Patrick Barron, an Austrian Economist

My Letter to National Review re: Damning Ron Paul for his supporters' beliefs

2012-02-01T11:24:00.000-08:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Damning Ron Paul for his supporters' beliefs
Date: Wed, 1 Feb 2012 11:54:53 -0500

Re: "Courting the Cranks", by Kevin D. Williamson

Dear Sirs:
Kevin D. Williamson unfairly tars Dr. Ron Paul for the opinions of some of his followers. In "Courting the Cranks"--an assessment of Murray N. Rothbard, an anarcho-libertarian who has been dead for twenty years--Mr. Williamson somehow gets around to attacking Dr. Paul, apparently because both Rothbard and Paul adhered to the Austrian School of Economics, which advocates a return to the principles of our Founding Fathers. Mr. Williamson admits that "Ron Paul promises to restore the American constitutional order". Yet in the same sentence he blames Dr. Paul for what he claims are the unconstitutional beliefs of his "most energetic partisans". How many, Mr. Williamson? Have you conducted a professional survey? Are any on his personal staff? I am a partisan, yet I do not hold unconstitutional beliefs. And, even if I did, how in the world can my thoughts be blamed on Dr. Paul? Further in his essay Mr. Williamson recounts the discovery of decades' old racist pamphlets that were disseminated under Dr. Paul's name and claims that they were written by Lew Rockwell, founder of the highly regarded Ludwig von Mises Institute. Dr. Paul disowns any knowledge of these pamphlets, and Mr. Rockwell denies writing them, yet both are condemned as guilty by Mr. Williamson. How can either man prove a negative? This is highly unfair.

Sincerely,

Patrick Barron

My Letter to the NY Times re: An Effective Policy to Avoid War with Iran

2012-01-24T07:40:00.000-08:00

From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: An Efffective Policy for Iran that Will Avoid War
Date: Tue, 24 Jan 2012 10:28:18 -0500

Re: Bomb-Bomb-Bomb, Bomb-Bomb-Iran? by Bill Keller

Dear Sirs:
Mr. Keller nicely explains the situation and various options regarding a potentially nuclear-armed Iran. Although he portrays Ron Paul's position as "the let-Iran-be-Iran extreme", there is nothing extreme about it. In fact, Dr. Paul's policy is the only one that will avoid war. At the present time the U.S. and the E.U.'s harsh economic sanctions will force Iran either to accept a humbling defeat without a shot being fired (not very likely) or close the Straits of Hormuz, which would surely bring war. The West has two excellent options that avoid both scenarios--an explicit policy of nuclear retaliation should Iran use its nuclear arsenal on either the U.S. or our allies, and/or provide a missile shield to protect our forces and our allies. Secretary of State Clinton voiced the former option as a possibility over a year ago. Both policies are strictly defensive and have been proven effective in the Cold War and now in relation to North Korea. There is every reason to expect them to be just as efficacious with Iran.

Patrick Barron

My Letter to the NY Times re: Greeks Return to the Land

2012-01-23T10:41:00.000-08:00

From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: Greek Return to the Land
Date: Mon, 23 Jan 2012 13:36:25 -0500

Re: With Work Scarce in Athens, Greeks Go Back to the Land

Dear Sirs,
Your front page, above-the-fold article on January 9th about the Greeks returning to the land is not as sanguine as Ms. Donadio portrays it. A peoples' return to the land in large numbers is a sure sign of a regressing economy, one that is becoming less specialized, less productive, and less affluent. The myth of the happy yeoman farmer is just that--a myth. The industrial revolution broke the shackles of a large and impoverished agricultural class everywhere, releasing them to more productive and prosperous lives in the cities. The Roman Empire's final days were marked by starving city dwellers fleeing to the land in search of food. Greek citizens may not be that desperate...yet, but there is no reason to portray this development in any way except as what is really is: a horrible adverse consequence of decades' of disastrous economic policies.

Patrick Barron

The Real Reason that College Students Demand More Goodies from Government

2012-01-05T05:05:00.000-08:00

Although this college professor's experiment may be shocking, I do not find it surprising. The professor blames the public schools for not teaching the great ideas of liberty and personal responsibility in a democratic republic. I do not necessarily disagree, but I think the source of the problem is much deeper. Our federal government DOES have the technical ability to shower as much fiat money on selected citizens as it wishes. There does not appear to be any practical limitation to its money printing ability. In fact Fed Chairman Bernanke famously stated this very fact in a speech a few years ago. Therefore, why should any American NOT demand that the federal government give them money for anything that they wish? The list of government largess keeps growing and will continue to grow because there is no practical or theoretical limit...as long as the government has the ability to print money. If prices go up...well, just increase the budget. Since I doubt that REAL economics is taught in the public schools and the media certainly is not interested in the consequences of increasing the American people's dependency upon government, we can expect that the public will continue to demand more and more fiat money for the same and new programs until the dollar becomes worthless.

http://www.youtube.com/watch?v=VxHfYNTrnic&feature=youtu.be

My Letter to National Review Magazine: Tyler Cowen Does Not Understand Money

2012-01-03T09:23:00.000-08:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Tyler Cowen Does Not Understand Money
Date: Tue, 3 Jan 2012 09:27:35 -0500

Re: The Eternal Struggle, by Tyler Cowen

Dear Sirs:
In his review of Nicholas Wapshott's new book Keynes Hayek, Tyler Cowen serves as a very poor arbiter of the monetary debate. Consider just his statement that "Whether we like it or not, the Fed has to do something (Cowen's emphasis), and letting the money supply continue to fall, in down times, is one of the worst options." This statement is followed a few paragraphs later by this one: "In essence, the American government spent almost a trillion dollars to postpone our economic pain by the grand span of two years." Is this the something that Mr. Cowen has in mind? Mr. Cowen is enamored with the discredited theory, advocated by Irving Fisher and revived by Milton Friedman, that money should be manipulated by the central bank to maintain a "stable purchasing power". This is a complete misunderstanding of what money actually is, and once one understands money's nature, one understands that pursuing a stable purchasing power is not only undesirable but also impossible. So, what is money? Money is a medium of exchange only. It is part of the market economy and is the most marketable good in an economy. Its purchasing power must be free to reflect the ever-changing ratios between itself and the thousands of an economy's vendible goods and services. As an economy gets more productive, the purchasing power of money will rise. If an economy becomes less productive--due to war, natural disaster, or anti-business government interventions--the purchasing power of money will fall. These are the signals that market participants need. The reason the money supply falls during the bust is that it was allowed to rise during the central bank initiated boom. The banks create money out of thin air during the boom. Debt created money comes into existence when they lend via the fractional reserve rules established by the Fed. But their lending is not based upon a prior act of saving, so their loans will fail. When the loan is written off, the money supply shrinks. All the Fed has accomplished by its expansion of reserves that then become money via the banking system is to create a boom/bust business cycle that destroys capital.

National Review needs to call upon some modern monetary theorists other than the likes of Mr. Cowen. Professor Joseph Salerno of Pace University, NYC, would be a good choice.

My Letter to National Review Magazine re: Repo Men, by Kevin D. Williamson

2012-01-01T12:22:00.000-08:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Repo Men
Date: Fri, 30 Dec 2011 10:16:38 -0500

Re: "Repo Men" by Kevin D. Williamson

http://www.nationalreview.com/articles/286704/repo-men-kevin-d-williamson?pg=1

Dear Sirs:

Kevin D. Williamson is giving Mark Steyn a real run for his money as best phrase-turner at National Review. His recent shocking report of how the American economy (read "us rubes in the sticks") is being bled to death by the Wall Street-Washington Axis of Evil contains dozens of memorable phrases. But the guts of his report reminded me of a story often told by Lincoln: a horse had stepped on his foot...he said he was too big to cry, but it hurt too much to laugh.

How to prevent such abuses as described by Mr. Williamson? Create another regulatory agency? Increase staffing at existing ones? Uh...sorry to say that this would be like adding to the staff of the Nazi SS in order to regulate crimes against humanity. There are two reforms that would go a long way to curing the problem or at least mitigating it greatly. One, return to sound money. Throughout Mr. Williamson's fine (if disturbing) report, one reads how Washington pored hundreds of billions of dollars into politically connected firms on Wall Street. Where does Washington get this money? It prints it, of course. Two, eliminate special rules for investment bankers. Subject them to ordinary commercial and criminal law, which requires that government prosecute fraud wherever it may be found. Sound money would make it difficult for Washington to reward its favorite cronies with actual cash, and exposure to ordinary commercial and criminal law would soon land both Washington and Wall Street "Repo Men" (aren't they really one and the same people?) in the hoosegow where they belong.

There is only one politician who champions such real reform. Does National Review dare mention his name? Ron Paul.

The European Central Bank Catches the Fed Disease

2011-12-21T08:17:00.000-08:00

From today's Open Europe news summary:

Huge demand for new ECB long-term bank lending;
The ECB this morning launched its first three-year lending operation with 523 banks requesting €489bn in loans, well above the expectations of between €250bn and €350bn. The previous largest amount requested was €442bn in one year loans back in June 2009. The aim of the long term lending operation is to provide secure long term financing for banks which can no longer gain funds from the usual avenues, in turn hopefully boosting lending in the wider economy and possibly purchases of sovereign debt. It was widely expected that demand above €400bn would prompt a positive market response. Open Europe’s briefing on the role of the ECB and the potential consequences for its long-term lending featured in the Telegraph, on EUobserver and on Zerohedge. The FT reports that US money market funds, formerly a key source of funding for European banks, have now cut their European exposure to record lows.

There is a reason that some banks "can no longer gain funds from the usual avenues.." There is only so much money that they can squander before the market has had its fill of their poor business choices. But our central bankers will not accept the legitimate judgment of those who invest their own money, so they print fiat money and make the taxpayer pay. This will lead only to higher prices and a continuation of the international raid upon capital that goes under the guise of "providing liquidity to the banking sector". It is nothing more than stealing purchase power from existing money holders in order to protect politically connected constituents. But that is not all. The real damage will be done in the years ahead as more capital is squandered in another credit-induced boom that will inevitably lead to a bust. The world need savings, real savings, not fiat money masquerading as savings.

Fed Money Expansion Is a Criminal Enterprise

2011-12-10T11:17:00.000-08:00

Today we take it for granted that our central bank, the Fed, can print money out of thin air, supposedly for our own good. When I say it "can" print money, I mean that in two ways. One, that it has the technical ability to print money, and two, that it has the legal and moral right to print money. Yes, the Fed can and does create money out of thin air. But I challenge the notion that it has either the legal or moral right to do so.

What Is Theft?

I am confident that all who read this article will agree that theft is a crime. Taking something that belongs to someone else is the definition of theft. If I lift your wallet and steal your money, I have committed a crime. But what if I steal from you S-L-O-W-L-Y so that you barely notice it at the time? I could do this very carefully, so that for some time you do not know what has happened. Perhaps you may not notice that I took only part of your money, believing that you must have spent it. Nevertheless, whether or not you notice that you have been robbed, I have committed the crime of theft.

Is Inflation Theft?

Now, let's examine what happens when the central bank expands the money supply. It is the stated goal of the central bank to create some inflation. By inflation, I am not speaking in Austrian economic terms. For Austrians, inflation means only one thing--expansion of the money supply not redeemable in specie (gold, silver, etc.). For the layman and for the central bankers, inflation means higher prices.

The Fed has engaged in a systematic attempt to keep prices higher than the unhampered market would establish. Since the fall of 2008 the Fed has expanded the money supply tremendously. M1 has increased by fifty-four percent and M2 has increased by twenty-three percent. So, the question remains: does this increase in the money supply represent theft by those running the Fed?

Austrian Monetary Theory Clarifies the Issue

To answer this question, let us examine monetary theory. Money is a medium of exchange and arises spontaneously in the market. It becomes a medium of exchange by the fact that it is the market's most marketable commodity, meaning that it is accepted by most market participants first for consumption and then for exchange for some other good at a later time. Only commodities can arise spontaneously as mediums of exchange, because only commodities have prior intrinsic or industrial value. Pieces of paper with fancy ink engravings do not have intrinsic or industrial value at all. As Murray N. Rothbard has outlined in his wonderful book What Has Government Done to Our Money?,the fiat money that we all use today was gradually and systematically forced upon the public by the coercive police powers of government. Why did it do this?

The answer clearly is that government wanted to be able to expand the money supply. It especially wanted to be able to bail out the big banks when their depositors grew concerned that they would not be able to withdraw their money on demand. But the government had a problem. It could not tax the country to provide for these funds--the public would not support such a blatant act of protecting the rich from their own foolishness. So it had to eliminate the NEED to tax the public. Thusly, over several decades it eliminated gold money, that it could not expand, and replaced it with fiat money that it could expand in infinite amounts.

Ben Bernanke has famously stated that the Fed cannot go bankrupt, because it can produce legal tender in whatever amounts are necessary. His statement is prima facie evidence that the purpose of fiat money expansion is to give purchasing power to some who have done nothing to earn it. This, of course, is theft.

By lowering the interest rate or engaging in quantitative easing, the Fed allows some economic units to purchase real goods and services that they would not have been able to purchase in the absence of fiat money expansion. These are goods and services that will be denied to current money holders at the price that would have pertained in the absence of fiat money expansion. It is irrelevant to the question of whether or not the Fed has committed the crime of theft to ask if prices are higher. It is irrefutable that prices are higher than they would have been in the absence of fiat money expansion. Paying this higher price means that the public has been robbed of something real. The lowered purchasing power of the public's money means that people can buy fewer units of goods and services.

The Founding Fathers on the Crime of Money Debasement

Our Founding Fathers understood the evil of money expansion much better than our so-called sophisticated modern central bankers. The 1792 Coinage Act made it a capital crime--i.e., death penalty--for debasing money! They understood that money debasement was a crime against all the nation's citizens, not just picking one or two pockets. They were unconcerned about the price level; the crime was tied directly to money debasement, a crime against property. Notice this: money IS property.

It is no exaggeration to claim that fiat money expansion is a criminal act, conducted purposefully in order to give purchasing power to some at the expense of all others. If anyone other than the Fed prints money out of thin air, he is prosecuted for the crime of counterfeiting. So why is the same act legal when perpetrated by the Fed?

I addressed this very question to a panel of Fed representatives touring the country on a public relations campaign in the summer of 2009. My question was "If it is beneficial for the economy, as you say, for the Fed to expand the money supply, why does the government prosecute counterfeiters?" To my astonishment and delight, my question was greeted with cheers from the audience. The Fed panelists squirmed in their seats and quickly called an end to the meeting!

For the Fed to claim that it acts legally according to an act of Congress does not eliminate the crime. During the Nazi era the Germans legally and democratically passed the infamous Nuremberg Laws that persecuted the Jews. Frederic Bastiat would not have been impressed with either the acts establishing the Fed or the Nuremberg Laws. He understood that "...the law may be diverted from its true mission, that it may violate property rather than securing it,..." Such is the case with the acts establishing the Federal Reserve Bank and expanding its power to debase money.

Expanding fiat money is a criminal act and should be prosecuted as such, just as the infamous Nuremberg Laws gave no legal cover to those who persecuted the Jews. We may be reluctant to admit that our government has committed, and continues to commit, acts that our Founding Fathers would punish with the death penalty. But such is the case.

All those who have participated and continue to participate in the criminal act of robbing hundreds of millions of Americans of their rightfully earned wealth that is held in the form of dollar assets must be brought to justice.

The Euro as a Tool for Socialism

2011-12-07T08:09:00.000-08:00

From today's Open Europe news summary:

Van Rompuy proposes fiscal integration through limited Treaty change;
Eurozone working on three-pronged financial backstop for eurozoneEuropean
Council President Herman van Rompuy has drawn up plans for fiscal integration in the eurozone which would not require only unanimous consent in the Council rather than ratification at the national level – thereby avoiding an Irish referendum or tricky parliamentary negotiations in all 27 member states. Under the plan eurozone states would enshrine debt and deficit limits in their constitutions, as well as a balanced budget commitment, and the European Court of Justice would judge whether they had been properly enforced. These changes could be made by amending protocol 12 of the EU Treaties, which relates to excessive deficits, rather than a full revision. Under this method the European Commission would not have the power to discipline countries which continually breach the fiscal limits, something which Germany is keen on. Van Rompuy therefore also sets out a plan for wider treaty change which gives the Commission greater power. Lastly, the proposal calls for the ESM, the eurozone’s permanent bailout fund, to have access to ECB funding.

One only has to ask why Van Rompuy demands that any member of the EU should have any say over the budgets of its fellow members to begin to understand the problem. The answer is simple--the structure of the euro socializes irresponsible behavior. Ludwig von Mises explained very clearly the social consequences of capitalism and socialism. Under capitalism the acting party itself enjoys all the benefits and suffers all the losses of his actions. Under socialism the acting party must share his benefits with all others and force all others to share his losses. So capitalist countries go from strength to strength as those who incur losses are forced from the market and are replaced by those who succeed. The exact opposite happens under socialism--those who succeed are fleeced in order to subsidize those who fail until the capital stock of the nation is consumed. Van Rompuy admits as much when he demands that the EU have control over the budgets of irresponsible members. This undemocratic interference into the affairs of a sovereign nation is required by the fact that the euro is a socialist project. As Philipp Bagus explains in his excellent book The Tragedy of the Euro, irresponsible nations export their losses to all the other members of the EU via their ability to print euros, and the responsible nations automatically bear the costs. The misconstruction of the euro (Philipp Bagus' term) means that the entire continent of Europe will be socialized to a greater and greater extent until its capital stock is consumed. We see it happening now with Greek pensioners retiring in their early fifties, thereby consuming capital, and forcing their German neighbors to work into their late sixties to pay the bill. Merkel is taking the wrong approach by demanding that Germany control Greek's budget. No self respecting, patriotic Greek could ever agree to such interference. And such interference is unnecessary. Scrap the euro and the consequences, for good or ill, of each country's internal policies will be borne by that country alone. Capitalism, with all its social benefits of rewarding success and punishing failure, will return to the international financial markets. Instead of constant bickering and threats of foreign intervention, each country will have an incentive to live within its means because it will not be able to live at the expense of its neighbors.

When Did We Change the NATO Treaty?

2011-12-05T11:47:00.000-08:00

From today's Air Force Magazine online:

NATO 3.0: NATO demonstrated that it is now an "operational alliance" via its successful air campaign in Libya, rather than just the collective defense construct of its Cold War founding, said the US permanent ambassador to the transatlantic alliance, Ivo Daalder. Speaking to reporters in Washington, D.C., last week, Daalder called today's alliance "NATO 3.0," building upon the original Cold War model and the alliance's later "export-of-security" model through its enlargement over the past 20 years. He noted that, at the height of the Libya operation, NATO had 177,000 military personnel under its command on three continents. While non-US aircraft flew most of the strike missions, US assets provided the majority of intelligence-surveillance-reconnaissance and aerial refueling capabilities. Only 10 percent of the precision-guided munitions dropped in Libya came from US aircraft, said Daalder. In comparison, US aircraft dropped some 90 percent of the PGMs during the 1999 Kosovo operation, he said. Belgian, Danish, and Norwegian aircraft together destroyed as many targets during the Libya operation as the French, he said during his Dec. 2 roundtable. Many allies were able to contribute beyond expectations, he said.

I don't recall any debate about expanding NATO's charter to become an "exporter-of-security" or a NATO 3.0. As much as all of us detested Kaddafi, Libya did NOT attack a NATO country, which would have triggered NATO's mutual defense mechanism. NATO's mission ceased to exist when the Soviet Union collapsed. Now it is just a useful mechanism for international adventures and bureaucratic advancement of people like Mr. Daalder. But he is sending real people in harm's way without a democratic mandate.

Sarkozy's Great Lie

2011-12-02T05:56:00.001-08:00

From today's Open Europe news summary:

Sarkozy: “Europe’s re-foundation is not a march towards more supra-nationality”;
Calls for greater use of qualified majority voting in the eurozone
In a keynote speech on the state of French economy and the future of Europe yesterday, French President Nicolas Sarkozy said that he will meet German Chancellor Angela Merkel on Monday to finalise Franco-German proposals for EU Treaty change, to be discussed at the next meeting of eurozone and EU leaders on 8-9 December. In contrast to Merkel’s plans to give the European Commission and the ECJ more power to enforce budgetary discipline on eurozone countries, Sarkozy said, “A more democratic Europe is a Europe where it’s [national] political leaders who decide…Europe’s re-foundation is not a march towards more supra-nationality…The crisis pushed heads of state and government to take on growing responsibilities, because, at the end of the day, they were the ones who had the democratic legitimacy that allowed them to decide. European integration will go the inter-governmental way because Europe will have to make strategic choices, political choices.”
Outlining his ideas for reform of economic governance in the eurozone, Sarkozy said that “every eurozone country must adopt a 'golden rule' enshrining the balanced budget target in its juridical order,” adding that in future eurozone countries should take more decisions by qualified majority. He also said that the ECB “has obviously a decisive role to play. There is debate over what it is allowed to do under its statute. I don't want to weigh into that debate. The ECB is independent. It will stay independent. I'm convinced that, in light of the deflationary risk which threatens Europe, the ECB will act. It's up to the ECB to decide when and with what means.”
An editorial in Le Figaro argues that Sarkozy “has promised [Merkel] the budgetary golden rule, the sanctions against countries that violate the rules, the respect for the independence of the ECB. It’s now up to the [German] Chancellor to decide if she also wants to accept a compromise to save the euro, through the mutualisation of national debts.” On his Le Monde blog, Arnaud Leparmentier stresses Sarkozy’s “intellectual incoherence”, adding, “The President imagines a French veto in Europe, but considers that smaller countries must accept the majority principle.”

Notice that Sarkozy says that "smaller countries must accept the majority principle". He means that they must accede to being run by French and German bureaucrats. (Hitler and Napoleon would be proud.) This crisis was caused by the misconstruction (as Professor Philipp Bagus calls it) of the euro and the abandonment of the immediate post-WWII vision of a truly liberal Europe of free trade and free people. Sarkozy's vision is of a protectionist European bloc against the rest of the world and a highly regulated, socialist government internally. If Europe does in fact go this route, it will stagnate and fail. It is the time for Europe's true statesmen to oppose this socialist march to totalitarianism.

One Intervention Leads to Another...and Another...

2011-11-27T04:26:00.000-08:00

From Open Europe's news summary of November 22nd:

In an interview with FTD, EU Commissioner for Economic and Monetary Affairs Olli Rehn argues for “the functioning of the eurozone to be improved through better coordination and tighter fiscal surveillance”, which would include having to clear national budgets in Brussels in order to ensure that rules on budgetary stability are adhered to. According to a draft copy of the Commission’s legislative package seen by Süddeutsche Zeitung, member states would have to submit their draft budgets to Brussels by April 15 in order for the Commission to provide comments and suggestions. The budget would then be discussed nationally and resubmitted by October 15 in order to get the Commission’s final approval. Rehn argues that the Treaty changes urged by Germany would not be necessary to achieve this, although he added that the Commission did not exclude this possibility. Handelsblatt reports that a source close to German Chancellor Angela Merkel has said that her goal is a Treaty amendment which allows for similar budgetary intervention and an enforcement role for the European Court of Justice, and according to experts, such a change can be achieved through a protocol added to the EU Treaties.

The crisis in Europe is a textbook example (Austrian economics textbook, that is...) of how the adverse consequence of one failed market intervention leads to another and another until the state, or in this case the European Union super state, controls all economic life at the expense of personal liberty.The failed attempt at establishing a common currency has created a tragedy of the commons (see Philipp Bagus' excellent book The Tragedy of the Euro), whereby the most irresponsible nations are rewarded for their irresponsibility. Now, instead of simply abandoning the failed project and considering something with a real track record--dare I say "gold standard" or money freely chosen by the market?--the elitists of Europe plan to move to the next step of trying to run the supposedly independent and sovereign countries that comprise the European Monetary Union from their cushy desks in Brussels. Here in America we would ask the rhetorical question "Are they smoking dope?". But since this is Europe, with more refined continental tastes, perhaps the question should be "Are they drinking supermarket wine?".

My Letter to the Wall Street Journal re: Fallacious Economic Theory by Fed Presidents

2011-11-20T18:35:00.000-08:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Fallacious Economic Theory by Fed Presidents
Date: Sat, 19 Nov 2011 17:50:50 -0500

Re: Fed Official Backs Action

Dear Sirs:
Seldom does one see so many fallacious economic theories displayed in one, short article. New York Fed President William Dudley believes that buying mortgage backed securities at above market prices with money that he creates out of thin air is "ammunition", and that he has a lot of it. But the reality is that more money does not create more resources--just ask the Zimbabweans or the Weimar Republic Germans. Cleveland Fed President Sandra Pianalto thinks that the definition of "inflation" is rising prices, and she doesn't see any. (The definition of inflation is expansion of the money supply, and more money eventually leads to higher prices.) Furthermore, she subscribes to the discredited "cost-push" theory of higher prices, whereby rising factor prices, such as labor union demands, somehow cause higher prices all by themselves. Well, labor unions may demand higher wages and they may get them, but the result will be unemployment to the extent that the wage increases granted are not supported by increases in labor productivity. With such gross economic ignorance at such a high level, no wonder we are in such a financial mess.

Patrick Barron

An Alternative View of the EU Crisis

2011-11-02T11:27:00.000-07:00

Today's news reports from Europe reveal that political leadership of all Europe wants to deny their citizens the right to stop the EU's inflationist policies. They are determined to punish Greek leadership for having the temerity of actually asking the approval of its citizens for accepting more debt and more regulation of their country from non-Greeks. Merkel and Sarkozy have called Panpandreou onto the carpet to explain himself. When did he dare to become a democratically elected GREEK official? The Dutch government decided it won't even ask the approval of its own parliament; it will sign the newest bailout deal right now before the people or the people's representatives catch the Greek disease and decide that they might have a say in whether to further burden themselves with unpayable debt.

All financial crises start somewhere. For the last few months it appeared that perhaps the Finns or the Slovaks would precipitate the crisis. And why is there a crisis? If the Euro elite, as exemplified by Merkel and Sarkozy, think that they have the answers, why are they so concerned? The answer, of course, is that the people finally have awakened to the fact that they do NOT have the answers...or rather that they have the same OLD answer that they have always had--namely, more debt and more debasement of the Euro.

