Monday, February 29, 2016

Former Bank of England Governor Says Eurozone Must Break Up

From today's Open Europe news summary:

Former Bank of England Governor warns Eurozone must break up if some members are ever to prosper again

In his new book, former Governor of the Bank of England Lord Mervyn King warns, “Put bluntly, monetary union has created a conflict between a centralised elite on the one hand, and the forces of democracy at the national level on the other…This is extraordinarily dangerous.” He adds that the measures aimed to keep the Eurozone together, such as bail-outs, “Will lead to not only an economic but a political crisis.” Lord King argues that the Eurozone must “face up” to its problems and the fact that some countries can only prosper again outside. Lord King accepts that “the counter-argument – that exit from the euro area would lead to chaos, falls in living standards and continuing uncertainty about the survival of the currency union – has real weight”, but sees little alternative for the struggling states.
The fall in living standards would be temporay. A breakup of the euro will stop the consumption of capital that is made possible by the Eurozone's bailout policies. The profligate countries of Europe would no longer have "legal" access to other people's capital, namely Germany's. They would have to reform their economies and live within their own, and not someone else's, means. A breakup of the Eurozone would save Europe from its current socialist, capital-consuming structure.

Wednesday, February 24, 2016

My letter to the Philadelphia Inquirer re: Is Bernie the good socialist?

Re: What kind of socialist is Bernie Sanders? by Joseph Betz

Dear Sirs:
Professor emeritus Joseph Betz thinks that Bernie is a good socialist, similar to the myth of the "good dinosaur", a movie to which I took my three year old grandson. Professor Betz says that "Economically speaking, a government that guarantees social and economic rights is socialist; its opposite is capitalist." He further states that "...socialism does not mean Karl Marx's government ownership of the means of production,..." Sorry, professor, but that's exactly what socialism means. To support his views Professor Betz resorts to the least persuasive form of argument--a call to authority. Professor Betz is enamored with the United Nations' 1948 Universal Declaration of Human Rights and the Catholic bishops of the United States call for government programs to secure "Economic Justice for All". Bernie may not be a socialist; he may be simply another politician who is willing to use the police power of the state to regulate business and confiscate property in order to meet his vision of the just society. However, neither Bernie nor Professor Betz offer any logical support for their views. I suggest that both read Claude Frederic Bastiat's The Law for starters. They will learn that self-ownership is the basis of all law and the foundation of the sanctity of private property. Limited government was formed by self-owning citizens to secure their rights. Bernie and Professor Betz, like so many these days, turn the citizen/government relationship upside down in order to further their own self-interests. Both should be ashamed of themselves.

Patrick Barron

The ECB can buy my old bottle cap collection

From today's Open Europe news summary:

Market players warn ECB could run short of sovereign bonds to buy

Reuters reports that a number of banks have warned that the ECB may run out of sovereign bonds to buy, particularly if it ups the size of its monthly purchases. The ECB would either have to alter its 33% limit of bonds per sovereign issuer or expand its purchases to other forms of bonds. Meanwhile, ECB Supervisory Chief Danièle Nouy has said, “We do observe a trend towards higher risk-taking by banks…in its search for yield.”

The ECB doesn't have to buy sovereign bonds in order to stimulate demand. It can buy anything. I am willing to sell it my old bottle cap collection. I would not object if the ECB placed a very high value on it; I certainly did when I was seven or eight years old. A few million euros would certainly cause me to increase my demand for the many luxuries of life, which undoubtedly would stimulate demand in certain sectors. How about it, ECB?

Saturday, February 20, 2016

My letter to the WSJ re: Inflation is not indicative of an expanding economy

Re: US Consumer Prices Flat in January, but Offer Glimmer of Inflation

Dear Sirs:
This quote from Ms. Davidson's article perfectly illustrates the fallacy that higher prices are desirable:

”Broad-based price growth is signalling that the wage and price pressures are building, an indication that the economy is expanding at a solid pace and that recessionary concerns are overdone,” PNC economist Gus Faucher said.

