Bank of England Governor will hold back the tides

Re: The new normal is 2.5%, not 5% benchmark interest rate

Mark Carney, Governor of the Bank of England:

“Why is that the case? Things have changed. Households have a lot of debt. The Government is consolidating its financial position. Europe is weak. The pound is strong. The financial system has been fundamentally changed – it has to carry a lot more capital, it has lot carry a lot more liquidity insurance and it will pass on those costs to borrowers. “As a consequence of all those factors, in order to bring the economy back to full employment, in order to get inflation at target, the new normal is materially lower than the old normal.”

Notice that Mark Carney does not offer a real reason that interest rates cannot rise to 5%, only that it would be inconvenient for borrowers and the ever hopeful "This time its different" theme. Therefore, it won't happen. Really? Sometimes it is inconvenient for the tides to rise, so perhaps Mr. Carney could be named Governor of Tides and hold them back.  His assumption, of course, is that interest rates are determine solely by central banks and that market forces are irrelevant.

European "Champion" or European "Crony Capitalist"?

From today's Open Europe news summary:

Following the failed merger of Siemens and Alstom, which eventually joined with General Electric, France is reportedly pushing for an easing of the EU’s antitrust rules to allow the creation of European “champions”. 

WSJ

Language is very important.  The merger between Siemens and Alstom did not "fail"; it was scuttled by the French government.  Now we see the true reason behind France's action--it wishes to create a crony capitalist company that it can control.  It is mercantilism in a new guise.

My letter to the Financial Times, London re: Here...take all the cocaine you want...

Dear Sirs:

The Fed's warning to banks that tougher stress tests are coming, so they should be making extraordinary preparations, is tantamount to passing out cocaine while warning that tough new drug tests will follow.  What does the Fed believe is the cause of this excessive risk taking if not its own policies to flood the banks with zero interest rate money?  Its explicitly stated purpose is to make funds available to those who would not receive loans otherwise, due to the natural interest rate pricing them out of the market.  But that is a good thing! Why should anyone desire to lend money to someone who cannot pay them back, which is exactly what the Fed's actions are designed to accomplish?  Madness!!!!

My letter to the Financial Times, London re: Socialized monetary union means constant meddling into sovereign affairs

Dear Sirs:

Wolfgang Munchau's post on June 23rd titled "Merkel versus Renzi for the future of the eurozone" illustrates the inherent weakness of the European Monetary Union.  Like all socialized services, the EMU requires constant meddling by foreigners into the affairs of sovereign nations, which can only lead to animosity and not cooperation.  Without the socialized EMU Italy could run its economy and its currency as it wished...and bear the full consequences of its policies.  Likewise, Germany could set a good example for the rest of Europe and the world...(are you listening US?).  Rather than lecturing one another or adopting policies, such as the European Central Bank's negative interest rate, that some believe to be destructive, each country should mind its own business.  This was the case before Germany was blackmailed into giving up its beloved and successful Deutsche Mark in order to gain international approval to reunite its country.

My letter to the Philadelphia Inquirer re: Wanting to jail the wrong bankers

Dear Sirs:

Mr. Joseph N. Distefano's column "Should some bankers be in jail?" targets the wrong the bankers.  Sure, private sector banks made what ultimately came to be revealed as bad loans, but why would they do this?  There is no quicker way to lose money than to loan it to someone who cannot pay it back.  The real cause of the banking crisis is central bank intervention to lower the interest rate below the natural rate set by the market.  Central bankers, Keynesians all, believe that such action is necessary to provide full employment and economic prosperity.  But the interest rate is the method for the efficient allocation of scarce savings.  Artificially lowering the rate makes it appear as if more savings are available for extending credit to the next, less creditworthy tier of borrowers.  It is a fiction.  Fiat paper credit is not the same as real credit, which can only be created by real savings.  Central bank intervention to lower the interest rate gives less incentive to savers while making it appear as if more credit is available to less worthy borrowers.  If any bankers should go to jail, it should be central bankers.