It is time for the politicians to step aside and let markets sort things out. Perhaps the contest to win Lord Wolfson's Prize (for the best recommendation for curing Europe's financial crisis) will bring forth new ideas...ideas that actually are very old; i.e., sound money and banking that is provided by private entities who are subject to standard commercial law.

My Letter to the Wall Street Journal re: Tax on Speculators

2011-11-02T05:07:00.000-07:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Re: Tax on Speculators
Date: Wed, 2 Nov 2011 08:03:10 -0400

Re: Time for a Tax on Speculation by Ralph Nader

Dear Sirs:
Since Mr. Nader fails to understand the source of our current economic woes, of course he will recommend a cure that will do nothing to fix the problem and most assuredly will make it worse. Generally, Mr. Nader blames "corporations" and trots out green-eyed envy of
Wall Street salaries as his evidence. Oh, and he says that Merkel and Sarkozy want a financial transactions tax in Europe and, since the Europeans have shown such foresight in handling their financial affairs, we here in America shoud emulate them. Well, Mr. Nader, take off your class consciousness glasses and take a look at the real problem--government control of money and banking. The government uses the Fed to fund its welfare state and endless overseas wars with massive amounts of new, fiat money. Here's a startling fact--more money does not produce anything. More money causes higher prices, a redistribution of wealth from the people to government's favorite insiders, and fosters the capital destroying boom/bust business cycle. Speculators are nothing more than government's favorite whipping boy, designed to shield our gaze from the real problem. The capitalists who oppose your ideas are right--a tax on speculators, really just a tax on capital--will harm ordinary Americans while doing nothing to cure the real problem.

Patrick Barron

My Letter to National Review re: The Real "Secret Bad Guy"

2011-11-01T13:23:00.000-07:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: The Real "Secret Bad Guy"
Date: Tue, 1 Nov 2011 16:18:08 -0400

Re: Occupy Salem by Kevin D. Williamson

I very much enjoyed reading "Occupy Salem" by Kevin D. Williamson in the Oct 31st edition of National Review. The source of American's frustration, as manifested in the "Occupy Wall Street" movement, can be debated endlessly, and Mr. Williamson certainly has hit upon some excellent causes; namely, America's fleeting industrial superiority as the only unscathed combatant at the end of WWII. But, like Mr. Williamson, I would advise the OWS types that the real "secret bad guy" is not behind the scene but right in front of them as chairman of the most corrupt organization on the planet. I refer, of course, to Ben Bernanke, chairman of the Federal Reserve Bank. "Most corrupt organization on the planet"? You bet. The Fed acts in complete secrecy and for very good reason. It prints mountains of money and distributes it throughout the world to the detriment of the American people. Bloomberg News' Freedom of Information Act lawsuit revealed that the Fed had lent hundreds of millions of dollars to foreign banks, following the financial crisis in 2008. It refuses to allow an independent audit of its operations. It refuses an independent audit of its gold reserves. It enforces the federal government's perverse regulations that force banks to lend to those who are not creditworthy--the infamous Community Reinvestment Act. It bails out some banks and lets others go under, for no known reason (although we know that there always is a reason and it usually is political). And I haven't even touched upon its role in promoting unsustainable and capital destroying bubbles through its control of money and the interest rate. So, open your eyes, you OWS types, and picket the real bad guy--the chairman of the Federal Reserve.

Patrick Barron

A Quick Lesson in Banking Realities

2011-10-19T14:52:00.000-07:00

From Open Europe news summary:

In the FT, Patrick Jenkins argues that new bank core tier one capital ratios of 9% could lead to reduced lending. He explains that several big banks across Europe have made clear that they will reduce lending commitments rather than raise additional capital in order to meet new EU capital requirements.
FT: Jenkins

A capital ratio is simply the capital account divided by total assets. As every school child knows (or should know!) the ratio can change from either a change in the numerator (capital), a change in the denominator (total assets), or a change in both. If government mandates that banks maintain a higher ratio, banks may choose to decrease the denominator (total assets) instead of increasing the numerator (capital). They would decrease total assets by reducing lending; i.e., not only refusing to make new loans but also refusing to renew existing loans. In today's money environment in which governments manipulate interest rates and change banking regulations as their whim strikes them, the market for new capital issues cannot be very attractive. Why risk more capital in such an environment?

Restating the Question

2011-10-13T08:11:00.000-07:00

The last paragraph of Japanese Prime Minister Noda's blog:

Within this month, I intend to formulate a concrete action plan on the basis of the midterm proposal for the revival of the food and agriculture industries in Japan that was compiled in August. In what ways can the national government assist in order to revitalize agriculture and transform it into a growth industry? I will put forward a definite vision as a nation so that the people who will be responsible for the future can engage in agriculture enjoying both big dreams and peace of mind.

He might just as well asked "In what ways can the national government encourage its people to make a career in a declining industry, one that requires fewer workers, produces less income than a career in alternative industries, and one that will burden the rest of the people of Japan through higher food prices?".

Social Security Cannot Be Reformed

2011-10-10T13:27:00.000-07:00

In his recent essay in National Review magazine titled "Social Security Alert" senior editor Ramesh Ponnuru noted that Republican presidential contenders Rick Perry and Mitt Romney debated the merits of whether or not Social Security should ever have been established…Perry saying nay and Romney saying yea. His discussion of the structure of the program during the Great Depression and its impact on American society over the decades was a fine primer for those who think very little about it other than what one is likely to receive in benefits upon retirement. However, many of us readers of National Review have thought quite a lot about it, and I, for one, was somewhat disappointed that Mr. Ponnuru’s piece was more of an appetizer than a main course. Not that there was one untrue thing in the entire essay. But mark his concluding remarks that reform is necessary and that "moderating the growth of Social Security benefits…is a matter of some urgency…". This is like saying that someone really should have thought about designing watertight bulkheads for the Titanic. Come on, Ramesh; give it to us straight. We can take it.

The truth is that Social Security is one of the most corrupting and disastrous programs ever sold to the American people. Let me fast forward to the punch line—Social Security is not sustainable, is an unjust welfare program masquerading as a retirement program, and it may well bankrupt the nation. How’s that for a program that Mr. Ponnuru correctly states "remains one of the most popular federal programs, and polls consistently find that voters want to prevent benefits from being cut."?

Social Security was sold as a lie. While the government told the American people that it was a true annuity program just like one that could be purchased in the private insurance market, it told Congress that the program was nothing more than a welfare program, like many others that had passed Supreme Court muster. Well, we are long past worrying that an independent judiciary might actually read a little document called the Constitution and prevent our all-mighty government from doing whatever it wants, so lets look at what the program is, what it is not, and what the future holds.

Why Social Security Is NOT Insurance

The government was correct in its testimony to Congress in the 1930s that Social Security is NOT an insurance program. It is nothing more than a redistribution scheme, funneling current taxes from workers to retirees. Anything left over goes into the Social Security Trust Fund. But the trust fund holds no profitably invested assets out of which one would receive dividends. It merely holds general obligation bonds of the federal government. But a government bond is much different than a bond issued by a private company. The proceeds of the government bond have been spent, with no means of repayment other than by future taxes; whereas, the proceeds of a private bond are invested in productive assets that generate a revenue stream sufficient to repay the bond. Thusly, Social Security cannot be privatized: there is nothing to privatize! If Social Security did allow workers to invest some of their social security taxes in the private economy, the Trust Fund would go broke much sooner, because expenditures would outstrip revenue to a much greater degree than currently projected. Just think of it this way…if ALL Social Security taxes were invested in the private economy in order to produce a stream of revenue for later beneficiaries, from what source would current beneficiaries receive their benefits once the Trust Fund has been exhausted?

What the Future Holds

Since Social Security taxes were spent rather than invested, the capital of the nation has not been structured properly to support future beneficiaries. In an unhampered market economy workers save during their productive years and invest that savings, via banks and the stock market, in long term investments. Since workers curtail spending, there truly are more funds for financing this longer-term production structure. But the workers’ Social Security taxes did not fund productive investment. They were spent immediately by current beneficiaries. Mr. Ponnuru refers to the work of Harvard economist Martin Feldstein, whom no one would confuse with an Austrian economist, who contends that the capital stock of the nation—that is, the plants and factories that make the stuff that we want to buy—has been diminished by the program. There has been too much spending and too little savings to provide the real goods that workers will demand upon retirement. We have been eating our seed corn, so to speak, and we all are the poorer for it.

And things will only get worse. When the Trust Fund is exhausted there are only two choices—cut benefits or increases taxes (or some combination of the two). Oh, yes, I forgot the third choice—print more money and pretend that the government is honoring its obligations. That’s what it is doing now via its QE1, QE2, and QE3 programs for bailing out Wall Street and the auto companies, funding national health insurance, and paying for wars around the world so numerous that I have lost count. No doubt this will be the preferred method for meeting the Social Security shortfall, too. Of course none of these smoke and mirror proposals are real solutions. Perry is right. Social Security should never have been established, and the sooner we end the sorry program the better. Social Security cannot be reformed; it can only be terminated. The only truly sustainable retirement program is the one that each of us provides for himself.

My Letter to National Review re: Why the Post Office Does Not Turn a Profit

2011-10-09T13:06:00.000-07:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Why the USPS Does Not Turn a Profit
Date: Sun, 9 Oct 2011 16:03:21 -0400

May I make a minor, but important, correction to Mr. Robert Vergruggen's otherwise excellent essay on the USPS titled "Dead Letter". The Post Office does not negotiate sustainable labor contracts with its unions and its unions have no concern over the terms that they demand not because the Post Office is a monopoly, as Mr. Vergruggen states, but rather because the Post Office is not a private company with private property to protect. If the Post Office were a private company with a government-enforced monopoly over first class mail delivery, it still would have to turn a profit or go out of business. Its shareholders would demand that the company turn a profit or, if that appeared to be impossible due to government interference in the labor market or union intransigence, they would demand that it cease operations and liquidate in order to preserve at least some capital. This is why private companies do a better job of negotiating labor agreements than public ones, and it is the same reason that capitalism is sustainable; i.e., those entrepreneurs who do a better job are rewarded with more capital to manage at the expense of those who do a poor job. So private firms go from strength to strength while public firms' deficits grow larger and larger.
Patrick Barron

Ron Paul's Campaign of Ideas

2011-10-05T04:28:00.000-07:00

Kevin D. Williamson doesn’t quite know what to make of Dr. Ron Paul. Mr. Williamson is Deputy Managing Editor of National Review magazine and noted columnist therewith. In addition he is the author of The Politically Incorrect Guide to Socialism, which did point-by-point to socialism what the Romans did to Carthage. In his recent NR cover essay “Ron Paul’s Last Crusade”, Mr. Williamson “doubt(s) that there’s anybody at National Review who is closer to Ron Paul politically than I am…” Nevertheless, he finds much that bothers him about some of the Ron Paul supporters and even Ron himself…what he calls “Ron’s Ronness”.

I believe that Mr. Williamson’s concern over the background and fervor of some of the Dr. Paul’s supporters can be dismissed as not of Dr. Paul’s making or concern. What politician can spurn the support of those who agree with him on important campaign issues because they also hold somewhat out-of-the-mainstream or even odious views about non-campaign topics? Dr. Paul graciously accepts the support of the John Birch Society, for instance, but that in no way obligates him to endorse their conspiracy theories about plots to replace American sovereignty with a one-world government. I’ve heard this concern from many people who have never heard of the John Birch society and I would be surprised if Mr. Williamson has not heard the same. There is no doubt that many of Dr. Paul’s campaign workers are young, idealistic, and perhaps dogmatic...as is often the case with the young. For instance, Mr. Williamson relates a conversation with a “well-spoken young woman” who did not handle very well his question of why Dr. Paul’s ideas were not all that popular. Is this really something for which Dr. Paul should be criticized? I think not.

So what about “Ron’s Ronness”? Mr. Williamson admires many of Dr Paul’s personal campaign traits; for example, that Dr. Paul almost never talks about himself or uses his family as props. His main beef is that Dr. Paul works any question around to the evils of fiat money and the unsustainable American military empire, which he is convinced will be the death of our liberty if not the death of the nation itself. But why is this a problem? Frankly, I see it as an indictment of our modern, personality centered campaigns of appearance over substance. American politics have been plagued by this phenomenon since 1928 when that new gadget the radio caused the electorate to be repelled by the Bronx-accent of New York governor and Democratic candidate Al Smith. Then it became enshrined as Gospel following the first-ever presidential TV debates, when Nixon’s five o’clock shadow and JFK’s Hollywood good looks may have tilted the 1960 election to JFK.

By contrast Dr. Paul harkens back to the days of the front-porch campaigns of the late nineteenth to the early twentieth centuries and even further back to the non-campaigning of Abraham Lincoln in 1860. The front porch campaign was coined in 1880 when candidate and later president James Garfield sat on his front porch and answered reporters’ questions. The last such campaign was by candidate and later president Warren Harding in 1920. Abraham Lincoln didn’t even go that far. He refused all interview requests during the dangerous 1860 campaign out of fear that he would say something not quite as he wished, which could then be used against him. He advised all those requesting interviews to study his many published speeches and position papers on all important campaign subjects. Dr. Paul has assembled such a campaign document in his recently release book Liberty Defined: Fifty Essential Issues That Affect Our Freedom. One could decide whether or not to vote for Dr. Paul simply by reading this book. Every topic that one could imagine is there, in simple, clear, unambiguous yet subtle writing. Dr. Paul himself explains that decades of thought went into this book. Do we really need anything else? How important, really, is the candidate’s looks, speaking style, wit, or charm to the great issues that he will face? I say not important at all.

Every interview with Dr. Paul eventually concludes with an attack on our monetary system for the simple reason that that is what is likely to destroy our liberties and possibly the nation itself, not al Qaeda or the Iranians or the North Koreans. Dr. Paul is a highly respected and much published Austrian economist. He has warned the nation about the dangers of fiat money and fractional reserve banking since he entered politics after Nixon took the nation off the last tenuous ties to the gold standard. His presidential campaign is a campaign of ideas. It is a true intellectual crusade, not because he calculated that that might get him elected but because an intellectual campaign is the only kind of campaign that can save us. It is an honest campaign, too. Unlike the typical politician who carefully tailors his speeches to match the prejudices or vested interests of his audience, Dr. Paul’s message is always the same—fractional reserve banking and fiat money are violations of historic legal principles. Their inherent fraud is revealed in frequent boom-and-bust business cycles that wipe out the honest savings of the people. Rather than prosecute such practices as fraud, bankers and businessmen conspired to create an institution that would shield THEM from the consequences of their fraud. That institution is the central bank; here in America it is called the Federal Reserve Bank. Although the central bank can protect the bankers and their politically connected businessmen by becoming a lender-of-last-resort, the central bank cannot stop the workings of economic law, which demands that someone, somewhere bear the loss of its wealth redistribution effects and capital destruction. That loss is born by the rest of us.

Dr. Paul is like a passenger on the Titanic who understands that plowing full steam ahead through iceberg infested waters is fraught with danger, while the captain and crew are engaged in schmoozing passengers about the ship’s finery and promises that they are part of a record-setting trans-Atlantic voyage. All is going well. The ship is making great progress. She is the finest product of modern engineering. She is unsinkable! Wait…what is that big, white thing up ahead? Too late. Too late.

Another Adverse Consequence of Welfare-On-Demand

2011-09-30T07:11:00.000-07:00

From today's Open Europe news summary:

Commission threatens to sue UK over benefits test
The European Commission has threatened to take legal action against Britain arguing that the UK’s “right to reside” test for determining benefit entitlements indirectly discriminates against non-UK nationals. The Government fears the move could leave taxpayers facing a bill of up to £2.5bn to pay for EU nationals, including “benefit tourists”, a new cost that could ruin the Coalition’s plans for welfare reform. In the Telegraph, Work and Pensions Secretary Iain Duncan Smith writes, “This kind of land grab from the EU has the potential to cause mayhem to nation states, and we will fight it.”
Open Europe’s Stephen Booth is quoted in the Mail saying, “Freedom of movement within the EU has largely been positive for the UK but issues surrounding benefits and social security are understandably very sensitive. For the freedom of movement within the EU to work, governments have to be able to assure their citizens that welfare systems won’t be abused.”
Meanwhile, in the Netherlands, Elsevier reports that a parliamentary enquiry has found that that the Dutch government underestimated and was underprepared for the number of migrants from Eastern Europe after EU enlargement.
Times Telegraph Telegraph: Duncan Smith Conservative Home Sun Express Express: Leader Mail Mail 2 Elsevier NOS

Here in the U.S. the states have known for a long time that generous welfare benefits attract "welfare benefit shoppers", from both within the U.S. and without. But the EU is going further than even the U.S. in mandating that their members--who, after all, are SOVEREIGN countries--establish NO criteria that would discriminate against such welfare benefit shoppers. It is welfare-on-demand and other socialist enterprises such as taxpayer education for non-citizens that is the primary cause of the backlash against the economically beneficial free movement of labor across political borders.

A Tactic of the Euro Elitists

2011-09-29T11:25:00.000-07:00

From today's Open Europe news summary:

Meanwhile, the Guardian reports on Deputy Prime Minister Nick Clegg’s speech in Warsaw today, in which he is expected to argue, “Any change to governance structures must not lead to a weaker and divisive Europe where the aims of ‘Euro ins’ are set against those of ‘Euro outs’. There can be no inhibiting of trade, for example, and no obstructing the single market. Any decision that affects the 27 must always be taken by the 27.”
Open Europe blog Spectator Coffee House blog FT Mail Guardian Times

One of the tactics of the Euro elitists is to equate support for the Euro as support for free markets and opposition to the Euro as opposition to free markets. This is a logical fallacy. Many countries engage in free trade with one another even though they do not use a common currency. Nevertheless, if Nick Clegg's desire is to expand trade while minimizing currency conversion costs, he should support a return to the classical nineteenth century gold standard in which each country's currency was merely an expression of a certain weight of gold. He should reflect upon these words of Ludwig von Mises in Human Action:

"The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth’s surface, everywhere destroying the fetters of age-old prejudices an superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating unprecedented progress of Western liberalism ready to unite all nations into a community of free nations peacefully cooperating with one another."

The ECB as a Fed Clone?

2011-09-27T06:32:00.000-07:00

From today's Open Europe news summary:

Mats Persson: Topping up bailout fund through ECB could prove to be “non-starter”
In an opinion piece in today’s CityAM, Open Europe’s Director Mats Persson writes that despite the positive news that eurozone leaders are now acknowledging that a Greek default might be necessary and the importance of recapitalising Europe’s banks, the alleged proposal for a new eurozone rescue package, based on leveraging the European Financial Stability Facility (EFSF) through the balance sheet of the European Central Bank (ECB), is a non-starter. He argues that: “the plan would require a radical reworking of the EFSF framework, since it is not designed to be leveraged or be subordinate to the ECB in terms of covering losses [and] using the ECB’s balance sheet to top up the EFSF would further expose the former to even more risky debt”. He notes that under the proposals “the ECB would fully enter the domain of fiscal policy”, which would be unacceptable to Germans. He argues that “a growing number of Germans now view the ECB with growing suspicion, as was seen in the dramatic resignation last month of Juergen Stark, the German representative on the ECB’s executive board, allegedly over the bank’s decision to start buying Italian and Spanish government bonds. One step further, and German support for the entire euro project could start to diminish.”

German finance minister Wolfgang Schäuble denied that a fivefold increase in the EFSF was imminent saying, “No, that is clear... We do not intend to increase it,” reports CityAM. Schäuble’s comments were echoed by a number of German politicians. Carsten Schneider, the SDP’s Finance spokesman said: "A new multi-trillion programme is being cooked up in Washington and Brussels, while the wool is being pulled over the eyes of Bundestag and German public. This is unacceptable."

The "programme..being cooked up in Washington and Brussels" is to turn the European Central Bank into a clone of the Federal Reserve Bank, a last-resort purchaser of worthless sovereign debt. Those who control the money control everything; thusly, turning the ECB into a European Fed would constitute a vast transfer of real power to Brussels.

Put Your Own House in Order

2011-09-16T05:35:00.000-07:00

From today's Open Europe blog, quoting British Deputy PM Nick Clegg (my emphasis):

On his part, Nick Clegg said last month

"Countries like the UK should not see ourselves as spectators, watching from the wings, triumphalist, complacent, as if Europe's economic woes are a eurozone problem, rather than a problem for all of us - as if it is enough to put your own house in order, but then stand by and let the neighbourhood crumble."

Why "yes", Nick, it IS enough to put one's own house in order. In fact, that is the most important job of any politician. It is mere hubris to believe that a political leader has any kind of mandate, let alone effective control, over the internal affairs of any other nation. Put your own house in order and set a good example for others to follow. That will have more positive and lasting impact on world affairs than pompous pronouncements of international agreements that everyone knows will be broken. Oh, and by the way, this goes double for President Obama.

Germany's FDP May Reinvent Themselves as Eurosceptics

2011-09-15T05:34:00.000-07:00

From today's Open Europe news summary:

In the FT, Quentin Peel notes that the “Free Democratic party, the junior member of [Chancellor Angela Merkel’s] coalition that has seen its support collapse in a series of state elections, is flirting with the temptation of walking out and reinventing itself as a eurosceptic champion.”

This is GOOD news! The FDP needs to represent free markets and free people in Germany and forge links to UKIP in England and the True Finns in Finland. Each new poll shows that a majority of the German populace want out of the EU and back on the DM. There is nothing threatening in any of this (in contrast to to the Polish prime minister's comments that a breakup of the EU would mean the possibility of war in Europe within ten years. This is tantamount to claiming that free markets and free people cause war, when the opposite is the case).

Retrying the Discredited Policies of Hoover and FDR

2011-09-09T08:52:00.000-07:00

I just finished re-reading America's Great Depression by Murray N. Rothbard. I read the book very carefully, because I needed to design a supervised reading course of the book for some students at the U. of Iowa. As I read the book, I was amazed that the same harmful policies pursued by Presidents Hoover and Roosevelt are being repeated today and justified by the same discredited economic theories.

Today's Open Europe news summary illustrates three harmful policies contemplated by the EU that were tried and found to be failures by Hoover and Roosevelt: (1) a proposed tax increases in the form of an EU-wide financial transaction tax; (2) a possible--and probable--rate cut by the ECB; and (3) the implied use of force to prevent a member from exiting the EU in order to avoid policies it deems harmful.

Hoover signed the largest tax increase in the history of the country at the bottom of the Great Depression, which destroyed purchasing power and incentives to produce. The Fed lowered interest rates, which made it impossible for banks to loan funds at a rate sufficiently high to compensate them for risk. The states were not allowed to opt out of the federal make work programs and new regulatory burdens.

I recommend that you read Rothbard's excellent book. You can download the book in PDF form for free: http://mises.org/resources/694

No Austerity for French Government Bureaucrats

2011-08-25T06:02:00.000-07:00

From today's Open Europe news summary:

Separately, French Prime Minister François Fillon yesterday announced an austerity package aimed at saving €1bn this year and €11bn in 2012. The measures include increases on some capital income taxes, the elimination of capital gains tax loopholes, increases in tobacco and alcohol taxes as well as an exceptional tax levy of 3% on the very rich. The plan also contains proposals aimed at harmonising the French tax system with that of Germany.

These tax increases are not "austerity" for the French government. The French government is NOT reducing spending. It is raising taxes to support and make permanent its current level of spending. The French people will suffer by having their after tax incomes reduced, to be sure, but there is no austerity at the government level. I doubt that one bureaucrat will lose his job, which cannot be said of the private French economy. France is becoming a divided nation--government employees and those who receive their political favors on one side and the rest of French society on the other. This cancer upon society of bloated governments is occurring everywhere.

My Letter to National Review Magazine re: Medicare

2011-08-24T07:56:00.001-07:00

Re: The Roadmap Back to AAA, by Kevin D. Williamson

Dear Sirs:
Kevin D. Williamson expresses in one sentence the true essence of Medicare when he states that it is "a welfare handout disguised as an insurance policy and structured as a Ponzi scheme."

Real insurance is sustainable, but Medicare is not real insurance. Most Austrian economists agree with Ludwig von Mises and Hans-Hermann Hoppe that it is impossible to insure one's own health, because the insured has too much control over the event that would trigger disbursements. Little needs to be said about the unsustainability of a Ponzi scheme. So we are left with Medicare as a welfare handout. Therefore, the real question is why the American middle class feels that it needs a welfare handout. My gut feeling is that most Americans feel that their taxes have been consfiscated for little benefit to themselves and that Medicare is one program that allows them to recoup some of their loss.

Patrick Barron

My Letter to National Review Magazine

2011-08-23T14:16:00.000-07:00

Dear Sirs:
I enjoyed Mr. Herman's review of Car Guys vs. Bean Counters by Bob Lutz. But, the title should be Car Guys vs. Government. Bean counter Roger Smith is a product of an industry trying to cope with government intervention. Mr. Lutz properly lays the blame for Detroit's woes on government's CAFE standards, but he is wrong to blame its labor trouble on the "uneasily cozy relationship" between Detroit and the UAW. This is just another example of an industry trying to come to terms with a previous government intervention--the Wagner Act. The New Deal era Wagner Act destroyed traditional legal principles that protected the automakers' property. This seems to be a lesson never learned--that government intervention in the free market always results in the OPPOSITE of its intended purpose. The CAFE standards led to more, not less, American dependence on foreign oil. And the Wagner Act harmed the working man. Everywhere it has been vigorously enforced industries decline along with blue collar employment. Ludwig von Mises' Human Action explains all and should be required reading in every American university.