Higher prices are the result of a combination of two factors, both of which are undesirable--lower output or an increase in the money supply which causes an increase in spending. The following simple formula of Professor George Reisman can be found on page 505 of his magnum opus Capitalism: A Treatise on Economics.

P = Dc/Sc

P is the general level of consumers' goods prices, in the sense of the weighted average of the prices at which consumers' goods are actually sold. Dc is the aggregate demand for consumers' goods. as manifested in a definite total expenditure of money to buy consumers' goods, and Sc is the aggregate supply of consumers' goods, as manifested in a definite quantity of consumers' goods produced and sold.

As further explained by Professor Reisman, "An expanding quantity of money operates to raise the general price level by virtue of raising aggregate demand relative to aggregate supply."

In other words, the Federal Reserve Bank's policy of printing more money causes aggregate demand to rise, but the rise in prices does not mean that more goods and services are being produced. It most probably means that more money is chasing the same or even smaller quantity of goods. In fact an increase in the quantity of money causes dislocations and disequilibrium in the structure of production, which causes the supply of consumers' goods to fall.

Therefore, an increase in prices, which is commonly called "inflation", is nothing to be desired by the general public.

Patrick Barron

The ECB will destroy the euro and all economies using it

From Open Europe news summary:

ECB accounts hint at further easing in March

The ECB yesterday released the accounts of its January monetary policy meeting, which showed unanimous support for the view that the bank’s policy “needed to be reviewed and possibly reconsidered” at the March meeting.  The accounts also mention that a view was put forward that the ECB could “consider a limited period of overshooting [its inflation target] in future.” The discussions also considered that downside risks were materialising and whether domestic demand could continue to offset weakness in external demand for the Eurozone.

It's all "demand", as if demanding a good or service will magically bring that good or service into existence. This is the classic Keynesian outlook on the world. It makes one wonder why pathetically poor Africans and Asians remain in such a state. Do they not "demand" more goods and services, too?

The ECB's inflationist policies will destroy the euro and the economies of Europe which use it. Time for Germany, especially, to get out of the Eurozone and reinstate the Deutsche Mark before the ECB manages to transfer all of its capital to the rest of Europe. Once Germany is dragged down to the level of Greece, etc., it's all over for Europe.

Wednesday, February 17, 2016

My letter to the WSJ re: Not too much production but too much of the wrong kind of production

Re: China's Economy Suffers From Hangover of Producing Too Much

Dear Sirs:
The focus of this otherwise excellent article should be that China has produced too much of the wrong goods. Easy credit causes disruption in the time structure of production, making longer term projects appear to be profitable in the future. But such will not be the case. Ludwig von Mises used the analogy of trying to build too large a house with too few bricks. The project appears to hum along nicely until the builder realizes that he does not have enough bricks--i.e., real goods--to finish the house. China's only rational option is to end the credit expansion that caused the current dislocation. More easy credit merely perpetuates and expands the destruction of capital.

Patrick Barron

Monday, February 15, 2016

Herr Krichbaum reveals more about the EU than he intended

From today's Open Europe news summary:

"German conservative MP Gunther Krichbaum – who chairs the Bundestag’s EU Affairs Committee – has warned that the UK “won’t be able to survive” outside the EU, citing the reintroduction of tariffs on British exports in the event of Brexit."

Herr Krichbaum has revealed more about the EU than he intended. The EU is a closed protectionist bloc; it allows free trade within its borders but imposes high tariffs and quotas on goods and services from countries lying outside its borders. The purpose of such a system is to restrict, rather than expand trade, in order to mollify politically powerful internal economic groups. Its purpose is NOT to allow EU citizens free access to the goods and services of the rest of the world.

Should the UK leave the EU, it may well face high tariffs on its potential exports to the EU. If so, it should NOT reciprocate and impose high tariffs on imports from the EU. The UK should adopt unilateral free trade. No nation can control the internal economic politics of other countries. All any country can do is trade freely with the world.

Friday, February 12, 2016

My letter to the Philadelphia Inquirer re: Who benefits from labor laws?

