Tuesday, May 27, 2014

My letter to the NY Times re: UKIP is neither left nor right

Re: Populist Party Gaining Muscle to Push Britain to the Right

Dear Sirs:
It is about time to end the inaccurate labeling of all political parties as either of the left or of the right.  The ultra left is always linked with Soviet communist and the ultra right is always linked to Nazi fascism.  The laymen is left to believe that there is no other paradigm for government and that most governments fall somewhere between the two extremes.  Your recent article about UKIP, the British Eurosceptic party, is a case in point.  Supposedly UKIP is a party of the right.  The error is one of trying to pound every political movement into the left/right paradigm.  The real divide is between freedom and tyranny.  Both communism and fascism are tyrannies and both are socialist.  Ludwig von Mises explained that there were two models of socialism--the Russian model, exemplified by the Soviet Union, and the German model, exemplified by Nazi Germany.  ("Nazi" itself translates as "national socialism".)  In the book that was partly responsible for winning him the Nobel Prize in Economics, The Road to Serfdom, Friedrich Hayek said that communism and fascism were two sides of the same socialist coin.  UKIP, by contrast, is a party of freedom.  It may be conservative in the sense that it wants to conserve (and regain) ancient British liberties and, to fulfill that end, Britain needs to leave the EU.  One needs merely to follow the daily insane edicts streaming from Brussels to realize that it is not a source or protector of anyone's liberties.

Thursday, May 22, 2014

The real cause of European budget indiscipline

From today's Open Europe news summary:

In a comment piece for FAZ, German Finance Minister Wolfgang Schäuble reiterates his call for an EU budgetary commissioner with powers to veto national budgets. He also suggests Europe should be a “multi-layered democracy: not a federal state…and yet more than a union of states with loose, weakly legitimised binding elements”.FAZ: Schäuble Irish Times
Is Schauble serious?  Does he really think that national parliaments will agree to having the EU veto their budgets?  And why does he think that politicians at the EU are competent to draft national budgets anyway?  Furthermore, any sane person knows that, even if national parliaments did agree to allow the EU veto power over their budgets, it is highly unlikely that these same profligate parliaments will honor their promises.

Profligate national parliaments pass bloated budgets because they believe that the European Central Bank will monetize their debt.  ECB President Mario Draghi has promised as much.  So, these parliaments are behaving rationally.  They know that they can escape the consequences of their profligacy, something that was impossible with national currencies.  The real cause of Europe's burgeoning debt is not necessarily profligate national parliaments but the promise that the EU will backstop their debt.  This is the fatal flaw in the European Monetary Union's structure.

National Parliaments Are the Only Legitimate Rulers

From today's Open Europe news summary:
In an interview with German news agency DPA, Open Europe Director Mats Persson argues that “reforming the EU is the best way to preserve it; in fact in the long run it may be the only way. It should be clear to everyone that the status quo in Europe is not an option. He calls for “strengthening the role of national parliaments...a veto right for national parliaments on European decisions if more than nine parliaments are in agreement.”DPA
Why should a national parliamentary veto require that "nine parliaments are in agreement"?  Why should some EU policy that is injurious to only one nation, such as the proposed financial transaction tax is to Britain, require the consensus of eight other national parliaments?  This smacks of two wolves and a lamb voting on what to have for dinner.  Mr. Persson needs to take his insight to its logical conclusion; i.e., that national parliaments are sovereign and do not need the approval of other nations' parliaments for exercising legitimate rule.

Wednesday, May 21, 2014

Let's make money worthless! Then we'll all be rich!

Re: Currency wars might be starting again

From the report: 
"European Central Bank President Mario Draghi called the euro's strength a "serious concern" last week, and officials in Australia, Canada and New Zealand have been making noise about weakening their currencies for weeks, the Financial Times reports."
Perhaps Draghi and other fanatical Keynesian central bankers should scrap their currencies and adopt the Zimbabwean dollar...or better yet the Confederate dollar of America's Civil War.  Wait a minute...even those currencies have some residual collector value...let's just make money completely worthless, then we'll all be rich!