Patrick Barron

Laundry Detergent and Fighter Jets--Two Socialist Failures

2011-08-17T12:50:00.000-07:00

In his second great book Socialism Ludwig von Mises explained why socialism is not an alternative to capitalism and, in fact, is not an alternative economic system at all. The elimination of private property by the socialist state makes economic calculation impossible; thusly, socialism in its pure form could not solve the ever-present problem of scarcity. The directors of a socialist state would not know what to produce, how to produce it, how much to produce, etc. Only free market capitalism can solve these problems. The main benefit of private property rights is to be able to make entrepreneurial decisions. Those who make good decisions prosper and are granted control of more resources. The opposite happens with entrepreneurial failures. So capitalist economies grow from the accumulation of capital and socialist economies consume capital until they collapse.

Laundry Detergents that Don't Get Clothes Clean

I was reminded of this basic law of economic science by two fairly recent incidents. The first occurred a few months ago when my wife and I had dinner with Professor Yuri Maltsev at the home of Michael and Dawn McKay in Fairfield, Iowa. Needless to say, the evening was delightful. We all had just read Jeffrey Tucker's Mises Daily Article titled "Why Everything is Dirtier" about why laundry detergent no longer gets clothes "clean and bright". Yuri said something that I will never forget. He told us that, when he told his mother, who suffered for most of her life living in Soviet Russia, about Jeffrey's article, she replied "Ah, the first sign of socialism – soap that does not clean." What a marvelous insight! I subsequently reread Jeffrey's article--which I highly recommend to you, dear reader. Laundry detergents no longer contain trisodium phosphate, an agent that helps whisk the dirt away during the rinse cycle. That dinginess you see in your clothes is the dirt that was not removed, the whole point of washing clothes. Similarly, this explains why your automatic dishwasher does not get your dishes ‘spotless’ anymore. The EPA banned the substance from commercially sold laundry products some time ago, although the consumer still can buy it in pure form and add it to his home laundry. A spokesman for the EPA explained that phosphates, a natural product, harmed the environment. Why we all have not succumbed to phosphate poisoning long ago was never explained. Mother nature was deemed to be harmed, so the substance was banned. Getting clothes clean was never a consideration.

(Twenty-five years ago, I consulted for The Citrus and Chemical Bank in Central Florida. The "Citrus" designation came from the local orange groves, and the "Chemical" designation came from the local open face phosphate mines. I can tell you that both oranges and humans were co-existing very healthily along with the huge natural deposits of phosphate.)

In banning phosphates from commercial laundry detergents the EPA did not consider the desires of the consumer or the property rights of the producers; thusly, absent market forces and legal protections, there was no need for economic calculation. The EPA spokesman did not care how or whether the consumer's clothes were laundered satisfactorily. True, the EPA does not own businesses that manufacture commercial laundry detergents, but in Human Action Mises also explained the two forms of socialism--that of the Russian variety and that of the German variety. In the Russian variety (that of Soviet Communism), it is clear that the state owns the means of production. In the German variety (that of Nazi Germany) business is still nominally owned by private individuals but the state makes all the important, and even some seemingly trivial but still important decisions – like what we can or cannot use to clean our dishes or clothes. Yuri’s mother understood that a small ‘first step’ of Socialism is taken. Mises explained that regardless of which socialist approach, Russian or German, the deleterious results were the same. Socialism expands, Freedom wanes; the State steps in and reduces our choices and, as a result, our quality of life is reduced – and life becomes more soiled.

Fighter Jets that Can't Fly

The second incident which reminded me of Mises' dictum that socialism fails due to the lack of economic calculation involves America's premier air superiority fighter--the F-22. The F-22 has been grounded since May due to a problem with the pilot's oxygen system. Just to let you know how serious this issue is, our government, in its vast wisdom, shut down the F-22 assembly line a couple years ago after producing only 167 aircraft. This is an astonishingly low production run, given the development cost, the success of the aircraft as the world's best fighter, and the fact that its replacement, the F-35, is many years away from deployment in any numbers. So right now America is without its most modern frontline air superiority fighter.

Sources from my old Air Force network claim that most modern military aircraft use a different oxygen system from the one I used many moons ago flying the F-111 and the one currently used on commercial aircraft. The new oxygen system is designed to operate in a chemical environment. Since outside ambient air may contain chemicals, the engineers did not provide the F-22 with access either to pressurized air in the cockpit or to outside ambient air should the system fail. Flight above 14,000 feet will cause rapid impairment of brain functions. Commercial airliners are pressurized, so our bodies believe that we are below 14,000 feet. But the F-22 pilot does not have access to a pressurized environment in the event of oxygen failure. Even if the pilot dove to below 14,000 feet, he would not be able to breathe outside ambient air--he cannot even jettison the canopy! So failure of the oxygen system on an F-22 means that the pilot either ejects or dies from hypoxia, lack of oxygen. Thus the “stand down”, the grounding of all F-22’s, was ordered until a solution is found.

Now, your local backyard mechanic probably could install a simple selector valve quickly and easily, giving the pilot access to ambient air in the case of oxygen failure. But the Air Force chose instead to form a committee to study the problem. Three months later the jets still are grounded and the pilots are losing proficiency since constant training/re-training is required. It isn't easy flying one of these machines! A professional musician once told me that he practiced his guitar every day, even after forty years of playing. He said, “If I miss one day, then I notice it. If I miss three days, then the audience notices it.” The term for losing flying proficiency is "getting behind the airplane". It is not just that the pilot loses a feel for the airplane as much as losing mental agility to anticipate what needs to be done next.

America Stumbles Down the Well-Worn Soviet Path to Military Failure

We should not be surprised that military hardware failures occur so frequently, for the military is the best example of a socialist institution in any society. Since economic calculation is difficult if not impossible for military hardware, there is no way to reasonably determine how to design hardware, what materials to use, and how many units to produce. The Air Force's F-22 debacle is distressingly reminiscent of Russia's military decline toward the end of the Soviet era. Despite pumping a huge proportion of its GDP into military hardware, the ravages of socialism meant that over-designed Russian military hardware could not be maintained. Tanks could not operate--most were not operational due to cannibalization of parts to keep a few going for appearance sake--and ships were abandoned in port, leaking radioactive waste into the water. Now the American Air Force has its limited F-22 fleet grounded and the highly trained pilots losing their edge daily.

The only "economic calculation" government understands is bigger budgets. More money is supposed to equal more of whatever is desired--national security, education, research discoveries, etc. But the opposite happens, due to the inherent socialist nature of government programs. The military does not generate revenue to offset its costs--as did the Revolutionary War era privateers!--so there really is no way to determine what to build, how to build it, and in what quantities...in other words, there is no room for economic calculation. Even though the U.S. spends half of the entire world's military budget--in other words, we spend as much on the military as all the other nations of the world combined!--we are less secure. The Air Force's inventory has never been older. Why it stopped production of the F-22 remains a mystery, but I suspect that Lockheed needed a big project in order to survive. So, it lobbied for a new fighter to replace the F-22, which was built by Boeing, and got it in the form of the F-35, recently dubbed the world's first "trillion dollar airplane". As consumers, the military always wants more and newer hardware, of course.

The F-35: Headed for Failure

The F-35 is supposed to perform many diverse missions--air superiority and ground attack for the Air Force and Navy, and close air support for the Marine Corps. Plus we expect to sell lots of units to our allies. But the Air Force does not expect to deploy the aircraft in numbers suitable for operational responsibilities until 2017 at the earliest, meaning that the British may complete construction on two new aircraft carriers designed specifically for the "jump jet" version of the F-35 before America can provide the aircraft. As an old F-111 crewmember, I am experiencing déjà vu. The F-111 was dubbed "McNamara's Folly", because it too was supposed to fill many diverse roles. But it proved to be too heavy to land on a Navy carrier and was not nimble enough as an air superiority fighter for the Air Force. The Air Force stopped using it as a dive bomber--the preferred method to deliver close air support to ground troops--after the wings fell off testing this maneuver. It finally found a niche in medium range interdiction missions. Likewise I predict that the F-35 will not be found suitable for all the roles promised by Lockheed. The main problem is the VTOL capability. VTOL is an acronym for "vertical take-off and landing". But VTOL capability subtracts from a fighter's range, maneuverability, and armament. The British Harrier is the only Western fighter ever built with VTOL capability. It was a favorite at air shows but could not stay in the sky with front line fighters of its day. There is no military justification for VTOL. No modern fighter will be based in primitive locations, due to the need for vast support infrastructure. The Navy's catapult system on its carriers is powerful enough to throw a jumbo jet into the air. VTOL is being driven by other considerations.

This fighter debacle illustrates several points about the difference between socialism and capitalism. Although the military may claim to be consumers, it is not purchasing its hardware with exchange generated by its own, previous production. It is in the same position as any welfare recipient. So the military and its suppliers lobby for more money with no real feedback other than success or failure in war. The United States has not won a war since World War Two. Korea was a stalemate; we lost Vietnam; we are still fighting in Afghanistan; Iraq is not pacified; and Libya is a mess.

So just as more welfare money has not reduced poverty, more money for the military has not made us more secure. Yet the poor and the military both demand and get more. This welfare/warfare socialism will bankrupt us just as Soviet communism bankrupted Russia. We are seeing the first signs of this decline in the grounding of our pathetically few and enormously expensive F-22's and the delays in production of the over-engineered F-35. Oh!...and detergent that doesn't clean!

Letter to the Wall Street Journal re: the British Riots

2011-08-17T12:20:00.001-07:00

Re: "The Barbarians Inside Britain's Gates" and "Notable & Quotable"

Dear Sirs:
Theodore Dalrymple and the editors of the London Telegraph are just the latest to observe that government interventions cause the OPPOSITE of their intended goals. Ludwig von Mises, for one, explained the phenomenon decades ago. The more extensive the intervention and the longer the time frame involved, the worse will be the outcome. In Britain's case, government has been contravening traditional legal principles for decades, making it almost illegal for citizens to defend themselves. This might work to some extent if Britain were Singapore, where the police and the courts do not tolerate anti-social behavior. But Britain does the opposite. Furthermore, its welfare policies have so corrupted its youth that millions are incapable of contributing to the economic system, becoming mere parasites upon society. So, in its desire for a more peaceful and prosperous society, British interventions into traditional legal principles of justice and protection of property rights have accomplished the opposite--civil strife and public bankruptcy.

Patrick Barron

Tell the Truth and Risk Jail!

2011-08-06T04:49:00.001-07:00

From yesterday's Open Europe news summary:

"Il Corriere della Sera reports that Italian prosecutors yesterday seized documents from the Milan offices of credit rating agencies Moody’s and S&P, as part of an investigation into the impact of evaluations on Italy made by the two agencies over the last weeks on the current financial markets turmoil."
Corriere della Sera Telegraph

The true face of government is revealed!

Another Round, Bartender!

2011-08-06T04:47:00.001-07:00

From yesterday's Open Europe news summary:

"European Commission President José Manuel Barroso sent a private letter to eurozone leaders which urged for “a rapid re-assessment of all elements related to EFSF [the eurozone’s temporary bailout fund]” and suggested leaders should quickly assess “how to further improve the effectiveness of both the EFSF and the ESM [the eurozone’s post-2013 permanent bailout fund] in order to address the current contagion.” This has been widely reported to imply that the overall size of the EFSF should be increased, to allow it to cover Italy and Spain."

So, if irresponsible government debt-financed spending and ECB money printing has led to a crisis, then the answer is....MORE OF THE SAME! Incredible!

But we should not be surprised. As long as governments have a facility that can print legal tender out of thin air, that is exactly what they will do. The financial crisis will never be resolved until the world returns to sound money. The political pressure to print money, when that is an option, will always trump responsible behavior.

Why Were There Boom/Bust Business Cycles During the Gold Standard Era?

2011-08-01T06:28:00.001-07:00

Austrian school economists universally cite the fractional reserve banking system as the primary cause of boom/bust business cycles, whereas defenders of our current fiat money/fractional reserve banking system claim that other forces are to blame, such as "shocks" to the economy like war and natural disasters, or inherent flaws in capitalism, such as periodic falls in demand. These Keynesians claim that periodic falls in demand which idle productive resources, including labor, must be countered by government intervention, primarily spending by government and artificial lowering of the interest rate by central banks. It is easy to see why this theory is so popular--it gives governments and central banks a scientific rationale for what they want to do anyway: spend and regulate. Despite decades of failure, this prescription still predominates the halls of governments and central banks.

For the Austrians the cause of the boom/bust business cycle has a simple cause which brings about a complex result. The simple cause is fractional reserve banking, which leads to bank credit expansion and malinvestment. The complex part is the Austrian explanation of how this credit expansion distorts the capital structure of the economy, leading inevitably to the bust. Bank credit not financed by real savings causes the unsustainable boom, and it is fractional reserve banking that allows banks to expand credit not backed by prior savings. So banks manufacture money out of thin air. Printing more money, as central banks are doing everywhere in the world right now, and deficit spending, also the policy of choice by governments, merely leads to more malinvestment, exacerbating the problem and leading to a deeper recession later that will take longer to heal...if the market is ever allow to heal.
Even in the so-called "gold standard era" of the nineteenth century, banks engaged in fractional reserve banking. Thusly, there were periodic boom/bust cycles. It was the absence of a one hundred percent reserve standard for demand deposits that accounted for these cycles. It need not have been so. Fractional reserve banking--in which the banker lends out DEPOSITED funds--was challenged in England in the early 19th century when some depositors asked the courts to force bankers to repay their deposits out of the bankers' personal funds. The depositors wanted the courts to treat deposit banking according to traditional legal principles. The banker would be required to keep ready for redemption one hundred percent of DEPOSITED funds, just as a grain elevator treats a farmer's deposit of corn or wheat. The elevator cannot speculate with this "deposit". But the courts ruled that the depositors had "lent" the banker the money rather than entrusted him with their money as a deposit. This judgment was accepted as precedent all over the Western world and led to dire economic consequences.

The economic side is that when the bank loans money in a fractional reserve system, rather than a one hundred percent reserve system, the money supply increases without an increase in prior savings. There are no new real resources freed for productive investment. Eventually reality reveals the problem, as prices start to rise in consumer goods, forcing resources back from more time consuming investments. These investments never were funded with real savings, only fiduciary monetary expansion. This is what caused the several depressions of the late nineteenth century.

But research has shown that these depressions were not nearly as onerous as those of the twentieth and now twenty-first centuries, because the underlying reserves themselves--gold and silver--could not be inflated. This provided a limit to the expansion. Furthermore, in the absence of a central bank as lender of last resort in the U.S., banks were wary of the ever-feared bank run, whereby bank depositors descended upon a bank en-mass demanding redemption of their deposits in gold. This fear limited credit expansion. But first the advent of the central bank in 1913, our Federal Reserve Bank, and the gradual demise of gold as reserves have meant a steady increase in bank credit expansion. Now the reserves themselves may be expanded by the Fed to infinite amounts. That is one source of the credit expansion. Then the fractional reserve banking system adds a second source of expansion.For example, if reserves are 1 monetary unit (m.u.) and the reserve requirement is 100%, then the money supply is 1 m.u. Next let's assume that we are under a gold standard and the banks are required to keep only 10% reserves. Now the money supply can be inflated to 10 m.u.'s. But, if reserves are not gold and the Fed inflates them to 2 m.u.'s and the reserve requirement is 10%, the money supply can be inflated to 20 m.u.'s. So, under a gold standard with fractional reserve banking, the reserves themselves cannot be inflated, which limits the extent of money inflation. But when reserves themselves are nothing more than blips on a computer screen, the money supply can be inflated to infinite amounts. This is the worst of all monetary worlds, because there now is no institutional check on monetary expansion. The Fed has created new reserves in massive quantities since the subprime lending bust of 2008--over a trillion dollars in new reserves! Under our fractional reserve system, the banks are able to expand credit to many times this already huge amount. This will lead to more not less malinvestment, because none of this credit expansion will have been financed by prior savings.

So, governments and central banks are doing everything in their power to create another unsustainable bubble. Central banks have intervened to keep interest rates close to zero (!), and governments are engaged in successive bouts of profligate spending that they characterize under the pompous title of "quantitative easing". It cannot last, and it will not last.

Corn, Corn Everywhere But Not an Ear to Eat

2011-07-18T13:49:00.000-07:00

The 2011-12 U.S. corn crop is estimated at 12.5 billion bussells. The largest producer, by state, is Iowa at 2.2 billion bussells, followed by Illinois at 2.0 billion bussells, and Nebraska at 1.5 billion bussells. With all that corn one would think that corn-on-the-cob would be readily available in farmers' markets and grocery stores in the state of Iowa. But such is not the case. The tenth largest farmers' market in the nation is located in Iowa City, IA. Dozens of farmers offer their goods each Saturday morning from spring to fall. But last weekend not one ear of corn was offered for sale there. The largest grocery store in town is the Hy-Vee, part of a Midwestern chain of 220 grocery stores. There one can buy corn-on-the-cob...shipped to Iowa from Georgia. So where is all that great Iowa corn? I think it's hiding in your gas tank.

My letter to the Wall Street Journal re: How to Cure the Housing Slump

2011-07-12T06:44:00.000-07:00

Re: U.S. Tackles Housing Slump

Dear Sirs:
U.S. interventions have caused massive malinvestment in housing for decades. As a result, America has the wrong housing in the wrong places at the wrong price. This inventory must be liquidated before we can return to a "normal" housing market. Therefore, make foreclosures easier not harder. And, in order to prevent the same thing from happening in the future, dismantle the entire governmental housing intervention bureaucracy. Liquidate Fannie, Freddie, the FHA, etc. Repeal the extortionist Community Reinvestment Act. Don't bail out anyone.

Patrick Barron

Germany at the Rubicon

2011-07-12T06:40:00.000-07:00

From today's Open Europe news summary:

In the Telegraph, Ambrose Evans-Pritchard argues that, with the eurozone crisis seemingly turning to Spain and Italy, “Germany must now be willing either to buy or guarantee Spanish and Italian debt, and in doing so to cross the Rubicon to fiscal and political union, or accept that EMU must break up with calamitous consequences for German foreign policy. Large matters, beyond the intellectual vision of Germany's current leaders.”

Germany--and the rest of the world, for that matter--must face up to the fact that debt, once created, cannot be ignored. It must be repaid or written off. It is time for the world to recognize that more debt solves nothing and, in fact, is counter-productive. More debt forestalls reform and funds the failed inflationist and statist policies of the post-war years. I hope that Evans-Pritchard is wrong and that these matters are not beyond the intellectual vision of Germany's current leaders. The Euro project is a failure due to economic laws that cannot be ignored. Fiat, government controlled money is a failure at the national level; elevating it to a regional level solves nothing but merely masks the inherent fatal flaws.

The Fed Recruits Academia to Its "Brave New World"

2011-06-13T04:20:00.000-07:00

On June 1, 2011 John C. Williams, president and CEO of the Federal Reserve Bank of San Francisco, delivered an address to the American Economic Association’s National Conference on Teaching Economics and Research in Education. He titled his address “Economics Instruction and the Brave New World of Economic Policy”. One wonders if Mr. Williams ever read Aldous Huxley’s chilling book, warning the world of the threat to individual freedom by a tyrannical one-world state. If he had I doubt that he would have included “Brave New World” in the title of his speech.

But perhaps he selected this title on purpose! For Mr. Williams’ speech was an unvarnished plea to recruit academia as co-conspirators to spread as economic truth the Fed’s latest, make-it-up-as-we-go-along, and increasingly panicking monetary interventions masquerading as well-thought-out policy. The speech was nothing less than an admission that the Fed’s monetary theories have failed, that it is experimenting with new ones, and that it wants academia to endorse whatever its latest policy experiments happen to be and incorporate them into college curricula! Here are his very words:

“We depend upon educators like you to explain how the Fed works and how our policies affect the economy. We all benefit when the public understands what we do and why, so we are very grateful for the work you do.”

A 1950s Grocer’s Account Book vs. a 2011 Credit Card Authorization

Mr. Williams launched into a rather disjointed defense of the reasons that the Fed had to employ new monetary policy tools. (Of the twelve policy tools on the Fed’s own website, Mr. Williams proudly proclaimed that nine of them did not exist four years ago.) I bet you didn’t realize that one reason monetary policy had to change was due to advances in the payment system. It seems that our ability to use debit and credit cards for purchasing goods and services has made traditional monetary aggregates obsolete. Again, in his own words:

“How do 1950s theories of cash and checks apply in a world in which you and I can instantly take out a loan of several thousand dollars with the swipe of a card at the cash register?”

It is obvious that Mr. Williams has never read Ludwig von Mises’ The Theory of Money and Credit. In Mises’ first great book he explains the differences between money and credit; thus, the name. Money represents final payment beyond which there is no recourse; credit must be satisfied via money. I’m certain that Mr. Williams would be surprised to learn that in early 1950s America credit was granted just as rapidly at some retail counters as it is today. Back then it was common for housewives to buy groceries on credit. The neighborhood grocer recorded the housewife’s almost daily purchases in a book kept under his counter. The transaction took less than a few seconds. Housewives settled their grocery accounts after their husbands were paid, usually in cash, at the end of the week. These credit transactions did NOT affect the money supply any more than do today’s credit card transactions. Furthermore, Mr. Williams may be surprised to learn that the debt card is simply “an electronic check”; it embodies all the legal risks and protections of a paper check. Of course, paper checks have been around long before 1950!

Next Mr. Williams bemoans the failure of some cherished monetary theories, such as the breakdown in the link between additional reserves and a growing money supply via the money multiplier. The volatility of the velocity of money gives him the vapors. Both theories assume that there is a mathematical linkage between the quantity of reserves, the quantity of money, and GDP. The thinking is thus--increase reserves, observe an increase in money; increase money, observe an increase in GDP. But, according to Mr. Williams:

“Despite a 200% increase in the monetary base—that is reserves plus currency—measures of the money supply have grown only moderately...(the) mechanical link between reserves, money supply, and ultimately inflation no longer hold…”

Driving down the interest rate hasn’t worked either.

“…model simulations recommended setting the feds funds rate below zero…”

So, what to do? Let’s try quantitative easing! The Fed bought $1.7 trillion in assets (many of dubious value), starting in late 2008 and will have added an additional $600 billion by June of this year. According to Mr. Williams, this is working. Based upon his “econometric analysis and model simulations…GDP will go up by three percent and the economy will add three million jobs…” Yes, this must be true--his econometric models say so, and who are we to argue with an econometric model? All of this nonsense would have been enough to get Mr. Williams laughed out of any Mises Circle gathering.

Defining “Growth” as an Increase in GDP

Embodied in Mr. Williams speech is the assumption that an increase in GDP represents an increase in economic output. That is why the Fed is unconcerned about inflation (what we Austrians call “rising prices”) and more concerned about deflation (what we Austrians call “falling prices”) If there really is some link between money and economic output via a money multiplier, then increasing money is as simple a way ever invented to bring on prosperity. (By this reasoning, Zimbabwe was tremendously prosperous.) So if prices rise by five percent and people are buying the same volume of goods and services, then according to the Fed the real economy improved by five percent. If it doesn’t happen—that is, if measured GDP fails to increase by five percent--then the government must deficit spend and the Fed must provide the funds at zero interest. As the Staples ad says, That was easy!

Of course, the Fed’s fixation with nominal GDP is the problem. As Jesus Huerta de Soto masterfully explains in Money, Bank Credit, and Economic Cycles, nominal GDP measures only final sales, and the majority of sales are NOT final sales but intermediate sales between companies. In fact a growing economy in which people extend their time preference, save more, and consume less may actually record a falling GDP! The structure of production is widened and lengthened, meaning that there are more stages of production and each stage gets larger. But GDP does not measure these intermediate stages.

Furthermore, in a sound money environment GDP would be flat to perhaps slightly rising, because real money—that is, commodity money such as gold—increases very slowly. Yet economies can boom with increased real production; prices fall, meaning that an unchanged volume of money simply does more work. But we see the political problem here. Nowhere in this real world is there a need for a central bank manipulating money. In fact, money manipulation by a central bank can cause only mischief, as explained so eloquently by Mises, Hayek, Rothbard, Huerta de Soto, and many, many others of the Austrian school. But don’t expect to hear that from the likes of Mr. John C. Williams or, unfortunately, many college professors attending the AEA conference. Austrian monetary theory is just too difficult for them; they’d rather reside in the Fed’s Brave New World and take a Soma Holiday.

My Letter to the Wall Street Journal re: Cyber Combat: Act of War

2011-05-31T05:05:00.000-07:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Re: Cyber Combat: Act of War
Date: Tue, 31 May 2011 06:01:53 -0400

Re: Cyber Combat: Act of War

Dear Sirs:
Despite the Pentagon's assessment of the threat from cyber warfare, it is up to Congress to declare war (Article I, Section 8 of the Constitution). In our constitutional republican form of government the military is strictly subservient to civilian authority via the president as commander in chief (Article II, Section 2 of the Constitution). Needless to say, the president may not delegate an authority that he does not possess.

Patrick Barron

My Letter to National Review re: Too Big to Win, by Mark Steyn

2011-05-27T14:42:00.000-07:00

Nobody assimilates so much diverse information and finds the common thread better than Mark Steyn. And nobody writes with such wit and style.

Here is my two-cents' worth of insight into why the U.S. hasn't won a war in two-thirds of a century:

There is a link between the advent of central bank-produced fiat money and war. Prior to 1913 the U.S. did not fight a foreign war, with the exception of the brief Spanish-American War, which Professor Ralph Raico has shown to be a trumped up affair with the U.S. taking over a tottering Old World power's colonial empire. With almost unlimited access to the nation's resources through its power to monetize the debt via the Fed, the federal government does not have to go to the people or the peoples' representatives to get the money to wage war. This has two serious problems. One, we fight at the drop of a hat anymore and, two, we do not fight to win...which would mean a shorter, cheaper war. So, to answer Mark Steyn's question about why we fight so badly, we do not have to win or even have a strategy to win, because the funding will continue as long as we do not lose. As for the U.S. spending 43 percent of the world's military budget, I believe this reflects the enormity of the waste and corruption at the federal level. It is similar to claiming that we are serious about the war on poverty, because we throw so much money down the welfare rat hole. Everyone knows that the war on poverty is a failure, yet the funding continues. Take the Air Force's "new" F-35. It has been under development by Lockheed for years, yet its projected operational date is still six or seven year away...and I'll bet dollars (for what they are worth) to doughnuts that that date will be extended. So procuring much needed new military hardware has become a very well-paying welfare assignment for top federal officials, top Air Force officers, and, of course, military contractors like Lockheed. All know that the funding will continue, despite their failure to produce. The Fed sees to that. So, they don't produce. The private sector would have fired everyone long ago and found a different way to procure military resources.Patrick Barron

My Letter to the Wall Street Journal--re: There's No Such Thing as "Natural Unemployment"

2011-05-22T04:22:00.000-07:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
CC: jeremyg@fins.com
Subject: No Such Thing as "Natural Unemployment"
Date: Sun, 22 May 2011 07:14:51 -0400

Re: Jobs Harder to Find as Natural Unemployment Shifts

Dear Sirs:
There is no such thing as "natural unemployment". Government interventions and union coercion create "artificial unemployment" by denying all to work at the price that they and their potential employers would agree. The only true scarcity is the scarcity of labor.

