veiled Criticism of Central Bank Exchange Rate Wars Everywhere

Re: Bundesbank Head Cautions Japan

Bundesbank President Jens Weidmann's criticism of Japanese politicians' meddling in central bank affairs can be seen as a veiled criticism of ECB policy. Weidmann warns against exchange rate wars, whereby central bankers worldwide engage in a destructive race to drive their currencies' exchange values lower than everyone else, in the fallacious theory that doing so will spur an exports driven economic recovery. This places sound monetary theory on its head and makes central bankers no better than counterfeiters. Who would believe that a counterfeiter's printing press would spur REAL economic output and make ALL members of society better off? Counterfeiters cause wealth to be transferred internally to the early receivers of the newly printed money at the expense of later receivers. In other words, each nation's citizens pay the entire cost of making exports cheaper; the foreign importer gains at the expense of the exporting nation's common citizens.

Thursday, January 17, 2013

My letter to the NY Times re: Don't you dare take legal steps to avoid higher taxes!

Re: Goldman Bonuses Won't Be Timed to Ease a Tax

Dear Sirs:
So Bank of England's Mervyn King finds it "a bit depressing that people who earn so much seem to think that it's even more exciting to adjust the timing of it." Really? He's being disingenuous, of course. Like every other parasite supported by confiscation of legitimately owned wealth, he just wants more of your money and he wants it now. And it's not enough that he wants more of your future earnings; he wants you to apply higher taxes in the future to your past earnings--a self-imposed ex post facto tax. I wonder if he took his own advice and made a voluntary payment to the British Treasury in 2012? Silly question, I know.

Tuesday, January 15, 2013

My letter to the NY Times re: China's Bubble Economy from Monetary Stimulus

Re: China Again Is Growing, More Slowly Than in Past

Dear Sirs:
Your recent report that China's economy is growing, but more slowly than in the past, contained this shocking statement:
"China is awash in cash, since the government has expanded the broadly measured money supply over the past five years much more rapidly than the United States, even though the Federal Reserve’s moves have attracted considerably more international attention. China’s money supply is now larger than that of the United States, even though China’s economy is half as large."
China's slow growth despite greater injection of monetary stimulus is a warning sign that its growth is a transitory bubble about to burst. Austrian economic theory explains that monetary stimulus will indeed cause a temporary expansion of GDP but that monetary expansion must accelerate to prevent a bust. There is no preventing the bursting of the bubble once the monetary expansion has begun. The earlier the monetary expansion stops the less damage to the real economy. Trying to prevent the bursting of the bubble, which appears to be China's policy, would require greater and greater monetary injections until the monetary system crashes per Germany in 1923 and Zimbabwe in more recent times.

Monday, January 14, 2013

My letter to the NY Times re: Nuclear Necessity Is No Myth

Re: The Myth of Nuclear Necessity

Dear sirs:
There is a parallel mindset between those who call for an end to nuclear weapons internationally and those who call for an end to guns nationally. Both assume that it is possible to prevent these weapons from falling into the hands of criminals, and both assume that, even if it were possible for these weapons to be banned, we would be safer without them. Both of these assumptions are false. Both Pakistan and North Korea shocked the world when they displayed the success of their clandestine nuclear programs. Furthermore, nuclear weapons make it possible for small nations to defend themselves from much larger ones. A case in point: Charles de Gaulle understood clearly that France's small nuclear arsenal was sufficient to deter the Soviet Union, and during the Berlin crisis of the early 1960's he prevailed upon President Kennedy and British Prime Mininster MacMillan to stand firm with him on Berlin.

Saturday, January 12, 2013

My letter to the NY Times re: Austrian Theory Superior to Empirical Analysis for Bank Risk

Re: Clouds Seen in Regulators' Crystal Ball for Banks

Dear Sirs:
Modeling of bank credit risk based upon empirical analysis of past events is an inappropriate tool for predicting future bank crises. Austrian business cycle theory, which requires no such empirical analysis, explains that once the central bank expands bank credit by driving the interest rate below its natural level, the subsequent boom must be followed by a bust. Empirically based "Agent-based modeling", which assumes that a "shock on a vulnerability of the financial system" is the root cause of the crisis, ignores this more fundamental cause. Even if regulators were successful in earlier identification of excessive leverage in a particular segment of the market, the damage has been done. Shutting off credit to one market segment will merely cause the excessive credit to flow to other market segments. The resulting continuous series of smaller, sector specific crises would be no better than a general crisis that occurs less often. If regulators wish to prevent a bust, they should tell the central bank to refrain from initiating the boom.

Wednesday, January 9, 2013

My letter to the Wall Street Journal re: the Swiss National Bank Cheapens Its Currency

Re: Button-Down Central Bank Bets It All

Dear Sirs:
Your excellent report of the unprecedented action by the Swiss National Bank to drive its currency lower is an example of the trap in which all the world's central banks have fallen. Their false paradigm of Keynesian and Monetarist monetary theory blinds them to reality. In their false paradigm the weaker the currency the better, because a weak currency spurs exports. But this shallow view fails to see the underlying reality that spurring exports with cheaper money is paid not by one's trading partners but by one's own citizens via higher prices and a lower standard of living. It is an internal transfer of wealth. Furthermore, any export gains that accrue as a result of weakening the currency will be short lived, because the exporters' factors of production will increase as inflation ravages the entire country. At that point exports will fall and the option will appear to be that another round of money printing is required. If this process is not halted, the currency will collapse. Since Switzerland is a relatively small country, the likelihood of its currency being the first to collapse is very great.

Friday, January 4, 2013

Likely Scenarios that Will Force the Fed to Tie the Dollar to Gold

From Dan Amoss of the Daily Reckoning, originally published in September 2012:

"For years, I’ve expected that at the end of all this central bank printing, we’ll see the end — not a reversal — of quantitative easing programs and a re-pegging of the US dollar to gold at much higher gold prices. A new gold standard would allow the Fed and other central banks to save face after the following sequence of events:

1. Central banks inflate their balance sheets and buy up many of the bonds governments issue to fund soaring budget deficits
2. Once the largest suppliers of scarce products realize they’re exchanging products for infinitely diluted paper money, they start demanding more and more money in exchange for sending their scarce products to the marketplace
3. Consumer prices start rising
4. Calls for monetary tightening (reduction of central bank balance sheets and interest rate hikes) grow louder
5. These central banks won’t be able to slash money supplies without crashing government bond markets and stock markets. They talk about tightening, but don’t tighten
6. As central banks lose credibility, gold launches on a final, near-vertical stage of its bull market
7. In response to inflation expectations running wild, governments and central banks draw up plans to re-peg currencies to gold in order to avoid having to drain trillions worth of cash from the banking system."

In the face of imminent hyperinflation, Dan Amoss postulates that the Fed will back the dollar with gold at some significantly higher price in order to avoid a complete collapse of the dollar. It is reassuring that the Fed can do this, but will it? Another scenario is that some large and important country, such as Germany or China, will back its currency with gold and cause demand for the dollar as the preferred means of international settlement to fall. This will cause prices to rise in the US as overseas dollars start to flow back into the only economy where they must be accepted for all debts public and private. Then the Fed will follow-the-leader of this major country and tie the dollar to gold.