Re: Where to Invade Next, directed by Michael Moore

Dear Sirs:
I look forward to watching Michael Moore's recent film that purports to show how Europeans and Africans have passed laws, such as long maternity leaves that must be paid by employers, that benefit "society". I doubt that Mr. Moore has ever asked himself who benefits from such laws. Big business is behind most of them. Such laws create barriers to low cost competitors and harm the very people whom the laws claim to help. For example, small business will refrain from hiring young women, if they might be forced to pay for generous maternity leave. Minimum wage laws were supported by labor unions in order to price minorities--immigrants, blacks, women--out of the labor markets. They still do. Mr. Moore needs to ask himself this question: If the benefits from labor laws are so wonderful, why is the police power of the state required to force employers to offer them? Wouldn't companies who adopted such benefits, or even more generous ones, become more successful? I suspect that Mr. Moore has answered the question himself. According to Mr. Derakhshani's review, Mr. Moore admits that he is showing only one side of each law--the beneficiary that he sees. This is akin to showing only the genteel lifestyle of antebellum, slave-holding Southern aristocrats.

Patrick Barron

Thursday, February 11, 2016

The Impact of Negative Interest Rates

Central banks the world over have lowered interest rates almost to zero-- i.e., they have adopted a zero interest rate policy (ZIRP)-- with the hope that cheap credit will revive moribund economies. Central banks have expanded their balance sheets by printing money to buy assets, which we Americans call an "open market operation". If it buys the government's own bonds, the process is called "monetizing the debt". These are just fancy names for printing money out of thin air in order to buy something. Whether the central bank buys an asset from an individual or a government bond from the Treasury itself, the money winds up in someone's bank account and the banking system's reserves expand. (The seller's checking account goes up, a liability for the banker, and the bank's offsetting asset is an increase in reserves held at the Fed.)


Keynesians who support this practice believe that printing money and reducing the interest rate will increase the bank's propensity to lend and public's propensity to borrow and spend. This increase in aggregate demand will push the economy forward. Evidence of success would be a slow rise in inflation--i.e., prices--and a steady reduction in excess reserves. (When banks lend, they credit a checking account. Their "reservable liabilities" go up, which increases their required reserves and lowers their excess reserves. Total reserves remain the same, however.)


Despite  ZIRP and multiple quantitative easing programs, whereby the central bank buys large quantities of assets while leaving interest rates at practically zero, the world's economies are stuck in the doldrums. Their only accomplishment seems to be an increase in public and private debt. Therefore, the next step for the Keynesian economists who rule central banks everywhere  is to make interest rates negative; i.e., adopt NIRP. The process can be as simple as the central bank charging its member banks for holding excess reserves, although the same thing can be accomplished by more roundabout methods such as manipulating the reverse repo market. Remember, it was the central bank itself who created these excess reserves when it purchased assets with money created out of thin air. The reserves landed in bank reserve accounts at the central bank when the recipients of the asset purchases deposited their checks in their local banks. Now the banks have liabilities that are backed by depreciating assets; i.e., the banks still owe their customers the full amount in their checking accounts, but the central bank charges the banks for holding the reserves that back the deposits. In effect the banks are being extorted by the central banks to increase lending or lose money. The banks have no choice. If they can't find worthy borrowers, they must charge their customers for the privilege of having money in their checking accounts or, as is happening in some European banks, the banks try to increase loan rates to current borrowers in order to cover the added cost.


 In European countries where NIRP reigns, so far the banks are charging only  large account holders. These large account customers are scrambling to move their money out of banks and into assets that do  not depreciate. The scramble for high grade securities has resulted in some securities being sold at a premium; i.e., the customers will get back less than they invested. How can this be? Well, the premium amount is less than the charge by the banks, so the large account customer is slightly better off. He loses somewhat less money. But this really does not solve the problem; it just means that the excess reserves are moved somewhere else, creating the same problem for the bank of the asset seller. Once reserves are created by the central bank, they can be destroyed only by a reversing open market operation by the central bank itself; i.e., it sells an asset, and the reserves flow back into the central bank.