Patrick Barron

Why Were There Boom/Bust Cycles in the 19th Century Gold Standard Era?

2011-05-18T11:25:00.000-07:00

(Last month I gave a brief talk to a group of students at the University of Northern Iowa. The organizer, Mark, asked me an interesting question.)

Pat:
Thanks for coming to UNI and discuss Austrian economics to a group of students. I was wondering if you could recap your argument on why the depressions occurred in the late 19th century and why they were not as severe.

Mark

Dear Mark,
My pleasure. Any time. The cause of all boom/bust cycles is the expansion of bank credit not financed by real savings. Fractional reserve banking allows banks to expand credit by manufacturing money out of thin air. This practice was challenged in England in the early 19th century, when some depositors asked the courts to force bankers to repay their deposits out of their personal funds. The depositors wanted the courts to treat deposit banking in the same legal manner as a bailment; that is, just as if a farmer deposited corn or wheat in a grain elevator. The elevator cannot speculate with this "deposit". But the courts ruled that the depositors had "lent" the banker the money rather than entrusted him with their money as a bailment. This is the legal side of the explanation to your question. The economic side is that when the bank loans money in a fractional reserve, rather than a one hundred percent reserve, system, the money supply increases without an increase in savings. Eventually reality reveals the problem, as prices start to rise in consumer goods, forcing resources back from more time consuming investments. These investments never were funded with real savings, only monetary expansion. This is what caused the several depressions of the late 19th century. But research has shown that these depressions were not nearly as onerous as those of the 20th and now 21st centuries, because the underlying reserves themselves--gold and silver--could not be inflated. This provided a limit to the expansion. But now the reserves themselves may be expanded by the Fed to infinite amounts. That is one source of the credit expansion. Then the fractional reserve banking system adds a second source of expansion.

For example, if reserves are 1 monetary unit (m.u.) and the reserve requirement is 100%, then the money supply is 1 m.u. Let's assume that we are under a gold standard and the banks keep only 10% reserves. Now the money supply can be inflated to 10 m.u.'s. But, if reserves are not gold and the Fed inflates them to 2 m.u.'s and the reserve requirement is lowered to 10%, the money supply can be inflated to 20 m.u.'s. So, under a gold standard with fractional reserve banking, the reserves themselves cannot be inflated, which limits the extent of money inflation. But when reserves themselves are nothing more than blips on a computer screen, the money supply can be inflated to infinite amounts. This is the worst of all monetary worlds, because there now is no institutional check on monetary expansion.

Sincerely,

Patrick Barron

What Drives Higher Unemployment

2011-05-11T05:44:00.000-07:00

One of my economics students traveled to India during spring break this year. Upon her return to class I asked if she had any observations about the Indian economy from an Austrian School of Economics perspective. She thought for a moment and then said that the Indians seemed to be very inefficient. For example, instead of using a backhoe to dig ditches or building foundations, Indian contractors used dozens of men with picks and shovels. I found this to be a wonderful observation, and the class discussed possible reasons for this phenomenon, which ranged from government regulations geared to increasing employment to the obvious surplus of cheap, manual labor.

Kevin D. Williamson addressed this subject in his May 2nd National Review article titled “A Nation of Sharecroppers”. He pointed out that one hundred and fifty years ago picking cotton was a job for slaves; fifty years ago it was a job for the rural working class, and now it is a job for a handful of very wealthy entrepreneurs driving monster John Deere cotton picking machines. What happened to the slaves and the rural working poor? Were all of them driven to destitution? My student worries about this possibility should Indian contractors get wise and buy backhoes, and Mr. Williamson worries that America’s working poor would be driven to dependency alongside the current welfare-dependent underclass. He provides no answers and ends his essay with the lament that for

“…a 21-year old man of average intelligence with a high-school education and a bit of training…his main attractions will be the sedative of dependency or the stimulant of underclass moral anarchy, and we cannot afford much more of either.”

I agree, but I think I know the source of the problem. (Here’s a hint: the word begins with “g” and ends in “ment”.) What Mr. Williamson and my student describe was observed by David Ricardo two hundred years ago and took the name “Ricardo Effect”. This term describes the phenomenon whereby labor is replaced by machinery and occasionally vice versa. Many have twisted Ricardo’s observation for their own purposes. For example, labor unions have justified striking for higher pay by claiming that such actions actually encourage businessmen to invest in productivity-enhancing capital, which raises the productivity of labor and labor wage scales. At the other extreme are the Luddites, who advise prohibiting businessmen from investing in these very same productivity-enhancing capital goods, because machinery causes “technological unemployment”. Both misunderstand what Ricardo observed.

Ludwig von Mises explains the Ricardo Effect, starting on page 767 of his magnum opus, Human Action. Mises explains that machinery replaces men only when the market is driving the cost of labor higher. Labor costs are rising because labor is more productive elsewhere. To remain in business the businessman must invest in capital goods to boost the productivity of labor in his industry, too. Therefore, labor has a choice between equally attractive alternative employments. In an unhampered free market system the Ricardo Effect is benign and just an interesting observation.

However, the Ricardo Effect turns malignant when the cost of labor is rising not due to improved productivity elsewhere but by non-market forces. To the businessman the result is the same; i.e., the cost of labor is rising and he must invest in productivity-improving capital goods. Ah, but here’s the rub. The productivity of labor is NOT rising, only its cost. Government regulations such as minimum wage laws, workers’ compensation insurance, matching social security taxes, family leave benefits, etc. are driving costs higher, not alternative employment at higher wages elsewhere. And these are just the seen costs. There are the unseen costs as well: such as the cost of defending oneself against wrongful employment termination, a new government-invented right to a specific job. Gone forever, apparently, is the concept of employment at will, whereby, absent an employment contract, jobs are “owned” by the employers, since employers create them, and are “offered” and withdrawn at their pleasure.

Today, this malignant Ricardo Effect is something for concern, as my student and Mr. Williamson articulate. Rather than being a product of a more productive labor market with alternative employment for workers whose employers fail to invest, this modern Ricardo Effect offers workers only welfare dependency and societal pathology.

Furthermore, it is not at all clear that elevating low end worker productivity--a goal that Mr. Williamson does perceive but fears cannot be achieved--would reduce unemployment for those at the low end of the wage scale. Government itself needs the unemployed in order to perpetuate its labor-regulating empire that provides it with high paying and secure jobs. What would all those labor lawyers, judges, advocates, investigators, insurance providers, and record-keepers do, if the country scrapped all labor laws and sent the departments of labor at all government levels to the scrap heap? A more likely scenario is that government will do what it has done since the Great Depression—keep raising the bar in all categories to provide itself with a steady supply of welfare dependents to nanny and goldbricks and slackers to defend in its kangaroo courts. After all, human nature has not changed…there is a disincentive to work, which can be abetted with government payments, and government has an infinite ability to rationalize its self-serving and predatory interventions. No wonder that capitalists are becoming more innovative in moving formerly “non-tradable” jobs into the “tradable” category. For example, x-rays can be read in India as easily as the office down the hall. Even shoe salesmen are not immune. Zappos has built a mail order empire selling shoes sans salesmen.

So, what’s the answer to this modern day malignant Ricardo Effect? As usual it is getting government out of the free market, which includes not just eliminating labor laws but also eliminating the entire welfare industry. It is a fallacy that our nation has millions of people who cannot provide for themselves and must ride through life on the backs of others or starve. All willing workers can find gainful employment, compete, and thrive without any government program or policy whatsoever. Jean Baptiste Say explained this phenomenon two hundred years ago. But that is a lesson for another time.

My Letter to the NY Times re: Temp Workers in Germany

2011-04-22T09:15:00.000-07:00

Re: Temp Workers in Germany Dismay Unions
Dear Sirs:
The issue of lower paid, less secure work in Germany comes down to this statement in your article--"At the heart of the debate is the question of whether a temporary, lower-wage job is better than no job at all." Who can answer that question other than the worker himself? Higher unemployment is the cost to be paid for raising the cost of labor above the natural rate. There is no way to avoid it. But it does not stop there. The higher cost of labor makes German companies less competitive, further reducing employment. Furthermore, those unemployed workers must be supported by the production of those still working. They must pay higher taxes, which reduces their standard of living and incentives to work. Then there is the social disintegration that follows from a demoralized unemployed population. Those who advocate labor market intervention have much for which they must answer.

Patrick Barron

My Letter to National Review re: Not Enough Money

2011-04-19T11:11:00.000-07:00

Monday, April 18, 2011

National Review:

Dear Sirs:
Catching up on my NR reading. Ah, a couple hours in the airplane, so I start on the April 4th edition. Another excellent article by Kevin D. Williamson—this one about Texas Governor Rick Perry, my kind of guy! I turn the page and…What!…”Not Enough Money”, by Ramesh Ponnuru! This must be some kind of April Fool’s joke! But, no. Now Ramesh is a great guy. I was privileged to sit next to him at the annual banquet of the Conservative Caucus of Delaware last fall and then introduce him to the group. He certainly knows a lot about the things of which he knows a lot…but monetary policy is not one of them. My copy of his essay in the April 4th edition is full of my pen and ink notations, which are too numerous to mention. Suffice it to say that Ramesh recites the mainstream economic opinion that equates prosperity with GNP growth. But this is a HUGE mistake, even if it is the opinion of the vast majority of economists. Modern day Monetarist School policy, with Milton Friedman as its champion, and Keynesian School policy, with just about everybody in government and the Fed as its champion, completely ignore capital theory. Both schools of thought want “flexible” money that can be managed by so-called experts to keep the economy on an even keel and growing nicely. (Tell me, how has that worked out?) Austrian School monetary policy emphasizes that sound money is as much a part of the free market as any other product. If you want more money, go dig some up and mint it. That is the only way that REAL money can grow…and that is a good thing! Ramesh relies upon the old MV=PY formula and then enhances it by adding the money multiplier. Just because someone writes a formula does not necessary mean that the formula represents reality…and this one does NOT. It is true that an increase in the demand for money will cause prices to drop, but it does not cause production to drop. And the reverse is true. If the velocity of money increases (the demand for money falls), prices will rise but nothing happens to production. But increasing the money supply causes all manner of evils, the worst being the temporal dislocation of the stages of the structure of production, which simply means that we make too much of the wrong stuff that no one wants to buy at a price that will turn a profit.

There’s much, much more to this than a short letter can elucidate. I’d love to have Ramesh in my Introduction to Austrian Economics class at the University of Iowa next semester. I especially like to educate my friends.

So, I turn the page and, lo and behold!, an excellent essay about one of my favorite economists: Walter Williams. John J. Miller even mentions that Walter was influenced by Ludwig von Mises and Friedrich Hayek. Ah, all is once again right with the world.

Warmest regards,

Patrick Barron

My letter to the Wall Street Journal re: Neither Political Overlords Nor Monetary Mandarins

2011-04-15T07:31:00.000-07:00

Re: Political Overlords Shackle China's Monetary Mandarins Dear Sirs: China needs neither political overlords nor monetary mandarins to straighten out its economy and prevent inflation. All it needs is sound money and free markets. In his masterful essay delivered to the Foundation for Economic Freedom on May 18th, 1970 titled "Can We Still Avoid Inflation?", Nobel Laureate Friedrich A. Hayek has this to say about using monetary stimulus to spur economic growth: "Those who counsel underdeveloped countries to speed up the rate of growth by inflation seem to me wholly irresponsible to an almost criminal degree." The crime to which Hayek referred is robbing the many via inflation, which is difficult to quantify, for the benefit of the few, which can be quantified. Undoubtedly this is the process that will continue in China whether the monetary system is controlled by politicians or bankers. The only difference is which set of elite will benefit at the expense of the masses. Patrick Barron

Surprise, Surprise! In the Face of Disaster Japan's Prime Minister Recommends Spending

2011-04-14T06:23:00.000-07:00

The Japanese government is fully committed to Keynesian spending as the antidote to every ill, including the recent natural disaster. Below is an excerpt from Prime Minister Kan's blog, which he sends out periodically and always is interesting reading. "At yesterday's press conference, I called on the public to refrain from a mood of excessive self-restraint while maintaining a spirit of thoughtful compassion towards the disaster-stricken areas. A mood of excessive self-restraint could reduce consumption and dampen the business activity of Japan as a whole. Conversely, purchasing products from disaster-stricken areas and enjoying them would help support the affected areas." So, the Japanese are being told to fiddle while Rome burns. It's the patriotic thing to do.

My Letter to the NY Times: Earth Friendly and People Hostile

2011-04-11T06:56:00.000-07:00

Re: Rush to Use Crops as Fuel Raises Food Prices and Hunger Fears Dear Sirs: There should be a special place in Purgatory for the environmentalists and the politicians who pander to them. Both camps oppose the extraction of oil from Mother Earth on Alaska's North Slope (just one example) and provide tax breaks, subsidies, and mandates for using food in its place, with the result that millions will starve. This is just one example of the blindness and callousness of the environmental activists to the consequences of their actions. Every economic intervention means that people are prevented from using their own resources to meet those needs most urgently desired. The free market with money prices is the road to prosperity, which includes both food and fuel. Any and all interventions which disrupt the free market will result in lower prosperity and, as this article so aptly illustrates, occasionally disaster. Patrick Barron

The Bank of England Hasn't a Clue

2011-03-28T15:33:00.000-07:00

Recently I was fortunate enough to have an entire day to myself in London, probably my favorite city in the world. Well, an entire day AFTER filling my family’s tea order at Fortnum and Mason plus buying cups, saucers, and plates approved by William and Kate as an “official” remembrance of their upcoming royal wedding. So, what would any American economist do to fill up the rest of his day except take a tour of the Bank of England, AKA “The Old Lady of Threadneedle Street”.

Unfortunately there is no regular tour of the bank itself, but I was directed to the bank’s official museum just around the corner. After spending a delightful and informative two hours there, I believe a tour of the building itself would have been much less interesting. After all, it is just a jumble of bricks and mortar, whereas the museum is an intellectual explanation of the bank’s history and its role in English and world history. And quite a history it is!

First of all, the good news—entrance to the museum is free; there is not even a charge for the handheld recorder that one really must use for a full understanding of the bank’s fascinating history and especially of how the bank sees itself. The museum is arranged approximately half interesting displays of physical objects, such as building plans, old bank notes, old registers of founding members, etc. and half history of the bank’s operation and its role in English life. Sometimes these two halves overlap. For example, behind a glass case was a mock up of a basket of groceries from 1958. The basket included two large, round loaves of unsliced bread, a pound of bacon, a dozen eggs, a pound of butter, and a quart of milk. This basket of groceries cost slightly over twelve shillings--approximately six tenths of a pound--in 1958. Today a pound costs approximately $1.61, so this rather large basket of wholesome English fare cost around a dollar in 1958!

I could see that we now were about to get down to brass tacks, so to speak, so I examined the bank’s mission. A pamphlet titled “Your money: what the bank does” states that the bank’s three main goals are “trust in banknotes, stable financial system, and low inflation”. Needless to say, the bank has failed miserably at all three, as it admits in so many words when recounting its own history. The bank was forced to suspend specie redemption several times throughout its long history due to its fraudulent (my word, not the bank’s!) issue of paper certificates in excess of its gold holdings. Each of these suspensions was discussed very matter-of-factly, as if a meteorite had struck the bank, destroying its ability to redeem banknotes for gold.

The Bank of England Funds the Crown’s Wars

Most of these suspensions of specie redemption came during or immediately after war, illustrating the bloodthirsty link between the crown and the bank. This is a symbiotic relationship. The crown grants the bank the monopoly of money production, meaning that its stockholders and officers have the ability to charge excess signori age charges, and immunizes the bank from commercial law by allowing it to suspend specie redemption without turning its assets over to its creditors. In return the bank monetizes the crown’s debts, allowing it to confiscate more resources than its citizens would allow were the crown forced to tax them directly or borrow honestly in the credit markets. Then the citizens might question the wisdom of the crown’s military adventures, requiring it to seek more pacific and, of course, less costly solutions to its international adventures.

Inflation Just Happens

Its explanation of inflation—i.e., higher prices— was very amusing. A recorded min-lecture and video display purported to explain this mysterious phenomenon (mysterious to The Old Lady of Threadneedle Street, anyway). I was very excited! I knew that either I was going to hear a self-critical explanation or, more likely, some hogwash. Hogwash won, hands down! Showing videos of life a hundred or so years ago and contrasting it with videos of modern, bustling London, the audio lecture claimed that demand for modern conveniences and the rising cost of imported goods were the two main “causes” of inflation. The explicitly stated message is that if we want all the conveniences of modern life, then everything is going to cost more. There simply is nothing that The Old Lady can do about it, don’t you see?

This entirely non-Austrian, yet typical explanation ignores the fact that all prices in general cannot rise unless either spending increases, due to an increase in the quantity of money, or the supply of goods decreases. The videos made it clear that modern day Britons live in wonderfully more prosperous times than their ancestors who ruled two-fifths of the surface area of the world a hundred years ago. So the paucity of goods explanation of inflation does not hold water. What about the higher cost of some imported goods? After all, Britain is a trading nation, dependent upon imports for its daily bread (the reason that Churchill claimed that the Battle of the Atlantic was the most crucial for Britain’s survival in World War II). But this is a circular argument; it begs the question of why imports cost more and there is no economic difference whether the staple of modern life is imported or not. Political borders have no bearing on economic law.

In a sound money economy—that is, one in which the money supply is held stable--an increase in the price of any good or service must cause a corresponding decrease in the price of some other good(s) or service(s). A nation’s finances are no different from that of the individual household. Let’s say that the price of some essential good such as gasoline (ahem!) goes up in price. Most of us would find it difficult, at least in the short term, to curtail our purchase of gasoline sufficiently to spend no more total dollars on this good than before the price rise. Over the longer term we may adjust by driving less, which means that the automobile is not as convenient as it was before the price rise, or we may take more drastic action, such as carpooling, walking to a bus stop, buying a more fuel efficient car, etc. But in the short term we must curtail the purchase of something else. That “something else” is the good or service which falls at the lowest end of our personal utility scale. For most of us that means that we may save less, until we adjust our lifestyle to higher priced gasoline. Then we may extend the date upon which we would purchase some large, expensive good, or we may forego its purchase entirely. This is Frederic Bastiat’s “unseen” cost to society. We can see more people riding the bus or walking to work, but we cannot see the vacation they did not take or the new dining room set they can no longer afford.

But the Bank of England hasn’t a clue. Higher prices are just part of modern life…if we want more “stuff”, especially foreign-made “stuff”, we just have to accept a higher price level. Don’t blame the Old Lady. What can it do? Certainly you don’t expect an institution that can manufacture money out of thin air to behave any differently, do you?

"Fear the Boom, not the Bust": My Speech at the Mount Sterling Investment Seminar, York, England, 17March2011

2011-03-24T10:19:00.001-07:00

“Fear the Boom, not the Bust”

Speech Delivered at:
The Mount Sterling Wealth Seminar

Thursday, March 17, 2011
York, U.K.

By Patrick Barron

All of the industrial world’s central banks and public treasuries currently are engaged in an impossible exercise—trying to re-inflate an artificially created boom through zero interest rates and deficit spending. The reality is that the current financial crisis was caused by central bank money expansion, so it cannot be cured by further money expansion. It is as if the so-called-doctor is continuing to bleed the patient who is already bleeding to death. The monetary induced boom destroys capital, but its destruction is masked by a monetary illusion. This illusion cannot be discovered by normal financial due diligence; it can only be understood by an understanding of proper economic theory, which is called the Austrian School economic theory, also known as “reality economics”.

In order to avoid unprofitable investments, you need to understand how a central bank monetary induced boom proceeds from the euphoria of “new era/new paradigm” illusions to the despair that “all is lost”. You must understand that the boom is the problem and that the bust is the solution. So, “fear the boom and not the bust”.

Like others before it in the modern era, this recent boom/ bust cycle was caused by expansion of credit, which expanded the money supply out of thin air due to fractional reserve banking.

Overall prices rise and wealth is re-distributed from those who produce it to those who consume it. Central bank money expansion initiates this boom/bust cycle, whereby capital is malinvested in longer term production processes for which there is insufficient real capital for profitable completion. Later higher prices and higher real interest rates bring the artificially initiated boom to an end, but not before real capital, real vendible goods, have been invested in enterprises which will never turn a profit. Money expansion ultimately destroys capital and leads to lower production in the future. Since the entire process was a monetary illusion of wealth creation when in reality it was capital destruction through malinvestment, the coming of the bust should be celebrated, for it is the beginning of the process of re-establishing the structure of production to reflect the true preferences of the consumer. The sooner the boom ends, the better. The boom destroys capital; the bust replenishes capital through savings. The economy needs savings, which the the foundation of production. The current fad, promoted by all central banks worldwide, is exactly the opposite. Central Banks want everyone to believe that it is Spending that drives the economy not savings. This is called ‘Shop Until You Drop Economics’ and is inherently flawed and unsustainable as I will further demonstrate.

Why Governments Destroy Sound Money

Governments destroy sound money, because sound money forces every economic actor, including government itself, to practice fiscal discipline. But central bank created fiat money allows government’ to avoid the hard choices that are part and parcel of an economy ruled by scarcity and uncertainty and opens the floodgates for unlimited – for a time – deficit spending by politicians. It can buy the votes of special interest groups through its control of money production and avoid the unpopular necessity of taxing the people or borrow honestly in credit markets, which crowds out private investors. So expansion of fiat money is in government’s self interest but not the peoples’ self interest, although this fact is hidden and propagandized away--for example, by blaming the credit crisis on “greedy bankers”.

Furthermore, we all receive or expect to receive expropriated property in some form, buying us off with retirement benefits and free healthcare services, for example. Under sound money the people are the masters and government is its servant. But under fiat money government is the master and the people are the servants. This is why Ludwig von Mises said that sound money is as important to human liberty as bills of rights and constitutions.

Inflating a New Bubble

Because monetary expansion masks the true nature of the economy and the systemic risks, it is advisable to rely upon an understanding of Austrian economic theory to guide our investment decisions. AE theory tells us that new money will go somewhere, creating bubbles that cannot be sustained. Examples are the dot com bubble of the late 90s and the housing bubble of the first decade of the new millennium. Today’s zero interest rates probably are inducing a stock market and bond market bubble right now.

Bubbles will appear also in commodities. The prices of corn, wheat, soybeans, iron ore, and oil have risen tremendously in the last year at the same time that production has risen also. This phenomenon is possible only due to an increase in money.

There is the great probability of another bubble in farm land prices in America, so it is probably the same in Europe. High commodity prices and low interest rates drive up the capital value of farm land. But this is a mirage. When the bubble bursts and interest rates rise, the capital value of farm land will fall. This has happened several times in my banking career. The last one in the 1980s was vicious—bankers in Iowa were murdered, because they were forced to repossess family farms that were used as collateral for farm land purchases. Other bankers were driven from their professions after death threats. I witnessed this phenomenon first hand. A banker from Wisconsin, a prime American agricultural state, recently told me that a land bubble probably already exists…but it is hard to tell. Exactly. It is hard to tell, because the standard risk analysis methods make farm loans appear to be sound…for now…because crop prices are high and interest rates are low. This is the perfect storm for a bubble in farm land prices.

But what about the higher bank capital requirements of Basel III? Won’t more capital protect us from bad loans? It is true that higher capital requirements will slow bank lending. If banks cannot raise capital, their only option is to reduce assets in order to meet the new, higher capital-to-assets ratios. But keep two things in mind: one, more capital will not prevent malinvestment via the boom and bust business cycle and, two, governments want the money supply to expand and they will continue to make it happen. A South Dakota banker recently told me, “We don’t know what to do with our excess liquidity.” But bankers WILL find something to do with their excess liquidity. They will make loans in the latest hot market, whether it is housing, farm land, directly to cities and municipalities (which is a new trend in the USA) or something else that is not on our radar screen right now. At his latest testimony before the Senate Banking Committee, Fed Chairman Ben Bernanke was questioned by a Democratic senator about why bankers weren’t utilizing their excess reserves to support new lending. The Fed chairman reassured the senator that in time they would! Where? We don’t know, but beware of the latest “can’t miss” loan bubble. Remember, five years ago housing was seen as a very safe investment. It was assumed that the price of homes never went down, or if they did, it wasn’t for very long. But AE tells us that it is foolish to rely upon past experience to predict the future. Just because housing has always been a safe investment does not guarantee that it will be in the future.

Austrian Investment Guidelines

Remember that the purpose of monetary expansion is to make it possible for government to steal resources from the legitimate owners and to take a greater share of new wealth generation (the silent tax of inflation). So, it is very difficult to invest safely in such an environment, because government WILL expropriate resources. Your challenge is to avoid investments that appear to be sound under normal financial analysis methods, but are more likely to suffer losses due to the distorted economic environment in which you must operate. So, here are some guidelines.

Number one; avoid those industries that are most capital intensive, because in an inflationary environment government taxes phony profits. Much capital investment was expended years ago at lower replacement prices, but the tax man does not recognize replacement cost, only historical cost. So capital intensive industries report higher profits due to low, historical depreciation expense. In effect, they are being taxed on their capital and cannot retain enough earnings to replace their worn-out plant and equipment. America’s so-called “rust belt” of the 70’s and 80’s can be attributed to the inflation that was begun in the 60’s. Now it is coming back.