There is no greater fallacy haunting the halls of central bankers these days than that devaluing one's currency will spur one's economy to greater production and prosperity.  There is no way that one country can force another to subsidized its economic recovery, which is the underlying assumption in competitive currency devaluations.  Rather, the devaluing currency zone experiences a transfer of wealth within its borders, from non-exporters to exporters, and another transfer of wealth to its trading partners who get valuable goods at bargain basement prices.  Read my article on the subject.

How to get rid of excess reserves and save the dollar at the same time

Re:  Philadelphia Fed President Plosser sees danger in excess reserves

Philadelphia Fed President Charles Plosser correctly understands the danger posed by the $2.5 trillion of excess reserves created as a result of the Fed's Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE) programs.  Currently the ratio of required reserves to M1, the most narrow measure of the money supply, is around five percent.  The ratio of required reserves to M2, the broadest measure of the money supply, is around one present.  So, these excess reserves could support an addition $50 trillion of M1 or an additional $250 trillion of M2.  To put this in perspective, right now M1 stands at $2.778 trillion and M2 stands at $11.215 trillion.  Thus, Plosser's concern.

But these excess reserves have created an opportunity, too.  Rather than try to destroy these reserves by, for example, selling its roughly $2.5 trillion in Treasury bills on the open market, the Fed could raise required reserves on M1 to 100%.  That would prevent the banks from manufacturing money via their lending operations at a twenty-to-one ratio (the inverse of the five percent effective reserve rate).  Then M1 could expand only if the Fed continued to monetize the debt by creating new reserves.  The next step would be for the Fed to cease monetizing the federal debt.  At this point reserves would be frozen at their current level as would M1, and the US would have a more sound monetary system.

Of course, this strategy depends upon weak men at the Fed standing up to powerful men at the US Treasury.  Where is Paul Volcker when we need him?

Tuesday, May 20, 2014

Governments Cannot Direct Investment

From today's Open Europe news summary:

In its staff report on Germany, the IMF recommends that the government boost investment spending by 0.5% of GDP per year, over the next few years, to help encourage private investment and boost growth in the eurozone. Meanwhile, the Bundesbank said in its monthly bulletin that it expects German economic growth to slow over the coming months.WSJ WSJ 2

A hundred years ago Ludwig von Mises shattered the idea that government can spend money rationally when he wrote Economic Calculation in the Socialist Commonwealth.  Rational economic calculation is only possible from private property owners.  IMF bureaucrats are seldom right about anything, and this recommendation is true to form.

Why Central Bank Stimulus Cannot Stimulate an Economic Recovery

Today every central bank on the planet is printing money by the bucket loads in an attempt to stimulate their economies to escape velocity and a sustainable recovery.  They are following Keynesian dogma that increasing aggregate demand will spur an increase in employment and production.  So far all that these central banks have managed to do is inflate their own balance sheets and saddle their governments with debt.  But make no mistake...central banks are not about to cease their confidence in the concept of insufficient aggregate demand.  In fact, European Central Bank (ECB) president Mario Draghi is considering imposing negative interest rates to force money out of savings accounts and into the spending stream.  Such an action is fully consistent with Keynesian dogma, so other central bankers will be impelled by the failure  of their previous actions to follow suit. 

Violating Say's Law 

Keynes' dogma, as stated in his magnum opus, The General Theory of Employment, Interest and Money, attempts to refute Say's Law, also known as the Law of Markets.  J.B. Say explained that money is a conduit or agent for facilitating the exchange of goods and services of real value.  Thus, the farmer does not necessarily buy his car with dollars but with corn, wheat, soybeans, hogs, and beef.  Likewise, the baker buys shoes with his bread.  Notice that the farmer and the baker could purchase a car and shoes respectively only after producing something that others valued.  The value placed on the farmer's agricultural products and the baker's bread is determined by the market.  If the farmer's crops failed or the baker's bread failed to rise, they would not be able to consume because they had nothing that others valued with which to obtain money first.  But Keynes tried to prove that production followed demand and not the other way around. He famously stated that governments should pay people to dig holes and then fill them back up in order to put money into the hands of the unemployed, who then would spend it and stimulate production.  But notice that the hole diggers did not produce a good or service that was demanded by the market.  Keynesian aggregate demand theory is nothing more than a justification for counterfeiting.  It is a theory of capital consumption and ignores the irrefutable fact that production is required prior to consumption. 