Understanding the Price Level

When I teach Austrian economics, I spend a lot of time explaining the three uses of money--holding, spending, and investing--and how only spending and investing affect the overall price level.  This helps my students understand that the total money supply can go up and prices remain stable or actually fall, if all the increase in the money supply goes into the holding portion.  On page 505 of his magnum opus Capitalism, George Reisman explains that the price level is determined by total spending in society divided by total production of goods actually sold in society.  So the spending part of his simple equation is composed of the final two uses of money--spending and investing.  His formula also helps explain the phenomenon of falling prices when total spending goes up, which can occur when there are revolutions in production, such as happened in America in the 1920s.  Furthermore, his formula helps explain an important consequence of malinvestment; i.e., that a society can produce things that no one wants to buy and that this production will not enter into the formula. Yet people were paid and create spending.  So the numerator goes up and the denominator stays the same or may actually fall, causing the overall price level to rise.

Understanding this is very important and not all that hard.  By the way, Reisman's book can be downloaded for free from his website:  http://www.capitalism.net/

My letter to National Review Magazine re: Free trade is NOT a "prisoner's dilemma"

Dear Sirs:

I despair that National Review has run such a piece of economic ignorance as Oren Cass's "Fight the Dragon", in which he calls on the US to wage economic war on China.  The basis of his claim that China's internal actions harm the US is contained in the second paragraph that trade is a "prisoner's dilemma".  Nonsense.  Trade is win-win. Each side trades what it values less for what it values more.  No nation can force another, against its will, to subsidize its economy. There is nothing that China (or Japan, our whipping boy of the 1980s, or any other nation) can do with its own currency or its own industries that can harm the US, except destroy its own economy and, thereby, provide fewer or less valuable goods to the worldwide market in the future.

Send Mr. Cass back to Econ 101.  He has a lot to learn...and, frankly, so do the editors of National Review for printing such drivel.

How to follow IMF advice

From today's Open Europe news summary:

The FT reports that the IMF will today urge the ECB to consider US-style ‘quantitative easing’, including “large scale” purchases of government bonds, to tackle low inflation and boost growth in the eurozone.

FT

More monetary madness from the Keynesian fanatics at the IMF.  Actually, there is much to learn from the IMF...just do the opposite of whatever it recommends.  The IMF opposes all of the following free market policies: cut government spending; restore sound money; reduce taxes; reduce regulations.  These are the four pillars of economic recovery, because they allow the private sector freedom of price discovery and freedom of social cooperation under the division of labor.  Of course, such a policy would mean that the haughty bureaucrats at the IMF, the ECB, the Fed, etc. would lose their jobs.  My advice to them---get a real job, if you can, and don't let the door hit you in the keister on the way out.

My letter to the Financial Times, London re: Fed oversight will not prevent shadow bank losses

Dear Sirs:
In his June 17th essay titled "Make shadow banks safe and private money sound" Mr. Paul McCulley displays a good understanding of the functional mechanics of commercial bank credit creation, shadow bank credit creation, and the powers of the Fed; however he reveals his lack of systemic knowledge of the underlying causes of bank crises.  Time and again in his brief essay, Mr. McCulley simply assumes that bank crises happen; ex., "panic ensues", the "system seized up", and, therefore, the need for a "lender of last resort (to) ensure a troubled shadow bank could always find a counterparty".  But what causes these crises, and why must a troubled shadow bank, or commercial bank for that matter, be assured of always finding a counterparty?  The answer lies in a deeper understanding of money, banking, and economics.  The Fed's massive expansion of fiat reserves is designed to permit banks to expand credit; there is no other reason for it to do this.  But fiat money expansion causes what we Austrian economists call "malinvestment; i. e., the initiation of mostly longer term projects for which there are insufficient resources for their profitable completion.  Note that the Fed's expansion of fiat reserves does not create one real capital resource.  If we really believed that this was the case, we would not prosecute counterfeiters.  Therefore, it is foolish for Mr. McCulley to believe that Fed regulation of shadow banks will prevent another crisis.  At this point the crisis is inevitable.