Number two, be very careful investing in the expansion of industries which are most removed temporally, meaning further away in time, from generating revenue. Two examples are mining and wineries. Unless new mines or wineries can be opened or expanded and new equipment can be employed in a very short period of time, which is unlikely, the boom will be over. This is the classic example of malinvestment in higher order goods—further away temporally from final, consumer goods—that cannot be sustained due to lack of real capital from real savings…not paper capital from the monetary printing press.

Number three, avoid industries that depend upon increased money creation or some form of government coercion for their existence. This includes governments, who are spending beyond their ability to pay with revenues from taxes. Taxes can be raised only so high before they begin to destroy the very basis of government’s existence; i.e., the private wealth creators. So, governments will attempt to pay off their debt with debased money. This has pernicious effects for the investor. Government bonds will fall in price, as interest rates rise, and some governmental bodies may default—for example, the state governments of California and Illinois. Governments are not productive enterprises; they depend entirely upon taxing away the wealth of others. They will eventually run out of ‘other people’s money. I would recommend that you avoid them.

Number four, avoid investments that catch the eye of government and environmentalists, such as natural resource exploration companies. Also avoid investments that governments might tax, regulate, or confiscate. Third world countries are notorious for allowing investment into their country only to confiscate them later, such as Venezuela’s oil industry or Cuba’s sugar industry.

Number five, do not base investment decisions on tax credits, subsidies, etc.—for example, sugar, milk, wind power, solar power, etc. America’s most grievous program along these lines is ethanol production, which is supported by all three types of government interventions. It is subsidized; there are trade barriers to the importation of competing ethanol products, such as sugar cane based ethanol; and its use is mandated. (The reduced demand for gasoline in recession America has created an ethanol glut. By law the refineries must mix a certain total amount of ethanol with gasoline per year. Currently the maximum ethanol blend is 10% ethanol/90% gasoline. But at the 10% blend American refineries will not use the mandated amount of ethanol. Congress recently stopped a bill that would require that refineries change the ratio to 15% ethanol/85% gasoline.) So, America is facing an ethanol glut. America has had these gluts before, and they usually end in price collapse. For example dairy industry subsidies created a cheese mountain in the 1980s. The government bought milk at subsidized support prices and stored it in government warehouses in the form of cheese. Eventually, the warehouses were full and the government gave away cheese “wheels” to city governments to distribute to the poor. This program became the subject of ridicule in America.

Number six, do not rely upon government oversight agencies or private rating agencies to protect you from what later becomes “obvious” malinvestment. New agencies armed with new regulations and enforced by new bureaucrats are fruitless attempts to prevent the evils caused by monetary expansion. But malinvestment is inevitable and impossible to identify even by an army of regulators. The regulators will be blinded by money expansion, too. A lower interest rate appears to regulators and entrepreneurs alike to be a fact of the market when it is not…it is artificial. Furthermore, early entrants into a market may make money if they get out early. This leads to the illusion that the market is in equilibrium when it is not. And, don’t forget that government WANTS more credit expansion, so even honest, professional regulators will be under pressure to issue rosy reports of the markets they regulate.

Investing in Gold

Let’s now talk about gold. I know that gold does not pay dividends. It is not an earning asset. Nevertheless, I cannot see that the price of gold can go anywhere but up. I say this due to fundamentals. The price of gold is really the gold price of money—dollars, Euros, Pounds. Instead of looking at the rising price of gold in money terms, we should be looking at the falling value of various types of money in terms of gold. The determination of the gold/money price is their relative demands and their relative supplies. The supply of gold cannot be increased very rapidly, and it can be increased only at great expense; whereas, the supply of fiat money can be increased to infinite amounts at zero cost. The demand for gold has been rising, as investors and average citizens like me seek a safe haven for whatever wealth they have accumulated. The demand of money has been shrinking—China and other savvy investors have been shedding the dollar, for example—and the selloff may become a rout.

One way to get a feel for the dollar/gold exchange ratio--also known as the “price of gold”, but really it is the gold price of money--is to calculate how many dollars an ounce of gold would “cover”, if the Fed were to anchor the dollar in its gold holdings. (By the way, this is what the Fed promised to do as a result of the Bretton Woods agreement; i.e., that it would anchor the dollar to its gold holdings at $35 per ounce. But the Fed did not keep its promise.) Notice that in 1980, when gold traded at $613 per ounce in the open market, the Fed could have covered its entire monetary base—that is, reserves plus cash held by the public—by revaluing its gold holdings at only $505 per ounce. Or, it could have anchored M1—checking accounts and cash held by the public—by revaluing its gold at $1,476 per ounce. Keep in mind that gold was trading at roughly 40% of this amount. Or it could have anchored all of M2—which adds short term savings and certificates of deposit to M1—at $5, 671 per ounce.

The Fed’s gold holdings have not changed--it still holds 261.5 million ounces of gold—but the monetary base, M1, and M2 have expanded tremendously. (At present the monetary base actually is larger than M1, an indication of the Fed’s frantic efforts to expand the money supply). Anchoring the monetary base in gold today would mean a dollar price of gold of almost $8,000 per ounce. Anchoring M1 would mean over $7,000 per ounce, and anchoring M2 would mean almost $34,000 per ounce. Noted Austrian School economist Thorsten Polleit has recommended anchoring ALL bank liabilities, not just M2, in gold at whatever the price may be. His rationale is that this is the only way to protect the people’s wealth. Otherwise, the continued expansion of fiat money will mean the total collapse of the dollar and destruction of the American middle class, as happened in Weimar Germany in 1923.

Ludwig von Mises’ explained how a fiat currency collapses in his “three phases of money destruction”. In the first phase, the peoples’ deflationary expectations—that prices will fall-- leads to higher money demand—sometimes called hoarding--and deflation, or price stability, becomes self-fulfilling…for awhile. Eventually price increases lead to a fall in the demand for money; people start spending before prices rise even further. This causes prices to rise even faster. Now we enter the “danger zone”, the final phase of money destruction in which the public expects prices to continue to rise forever, so demand for money collapses and the crackup boom occurs.

It is very likely that the U.S. is past phase one and well into phase two at the present time. Although Austrian economics is not a predictive science, be aware that currencies can collapse very quickly--in a Whoosh!, so to speak. Examples are Germany in 1923 and modern Zimbabwe.

In conclusion, do not be misled by all the illusions caused by increased monetary expansion, no matter how fashionable. The immutable laws of economics will prevail. They cannot be rescinded, no matter how much enticement, coercion, and even terror a government attempts. Do not be swayed by government propaganda that zero interest rates and deficit spending have cured the economy and that it is safe and even patriotic to “invest in the future”. This is a time for capital and wealth preservation, so that society has something upon which to build when economic intervention has run its course and the people are desperate enough to, once again, give freedom and liberty a chance.

My Speech at the Eurpean Parliament--March 16, 2011

2011-03-23T04:58:00.000-07:00

Why Monetary Expansion Must Stop
Address Delivered at the European Parliament, Brussels on March 16, 2011
By Patrick Barron

Introduction: The Illusion of Unlimited Resources

The current problems faced by all the world’s economies stem, primarily, from one source: the demise of sound money, whose quantity could not be increased without significant cost, and its replacement with fiat money that can be inflated to infinite amounts at almost no cost to the producer.

Expansion of fiat money makes it appear to ALL market participants, including financial regulators, that there are more resources available than really exist. Thusly, all participants, including governments, embark on programs which cannot be completed…there just are not enough resources in the economy. Not only does fiat money create the illusion of greater wealth, it makes embarking on new projects irresistible. After all, does it not always appear that lack of money is all that stands between man and the fulfillment of all his dreams? Now, with unlimited quantities of fiat money, the day seems to have arrived when anything is possible. But this is an illusion.

Throughout my talk I will refer to economic laws that act as impenetrable barriers to achieving the goals sought by monetary expansion. These are laws of human nature—to ignore them brings serious adverse consequences. Economics is a social and not a natural science, because man is a social being. His actions are not governed by physical stimuli but by preferences derived from subjective valuations, all of which are unknowable, undergo constant change, and, thusly, cannot be predicted. Nevertheless, we do know that man is rational; that he acts to attain goals which he believes will improve his satisfaction; that he employs scarce means to do so and that means imply costs; but, since he expects to improve his satisfaction, he expects the costs to be less than the satisfaction to be attained; so man expects to profit from his actions. From this brief explanation of man as a rational being, we can derive irrefutable economic laws.

Two Evils of Monetary Expansion:

There are two main evils of monetary expansion: (1) recurring financial crises and (2) expansion of the wealth destroying welfare/warfare state.

I’ll start with why we continue to have recurring and ever more damaging financial crises. If there is enough time, I will speak very briefly on expansion of the wealth destroying welfare/warfare state.

No Societal Benefit from Monetary Expansion

Expansion of fiat money denies the irrefutable economic law that money is subject to the Law of Diminishing Marginal Utility. This insight was explained by Ludwig von Mises in his 1913 classic The Theory of Money and Credit. Mises explained that money is not “neutral”, that money is a good and is subject to all the laws of economics as are all other goods. Since each new marginal unit conveys less utility than all previous units and, since money is fungible—meaning that each new unit is indistinguishable from monetary units already existing—then the purchasing power of all money is reduced. The first users of the new money benefit most from the newly created money. This is a tight circle nearest the event of the new money being created. Those furthest away from this event, who are in a wider circle of the general economy, all lose since this new money dilutes the value of each unit of money they are already holding. Think of it as pouring water into milk. Therefore, expansion of the money supply conveys no overall societal benefit.

Money Expansion Is Not Stimulative:

Immediately we see that an increase in money cannot be stimulative overall. Although it can stimulate some parts of the economy (those who get the new money first), it can do so only at the expense of all other parts, violating another immutable law of economics, Say’s Law, which essentially tells us that we can’t get something for nothing. With the creation of new fiat money wealth has been redistributed from the current holders of money—the rightful owners--to illegitimate new allocators who steal, without getting noticed, other people’s money. The first or early receivers of the new money benefit at the expense of those who receive it later, through the market process, or do not receive it at all; for example, retirees living on privately accumulated wealth. The early receivers buy at existing lower prices; later receivers pay higher prices.

As this newly created money dilutes the existing money’s purchasing power we see this as high prices—later and not immediately. Higher overall prices are the logical consequence of any expansion of money. The price level can be thought of as the result of total monetary spending divided by the total supply of goods and services offered on the market. If the numerator—total spending-- goes up or the denominator—total market supply of goods—goes down, the price level increases. Some may object to this explanation, saying that “sometimes the price level remains relatively flat despite an increase in the quantity of money, because the total supply of goods increases enough to offset increases in total spending.” My answer is that this is a justification for slow, planned inflation which ignores damaging structural changes that still occur in the economy. I will discuss these in a few minutes.

The Prosperity Illusion Caused by a Rising Gross National Product

Unfortunately, increased spending creates the illusion of increased prosperity, because we measure prosperity by the growth in Gross National Product (GNP), a measure only of total spending, the numerator in the Quantity Theory of Money equation. Under sound money, GNP remains the same, because the quantity of money…and thusly, the quantity of total spending…remains unchanged. But under fiat money inflationary spending, caused by planned inflation of the money supply, this is described as economic “growth”. The more government inflates the quantity of money, the greater economic growth appears to be as measured by GNP. But, this is an illusion. It is not growth at all. It is just a consequence of measuring higher prices.

So far we have seen that fiat money does not stimulate the economy overall; it merely rewards some at the expense of others and creates higher overall prices. But the main structural damage, to which I earlier referred, occurs in the structure of production as manifested by recurring boom/bust cycles. Here is where fiat money and credit expansion cause pure capital consumption, robbing the future productive capability of the economy.

Malinvestment and the Austrian Business Cycle

In the mistaken belief that the economy can be stimulated into a higher level of production by more money, central bankers lower interest rates below the natural, market rate. The ultimate result of such intervention is destruction of capital through what Austrian economists call malinvestment. Capital is devoted to lines of production, primarily into longer term investments, that will never be profitably completed.

We must address this most pressing question: Why do so many businesses fail at the same time? Can it be that a mass incompetence spreads through the economy so that we experience a wide scale bust from time to time? Governments and central bankers focus on this bust and try to postpone it, thinking that this bust is the problem. But, ladies and gentlemen, I am here to tell you that the bust is not the problem. The problem is the boom and why it was created in the first place. Fortunately this business cycle phenomenon has been very well explained by Austrian Economics. For those of you who have the time, I will be happy to explain the details of this after my talk. Suffice it to say that it is the intervention of the central bank that puts into motion the culprit of “artificial interest rates”. These are false signals to businesses that there are new, real resources for investing in longer-term capital expansion projects. But this is a false signal. There are no new, real resources for the successful and profitable completion of all new boom-time projects.

Coercion Is No Solution

Rather than cease its monetary intervention, government counters these consequences with coercion in the form of increasing bureaucratic oversight of banks, mandatory increases in bank capital requirements, and the creation of bailout funds.

Increasing bureaucratic oversight rests on two false ideas—that bureaucrats CAN discern potential problems to which bankers are blinded and that, unlike bankers, bureaucrats are not greedy by nature, so they will not take on increased risk. But government bureaucrats can no more detect errors, culpable or otherwise, than can the financial community they are supposed to regulate. The normal economic cues are hidden by expansion of money and manipulation of the interest rate. Regulators and systemic risk analysts are no more able to detect these errors than anyone else. All the oversight boards will accomplish is adding cost to the banking system and possibly creating what Wilhelm Ropke called repressed inflation and what we today call stagflation, whereby production declines and employment falls while prices rise.

Bailout funds are the culprits behind any increased risk taking by greedy bankers. These funds create moral hazard, whereby market participants know that some or all of the cost of increased risk will be borne by others but that benefits will not be shared. In addition, due to the law of diminishing marginal utility of money, the funds themselves continue rather than cure the problem initially caused by money expansion, for the funds are formed by even more money expansion.

All of this intervention leads back to the evils of redistribution of wealth, higher prices, and more malinvestment, a vicious and destructive cycle.

The Cognitive Dissonance of Money Expansion Followed by Increased Coercion

This entire process is a psychological phenomenon called cognitive dissonance; that is, holding two conflicting thoughts in the mind at the same time. Expansion of the money supply and lowering of interest rates in order to stimulate the economy is not compatible with increased bank capital requirements and oversight boards to detect systemic risk. The government expects that a lower rate of interest will promote more economic activity through increased lending. Yet the law of diminishing marginal utility applies to lending also. The only way to make more loans is to lend to less creditworthy customers. Yet this is the situation that more oversight attempts to prevent. Therefore, even if the governments’ oversight boards could detect less creditworthy borrowers, the very purpose of lower interest rates is one in which such lending is required. This makes no sense from an economic or financial point of view, but it does make sense from a political, command and control point of view. So lower interest rates and increased government oversight becomes nothing more than full employment for bureaucrats who enjoy the perks of power and who bear none of the responsibility for their actions.

The choice is clear—either more of the same—that is, more fiat money pumping and more regulation, with increasing worse outcomes--or an abandonment of monetary expansion and bank oversight by government and its replacement by sound money and the normal checks and balances of the free market.

Expansion of the welfare/warfare state:

Since we have time, I’ll now discuss the second main evil of fiat money growth--expansion of the wealth destroying welfare/warfare state.

Because the wealth generating sector of society has nothing to gain and everything to lose by expansion of the welfare/warfare state, under a sound money environment these wealth destroying activities would be vigorously opposed. But under a fiat money system, many of those who benefit from the unhampered market economy are blinded by the money illusion and believe that government spending does not come out of their own pockets. Therefore, it is no coincidence that the Progressive Movement in the late nineteenth and early twentieth centuries coincided with both increased government spending AND an increase in the money supply to be provided by central banks. Like all unsustainable enterprises, the welfare/warfare state depends upon ever increasing injections of fiat money; otherwise its programs collapse rather quickly. Ever larger increases in fiat money merely delay the day of reckoning, because the ordinary cues of higher taxes and higher interest rates are avoided for a time. So fiat money leads government to make promises that it ultimately cannot deliver.

When government finally becomes aware that it IS limited in what it can accomplish, it is faced with a stark choice. If it scraps programs, it risks civil unrest from the program constituents. The alternative is to continue the programs in name only, resorting to price controls and rationing. National healthcare systems are the best examples of this phenomenon. Not only is demand for healthcare services greatly increased—a true tragedy of the commons, whereby commonly held resources are plundered to extinction—but the quantity and quality of services actually decline. The Medicare system in America tries to solve this problem by underpaying for services and then forcing providers, via threats to pull their business licenses, to absorb Medicare losses in the hopes of making up the difference with private pay patients. To avoid losses and remain in business, medical practices counter with lower service quality and delays. Our neighbor to the north rations care to those who can live and suffer long enough to advance to the front of long waiting lists. In a recent suit brought by a Canadian patient, a Canadian judge stated that “access to a waiting list is not access to healthcare”.

The Long Term Solution: Liberate Money and the Economy from Government Control

A free market economy, which includes money freely chosen by the market, does not suffer disequilibria, periodic booms and busts, or high unemployment. The constant search of market participants to better themselves will result in cooperation rather than confrontation with all peoples everywhere. The liberal order, as envisioned by scholars such as Ludwig von Mises, can expand to encompass the entire world, resulting in peace and ever expanding prosperity for all cooperating men everywhere.

Sound money is essential; therefore, the first order of business for Europe is to stabilize the Euro. Stop inflating its supply. Stop purchasing sovereign debt. Anchor the Euro in gold and/or silver. Try to gain international cooperation when doing so, in order to prevent large swings in gold and silver imports and exports when other nations see that they must emulate Europe. Nevertheless, if this is not possible, anchor the Euro in gold or silver anyway.

Then begin the process to privatize money by eliminating legal tender laws. Let the market use whatever money it chooses, even multiple monies. Some Austrian economists believe that eliminating legal tender laws is all that is required of government…that the free market will choose the money that it finds best suits its purposes. That may be the case; it certainly is worth the effort. A practical step would be to relax legal tender laws in one or both of two ways, the non-enforcement of legal tender laws or the de-criminalization of private money production. Non-prosecution would open the door to private, competing monies.

End all regulation of banking, including deposit guarantees, which only cause moral hazard. But, enforce 100% reserves against money certificates and demand deposits. Reform the commercial code to provide legal protections for bank depositors just as is the case with any warehouse bailment. But allow complete freedom of loan banking, whereby the banker takes legal ownership of funds for some set period of time, with a promise to return the funds, plus interest, at the end of the contract. This form of loan banking can be risk free, as when customer loans to the bank are less than the bank’s capital account. It is also non-inflationary, because the bank lends only funds that have been transferred to it and it alone—the depositor gives up his claim to the funds for the length of the contract. Undoubtedly, under such legal protections and known risks, the public would be better served than by the current, fractional reserve system of constant expansion and contraction of the money supply via bank lending.

Rules for the Statesman

Those in positions of power, such as all of you here, must be guided by reason and not emotion. Adopt as your motto Immanuel Kant’s categorical imperative. Pass only laws that are universally applicable--that benefit all men at all times and in all places. Treat men as ends in themselves rather than as means to other ends, such as national or regional pride. Not many laws will meet these high standards. Certainly printing money, which reduces the purchasing power of money already in circulation and benefits some at the expense of others, fails this test, as does buying sovereign debt at subsidized interest rates. Both of these practices lead not to freedom and security but to suffering and conflict. I ask you to lead as statesmen always do: based on principles that work, are true, and are real.

My letter to the Telegraph re: Economic Fallacy

2011-03-14T03:10:00.000-07:00

From: patrickbarron@msn.com
To: atletters@telegraph.co.uk; stletters@telegraph.co.uk
CC: tomrstevenson@fil.com
Subject: Economic Fallacy
Date: Mon, 14 Mar 2011 05:52:48 -0400

re: Japan could emerge stronger from the catastrophic quake, by Tom Stevenson

Dear Sirs:
Mr. Tom Stevenson is the latest financial "expert" to be blinded by the illusions of monetary expansion. In his column on Sunday, March 13 he stated the following:

"In the short term, the impact on the Japanese economy will be negative...Further out, the rebuilding effort will probably stimulate the economy via construction and other capital spending. The net impact on GDP might be positive, not the least because the Bank of Japan quickly made it clear it will provide whatever liquidity is required."

This is the nonsensical conclusion that one draws from blind adherence to Keynesian economics, which equates demand-side monetary expansion with an increase in the well-being of an economy. By this logic one should rejoice at the destruction of war and natural disasters that destroy capital and lives. Perhaps we all should burn down our homes, factories, and shops, so that our central banks can shower us with pieces of paper, making us feel oh-so-rich! Japan needs savings, not spending, to obtain the capital it will need to rebuild. Monetary expansion does not create new capital. It is nothing more than an accounting fiction, made possible by the ability of central banks to create fiat money out of thin air.

Patrick Barron

Merkel's Bogus Claim

2011-02-24T07:42:00.000-08:00

German Chancellor Angela Merkel claims that Ireland's low tax rate helped cause the banking crisis. Although a lower tax rate on some sector of the economy can cause more investment in that sector, it cannot cause malinvestment. Malinvestment is caused by false economic signals from the central bank's artificially lowered interest rate. This makes all economic actors believe that more capital exists for long term investment than is actually the case. Ms. Merkel is deflecting the cause of the banking crisis from excess money creation, caused by the European Central Bank, to bogus and unproven claims that higher taxes will ensure economic stability. It is ever thus with those who live off the efforts of others, as do all politicians. They try to convince the wealth generators that they, the wealth consumers, are somehow responsible for economic prosperity and are due a bigger share of the pie via higher taxes.

My Letter to the Wall Street Journal re: Regulating Imbalances

2011-02-18T06:59:00.000-08:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Impossible Task
Date: Fri, 18 Feb 2011 09:55:51 -0500

re: G-20 May Agree on Imbalances Measures

Dear Sirs:
The G-20 is attempting the impossible when it believes that it can establish and enforce rules and guidelines to prevent and/or cure global economic imbalances. Such imbalances that exist today in current account, public and private debt, and foreign reserves are enabled and prolonged by economic interventions made possible by government control of fiat money. None of these imbalances can be sustained in a free market, sound money environment. Countries that import too much lose gold, prices fall, and the gold outflow reverses; thusly, gold is an automatic market regulator of current account and reserve imbalances. Interest rates take care of both public and private debt levels. Wiley investors, the best protectors of their own money, will demand onerous terms of risky creditors or cease to offer terms at all. Get government out economic matters and send the pompous G-20 politicians and bureaucrats home.

Patrick Barron

My Letter to the Wall Street Journal re: The Real Cause of Higher Prices

2011-02-17T08:47:00.000-08:00

re: Food, Energy Push Up Consumer Prices

Dear Sirs:
The title of your lead article about rising prices repeats the discredited economic theory that overall price inflation is caused by rising prices in certain segments of the economy, the so-called "cost-push" theory of higher prices. This is a circular argument. Higher prices are the result of one or both of only two phenomena--higher spending due to expansion of the money supply or lower product output. The Fed's irresponsible expansion of base money, through its QE1 and QE2 debt monetization programs is fueling commodity inflation first. It will spread to the rest of the economy eventually. Stopping higher prices requires only one thing--stopping the monetary printing presses.

Patrick Barron

No Room for Anti-inflationists at the European Central Bank

2011-02-14T13:53:00.000-08:00

From today's Open Europe news summary:

Axel Weber to step down from the Bundesbank at the end of April;
Slovak candidate for ECB board of directors rejected because of her country’s opposition to Greek bail-out

The German government confirmed on Friday that German Bundesbank President Axel Weber will leave his post at the end of April for “personal reasons.” In an interview with Der Spiegel, Weber also explained that he had decided to withdraw his candidacy for European Central Bank President because his “clear position” on issues such as the ECB bond purchases from struggling countries risked putting him on a collision course with some eurozone governments. The front page of Handelsblatt notes that German Finance Minister Wolfgang Schäuble has agreed to give up Germany’s demands for the chairmanship of the ECB, but only under the condition that German Chancellor Angela Merkel successfully pushes ahead with her ideas for an EU economic government with France, something which Weber reportedly opposed.

The frontpage of German magazine Wirtschaftswoche carries the headline, "Axel Weber goes, inflation arrives". The paper warns that "the departure of Axel Weber endangers trust in the stability of the euro." Former German SPD Finance Minister Peer Steinbrück has denied claims that he could replace Weber as Germany’s candidate for the ECB top post. In an interview with Bild, German Economy Minister Rainer Brüderle has suggested that the next ECB President does not necessarily have to be German, provided that they consider price stability as a priority to achieve growth and prosperity.

Meanwhile, FAZ reports that diplomatic sources have confirmed that Belgian Central Bank official Peter Praet will be appointed to the ECB board of directors at the expense of the Slovak candidate, Elena Kohútiková, who may have been rejected because of her country's resistance to the Greek bail-out. De Morgen quotes ECB President Jean-Claude Trichet saying that he "couldn't understand why a country that refused to show solidarity with the Greeks would want a top position at the ECB."

Saturday’s Independent Saturday’s Guardian FT Weekend Handelsblatt BildSpiegel Stern BildBild: Brüderle Bloomberg Le Monde Economist

The German magazine Wirtschaftswoche says it best, "Axel Weber goes, inflation arrives".

In his opposition to anti-inflationist Elena Kohutikova of Slovakia, Jean-Claude Trichet tries to pull a clever sematic trick when he says that opposing inflation is the same as opposing Greek solidarity. It is not. The best thing for the common Greek citizen is for Europe to force the Greek government to live within its means, liberalize its economy, and end corruption. Bailing out the Greek political class with printed Euros, which is a stealth tax on the rest of Europe, can hardly be justified as showing solidarity.