Central bank credit expansion is the best example of the Keynesian disregard for the inevitable consequences of violating Say's Law.  Money certificates are cheap to produce.  Book entry credit is manufactured at the click of a computer mouse and is, therefore, essentially costless.  So, receivers of new money get something for nothing.  The consequence of this violation of Say's Law is capital malinvestment, the opposite of the central bank's goal of economic stimulus.  Central bank economists make the crucial error of confusing GDP spending frenzy with sustainable economic activity.  They are measuring capital consumption, not production. 

Two Paths of Capital Destruction 

The credit expansion causes capital consumption in two ways.  Some of the increased credit made available to banks will be lent to businesses that could never turn a profit regardless of the level of interest rates.  This is old-fashioned entrepreneurial error on the part of both bankers and borrowers. There is always a modicum of such losses, due to market uncertainty and the impossibility to foresee with precision the future condition of the market.  But the bubble frenzy fools both bankers and overly optimistic entrepreneurs into believing that a new economic paradigm has arrived.  They are fooled by the phony market conditions, so bold entrepreneurs and go-go bankers replace their more cautious predecessors.  The longer the bubble lasts, the more of these unwise projects we get. 

Another chunk of increased credit goes to businesses that could make a profit if there really were sufficient resources available for the completion of what now appears to be profitable long term projects.  These are projects for which the cost of borrowing is a major factor in the entrepreneur's forecasts.  Driving down the interest rate encourages even the most cautious entrepreneurs and bankers to re-evaluate these shelved projects.  Many years will transpire before these projects are completed, so an accurate forecast of future costs is critical.  These cost estimates assume that enough real capital is available and that sufficient resources exist to prevent costs from rising over the years.  But such is not the case.  Austrian business cycle theory explains that absent an increase in real savings that frees resources for their long term projects, costs will rise and reveal these projects to be unprofitable.  Austrian economists explain that a declining interest rate caused by fiat money credit expansion does not reflect a change in societal time preference--that is, society's desire for current goods over future goods.  Society is not saving enough to prevent a rise in the cost of resources that long term projects require.  Despite central bank interest rate intervention, societal time preference will reassert itself and suck these resources back to the production of current goods, where a profit can be made, and away from the production of future goods. 

No Escape from Say's Law 

No array of bank regulation can prevent the destruction of capital that becomes apparent to the public through an increase in bank loan losses, which may reach levels by which major banks become insolvent.  Bank regulators believe that their empirical research into the dynamics of previous bank crises reveals lessons that can be used to avoid another banking crisis.  They believe that banker stupidity or even criminal culpability were the underlying causes of previous crises.  But this is a contradiction in logic.  We must remember that the very purpose of central bank credit expansion is to trigger an increase in lending in order to stimulate the economy to a self-sustaining recovery.  But this is impossible.  At any one time there is only so much real capital available in society, and real capital cannot be produced by the click of a central bank computer mouse.  As my friend Robert Blumen says, a central bank can print money but it cannot print software engineers or even cups of Starbucks coffee to keep them awake and working.  Furthermore, requiring banks to hold more capital--which is the goal of the latest round of negotiations in Basel, Switzerland--is nothing more than requiring stronger locks on the barn door, while leaving the door wide open.  Closing the door tightly after the horse is gone still means the loss of the horse.  Why would an investor purchase new bank stock offerings just to see his money evaporate in another round of loan losses? 


