Thursday, December 18, 2014

The Case Against Economic Intervention

The basic unit of all economic activity is the un-coerced, free exchange of one economic good for another based upon the ordinally ranked subjective preferences of each party to the exchange. To achieve maximum satisfaction from the exchange each party must have full ownership and control of the good that he wishes to exchange and may dispose of his property without interference from a third party, such as government. The exchange will take place when each party values the good to be received higher than the good that he gives up. The expected, but by no means guaranteed, result is a total higher satisfaction for both parties. Any subsequent satisfaction or dissatisfaction with the exchange must accrue completely to the parties involved. The expected higher satisfaction that one or each expects may not be dependent upon harming a third party in the process.

Several observations can be deduced from the above explanation. It is not possible for a third party to direct this exchange in order to create a more satisfactory outcome. No third party has ownership of the goods to be exchanged; therefore, no third party can hold a legitimate subjective preference upon which to base an evaluation as to the higher satisfaction to be gained. Furthermore, the higher satisfaction of any exchange cannot be quantified in any cardinal way, for each party's subjective preference is ordinal only. This rules out all utilitarian measurements of satisfaction upon which interventions may be based. Each exchange is an economic world unto itself. Compiling statistics of the number and dollar amounts of many exchanges is meaningless for other than historical purposes, both because the dollars involved are not representative of the preferences and satisfactions of others not involved in the exchange and because the volume and dollar amounts of future exchanges are independent of past exchanges.

Let us examine a recent, typical exchange that violates our definition of a true exchange yet is justified by government interventionists today--subsidized, protected, and mandated use of ethanol. Number one, the use of ethanol is coerced; i.e., the government requires its mixture into gasoline. Government does not own the ethanol, so it cannot possibly hold a valid subjective preference. The parties forced to buy ethanol actually receive some dissatisfaction. Had they desired to purchase ethanol, no mandate would have been required. Therefore, including the dollar value of ethanol sales in statistics purporting to measure the societal value of goods exchanged in our economy is meaningless. This is just one egregious example of many such measurements that are included in our GDP statistics purporting to convince us that we have "never had it so good".

Our flawed view that governments can improve satisfaction caused us to misjudge the military threat of the Soviet Union for decades. Our CIA placed western dollar values on Soviet production data to arrive at the conclusion that its economy was growing faster than that of the US and would surpass US GDP at some point in the not too distant future. Except for very small exceptions, all economic production resources in the Soviet Union were owned by the state. This does not necessarily mean that it was possible for the state to hold a valid subjective preferences, for those who occupied important offices in the state held them at the sufferance of what can only be described as gang lords, who themselves held office very tentatively. State ownership is not real ownership. Those in positions of power with responsibility over resources hold their offices for a given period of time and have little or no ability to pass their office on to their heirs. Thus, the resources eventually succumb to the law of the tragedy of the commons and are plundered to extinction. Nevertheless the squandering of the Soviet Union's commonly held resources was tallied by our CIA as meeting legitimate demand.
Professor Yuri Maltsev saw first-hand the total destruction of the Soviet economy. In Requiem for Marx he gives a heartbreaking portrayal of the suffering of the Russian populace through state directed, irrational central planning that did not come close to meeting the people's legitimate needs, while our CIA continued to crank out bogus statistics of the supposed strength of the Soviet economy upon which the Reagan administration based its unprecedented peacetime military expansion. Maltsev, an Austrian economist, was unable to convince Gorbachev's government to allow private ownership of the nation's resources. Without private ownership of production resources, there could be no true ordinally held subjective preferences for their rational allocation. Gorbachev's other reforms were half-hearted and mis-implemented. They were insufficient to prevent the imminent collapse of the Soviet economy.

With the proviso that no exchange may harm another, as explained so well in Dr. Thomas Patrick Burke's book No Harm: Ethical Principles for a Free Market, we are led to the conclusion that no outside agency can create greater economic satisfaction than can a free and un-coerced exchange. The statistics that support such interventions are meaningless, because they cannot reflect the satisfaction obtained from true ordinally held subjective preferences. Once this understanding is acknowledged and embraced, the consequences for the improvement of our total satisfaction are tremendous. Our economy can be unshackled from government directed economic exchanges and regulations. The "no harm" principle can be enforced by normal commercial and criminal law. For example, since one may not pollute the waters that are used by others, normal tort law, which is based primarily upon precedence, would replace costly EPA compliance regulations, which are based primarily upon statute law and bureaucratic regulation. All labor laws can be scrapped, which would reduce the cost that businesses must bear to support extensive human resources departments, which have become little more than arms of government agencies. Freedom to engage in any economic exchange that causes "no harm" would extend internationally, too. All trade restrictions would be seen to be illogical and unnecessary. Satisfaction increases with greater opportunities for un-coerced exchanges; therefore, international trade restrictions are counter-productive. The revival of the free trade movement would benefit world peace and result in fewer scarce resources directed to national defense.

In conclusion we see the consequences that can accrue from a better understanding of the true nature of economic exchange. Be on your guard for those who claim to be able to improve our satisfaction and protect us from harm through expansion of government coercion in the market.