My Letter to the NY Times re: the Credit Crisis

2011-02-03T06:16:00.000-08:00

From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: The Credit Crisis
Date: Wed, 2 Feb 2011 16:34:08 -0500

Dear Sirs:
Your Friday, January 28, 2011 business section had three major stories on the credit crisis: (1) For Housing, A Quick Fix Or Less Risk, by Floyd Norris, (2) Crisis Panel's Report Parsed Far and Wide, by Sewell Chan, and (3) Few Signs of a United Approach to Financial Regulations, by Jack Ewing. All three major stories have the same theme; that is, the necessity to regulate credit in order to prevent another financial crisis. However, none of the articles consider that government intervention in the credit markets caused the problem with us now or understand that continued intervention cannot prevent another crisis. It was central banks' expansion of the money supply and governments' policy interventions that created an unsustainable credit bubble. No financial regulation or oversight will prevent another crisis as long as these two factors exist. What no one wants to hear is that only a free market can prevent these crises.

Patrick Barron
20 McMullan Farm Lane
West Chester, PA 19382

Impoverishing Wealth Producers

2011-02-03T05:57:00.000-08:00

From today's Open Europe news summary:

Handelsblatt and Der Spiegel report on the dispute between the European Commission and the German government over new plans to cap eurozone countries’ trade surpluses at 4% of GDP, which could curtail Germany’s exports. German Economy Minister Rainer Brüderle said that he considered the targets “absurd”, adding that “the proposal does not fit a modern competitive Europe.”

Handelsblatt reports that, in spite of increasing inflation in the euro area, the ECB will probably not raise interest rates for the moment, for fear of further destabilising peripheral eurozone economies. Open Europe’s Pieter Cleppe is quoted in the Irish Daily Mail saying that if the ECB decided to raise interest rates in the near future, “it would kill any Irish recovery.”

I cannot believe that Germany will tolerate any interference with its export industries; therefore, if this measure is adopted, why should Germany remain in the EU?

In the first week of class for my Austrian Economics students at the University of Iowa we discuss the concept of "Diminishing Marginal Utility" as applied to money. An increase in the money supply conveys NO societal benefit. Among other evils, it transfers wealth from those who produce it to those who have not produced it, the very definition of theft and injustice. By tolerating increased inflation, the ECB is stating publicly that its policy is to transfer wealth by stealth means from some EU members to others. Again, why should those being robbed tolerate such a policy?

Germany and the Future of the European Union

2011-01-26T06:52:00.000-08:00

From today's Open Europe news summary:

Germans’ trust in the EU hits all-time low FAZ reports on a poll conducted by
the Allensbach Institute, showing that German citizens’ trust in the EU has
fallen to an all-time low. 63% of respondents had "little or no trust" in the
EU, up from 51% in March 2010. Only 25% had “very large or large trust" in
European integration, down from 37% ten months ago. 68% of respondents had
“little or no trust” in the single currency, almost back to the level of 16
years ago. Only 4% could correctly answer the question “Who is Herman Van
Rompuy?”FAZ Allensbach InstituteIMF: Eurozone crisis is the biggest threat to global
economy;Bloomberg poll: 59% think one or more members of the eurozone will leave
the currency by 2016An IMF report released yesterday warns that a deepening of
the economic crisis in the eurozone is the biggest threat to the global economy.
A poll conducted by Bloomberg, of 1,000 investors, analysts and traders, reveals
that 59% think one or more members of the eurozone will leave the currency by
2016, 11% think this will happen within 12 months.The WSJ reports that
yesterday’s debut bond auction to fund the EFSF was nine times oversubscribed;
bids were received for over €40bn at yields of 2.89%. El Pais reports that the
Spanish government’s decision to inject only €20bn into the cajas yesterday has
been received critically by investors. Rating agency Moody's has estimated that
the cajas lacks €89bn in capital, reports FAZ.The Irish Times reports that,
ahead of today’s vote in the Irish Parliament, three independent MPs, crucial to
the government’s majority, have threatened to withdraw their support for the
Finance Bill unless changes are made. A separate article in the paper reports
that Germany may concede on lower-interest loans to Ireland and other peripheral
eurozone countries if they agree to establish a cap on budget deficit in their
constitutions.Les Echos reports that yesterday EU Economic and Monetary Affairs
Commissioner Olli Rehn travelled to Berlin to discuss the possibility of
increasing the size and scope of the EFSF with some high-profile members of the
FDP, the junior partner of German Chancellor Angela Merkel’s coalition
government. However, FAZ notes that Rehn failed to persuade German Foreign
Minister and FDP leader Guido Westerwelle. Meanwhile, writing in
Wirtschaftswoche, Director of the IFO Institute Hans-Werner Sinn argues that
calls for an increase of the EFSF are dangerous, adding that they hide the EU’s
desire to take over a part of the old debt of troubled member states.City AM City AM Bottom Line City AM EurActiv City AM WSJ WSJ 2 WSJ 3 WSJ 4 WSJ 5 Irish Times Les Echos Le Monde Irish Times Público City AM FT: Spiegel Le Monde: Ricard BBC: Hewitt Irish Independent: McWilliams El Pais El Pais 2 Irish Times Bloomberg Jornal de Negocios Económico Expansion FT

Germany holds the key to any future that the EU may have, and it appears that the great mass of the German people do not have confidence in the EU. The German elite continue to support the EU; for example, the Irish Times reports that "Germany may concede on lower-interest loans to Ireland and other peripheral eurozone countries if they agree to establish a cap on budget deficit in their constitutions." So, these countries will get their lower interest loans and agree to something that they have no intention of doing; i.e., capping their deficits. This is just kicking the can further down the road (an old American expression). But private German citizens, like Hans-Werner Sinn recognize the danger of socializing EU member states' debts.

Perhaps the largest lost opportunity following the collapse of the Soviet Union was Germany's concession to the rest of Europe that it abandon the Deutschmark in exchange for being allowed to unify their country. Despite the blustering of the other European nations, there was no way that German reunification could have been prevented. Had Germany proceeded with reunification and kept the Deutschmark, it is very likely that several nations of Europe would have converted the Deutschmark by now (the conclusion drawn by Professor Philipp Bagus in his recent book, The Tragedy of the Euro) and the financial crisis would not have spilled over to these countries. Furthermore, a deteriorating dollar exchange rate with a large Deutschmark denominated region would have had a sobering effect on the Fed, which may have led it to abandon its easy money policies.

But, the Germans got the Euro, which has been inflated almost as much as the dollar, instead of a much sounder Deutschmark. Although there is no going back to the 1990's, Germany still can shed itself of the Euro. Despite the temporary challenges from such a move, in the long run a strong Deutschmark would be a beacon of sanity for the rest of the world.

A Loophole Allows Multiple Counterfeiters of the Euro

2011-01-25T06:13:00.000-08:00

This link to an Open Europe News Summary Blog reveals that any country in the Euro Zone can print as many Euros as it wishes simply by notifying the European Central Bank. This is why Ireland was able to print 51 billion Euros last week to bail out its banks. Here's the quote from the Open Europe blog:

The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money... ...A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.

This is very disturbing. In effect it allows mutliple, legitimate counterfeiters to print as much money as they wish; therefore, hyperinflation will ensue very quickly, because each Euro Zone member will have a great incentive to print money as fast as possible before prices go up. This could be the very quick end of the Euro, and it could create chaos in Europe and around the world.

American readers can consider this analogy: it is as if each state of the union could print as many dollars as it wished simply by notifying the Fed. Does anyone doubt that the dollar would collapse into hyperinflation overnight?

Click here: Open Europe blog: Is EMU a new Rouble zone?

Lessons from the Great German Hyperinflation of 1923

2011-01-14T15:01:00.000-08:00

When Money Dies, by Adam Fergusson
Reviewed by Patrick Barron

Feel the need for a good, old-fashioned horror story, one that will make your hair stand on end? Maybe one that will cause bile to rise in your throat? Well, don’t bother to reread William Peter Blatty’s The Exorcist, Mary Shelley’s Frankenstein, or Bram Stoker’s Dracula. For a detailed account of the descent of an entire country into despair and barbarism read Adam Fergusson’s When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany.

First published in 1975 and re-published in 2010 and made available through The Mises Institute, When Money Dies should dispel the notion that the rule of men is superior to the rule of law. Why “the rule of law”? Because it was the violation of the rule of law by governments themselves that supplanted the peaceful, liberal order of a gold-based international monetary system with one in which central banks, at governments’ behest, could print fiduciary media without limit. The full implication of this change was seen in Weimar Germany, the German people’s first experiment with representative democracy, where civilized society fell victim to the evils of the monetary printing press. For all practical purposes, the Mark was not worth the paper upon which it was printed. Eventually the Reichsbank issued the largest denomination note ever printed in the history of the world, a one hundred trillion-mark note, which no one would accept for payment. Be very careful if you believe that it can’t happen today.

Throughout Fergusson’s detailed, almost day-to-day description of government’s attempt to chase its tail around the inflationary circle and the pathetic, heart-rendering response of the great mass of the German people who tried to survive when their money became worthless, my thoughts kept returning to modern day America. The hair really did rise on the back of my neck and the bile really did rise in my throat when I realized that nothing had changed in the essential realm of our current monetary system; that is, that men rather than law control our money and their understanding of the very nature of money is no different than it was almost a century ago.

For those who believe that Germany’s central bank destroyed its own currency in order to print its way out of its World War I reparations payments, Fergusson gives compelling evidence to the contrary. One, there no evidence in the written record that German bankers ever secretly pursued this goal, and there is much written record. Two, in any case Germany was forced by the Treaty of Versailles to pay its reparations in gold or real goods anyway. So we must look elsewhere for the cause of the great currency inflation. And we need look no further than that men in positions of power were ignorant of monetary theory and had every incentive not to become knowledgeable about such theory.

Money production had become politicized throughout the world prior to World War I (Hum…I wonder is there is a cause-and-effect link here?) Rather than backing circulating currency to gold at least to some marginal extent, central banks engaged in a strategy to remove all the restrictions to their inflation of the money supply necessarily imposed upon them by the fact that the quantity of gold could not be inflated.

Hard as it may be to believe, Fergusson presents a compelling argument that the central bankers of Europe did not believe that the quantity of money had anything to do with the price level. And I suppose you think that our modern Fed rulers understand at least this much. Well, if they did they would not inflate the money supply. They would not issue statements that they are pursuing a two-percent inflation rate to achieve full employment. (By the way, full employment was one of the main justifications for the Reichsbank’s inflationist monetary policies. So nothing has changed. Central bankers still believe that monetary policy can lower the unemployment rate.) We see what happened in Weimar Germany. When a little monetary inflation failed to cure all ills, a little stronger dose was prescribed, and stronger and stronger doses until chaos reigned. Today’s pronouncements are no different. The Fed and their easy money, Keynesian-trained apologists are calling for even more monetary inflation. So we now have QE2 and maybe QE3 and QE4. It has not been ruled out and who or what will prevent it? Nothing, for failure of the latest monetary binge becomes justification for more. Furthermore, the near term advantages are irresistible. Bailouts are heralded by all who get the money, and the same apologists issue their propagandistic approval, which is disseminated by an ignorant mainstream media to a populace untrained in economics.

But the most important conclusion that one can draw from the great German hyperinflation experience is that money expansion is a prelude to and an enabler of war. The demise of the gold standard is the common thread that underlies the belligerency of the European powers around the turn of the 19th to the 20th century. America lagged behind somewhat but only somewhat. The ability to print money in unlimited quantities explains why the 20th century was the most brutally destructive in history. Printed money allows governments to embark on military adventurism, because it allows them to confiscate resources and reward key constituents. Even during Weimar Germany’s direst hours, there were those who knew how to benefit from the chaos. They were the scum of society plus the cream of society. The scum were all crooks and the cream was the politically connected industrial and financial elite. The middle class bore the lion’s share of the cost and was destroyed. Is this starting to sound familiar?

Today one must be either dependent upon welfare or receive too-big-to-fail bailouts in order to benefit from money expansion. Again, nothing has changed. The middle class scrambles to make ends meet while politically connected pressure groups benefit. In the meantime men who only yesterday were little more than highly paid extortionists, scamming state governments for the benefit of special interest groups, now send American troops, like so many toy soldiers, to every corner of the world. Our military is stretched to the breaking point while our strategic defenses suffer. This is why America was so eager to sign a disreputable new arms treaty with Russia—supposedly we can cut our strategic missile deterrence force in order to pay for expansions of the fruitless war on terror and new bread and circuses for the masses in the form of healthcare reform. Gone are the days of a strong defense and a non-interventionist foreign policy. And gone forever are the days of personal responsibility and living within one’s own means. To this we may give credit where credit is due—fiat money produced in unlimited amounts and showered on those who support the government.

This cannot last. For a sickening glimpse into the abyss that awaits, read When Money Dies.

More "Tragedy of the Commons" for the Euro

2011-01-14T09:07:00.000-08:00

From today's Open Europe news summary:

"El País reports that the European Commission is working on a proposal to pool the issuance of sovereign debt, guaranteed by the eurozone rescue fund."

The is just another indication that no one in a position of power at the EU understands Professor Philipp Bagus' argument--in his excellent book The Tragedy of the Euro--that the Euro will succumb to the economic law known as "The Tragedy of the Commons", whereby a commonly held resource is plundered to extinction. Pooling sovereign debt absolves the most irresponsible nations from confronting their unsustainable spending by forcing more responsible nations to pick up the tab. All of the incentives are weighted in favor of irresponsibility and none to responsibility. No pie-in-the-sky plan by the EU to dictate budgets to its members will ever work. The members will either ignore such interference or, as has already happened, cook the books to make it appear that they are doing so.

My Review of The Tragedy of the Euro, by Philipp Bagus

2011-01-08T10:24:00.000-08:00

The Tragedy of the Euro, by Philipp Bagus
Reviewed by Patrick Barron

In this small gem of a book Professor Philipp Bagus of Universidad Rey Juan Carlos, Madrid has given us much more than an explanation of why the Euro will fail the common man in Europe. He has given us a grand lesson in power politics and economic reality that is applicable throughout the world at all times and all places.

The title of his book frames his economic argument. A resource succumbs to the “tragedy of the commons” when property rights in the resource either are missing or not sufficiently enforced. All grab for as much of the resource as quickly as they can until the resource is plundered to extinction. In this case, the Euro is the resource that is being plundered by the European elite in its bid for centralized power and special privileges at the expense of the common European citizen. This plunder has played out against a background of great change in Europe. The vision of a united post war Europe always meant two essentially different ideals—the liberal order (in the 19th century meaning of the term) of free trade and free migration, which would leave the nation states intact, vs. the statist ideal of a centralized European empire. The fall of the Soviet Union signaled the possibility that the liberal order would prevail following the brutality of 20th century socialism of the German and Russian varieties. This beneficial development would have meant the end of special privileges for the Euro-elite who had waged a several decades’ battle to hijack the post World War II European project.

The Liberal Vision of Post War Europe

The founders of modern, post war Europe had one aim in mind—the prevention of war by removing the need for war. The two 20th century European-initiated world wars had economic nationalism as their foundational cause. This process started during the so-called Progressive Era at the turn of the 19th to the 20th century and reached its zenith in the 1930s. In the heart of Europe, with an advanced industrial economy manned by an industrious people, Germany was especially vulnerable to trade barriers. Its home grown energy and food resources were inadequate to run its industrial economy and feed its dense population. As illustration, Professor Bagus reminds us that the British naval blockade of Germany in World War I doomed 100,000 Germans to the cruelest death of all—starvation. With the demise of free trade in the early 1930s, Germany was haunted by the specter of a renewal of its immediate post WWI fate of widespread famine. Therefore, it embarked on a campaign of conquest to secure lebensraum or “living room”, validating Bastiat’s dictum that when goods do not cross borders armies will. Combined with the destruction of the middle class during the 1923 hyperinflation the German people were easy targets for a tyrannical regime that promised economic security at the expense of freedom.

It was this scenario that the European integrationists hoped to avoid through four main avenues—free movement of people, capital, goods, and services within Europe. This goal has been largely achieved and has made a war between any two European states almost unthinkable today. This goal does not require a centralized enforcement mechanism or regulatory bureaucracy in order to function. It especially does not require a common currency among its members.

The Centralizing Vision of Post War Europe

Almost immediately after the formation of the first, modest European integration success, the formation of the European Coal and Steel Community, the European elite began its propaganda campaign to build a permanent European bureaucracy in order to secure special privileges for itself and its class. Dr. Bagus adds much to our understanding of this process. He explains that the European elite in different countries forms a class that transcends borders; that is, the elite in France, for example, have more in common with the elite in Germany and Spain than they do with their own countrymen who are common citizens. So French bureaucratic elite ensures that property developers in Spain and exporters in Germany get the funds they need at a low price. This is one battle line. Another battle line is composed along geographic boundaries. The Latin countries, with France as their leader, comprise a block that is less productive than the harder working and more capital intensive Nordic countries, with Germany as their leader. The goal of the Latin bloc is to institutionalize resource transfers from the north to the south. This is where the Euro proves to be a stealth weapon, for outright capital transfers are easy to see and understand and, thusly, can be limited, whereas the machinations of a central bank are not. Add to its complex dealings a propaganda campaign in which, just as in America, economists are “employed” to do research for the European Central Bank and, therefore, form a corrupt priestly class protecting the elite from honest criticism. It is shocking to learn the brazenness with which the European elite, which includes even the German courts, ignores or rationalizes away the treaty-born prohibitions that, supposedly, would prevent the European Central Bank from financing the sovereign debt of its members. This is a lesson that paper assurances mean nothing if the parties involved are dishonest and the citizenry is unwilling or unable to throw the rascals out.

Here is the heart of Professor Bagus’ contribution to our understanding. By grounding his explanation in solid Austrian economic concepts, we learn that the European Monetary Union (EMU) is both a Trojan horse for economic tyranny and, what probably is not understood even by its proponents, an impossible vehicle to sustain…it simply will fail of its inherent contradictions. Put in the simplest terms, the Euro will be plundered by the Latin bloc until inflation reaches unacceptable levels or until the Nordic bloc refuses to participate any longer and secedes from the European Monetary Union and possibly from the European Union itself.

Perhaps I lead a sheltered life, but I found The Tragedy of the Euro to read like a great adventure novel. Here we have heroes (mostly post war German bankers, resisting inflation) and villains (mostly post war Frenchmen, allied with post war German politicians, determined to keep the common German citizen paying and paying). The villains believe, falsely, that they can secure for all time their special privileges over the German citizenry—which is not the same as the German elite, who often collude with the French elite for their own privileges. But this is their great error, which Professor Bagus explains so clearly. They want to ignore the laws of economics by building coercive pan-European bureaucracies to enforce their will. But this will not work. How long it will last is the question.

The European financial crisis proceeds from day to day. This wonderful book will help everyone understand what is really happening and, we hope, provide a lesson for others. Are you listening, America?

The Foundation of Peace and Free Trade

2010-12-26T05:56:00.000-08:00

I added this comment to an excellent essay by CATO's Dan Griswold:

The U.S. should declare itself a free trade nation, regardless of the actions of other nations. As we become more prosperous, our example will do more for the free trade movement than all the international agreements and excellent essays, such as this one, combined.

There is another, more basic, reason for free trade. Frederic Bastiat explained in his 1850 book The Law that man is born free. He owns himself. He is not owned by any other men or by a government, because government is formed by free men and, as such, can do only what other free men can do...and enslave another is not one of those things. From this basic and unassailable tenet Bastiat explains the limits of government. Forbidding trade among men is not a legal power that can be exercised by a legally formed government.

My Letter to National Review--Let Big Government Collapse

2010-12-25T09:25:00.000-08:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Let Big Government Collapse
Date: Sat, 18 Dec 2010 20:43:15 -0500

Dear Sirs:
After devouring your December 20th issue, it is almost impossible to come to any other conclusion than that Big Government is the enemy of the people everywhere. Jim Manzi's "Unbundle the Welfare State", Andrew Stuttaford's "PIIGS to the Slaughter", and "The Enemy Within" by Ian Murray and F. Vincent Vernuccio cannot help but list case after case of the immense damage done to the common man by Big Government. The answer is NOT to figure out how to save Big Government, but how to convince the common man that he can do better without Leviathan. The common man does not need government to provide him with a retirement income or healthcare, much less oversee the terms of his employment, the quality of his children's day care, and all the other preposterous so-called "services" that supposedly protect him from the normal vagaries of life. Let the whole corrupt house of cards collapse, along with government's bought-and-paid-for supporters, from the big banks to the public sector employees and to all those who get money from the government only because the government takes it from others at the point of a gun. Return government to the American Founders' ideal of limited government that protects our lives, liberties, and property. The free market and an honest court system will take care of all the rest.

Patrick Barron

Another Bad Idea

2010-12-24T06:02:00.000-08:00

From today's Open Europe news summary:

German Finance Ministry outlines new eurozone bailout institution;

Euro must be based on “German stability interests” as concession for
support

Sueddeutsche reports that a leaked position paper has revealed that the German Finance Ministry has drawn up proposals for a new body, named the “European Stability and Growth Investment Fund”, to manage the permanent eurozone bailout fund planned for 2013, the European Stability Mechanism. If granted loans from the fund, countries would be required to provide 120% in collateral in the form of gold reserves, stakes in companies, or revenue rights, the newspaper said. The fund would also be able to buy existing European government bonds, freeing the ECB from this task.

Reuters quotes the Ministry’s paper saying that Germany will affirm its “national interest” rests in maintaining the single currency. The euro, however, must “orientate itself on German stability interests” as a “concession to Germany, as the largest economy in the euro zone, serving as an anchor of stability.” According to Sueddeutsche, the new fund would in principle have access to “unlimited refinancing” in order to secure the health of the single currency. The Ministry confirmed the existence of the paper but said it had not approved the proposal, nor had the German government.

To quote a portion of the above report, the "new fund would in principle have access to 'unlimited refinancing' in order to secure the health of the single currency." This just does not make any sense. Where will the fund get the Euros for this "unlimited refinancing"? It is obvious that the European Central Bank will print the money. This will in no way strengthen the Euro, but will debased it. Further down in the same news summary was a report that Bloomberg News was suing to obtain information that the Greek government had used derivatives and swaps to hide the magnitude of its real debt. We must remember that the fund would be lending not to owners with their own financial assets at stake but to politicians and bureaucrats temporarily placed in powerful offices. The primary goal of such people is to secure their own jobs and their own well-being by buying off powerful internal constituents. Finally, the very idea that Europe should bail out failing economies reveals a complete lack of understanding of the law of moral hazard and the real purpose of a market economy. Prosperity is NOT secured through taxing profitable enterprises--even if indirectly through currency debasement--in order to allow unprofitable enterprises to continue. This is a prescription for capital consumption on a massive scale, because politicians and bureaucrats will have no objective criteria to determine where the "unlimited refinancing" line can be drawn.

Patrick Barron

My Letter to the Wall Street Journal re: New Debit Card Rules

2010-12-17T06:18:00.000-08:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Re: New Debit Card Rules
Date: Fri, 17 Dec 2010 08:27:20 -0500

Re: New Debit Card Rules

Dear Sirs:
The new debit card rules are nothing more than price fixing by government, with all the adverse consequences ignored as a matter of course--fewer merchants able to accept debit cards; fewer bank customers who qualifiy for debit cards; fewer debit card sales; and lower merchant profits. But the bigger question is this: Where in the Constitution lies the power of Congress to intevene in the relationship between merchants and their banks? The commerce clause? If this is the answer, then it is turning the commerce clause on its head, for the commerce clause was intended by our Founders to ensure free markets among the states.

Patrick Barron

My Letter to National Review re: The Welfare State

2010-12-14T19:03:00.000-08:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Why Jim Manzi is Wrong about the Welfare State
Date: Tue, 14 Dec 2010 21:58:34 -0500

Dear Sirs:
Jim Manzi's fairly typical prescription for how to reign in the welfare state--Unbundle The Welfare State--will fail because his premise about man and government is wrong. Manzi says that some men demand government interventions to relieve them of their anxieties and that it is government's legitimate role to decide where to draw the line. It is clear that Mr. Manzi has not read Frederic Bastiat, who explains that welfare is both illegitimate and impractical. It is true that some men desire to plunder others, but government's endorsement of some form of "legitimate plunder" validates this essentially criminal demand rather than regulate it and make it harmless. As Bastiat explains in the first dozen or so pages of his classic The Law, all men are born free and have a legitimate right to defend themselves from the plunder of others. Since government is a product of cooperative men, it can have no other powers except those that these men possessed themselves. Since free men do not possess the legitimate power to plunder others, they cannot pass that power to government. Therefore, government welfare is illegitimate plunder. Furthermore, rather than mitigate some men's desire to live off the fruits of others' labors, government welfare exacerbates this human weakness of character and divides men rather than unite them. We can expect all welfare states to implode under their own self-contradictions, as the ranks of the plunders grow and those of their victims shrink.

Patrick Barron

Let the Revolution Begin in Ireland

2010-11-30T15:35:00.001-08:00

The latest crisis in the European Union—the Irish financial crisis--is the result of the socialization of money, the Euro. The EU has been using the Euro as an enticement for bribing recalcitrant nations into accepting its top-down rule. If governments would not accept the EU’s harmonization policies of high taxes, high regulation of business, and high farm subsidies, they would not get funding at cheap European Central Bank prices. For governments addicted to deficit spending, this was an easy bribe to accept.

In an honest world, one in which money is sound and the rule of law governs commercial transactions, no government would be able to spend beyond its means. If a government threatened default, its bondholders would be able to take possession of assets, to the extent practicable, and then suffer losses. But there would be no bailout. For many years thereafter the government would be forced to live within its means, because its financial reputation would have been ruined. Of course, the very thought of a government being restrained by anything is anathema to modern Progressives, who view government action as the panacea to all of society’s ills. And nothing enables government action like money that can be manufactured in unlimited amounts, if one only adheres to the manufacturer’s demands.

The Irish people may not believe it, but temporarily staying on the Euro is the only thing standing between them and their government’s determination to spend the nation into bankruptcy. Leaving the EuroZone and returning to their own currency would mean hyperinflation and starvation. The Irish government would give in to the demands of powerful constituents that it shower the nation with enough new money to forestall the necessary economic correction. The money printing presses would be running full tilt.

But the Irish should not incur more Euro debt, no matter what terms are offered, for this merely makes the eventual day of reckoning even worse. No, better to face facts now and do what is right. Let the banks go bankrupt. Slash welfare spending. And, most importantly, free the Irish economy from all economic restrictions, even if it means ignoring EU mandates.