The governments and central banks of the world are engaged in a futile effort to stimulate economic recovery through an expansion of fiat money credit.  They will fail due to their ignorance or purposeful blindness to Say's Law, that tells us that money is the agent for exchanging goods that must already exist.  New fiat money cannot conjure goods out of thin air, the way central banks conjure money out of thin air.  This violation of Say's Law is reflected in loan losses, which cannot be prevented by any array of regulation or higher capital requirements.  In fact rather than stimulate the economy to greater output, bank credit expansion causes capital destruction and a lower standard of living in the future than would have been the case otherwise.  Governments and central bankers should concentrate on restoring economic freedom and sound money respectively.  This means abandoning market interventions of all kinds, declaring unilateral free trade, cutting wasteful spending, and subjecting money to normal commercial law, which would recognize that fiat money expansion by either the central bank or commercial banks is nothing more than outright fraud.  The role of government would revert to its primary, liberal purpose of protecting life, liberty, and property and little more.

Wednesday, May 14, 2014

The end game of Keynesianism: Savings confiscation to force spending now

From today's Open Europe news summary:
Reuters: ECB readies negative deposit rate and target liquidity for June
WSJ: Bundesbank ready and willing to back further easing of ECB policy

Reuters reports that the ECB is working on detailed policy plans for its June meeting including cuts to all interest rates and targeted liquidity operations to boost lending to the real economy. The ECB could also announce a plan to purchase asset backed securities (ABS) which would come into force later this year. Meanwhile, the WSJ reports that, according to unnamed sources, the Bundesbank is willing to support such unprecedented steps to ease policy, if inflation got unacceptably low. The euro dropped sharply on both reports.
WSJ Reuters Reuters 2 Reuters Deutschland

"Negative deposit rates" means that the banks will charge the customer for saving money and placing it in the bank.  According to Keynesian theory (if there really is such a thing) government needs to spur "aggregate demand" in order to stimulate the economy to increased production.  Keynes had no respect for savings...only spending.  He called the consequences of savings to be a "paradox of thrift" in that if we all save instead of spend, then the economy will go into a death spiral.  He was completely ignorant of capital theory, which explains that REAL capital, not paper money capital, comes from deferring spending ON CONSUMER GOODS in order to increase spending ON CAPITAL GOODS.  The money that we save is not destroyed.  It goes into the lendable funds market to finance long term capital investment that will pay future dividends, both literally and figuratively, ensuring MORE goods in the future.

It is a mark of the fanaticism and desperation of the Keynesians that they would resort to threats of money confiscation in order to prevent people from saving and force them to spend in the present.  This is shear and utter madness...some might say it is theft on a vast scale, perpetrated by government fanatics.

Tuesday, May 13, 2014

My letter to National Review Magazine re: Not Quite at the Source of the Banking Problem

Dear Sirs:

I read with great interest Ms. Diana Furchtgott-Roth's glowing review of Fragile by Design: The Political Origins of Banking Crises and Scarce Credit.  I decided not to buy the book, because, unlike the reviewer, I do not believe that the authors have quite yet arrived at the heart of the banking problem.  Banks deal with money yet modern banking practice violates the essence of sound money as a commodity which society has chosen as the most marketable and, therefore, as its preferred medium of exchange.  Money--that is, real money--cannot be manufactured out of thin air either by a central bank or a commercial bank.  It is part of the market economy, which is ruled by scarcity and uncertainty.  The authors' claim that the US banking industry has been made more stable by bank mergers and the ability to branch anywhere in the nation and their further claim that proper regulation is needed does not dig nearly deep enough.  Banking needs to be subject to normal commercial and criminal law, which would eliminate banks' ability to engage in fractional reserve banking.  Demand deposits should be backed one hundred percent by real reserves, probably gold, and banking should be separated into deposit banking and loan banking.  Loan banks would be funded by depositors' decisions to transfer ownership of part of their demand deposits to the Loan Banker for a designated period of time.  If the Deposit Banker or the Loan Banker failed to return the depositor's money either upon demand, as in the case of the Deposit Banker, or at maturity, as in the case of Loan Banker, the bank would be declared insolvent, closed, and liquidated.  In the case of the Deposit Banker, he might face criminal charges if he issued un-backed script.  None of this requires banking regulation, only government enforcement of normal, commercial law.  Some claim that ordinary people would not understand this dual banking system sufficiently to protect their assets.  In this article I make the opposite claim; that is, that modern banking been made unnecessarily complex and that even children understand real money.