But that is not what the central banks want. They want to force the banks to lend money in order to avoid the excess reserve charge. They appear poised to increase the so far nominal cost of a half percent or less. If the central banks can charge a half percent, they can charge anything they wish and, given the Keynesian mindset that led to the insanity of negative rates in the first place, probably will do so.


Negative rates violate numerous tenets of Austrian economics. For example, the basis of Interest rates is consumer time preference, described by David Howden in an article written almost three years ago about the loss of Canadian manufacturing.


Time is a factor necessary for production, and unique in the sense that we cannot economically allocate it like other inputs. The choice of time is always “sooner or later” and never “more or less” (as is the case with other input factors). Interest rates help us determine how soon we should consume a good, or how long a production process should be. Low interest rates imply that the future is not heavily discounted. At a low rate you will be willing to wait a longer period of time to realise the enjoyment of consumption or the profits of an investment. High interest rates invoke the corollary – you will want to consume earlier, or employ production processes that pay off in as short a time as possible.

Dr. Howden goes even further to show how central bank production of money out of thin air in order to drive down the interest rate causes disequilibrium between borrowers/investors and savers (the very purpose of the interest rate in an unhampered economy is to create equilibrium between these two groups), disequilibrium in the time structure of production (primarily an overinvestment in longer term projects), and the inevitable boom/bust business cycle that results from the fact that real savings had not increased to provide the real goods necessary for the increased investments. First businesses go bankrupt, then the banks, then the population as a whole.


But can't the central bank just print more helicopter money to save everyone? Unfortunately, no. More money cannot cure what too much money created; i.e., higher and higher prices and loss of production.


Of course, an economy that has been thrown into disequilibrium by negative interest rates may display many weird anomalies before succumbing to the "crack up boom", as described by Ludwig von Mises. Alasdair Macleod of Gold Money dot com suggests that an early indication of loss of confidence in money is a  commodity boom in precious metals. Prices rise faster and faster and production collapses. The public understands that the monetary authorities have no intention of reversing their negative interest rate policies and restoring sound money and banking. In a mad rush to save their wealth from total destruction, the public will start to buy what it hopes to be assets that will not depreciate. This sets off a huge boom in some asset categories; thus the "boom" portion of Mises'  "crackup boom" scenario. But the crackup follows on the boom's heals.


The real pity is that falling prices eventually create the conditions for a normal economic revival. Deflation is not a death spiral as the Keynesian believe. The public's demand to hold money will be satisfied when their reserves of money balances are sufficient in relation to the price level, they are once again confident of the future, and are willing to invest for the long term.


The suppression of interest rates has been unnecessary and harmful. Nevertheless, expect more central banks to follow the early leaders-- Switzerland, Sweden, Denmark, and even upon occasion the European Central Bank itself--into negative interest rate territory. The crying shame is that it will not work and will cause great harm to hundreds of millions of people. It may even collapse Western civilization.


Monday, February 8, 2016

More Eurozone integration will bankrupt Germany

From today's Open Europe news summary:

Bundesbank and Bank of France Governors call for Eurozone finance ministry

In a joint article for Sueddeutsche Zeitung Bundesbank President Jens Weidmann and Bank of France Governor Francois Villeroy de Galhau argue, “The current asymmetry between national sovereignty and communal solidarity is posing a danger for the stability of our currency union…Stronger integration appears to be the obvious way to restore trust in the euro zone, for this would favour the development of joint strategies for state finances and reforms so as to promote growth.” The pair calls for a creation of a Eurozone finance ministry to achieve this end. The also warn that, while monetary policy has helped the Eurozone, “can’t create sustainable economic growth”.

Well, I used to think that Jens Weidmann and the Bundesbank were the only sane voices in the Euro Zone, but now it looks like Germany has tied its fate irrevocably to the inflationist and irresponsible EU countries. This is exactly what those countries want to hear--that Germany will continue to subsidize their irresponsible, profligate, and unsustainable socialist programs. Germany must know that there is no bottom to this pit. The end game is Germany insolvency along with the rest of Europe. Therefore, Germany is doing its neighbors a disservice by enabling them to continue to destroy their countries. Soon all Europe will look like the Soviet Union in 1989.