Staying on the Euro should be viewed as an intermediate step before returning to the gold standard. At least the Euro provides some restraint on money production, whereas there would be no restraint on punt (the former Irish currency) money production. But gold money is the sine qua non of fiscal discipline. It cannot be inflated and it cannot be destroyed. Governments must tax or borrow honestly for every expenditure. The people are in charge, for government must go to the people for funding rather than to the operators of the money printing press.

The Irish crisis is just the latest indication that the end of the era of fiat money is fast approaching. Despite the daily financial scares, this can be a good thing, for fiat money is the enemy of the peoples’ liberties everywhere. Let the revolution begin in Ireland.

My Letter to the WSJ re: "Africa needs aid, not flawed theories" by Bill Gates

2010-11-27T09:10:00.000-08:00

Re: "Africa needs aid, not flawed theories" by Bill Gates

Dear Sirs:

Poor Bill Gates. He is finding that even he cannot put the entire continent of Africa on the dole; therefore, government--meaning the rest of us--must chip in. Nor can he stop global warming all by himself (or is it "climate change"?), therefore, the rest of us have to submit to top down restrictions. His evidence of the efficacy of such top down policies is "declining air-pollution emissions in the U.S. ...that...has come about because of government regulations based on publicly funded science..." Well, Mr. Gates can spend his vast wealth in any way he desires, but he will find few of us common folk who share his optimism that aid to Africa will cure what ails it or that reducing our standard of living will do anything except, well, reduce our standard of living. Africa needs capitalism; that is, free markets, private property, protection of such property from criminals in and out of government, entrepreneurs, and most of all freedom. Mr. Gates can help Africa most by building Microsoft plants and offices there, employing Africans in the digital economy and training them in the methods of successful business. This is Mr. Gates' expertise. Then a modern Africa will be able to afford clean water and clean air. And Africa and the rest of the capitalist world will easily adapt to whatever change Mother Nature throws at us.

Patrick Barron

My Letter to the WSJ re: Behind Gold's New Glister

2010-11-26T07:23:00.000-08:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Re: Behind Gold's New Glister
Date: Fri, 26 Nov 2010 10:20:58 -0500

Re: Behind Gold's New Glister

Dear Sirs:

GLD created a market for a product that was growing in demand. It is not true that it somehow created demand that was not there in the first place. It is evident to all that fiat monetary systems the world over are nearing the end of their usefulness, because governments have inflated their supply and are promising even more inflation. Thusly, the people are flocking to the one commodity that always retains it value--gold. It is important to remember that the so-called price of gold is nothing more than a relationship of a known commodity that cannot be inflated to something of absolutely no intrinsic value and which can be inflated to infinite amounts.

Patrick Barron

My letter to the Philadellphia Inquirer re: What would the founders do?

2010-11-21T08:20:00.000-08:00

From: patrickbarron@msn.com
To: inquirer.letters@phillynews.com
Subject: Re: What would the founders do?
Date: Sun, 21 Nov 2010 11:13:34 -0500

Dear Sirs:
The headline of Stephan Salisbury's review of Jill Lepore's book about the Tea Party movement, titled The Whites of Their Eyes, asks the question "What would the founders do?". I think I know the answer. They would tell us to read the Constitution.

Sincerely,

Patrick Barron

My Letter to National Review re: "Red Scare" by Kevin D. Williamson

2010-11-12T06:47:00.001-08:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Re: Red Scare by Kevin D. Williamson
Date: Fri, 12 Nov 2010 09:08:03 -0500

Re: Red Scare, by Kevin D. Williamson

Dear Sirs:
Many thanks to Kevin D. Williamson for his eye-opening and sober assessment of the Chinese economy and our government's fatuous policy of using China as the all-purpose whipping boy for problems of our own making. A common theme that ran through Mr. Williamson's essay is the harm done to ordinary people in every country by their governments' incessant economic interventions. Economics knows no political borders--a little understood rule of life that bears much repeating. It makes absolutely no economic difference if a product I buy is manufactured by my next door neighbor or a Chinaman. We both benefit from the exchange of my money for his good or service and do so at no cost to anyone else. No nation is somehow better off when other nations suffer economic disruptions. It is not true that Americans were better off at the end of WWII because our manufacturing base was undamaged by war while much of the rest of the industrialized world lay in smoking ruins. We enjoy a much higher standard of living by the spread of the specialization of labor which has occurred in the world since then. The only thing standing in the way of an even higher standard of living for all men everywhere is the foolish idea that economic gains for citizens of some nations come at the expense of others. Mr. Williamson is right to warn us that the policies that flow from this false view of the world can "lead to a trade war--or a war war." Instead of brow-beating our G-20 trading partners into agreeing to some new mercantilist agreement that will stifle trade with monetary and capital controls, the U.S. should renew its dedication to free-market capitalism.

Patrick Barron

Stable Money Required for Economic Progress

2010-11-03T12:42:00.001-07:00

It now seems certain that the Fed will embark upon a new, second round of money expansion, called Quantitative Easing, or QE2 for short. During QE1 the Fed expanded its balance sheet by roughly $1.7 trillion by purchasing assets, mostly government bonds, in order to lower interest rates and spur economic recovery. At least this was the Fed’s goal. It did lower the interest rate for short term rates to as close to zero as can be expected; now it will target longer term rates by offering a higher price for these instruments, thusly, driving down their interest rate. The Fed fears deflation, which it defines as a general decrease in prices, and is on record as desiring to instill at least a two-percent inflation rate, which it defines as a general increase in prices. The Fed policy makers believe that a two-percent inflation rate is what is necessary for the American economy to achieve full employment, which is one of the Fed’s overall policy goals. The other policy goal is stable prices. In typical government Newspeak the Fed boldfacedly asserts that a two-percent increase in prices is the same as stable prices. I guess it all depends upon one’s definition of “stable”.

There is little doubt that the Fed will be just as successful in driving down long-term rates as it has been in driving down short-term rates, but neither of these actions will help the economy. On the contrary, these actions will harm the economy. What the Fed should pursue exclusively is a stable supply of money, which is not the same as stable prices. The Fed should cease its sales and purchases of assets. Furthermore, it should end its interference into any money markets, such as the Federal Funds market for overnight sales and purchases of bank reserves. In other words, the Fed should stand aside as an active participant in the nation’s economy and act solely as a protector of the supply of money.

In the interest of space and the reader’s patience, I will explain very briefly why a stable money supply is desirable.

Money is a universally accepted medium of indirect exchange, meaning that people hold money only in order to expend it at some later time for a good or services that they really desire. (It is not true that people have an unlimited desire for money; they have an unlimited desire for the things that money will purchase.) As such, the relative demand for goods and services is expressed in terms of money, the universally accepted medium of exchange. But the exchange ratio between money and all individual goods is constantly in flux. Some goods become cheaper as their supply expands and/or demand for them drops. The opposite is true when a good’s money price rises. In an expanding economy, there is a general tendency for most goods to fall in terms of money, as long as the supply of money is held stable. There is no adverse economic consequence to such a situation; that is, in an environment of generally falling prices businesses will make money, pay back loans, and expand operations. It is not true that falling prices are a mark of a failing economy.

In order to keep prices from falling in a generally expanding economy that produces more goods and services, the supply of money must increase. This happened in the 1920’s and led to the 1929 stock market crash. As Murray N. Rothbard explains in America’s Great Depression, the 1920’s were a period of rapid productivity increases due to such factors as the expansion of the nation’s electrical grid and the introduction of the assembly line. But the barely decade-old Fed--which was under the sway of Irving Fisher, a very influential economist who held that price stability was important--increased the money supply throughout the decade to offset the tendency of prices to fall.

This interference in monetary affairs sent false price signals to entrepreneurs that more resources were available for long-term investment than really was the case. The structure of production was altered in such a way that not all enterprises could be completed profitably. The nation was not saving as much as the lower interest rate would suggest. The Fed had enticed businessmen to begin investments that were contrary to the wishes of the consumer as expressed by his real spending patterns. He wasn’t saving enough. Eventually the reality of the situation became apparent and the stock market crashed. But rather than allow the economy to shed the malinvestment, the government undertook a decade’s long experiment in even more intervention in a futile attempt to rekindle the false boom. Only the exigencies of World War II convinced government to end the worst of the Hoover/New Deal policies in order to ramp up war production.

So, we see that it was fiat money expansion that caused the stock market to crash at the end of the 1920’s. The general price level had indeed remained stable throughout the Roaring Twenties, but we now know that it should have fallen. A generally falling price level would have prevented the malinvestment of business, for interest rates would have reflected the true state of the cost of savings for long term capital investment. The structure of production would not have been skewed, which later required its wholesale liquidation.

Today’s Fed is contemplating inflicting an even worse situation on the nation—a positive inflation rate. By driving down long term rates it hopes to entice businessmen to alter the structure of production in favor of longer-term investments. At the same time it is trying to spur consumer spending. These are completely contradictory goals and cannot both be achieved. If the consumer spends more, he saves less. In a free market, this will drive up interest rates to reflect the consumer’s preference for goods in the immediate term rather than in the long term. If the consumer saved more, the additional supply of funds would drive down the interest rate and make longer term capital investment feasible. We cannot have it both ways. Furthermore, the Fed does not know the proper level of interest rates, because it cannot possibly know the consumer’s propensity to spend and save…nor need it know. If the Fed does its only job properly, which is keeping the money supply stable, the aggregate actions of all consumers will determine the interest rates for all maturities.

In conclusion, the Fed should not pursue any interest rate strategy. Rather, it should keep the money supply stable so that the market will allocate savings to establish the structure of production in accordance with the desires of the consumer. But current Fed policy is a replay of its own failed strategy of the 1920’s and ‘30’s, except it is a policy on steroids. The result will be more malinvestment, more bankruptcies, more unemployment, and general impoverishment of the nation.

My Letter to National Review re: The Bender is Over

2010-11-01T03:00:00.000-07:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Why "The Bender Is Over"
Date: Fri, 29 Oct 2010 14:10:04 -0400

Re: The Bender is Over, by Ramesh Ponnuru and Richard Lowry

Dear Sirs:
As much as I enjoyed and appreciated Messrs Ponnuru and Lowry's political insight into the president's falling ratings, I kept waiting for something of more substance to explain the phenomenon beyond "the public really is more conservative that we all thought". Why is the public more conservative than we all thought? I think the answer is clear--socialism just doesn't work and everyone knows it. The lesson of the fall of the Soviet empire has not been lost on free peoples everywhere, especially in the U.S. We just won't fall for the shyster's line anymore that we all can live at one another's expense.

Patrick Barron

My Letter to the WSJ re: A Carpenter With Only One Tool

2010-10-27T12:55:00.000-07:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Carpenter with only one tool
Date: Wed, 27 Oct 2010 15:51:21 -0400

Re: Fed Gears Up for Stimulus

Dear Sirs:
The Fed is like the carpenter with only one tool, a hammer, who sees every problem as needing a good pounding. The Fed's only tool is the monetary printing press, so it sees every economic problem as a lack of money. According to your report, "The Fed's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates." This statement, which undoubtedly is true, illustrates perfectly the Fed's chief policy error. It has no regard for the role that savings plays in an economy. It is savings that the economy needs in order to rebuild the malinvestment of the lost decade of this new millennium. Savings is the fuel of capital investment. Without savings a modern economy will fail to replenish its capital stock. Ours is being consumed in an orgy of wasted government stimulus spending. Already the poor saver is getting next to nothing for his money, and Bernanke would drive him completely out of the market. If he succeeds, and it seems likely that he will, our economy will resemble that of Argentina in a few years--a once prosperous country driven to default, hyperinflation, widespread poverty, and political tyranny.

Patrick Barron

My Letter to the WSJ re: A Madman Wants to Rebalance the World's Economy

2010-10-22T12:47:00.000-07:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: A Madman Thinks He Can Rebalance the World's Economy
Date: Fri, 22 Oct 2010 15:40:12 -0400

re: Geithner's Goal: Rebalance the World's Economy

Dear Sirs:
Interviewing Timorthy Geithner must be a frightening experience, for it must soon become apparent that the man is stark raving mad. The very idea that he and his fellow bureaucrats in other countries believe that they can fathom the essence of the world's economy, decide which countries should be allowed to grow and to what extent, decide the statistical measures that would indicate which countries' growth rates are sustainable and which are not is patently preposterous. Countries which adopt capitalism and grant basic political and economic freedoms, most importantly the protection of property rights, will grow much faster than those who adopt less favorable policies. Would Mr. Geithner and his fellow madmen deem these countries to be pariahs and erect trade and capital barriers to prevent them from becoming more prosperous? Apparently the success of a free people would be an embarrassment to big government madmen such as Mr. Geithner; therefore, the rest of the world must mobilize to stop them.

Patrick Barron

My Letter to the WSJ re: China Raises Interest Rates

2010-10-19T06:29:00.000-07:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Re: China Raises Interest Rates
Date: Tue, 19 Oct 2010 09:23:57 -0400

Re: China Raises Interest Rates

Dear Sirs:
Economic data from China is always suspect. I doubt that China's inflation rate, as measured by its CPI, is below 4% as officially reported. By holding its currency cheap China has subsidized its export industries at the expense of higher prices in the rest of its economy. This classic mercantilist policy was bound to fail. If the Bank of China ceased its currency interventions, there is little doubt that China's interest rates would go much higher, causing a necessary restructuring of China's economy and an end to price and asset inflation. This move is always resisted by powerful interests who have become rich due only to government manipulation of the currency and other interventions. It is the same everywhere in the world. The first nations to abandon mercantilism will reap the gains of capital inflows. It appears that China has learned this lesson.

Patrick Barron

My Letter to the WSJ re: The Myth of Full Employment via Money Expansion

2010-10-15T07:48:00.000-07:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
CC: jon.hilsenrath@wsj.com
Subject: The Myth of Full Employment via Money Expansion
Date: Fri, 15 Oct 2010 10:42:33 -0400

Dear Sirs:
Fed Chairman Ben Bernanke is confused about the money supply, the price level, and the benefits of manipulating both to achieve full employment. In his speech at the "Low-Inflation Environment Conference", he states that it is the Fed's intention to promote price stability and full employment via a two percent general price inflation rate. So, which does he want--price stability or two percent price inflation? And how exactly will either promote full employment? The simple and well-know "rule of 70" reminds us that prices will double in the number of years equal to 70 divided by the inflation rate. So at a two percent price inflation rate, the price level will double in thirty-five years. That is hardly price stability. Plus, the only way the general price level could remain the same in a growing economy is for the money supply to increase in proportion to the increase in production, causing repeated boom/bust business cycles. In a stable money environment prices would fall as production increases, a boon to every level of society. Sixty years ago the great German economist Wilhelm Ropke demolished the fallacy that full employment could be achieved via money expansion. I suggest to your readers his excellent essay on the subject, "The Economics of Full Employment", found in The Critics of Keynesian Economics.

Patrick Barron

My Letter to the WSJ re: Dollar Slide

2010-10-14T13:08:00.000-07:00

From: patrickbarron@msn.com
To: andrewj.johnson@dowjones.com; wsj.ltrs@wsj.com
Subject: Dollar slide caused by stimulus
Date: Thu, 14 Oct 2010 15:39:02 -0400

Dear Mr. Johnson,
You led your article today about the dollar slide with this statement:

"The dollar fell sharply against a range of currencies Thursday as prospects for Asian economic growth contrasted with the likely need for more stimulus in the U.S."

The U.S. does not need more stimulus. It needs more savings. Stimulus merely consumes capital and puts the U.S. further into debt, contributing to the dollar's slide. Let me recommend that you acquaint yourself with the Austrian school of economics. Go to www.mises.org and search on monetary policy to learn how markets really work. As Ludwig von Mise wrote many decades ago, all exchange rates are set in the market by the relative purchasing power of the respective currencies. The dollar's purchasing power is being eroded with the threat--no, let us say "promise"--of further erosions. This threat to the U.S. economy is as serious as it is unnecessary.

Patrick Barron

The Special Importance of Austrian Economics to Young People

2010-10-07T14:15:00.000-07:00

As faculty advisor to the “Students for Austrian Economics” club at the University of Iowa, I was asked to speak to the group about the importance of Austrian economics in the world today and why it is especially important to young people. I was flattered by this request, because I admire the courage of the members of this group who stand against most of what they hear every day about how the world works. But I was also challenged to state clearly something that I had not considered for some time. Although I read Austrian economics almost exclusively, I had not thought much about why I read it—to me it was self-evidently true. Therefore, I found it a challenge to state the case for Austrian economics to members of the club who might not be as devoted to the discipline as I am and who desire to be convinced.

Road Map for Government Policy

First of all, Austrian economics is important to everyone, not just young people, because it provides a road map for government policy. Wrong government policy can destroy nations and entire civilizations. I fear that we are on the path to just such destruction right now. But why I think this does require some basic understanding of just what Austrian economics is.

I prefer the definition of my friend Michael McKay, host of the weekly radio show Radio Free Market. Michael begins each of his shows with the statement that “Austrian economics is 'reality’ economics and reality is not optional”. There are two main elements of Austrian economics that make it real—its placement in the social sciences rather than the natural sciences and its emphasis on micro as opposed to macro analysis. Ludwig von Mises’ last book, The Ultimate Foundation of Economic Science, explained the proper place of economics in the social sciences, relying upon deduction from the rock solid foundation of irrefutable truths. Because we are dealing with man and his preferences, economics is not a natural science with its reliance upon empirical observation to discover natural laws from which to develop mathematical predictions of economic outcomes.

For example, we cannot with any certainty state that the recession will come to an end X number of months after the Fed injects Y amount of money into the system. But that is exactly what other economic disciplines, primarily Keynesianism, purport to be able to do. Austrian economics tells us is that increases in the money supply will debase all money currently in the hands of the public, reducing money’s purchasing power and redistributing the ownership of wealth assets. This is not a theory based upon empirical observation, but an economic truth deduced from irrefutable maxims.

This is important, because so much misguided policy flows from this very basic misunderstanding, and we are witnessing it right now. As Ludwig von Mises stresses in chapter 17 of Human Action, “catallactic precision cannot be applied to historical problems” and that “attempts to measure economic magnitudes are based on entirely fallacious assumptions and display ignorance of the fundamental principles both of economics and of history.” Massive spending and monetary pump priming have not gotten the desired results that the current batch of Keynesian economists desired, so they are poised to engage in an even more radical step called quantitative easing. Quantitative easing just means that since the interest rate cannot be driven any lower than zero, the central bank must simply print money and give it to the government to spend as it pleases. And, since the Keynesians in government believe that economics is a natural science, they will point to their own meaningless statistics to rationalize their actions.

Spending Does Not Equal Prosperity

Nowhere is this dichotomy between Keynesians and Austrians more apparent than in how each school of economic thought would measure economic success. For example, we are constantly told by our government that the recession technically ended last year, because GNP stopped shrinking. Here is the great macro vs. micro approach. Whereas Austrians take the individual as the object of analysis, Keynesians place emphasis on GNP. And they measure GNP by total spending in the economy. Now let’s just look at this for a moment. For the Keynesians spending is the be all and end all. As long as people are spending, then they must be buying something that someone produces. Therefore, Keynesians equate spending with prosperity. If people reduce their spending and increase their savings, GNP will fall. When this happens, government spending must increase to replace private sector slack. Taken a step further, government spending can spur an economy to new heights, if private spending is not positive enough. Now isn’t this a wonderful theory--that government can spend the nation into prosperity? Unfortunately this isn’t working very well.

Austrians would not place any emphasis on total GNP, because spending does not equal prosperity. If a man spends a great deal, we may conclude that he earns a lot or it may just be that he is spending profligately. The latest spending craze in housing is an excellent example. Housing sales skyrocketed for years, but it turns out that many of these sales were to people who really could not afford to purchase them. They lost their homes when the bubble burst, which was a direct result of government making it appear as if more people could afford homes that was actually the case. Spending did increase, for awhile anyway, but it could not be sustained. Reality was not optional, after all.

By contrast the Austrians place all economic analysis on the individual, not society as a whole. The economy is just the aggregation of all individual decisions, so once you understand how individual men act you will understand how to make an economy work better. For example, Austrians place more emphasis on freeing man from the straightjacket of government taxes and regulations that prevent him from freely cooperating with other men in order to achieve his goals. Other men are seeking the same cooperation of him, so their mutual cooperation creates winners all around. Each expects to improve his situation. If we look only at what man spends, we really do not know whether he is creating wealth or consuming it.

Justice, Law, and Inalienable Rights

But Austrian economics is important for much deeper reasons. Whereas all other economic schools of thought are willing to sacrifice some members of society or citizens of other countries for supposed economic gains, Austrian economics emphasizes the importance of law, justice, and God-given inalienable rights that accrue to each and every individual. These are not a hindrance to economic progress but are part and parcel of economic progress. Not only does Austrian economics focuses on the welfare of the individual, it holds the life, liberty, and property of all individuals sacrosanct. Although few today openly call for persecuting minorities, most economic schools of thought denigrate the importance of private property. Some even openly support confiscating the property of the rich for redistribution to the poor. Austrians place property rights as an extension of individual rights, for without property man cannot survive. Thus, Austrian economics promotes not just a higher standard of living but it does so by holding the individual as an inviolate entity whose rights precede those of society and the state. This has further implications for international peace, for Austrian economics asserts that economic science does not end at political borders. The benefits of free exchange can and should extend to the entire world, spreading peace and prosperity instead of war and poverty. At no time since the end of the Second World War have governments expressed such outright hatred of foreigners and attempt to blame them for all economic ills. Even this week our own Secretary of the Treasury Timothy Geithner fanned the flames of international ill will by blaming our current economic woes on the Chinese. This is as preposterous economically as it is dangerous politically. This is a prime example of how an economic theory can lead nations to war—if a government really believes that Chinese economic policies are harmful to us, it will feel justified to protect us. When goods stop crossing borders, armies will. As Ludwig von Mises states in chapter nine of Human Action, it is the autarkic policies of hegemonic states that are the main cause of war.

The Young Can Free Themselves from Entrenched Ideas

We now conclude with why Austrian economics is so important for young people. The current Keynesian system has created an entrenched class who will never admit the limitations of their fervently held ideas, because they benefit from them. The government is a revolving door of Wall Street bankers, environmental activists, union supporters, and others dependent upon government interventions. They will never give up their power and their privileges. Therefore, it is up to a new generation who is not yet tainted by the corruption of government to “stand up for freedom”, as Michael McKay always ends his Radio Free Market show. Austrian economics provides the analytical tools to expose the reality of a corrupt system in which the few gain at the expense of the many. The young have a choice. They can join the corrupt system or they can throw it out. Will they choose peace and prosperity, or will they choose poverty and war?

My Letter to the Wall Street Journal re: Geithner Takes Aim at China Policy

2010-10-06T10:26:00.000-07:00

Re: Geithner Takes Aim at China Policy

Dear Sirs:
The Geithner speech is nonsense on two levels. Number one, and most importantly, if a country holds its currency cheap, it is subsidizing the living standards of its trading partners. If the Chinese are foolish enough to subsidize our lifestyle--which, by the way, they have been doing for some time now--then why would we desire that they stop? Secondly, the logic of his argument is childish. If we think China's monetary policy is wrong, why are we encouraged to do the same thing? (I can just hear Mrs. Geithner asking her little boy Timothy why he jumped in the mud puddle...and little Timothy telling his mother that he did it because his friend did it.)

No country can force another country to pay its bills or cause another country to have higher unemployment. The most damage that a country can do to another is indirectly--by adopting policies that reduce its contribution to the world economy. For example, the world is worse off because Cuba is a communist country and does not produce goods for the world market.

Patrick Barron

My Letter to National Review re: Acting White

2010-10-04T10:12:00.001-07:00

From: patrickbarron@msn.com
To: submissions@nationalreview.com; letters@nationalreview.com
Subject: Letter to National Review--"Moot Causes" needs one more step
Date: Mon, 4 Oct 2010 13:04:59 -0400

Dear Sirs:
A college professor friend of mine says that you need to ask "Why" at least five times to arrive at the root cause of something. Such is the case of "Moot Causes", Roger Clegg's review of Stuart Buck's book Acting White: The Ironic Legacy of Desegregation. Mr. Clegg lays the problem of "black students' rejection of academic achievement" at the high level of out-of-wedlock births--70%!--and the lack of a male role model in the lives of children. This undoubtedly has merit. But what is the cause of all those out-of-wedlock births? I believe the answer is economic regulation and the welfare state. Economic regulation has priced unskilled labor out of the market; there is no "first rung on the ladder" of the job market for many urban poor. But welfare entitlements prevent the outright destitution that would be the result of this market intervention. The result is the deplorable spectacle of multi-generational welfare dependency, crime, and other societal pathologies. End economic regulation AND welfare. Those on welfare will have the job opportunities they need, and, once again, school will be seen as the necessary preparation for a life of work rather than a prison to which one is sent by the truant officer.

Patrick Barron

Letter to National Review re: Bank of America, by Kevin D. Williamson

2010-09-28T07:14:00.000-07:00

From: patrickbarron@msn.com
To: submissions@nationalreview.com; letters@nationalreview.com
Subject: Re: Bank of America by Kevin D. Williamson
Date: Tue, 28 Sep 2010 09:57:11 -0400

Dear Sirs:
Among many of Kevin D. Williamson's excellent and pointed comments about Obama's new "infrastructure bank" is this one: "...the Fed...whose managers pay the very highest prices for the very worst assets...". Mr. Williamson then exposes the bizarre world of government earmarks for projects that no one would fund if asked to do so privately. And herein lies the main problem--where does the Fed get all that money for its bloated balance sheet of dubious assets and where does the government get all that money for its new infrastructure bank? Well, it manufactures it out of thin air; in other words, it counterfeits it. The government commands real, scarce resources with non-scarce, fiat money. It has found the Midas touch, at least for awhile. But each expansion of the money supply reduces the purchasing power of money already in circulation in addition to causing structural dislocations, such as the housing bubble. Unchecked expansion of fiat money is undermining our economy and is the greatest threat to our nation today. Bizarre spending is merely a symptom of the disease.