Getting Just a LIttle Bit Pregnant

From today's Open Europe news summary:
In an article looking at David Cameron’s EU renegotiation strategy, Le Figaro quotes Open Europe Director Mats Persson as saying, “Cameron will try to maximise the reforms while avoiding a renegotiation of the [EU] treaties in order not to create further instability… it’s a double-edged sword, because a number of British Conservatives could judge his positions as too weak and demand that he ask for more.”Le Figaro
Renegotiating the Maastricht Treaty is a futile effort, since the EU ignores that treaty's clear-as-day wording right now.  Britain's original sin was assuming that it could give up pieces of its sovereignty to a supranational body and still remain a sovereign nation.  It's like getting just a little bit pregnant.

First airplanes and now cars...people are next

From the Open Europe news summary of May 12, 2014

The Mail on Sunday reports that the European Commission has ruled that all new vehicles must be fitted with a “black box” for use in emergencies quoting a letter from Transport Minister Robert Goodwill as saying that “ the costs to the UK outweigh the benefits. Unfortunately, there is very little support for the UK position and no possibility of blocking this legislation.”Mail on Sunday
Why stop at placing a black box in cars?  After all, this Big Brother monitoring is for our own good.  The wonders of modern medicine and miniaturization make it possible to implant a black box in each of us!  Then Big Brother can take very good care of us.

Bond Bubble in Europe's Periphery?

Re: A Bond Bubble in Peripheral Europe?

Open Europe's Raoul Ruparel asks an important question and hints that the answer is YES.  To much self-congratulations the nations of peripheral Europe have been selling their sovereign bonds at very low interest rates.  Let's all party hearty, right?  No need to reform dysfunctional economies, because those sticky credit gates have been flung wide open again.  Not so fast.  Ludwig von Mises explained that there are many components to the interest rate and one of the most important is plain, old-fashioned credit risk.  In a sound money environment, I doubt that anyone would buy sovereign bonds from nations on Europe's periphery without taking collateral in assets upon which a creditor could lay his hands without a prolonged and expensive legal battle.  Mr. Ruparel's first of three key factors explains it all, in my opinion.  ECB president Mario Draghi has promised to print as many euros as necessary to prevent any  member of the Eurozone from defaulting.  So, these otherwise worthless or near worthless pieces of paper come as close as one can get to a risk-free investment.  Did anyone notice that these bonds were quickly sold as soon as Germany's constitutional court ruled against those out-of-date old fogies in Germany's who honor the rule of law and hard money?  The clear-as-day prohibitions against ECB money printing and sovereign bond buying have been erased from the Maastricht Treaty in much the same way as have the U.S. Constitution's enumerated powers in Article I, section 8, proving that treaties and constitutions are only as effective as the people to whom they are entrusted.

Monday, May 5, 2014

My letter to the NY Times re: Perhaps...

Re: Once More, Economy Exhibits Weakness

Dear Sirs:
Perhaps "the economy turned in another disappointing quarterly performance" because it never has recovered.  Perhaps "the electorate remains skeptical that things are getting better" because they live in the real world and know that things are NOT getting better.  Perhaps the so-called economic recovery is nothing more than the Fed measuring its own increase in the money supply.  How long will the Fed stick to its discredited Keynesian prescription of increasing aggregate demand through monetary intervention?  The recession began six years ago.  Surely even the most dyed-in-the-wool Keynesian must begin to question his view of how an economy operates.