Tuesday, December 16, 2014

Russia takes a page out of the Paul Volcker playbook

From Zero Hedge: Russia Shocks With Emergency  Rate Hike

The move by the Bank of Russia to drastically raise rates is the first break by a major central bank in the worldwide Keynesian dogma that lower rates are required to cure almost any financial or economic problem. Paul Volcker knew better. During the waning days of the Carter administration and the beginning of the Reagan era, Fed Chairman Paul Volcker ordered the Fed to cease monetizing US Treasury debt. Interest rates peaked a just over twenty percent! The economy went into recession as twenty years of malinvestment, made possible by central bank interest rate manipulation, was purged from the economy. Folk lore tells us that Volcker raised interest rates. He did no such thing. He stopped manipulating interest rates by refusing to buy US Treasury debt with printed money, what is euphemistically called debt monetization, and interest rates rose to the level required to fund the debt markets at that time.

Volcker understood that the real economy needed savings, not more spending. Real savings must come from deferred consumer spending. Deferred spending feeds real liquidity to the loanable funds market, where capital is replenished and which leads to improved productivity via expanded specialization of labor. Prices actually fall!

Sound money was just one part of the Reagan/Bush platform of economic recovery. The other three were deregulation, lower government spending, and lower taxes, which the Reagan administration accomplished to some extent. The rest is history. The US entered into a period of rapid growth and falling inflation. Regrettably, this was the last time that the US was blessed with a Fed chairman of independence and integrity. All subsequent recessions have been "fought" with monetary stimulus, increased regulation, increased taxes, and increased government spending. Today's Keynesian charlatans actually desire inflation, all the better to rob savers and allow the government to fund its out-of-control debt with debased money.

Apparently Russia is buying none of this nonsense of competitive currency devaluation to solve the financial attack by the West upon its economy that followed its annexation of Crimea. Putting the geopolitical issues to the side, Russia needs to tighten its financial belt, so to speak, in order to retain investment capital and increase savings. If it were really serious, it would stop interest pegging altogether, per Paul Volcker, and allow rates to rise to whatever level is commanded by the market. Does anyone want to guess to what level interest rates would rise in the US, if the Fed stopped monetizing Treasury debt? I doubt that twenty percent would be high enough. 

Friday, December 12, 2014

Dollars will come home when overseas demand to hold them drops

 Spare Dollars by Alasdair Macleod
It is very interesting that Alasdair mentions that there is increasingly little need for the Petrodollar market, since most of the Middle East's oil is going East and not West. I mentioned this in my latest essay as a possible end of the dollar as the world's premier reserve currency. To wit, the following quotes:

"To this we should add the Middle East, most of whose oil is now exported to China, India and South-East Asia, making the petro-dollar potentially redundant as well."--Alasdair Macleod

"... it is possible that the eurodollar and petrodollar markets could end, forcing holders of US dollars to exchange them for goods and services in the one part of the world that must accept dollars."--Pat Barron

There is "the potential tsunami of dollars just waiting for the opportunity to return to the good old US of A."--Alasdair Macleod

And when those dollars come home, the Fed's options will be limited between recession and higher prices. There are no other options.

Wednesday, December 10, 2014

Denmark joins Switzerland in mad rush to destroy its currency

Denmark promises to match the ECB's money printing craze

First the normally sane Swiss promise to match the European Central Bank's money printing mania. Now the Danes' have succumbed to the same insane fever. These central bankers harbor the fallacious notion that they can "protect" their currency by debasing it. Yes, if the ECB debases the euro, Danish export goods will become more expensive in euro denominate terms. But this is only temporary; the Krone/Euro exchange rate will adjust to reflect the relative purchasing power of each currency. But all the central banks of the world are ruled by Keynesian economists, who see money printing as the cure for all ills. If you believe this, then printing more local currency to match that of your neighbor makes sense.

Read my articles Currency War Means Currency Suicide  and Value in Devaluation? that debunk this theory.

Friday, December 5, 2014

Are these two events linked?

From today's Open Europe news summary:

According to documents seen by Reuters, Eurozone finance ministers are considering extending Greece’s bail-out programme, due to end this year, by six months to the middle of 2015. However, a Greek government official insisted that “Greece can discuss only a technical extension [of the programme], which cannot be longer than a few weeks.”

The Bundesbank has this morning halved its 2015 GDP growth forecasts for Germany from 2% to 1%.

Of course, Greece will get its extension! The European Central Bank feels that it really has no choice except to send good money after bad. This is how hyperinflations begin, with the central bank believing that it has no choice except to continue to print money. The European Union has implicitly, if not explicitly, proclaimed that no nation can be kicked out of the EU or the European Monetary Union (eurozone) and that no nation will be allowed to default. This removes all real political pressure for any country to reform, so the only course is to print more money and pretend that reform is simply being delayed.

How long it will take Germany to come to the same conclusion? It may already have, but it cannot muster the political gumption to admit that it joined a dishonest, impractical, and parasitical organization.