Patrick Barron

Only a 132 Year Payback for the All-Electric Car!

2010-09-14T11:14:00.000-07:00

There are few examples where government interference in the economy is more pervasive than energy. Now, the term energy encompasses a plethora of technologies, and each attracts the gimlet eye of Big Brother. In recent years environmental groups have been very successful in insinuating themselves into the halls of government so that today there is a revolving door between government and the environmental movement just like the revolving door between the government and other key industries, such as banking and the military-industrial complex. Government would have us believe that a new regulation is the result of some great, objective, and careful investigation. But mostly these regulations and spending programs are foisted upon us by the people who only yesterday were nothing more than lobbyists for some fervently held cause. There has been no new data, but yesterday’s lobbyist today carries the mantle of great authority and prestige as a high level government bureaucrat.

We economists call such lobbying “rent seeking” and those who engage in it as “rent seekers”. Rather than seeking the cooperation of other men in the free market, a rent seeker lobbies government to impose some special privilege. The cost of the rent seeker’s efforts is greatly reduced, because he need convince only a few elected officials or government bureaucrats rather than the entire market. His job is made all the easier by the knowledge that the elected official or government bureaucrat can grant the privilege with no cost to himself. And when a rent seeker gets a job in government itself, well, the fox is in the henhouse. Officials move billions of dollars and coerce millions of people with no responsibility whatsoever. If a program fails to achieve its grand design, no government official suffers the consequences. Furthermore, failed regulations are seldom repealed, because, despite the net burden to the economy, a few new constituents do benefit and lobby mightily to keep them in place.

A Revolving Door Lobbyist for the All-Electric Car

Such is the case as recently reported by the Associated Press in regard to a lobbyist for an all-electric car.
"Leading the Charge” glorifies Mr. David Sandalow, a U.S. Department of Energy assistant secretary and an avid advocate for the all-electric car. He has converted his Toyota Prius Hybrid into a plug-in hybrid at the cost of $9,000. Now Mr. Sandalow can recharge his car’s battery from his home electrical outlet. Unmodified hybrid cars recharge their batteries only while operating on their gasoline powered engines.

Mr. Sandalow is very proud that his daily five mile commute (a ten mile round trip) can be accomplished with a need for a gasoline refueling stop only "about once every month or two". Nevertheless his car needs to recharge after only 30 miles of travel, so he advocates that the government pursue developing a battery that will allow 100 miles between rechargings. The government itself estimates the cost of such a battery at around $33,000 per battery. (How the government knows this when no such battery yet exists was left unclear.) The article reassures us that government tax credits and stimulus funds will reduce the cost to the consumer to around $10,000 per battery. (But we Austrian economists know that government subsidies do not lower costs; they only change who pays. So it is disingenuous to say that government subsidies will lower the cost of such a battery.) Mr. Sandalow estimates that his electricity cost is equivalent to buying gasoline at $.75 per gallon.

Recoup Your Investment in Only 132 Years!

One does not need to be a Brookings Institute scholar like Mr. Sandalow, specializing in “oil dependence, electric vehicles, and climate change”, to see why no one will willingly purchase an all-electric car, much less the one million that President Obama wants on the nation’s highways in five years. (Call me cynical, but this number does not sound as if it were the result of a scientific analysis either.) First of all the cost of anything is that which is foregone by the purchase. In other words, when we buy something, we cannot spend this money on other things. That is what our cost is. In the case of Mr. Sandalow, his $9,000 investment cost him 3,000 gallons of gasoline at the current price of roughly $3 per gallon. Assuming Mr. Sandalow's Toyota Prius gets only 20 miles per gallon, he could have driven his car for 60,000 miles. Since his commute is 10 miles per day, Mr. Sandalow's conversion cost is the amount of gasoline he could have purchased to drive to work for 22.7 years. But that is not the only cost; the cost of electricity, which Mr. Sandalow estimates to be the equivalence of $.75 per gallon gasoline, has yet to be considered. This expense adds an additional $2,250 to his commute. (60,000 miles divided by 20 miles per gallon times $.75 = $2,250) Stated another way, he could have purchased another 750 gallons of gasoline and commuted to work for another 5.7 years, or 28.4 years total.

(By the way, there is nothing special about needing to fill up only once every month or two. Mr. Sandalow commutes for only 220 miles per month (10 miles per day times 22 work days per month). There is not a car in America that will not go further than that on a tank of gasoline. As coincidence would have it, my wife commutes ten miles per day to work in her SUV. She gets 16 miles per gallon in town. So she burns just shy of 14 gallons of gasoline per month commuting to work, well within her tank’s 25 gallon capacity.)

Now let’s move on to the $33,000 battery. Hold onto your hats! At $3 per gallon, Mr. Sandalow could have purchased 11,000 gallons of gasoline and driven his Toyota Prius for 220,000 miles. But, again, he would have had to buy electricity at the equivalence of $.75 per gallon, which would have cost him another $8,250. With this additional money he could have driven another 55,000 miles, or 275,000 miles total. This would allow our intrepid energy saver to drive to work for 104 years. (Of course, this cost assumes that one $33,000 battery will last for that many miles. If two batteries are required, you can double the cost and the years required to break even.)

So, by converting his car to a plug-in hybrid for $9,000, buying a yet-to-be produced 100 mile range battery for $33,000, and buying electricity for the equivalence of $.75 per gallon of gasoline, Mr. Sandalow could have purchased enough $3 per gallon gasoline to enable him to drive to work for 132 years!

Trust Only the Free Market

In conclusion, I have looked at the all-electric car calculation only from the side of the consumer. I have not touched upon the nation’s capacity to generate enough electricity to recharge those one million batteries so desired by President Obama. And one can merely speculate on whether producing this additional amount of electricity will cause more smokestack pollution than the tailpipe pollution it supposedly will prevent. Certainly this is not a debate in which Austrians would engage. As Ludwig von Mises makes clear in Human Action, chapter 8, the only basis of economic calculation is money prices via a free market. This does not mean that unlimited pollution from power plants or automobile tailpipes is permissible. Property rights and one’s health may not be abridged by another’s pollution. But it does mean that a basis already exists for deciding upon the wisdom of an all-electric car—the free market. Each man strives to improve his own condition by seeking the cooperation of others. Entrepreneurs who believe in the all-electric car are free to invest their own money and lobby investor capitalists for more. But right now the all-electric car appears to be a black hole for wasting more taxpayer money. We must disabuse ourselves of the propensity to believe that anything can be accomplished as long as government throws enough money at it. We have been down this road before with the fast breeder nuclear reactor that was supposed to produce more fuel than it consumed. Billions was wasted. We seem to be doing the same thing today with wind and solar power, too. There may be an economically rational niche for these energy technologies, but only the free market will give us the answer.

My Letter to the Philadelphia Inquirer re: the all-electric car

2010-09-05T13:24:00.000-07:00

From: patrickbarron@msn.com
To: inquirer.letters@phillynews.com
Subject: "Do the Math" to Reveal Faulty Logic behind the Electric Car
Date: Sun, 5 Sep 2010 10:10:17 -0400

Re: "Leading the Charge", Business Section for Saturday, September 4, 2010

Dear Sirs:
One need only a grade school knowledge of mathematics to understand why the electric car is not commercially feasible at this time. Take your article, Leading the Charge, about Mr. David Sandalow, a U.S. Department of Energy assistant secretary and an avid advocate for the all-electric car. He has converted his Toyota Prius into an all-electric car at the cost of $9,000. He travels five miles to work each day (a ten mile round trip) and needs to refuel only "about once every month or two", but his car needs to recharge after only 30 miles of travel. He estimates that his electricity cost is equivalent to buying gasoline at $.75 per gallon. He is enthusiastic in advocating that the government pursue developing a battery that will allow 100 miles between rechargings. The cost of such a battery is estimated by the government to be around $33,000 per battery. (Government subsidies do not lower costs; they only change who pays. So it is disingenuous to say that government subsidies will lower the cost of such a battery.)

OK, let's do the math, and one does not need to be a Brookings Institute scholar like Mr. Sandalow, specializing in energy, to see why no one will willingly purchase an all-electric car. First of all the cost of anything is that which is foregone by the purchase. In other words, when we buy something, we do not spend this money on other things. That is what our cost is. In the case of Mr. Sandalow, his $9,000 investment cost him 3,000 gallons of gasoline at the current price of roughly $3 per gallon. Assuming Mr. Sandalow's Toyota Prius gets only 20 miles per gallon, he could have driven his car for 60,000 miles. Since his commute is 10 miles per day, Mr. Sandalow's conversion cost is the amount of gasoline he could have purchased to drive to work for 22.7 years. But, Mr. Sandalow's electric cost of $.75 per gallon has yet to be considered. This expense adds an additional $2,250 to his commute. Stated another way, he could have purchased another 750 gallons of gasoline and commuted to work for another 5.7 years, or 28.4 years total.

Now lets move on to the $33,000 battery. Hold onto your hats! At $3 per gallon, Mr. Sandalow could have purchased 11,000 gallons of gasoline and driven his Toyota Prius for 220,000 miles. But, again, he would have had to buy electricity at the equivalence of $.75 per gallon, which would have cost him another $8,250. With this additional money he could have driven another 55,000 miles, or 275,000 miles total. Of course, this cost assumes that one $33,000 battery will last for that many miles.

Now, how many want to buy an all-electric car? If you raised your hand, please return your grade school diploma.

Patrick Barron

Predicting the Price Level

2010-09-01T07:51:00.000-07:00

A key disagreement between the Austrian economists and Keynesian economists is over the consequences of expanding the money supply. Keynesians claim that increasing the money supply will cause a beneficial increase in economic activity, whereas Austrians claim that increases in the money supply cause all manner of bad consequences, one of which is the lowering of the purchasing power of all money currently in circulation. The most visible sign of such loss of purchasing power is a general rise in the price level. Therefore, it is important that the Austrians answer the Keynesians who say that the Austrian monetary theory is wrong, because the government’s pump priming, trillion dollar stimulus spending and the Fed’s massive asset purchases have not caused runaway price inflation. In this essay I will answer this criticism by explaining the fundamental forces at work to explain the relationship between the money supply and the price level and the forces of government intervention that make short term price level predictions impossible.

The Quantity Theory of Money

At the foundation of our understanding of money and prices resides the quantity theory of money. At this most basic level it is axiomatic that the price level is the intersection of the quantity of goods for sale on the market and the amount of money available to purchase these goods. Prices can rise for only two reasons. One, the quantity of money rises faster than the quantity of goods for sale. Two, the quantity of goods for sale drops faster than the quantity of money. Of course the reverse is true about a falling price level. Prices can fall for only two reasons. One, the quantity of money falls faster than the quantity of goods for sale. Two, the quantity of goods rises faster than the quantity of money.

Let’s use a simple example. Assume that there is only one commodity for sale in the economy. One hundred units of this commodity are produced. The money supply consists of one thousand units of currency; we’ll use dollars as our money supply unit. The only price that will clear the market of all goods offered for sale is ten dollars per unit. ($1,000 divided by 100 units) Let us suppose that there is a production improvement that allows the market to produce two hundred units of the same commodity. Then the market-clearing price will be five dollars per unit. ($1,000 divided by 200 units) Likewise, let us assume that the money supply increases to two thousand dollars while the ability of the market to produce goods remains the same at one hundred units. Then the market-clearing price will be twenty dollars per unit. ($2,000 divided by 100 units) From this simple example one can clearly see that, if we admit that the U.S. economy produced more goods today than it did twenty years ago, then the primary reason that prices have not fallen is that the money supply increased concomitantly. Likewise, if prices are higher now than they were twenty years ago and real economic output is essentially the same, then the culprit must be an increase in the money supply. But most of us grant that the U.S. economy produces more “stuff” than twenty years ago. So if the price level is higher, the only explanation is an increase in the money supply. Had the money supply remained stable, the only way that the market could have cleared the larger supply of goods would have been for prices to fall.

(Since 1990 M2 has increased by a factor of 2.62 while nominal GNP has increased by 2.57, which leads one to the conclusion that the economy has not really grown at all in terms of real goods and services in two decades. All of the increase in GNP can be attributed to higher nominal prices caused by an increase in the money supply.)

The Three Uses of Money

The quantity theory of money is at the foundation of understanding money and prices, and it does explain long-term trends. But other factors operating within this foundational theory determine market prices in the short-term. One of those factors is an explanation of the purposes to which money can be used.

There are three and only three uses for money—to hold (hoard), spend, and invest. Of the three, only the combined size of the spend-and-invest components determines the price level; i.e., spending and investing are those components of the money supply that are brought to market to purchase goods available for sale. As the total quantity of spending and investing increase in relation to the quantity of goods and services brought to market, prices will increase. If either or both of these components decrease, prices will decrease. Importantly, if the money supply increases and all of the increase goes into hoarding, the price level will remain the same.

Suppose that the Fed printed enough paper money to give everyone in America one million dollars. Since there are 300 million Americans, the money supply would increase by 300 trillion dollars! Surely that would trigger higher prices! But let us also assume that every American took the money and placed it under his mattress. He did not spend one cent. What would happen? Well, the money supply would increase by 300 trillion dollars, but the price level would remain the same. All the new money would have gone into hoarding and would have no impact on prices.

An Ever-Changing Money Supply

So far our discussion of how money affects prices assumes that there is no intervention by an outside, coercive agent that attempts to manipulate both the total size of the money supply and the three uses of money. Unfortunately that is not the case. The government intervenes regularly and inconsistently in monetary matters, making it almost impossible to point to one or two factors that will have the most impact on prices.

The most important interventionist governmental body is the Federal Reserve Bank, our central bank, which almost always attempts to expand the money supply. It “adds liquidity”, mostly by increasing bank excess reserves. Right behind the Fed is the Treasury Department, which spends the money. Both attempt in various ways to stimulate the economy by ensuring that any increases in money go into the spending and investing buckets and not into the holding/hoarding bucket. Currently the Fed and the government want all of the money to go into the spending bucket exclusively, so that the GDP numbers will rise. You see, the government measures the size of our economy by how much we spend, so it tries to manipulate this number in a variety of ways. The “cash for clunkers” program is a case in point. If nothing else causes one to question this whole paradigm, the government’s claim that destroying still useful, but older vehicles adds to our economic well being should end such naiveté.

It is beyond the scope of this article to explain the many ways that the Fed increases excess reserves and the effect this increase can have over time on the size of the money supply. Let us just say that although the Fed has less than perfect control over the money supply in the short run (and the short run can be years long), it is the size of total reserves and the reserve requirements that establish the outside parameters of the money supply. Typically bank excess reserves are around only $2 billion or less, not a great deal in an economy the size of ours. As of July 28, 2010 bank excess reserves stood at $1.012 trillion dollars! Since we have a fractional reserve banking system, the potential exists for banks to expand our money supply by many multiples of these excess reserves.

Conflicting Government Interventions

But it gets even more complicated! While one department of the Fed tries to expand the money supply, there is another whose actions prevent it—the bank examining force. As the left hand of the Fed hands out reserves to all comers, the right hand ensures that those reserves will not be converted into money via lending. In fact the right hand of the Fed--and other bank regulatory agencies, such as the FDIC--currently exercise a deflationary impact on the money supply. These agencies are forcing banks to charge off suspect loans against capital. When a bank’s capital ratio falls below that required by bank regulations, the bank has only two choices. It can attempt to raise capital, a difficult thing to do these days, or it can reduce the size of its balance sheet by reducing loans outstanding. Loan reduction has a deflationary effect on the money supply.

Add to this structural issue the fact that there really aren’t many good loans out there, which would create new money as desired by the Fed’s left hand, and you can see why all that additional liquidity has yet to reach its potential as the basis of new money. The key word here is “yet”. The potential for a massive increase in the money supply exists, however.

The Risk of Hyperinflation

Now we get a glimpse of what has been happening. The Fed has been adding liquidity mostly in the form of excess reserves. As yet these excess reserves have not been employed by the banking system to support an increase in the money supply via new lending...the bank examining force has blocked this route. The money that has found its way into peoples’ pockets has stayed in peoples’ pockets--it has been hoarded. There is no way to predict the end to hoarding, the end to bank recapitalization, and the end to bank loan problems. But when these deflationary factors do end, American prices will rise as the hoarded money and the increased money created by increased lending flow into spending and/or investing. At that point we will enter what Ludwig von Mises called the “danger zone”. No one will wish to hold depreciating dollars; they will be spent as rapidly as possible, creating the real possibility of what Mises called the “crack-up boom”. Despite the tough talk by Fed Chairman Bernanke, the Fed will be powerless to prevent this debacle. Money will become worthless.

My Letter to the WSJ re: Russia Bans Grain Exports

2010-08-06T05:10:00.000-07:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Russia Bans Grain Exports
Date: Fri, 6 Aug 2010 08:05:33 -0400

Re: Russia Bans Grain Exports

Dear Sirs:
Russia is suffering from excessive heat and wildfires. So President Putin has banned the export of grain and has set up an emergency relief fund of $1.2 billion for farmers. These measures usually meet with approval by those unfamiliar with economics. But President Putin's arbitrary decisions overrule the wishes of millions of Russians. If Russians want more grain, they can divert their spending from less important choices. But they will have less money with which to do so, because President Putin also has confiscated it for handouts to farmers. The market is far superior in reacting to natural disasters than arbitrary government edits. Yet politicians must grandstand, so they wave their hands and pass laws to convince the public that they can make it all better. We saw this farce in spades five years ago when Hurricane Katrina hit New Orleans and the Gulf coast.

Patrick Barron

My Letter to the Financial Times re: France Preventing Outsourcing by State Industries

2010-08-06T04:37:00.000-07:00

From: patrickbarron@msn.com
To: letters.editor@ft.com
Subject: Re: France to reign in state-backed groups
Date: Thu, 5 Aug 2010 19:09:25 -0400

Re: France to rein in state-backed groups

Dear Sir:
By prohibiting state-backed companies from seeking the lowest cost and/or best quality factors of production, the French economy will revert, by just that much, to a lower production possibility frontier. This process will create an economic cancer in the French economy, because these industries will require higher and higher levels of subsidies, robbing other, more entrepreneurial businesses of life-giving capital. This is just another obstacle placed on the French economy by its Mercantilist-style governmental policies.

Patrick Barron

My Letter to the WSJ re: Geithner Pushes Tax Boost for the Wealthy

2010-08-05T07:06:00.000-07:00

From: patrickbarron@msn.com
To: wsj.ltrs@wsj.com
Subject: Geithner Pushes Tax Boost for the Wealthy
Date: Thu, 5 Aug 2010 08:20:00 -0400

Re: Geithner Pushes Tax Boost for the Wealthy

Dear Sirs:
By defending increasing taxes on the wealthy, Treasury Secretary Geithner honestly reveals three things about this administration that the American people should know. One, that this administration wants more of the peoples' money; two, that the administration knows that the only place to get it is by taking more of the money from the nation's most productive people (that's why they are paid more); and, three, that the administration believes that savings is bad for the economy. Seldom has a high administrative official been so revealing about the vast chasm that exists between those who must work for a living and those who live as parasites off the fruits of others' labor.

Patrick Barron

Understanding the Relationship between Money and the Price Level

2010-08-04T11:15:00.000-07:00

One of the conundrums of current economic life is why the increase in the money supply had not caused runaway price inflation. Furthermore, the federal government has run a one-trillion-dollar deficit this year, with promises of more for several more years, while at the same time interest rates have fallen to unprecedented low levels. Both of these phenomena seem to violate economic law. Shouldn’t more money drive up prices? And shouldn’t government’s massive borrowings cause interest rates to rise? Yet prices for most goods have remained stable and the interest rate is at historic lows. Has all economic law been shown to be fallacious?

In this essay I will explain the fundamental forces at work to explain the relationship between the money supply and the price level, which will, coincidentally, help to explain the low rate of interest. There is no violation of economic law. The seeming anomalies stem from the fundamental error of placing economics within the realm of the physical sciences and not in the realm of the social sciences. The view of economics as a physical science leads one to the conclusion that economics is mechanical and can be explained by formulas; whereas understanding economics as a social science leads one to understand that human volition cannot be predicted or reduced to mathematical formula with substantive and temporal exactness.

The Quantity Theory of Money

At the foundation of our understanding of money and prices resides the quantity theory of money. At this most basic level it is axiomatic that the price level is the intersection of the quantity of goods for sale on the market and the amount of money available to purchase these goods. Prices can rise for only two reasons. One, the quantity of money rises faster than the quantity of goods for sale. Two, the quantity of goods for sale drops faster than the quantity of money. Of course the reverse is true about a falling price level. Prices can fall for only two reasons. One, the quantity of money falls faster than the quantity of goods for sale. Two, the quantity of goods rises faster than the quantity of money.

Let’s use a simple example. Assume that there is only one commodity for sale in the economy. One hundred units of this commodity are produced. The money supply consists of one thousand units of currency; we’ll use dollars as our money supply unit. The only price that will clear the market of all goods offered for sale is ten dollars per unit. ($1,000 divided by 100 units) Let us suppose that there is a production improvement that allows the market to produce two hundred units of the same commodity. Then the market-clearing price will be five dollars per unit. ($1,000 divided by 200 units) Likewise, let us assume that the money supply increases to two thousand dollars while the ability of the market to produce goods remains the same at one hundred units. Then the market-clearing price will be twenty dollars per unit. ($2,000 divided by 100 units) From this simple example one can clearly see that, if we admit that the U.S. economy produced more goods today than it did twenty years ago, then the primary reason that prices have not fallen is that the money supply increased concomitantly. If the money supply had remained stable, the only way that the market could have cleared the supply of goods for sale would have been for prices to fall. Since most price statistics show that prices have not fallen and in fact have risen somewhat, then the only explanation is that the money supply increased.

(Although the quantity theory of money knows no definitive author and has been known for centuries, Professor George Reisman has written extensively on the subject. I recommend pages 505 and 506 of his magnum opus Capitalism for a brief explanation. Then the reader can continue elsewhere in this magnificent book for further and more detailed discussion of money, prices, and production.)

There Are Only Three Uses of Money

Yet my illustration above and recent experience seem to make a mockery of economic science. I had said that economics was not a physical science, and yet I used mathematics to illustrate my point. Is not mathematics a physical science? Furthermore, my illustration would predict that prices must rise when the money supply increases, and yet in recent months the money supply HAS increased and prices have not followed. Should we discard the quantity theory of money? No. The theory is at the foundation of understanding money and prices and it does explain long-term trends. (Since 1990 M2 has increased by a factor of 2.62 while nominal GNP has increased by 2.57, which leads one to the conclusion that the economy has not really grown at all in terms of real goods and services in two decades. All of the increase GNP can be attributed to higher nominal prices caused by an increase in the money supply.) But other factors operating within this foundational theory determine market prices in the short-term.

There are three and only three uses for money—to hold (hoard), spend, and invest. Of the three, only the size of the spend-and-invest components determine the price level; i.e., spending and investing are those components of the money supply that are brought to market to purchase goods available for sale. As the total quantity of spending and investing increase in relation to the quantity of goods and services brought to market, prices will increase. If either or both of these components decrease, prices will decrease. Furthermore, if the money supply increases—that is, the total of all three uses increases—and all of the increase goes into hoarding, the price level will remain the same.

(As is the case with the quantity theory of money, the concept that there are only three uses of money was not discovered by any single economist, but I refer the reader to chapter seven of Hans-Hermann Hoppe’s The Economics and Ethics of Private Property for an excellent discussion of the subject.)

Here is an example that I use in my Austrian economics class at the University of Iowa: Suppose that the Fed printed enough paper money to give everyone in America one million dollars. Since there are 300 million Americans, the money supply would increase by 300 trillion dollars! Surely that would trigger higher prices! But let us also assume that every American took the money and placed it under his mattress. He did not spend one cent. What would happen? Well, the money supply would increase by 300 trillion dollars, but the price level would remain the same. All the new money would have gone into hoarding and would have no impact on prices.

Now we get a glimpse of what has been happening for several years. Central banks around the world have been printing money, but most of this money has been hoarded. When governments spend money without first borrowing it from the existing monetary stock or taxing it from the citizenry, the new spending eventually goes into bank reserves. Since the banks have not increased lending, the money supply has not increased. As of July 28, 2010 bank excess reserves stood at $1.012 trillion dollars. This is a form of money hoarding. Another form of money hoarding is the buying of sovereign debt. For example, the U.S. government has sold hundreds of billions of dollars of debt to our trading partners. This happens when foreigners foolishly believe that running large trade surpluses is somehow a national advantage. But Frederic Bastiat exploded this fallacy over a century and a half ago in his essay Government. By holding its currency cheap in order to export goods, a country impoverishes itself by shipping useful goods in exchange for depreciating paper money. Since these foreign governments have no use, so far, for American products, they buy U.S. Treasury debt in order to “park” the money until some future date. This, too, is a form of hoarding, because the money does not finance spending and/or investing.

The End to Hoarding

There is no way to predict the end to hoarding, but when it comes American prices will rise: the hoarded money will flow into spending and/or investing. At some point the hoarded money will burn a hole in peoples’ pockets. The first holders of large amounts of American money will be able to exchange their dollars for goods, services, and assets at today’s prices. But as this hoarded money flows into spending and investing, prices will start to rise. Other holders of hoarded U.S. dollars will realize that nothing can stop the depreciation of the dollar, as illustrated by relentless price increases. Now we will enter what Ludwig von Mises called the “danger zone”. Even if the central banks try to stop the flow of hoarded funds into spending and investing, they will be unsuccessful because market psychology has changed. No one will wish to hold depreciating dollars; they will be spent as rapidly as possible, creating the real possibility of what Mises called the “crack-up boom”. Money becomes worthless.

Just as the psychology of today’s market mitigates holding dollars, once the floodgates have been opened the psychology of the market will reverse. In The Mystery of Banking Murray N. Rothbard explained that market psychology can change very slowly, as in America for the first two decades after World War II, or very rapidly, as in Germany after World War I, where in 1923 the world witnessed the worst crack-up boom ever to appear in a modern, industrial nation. Germany recovered only when it exchanged the old mark for the new Rentenmark at one trillion old marks for each new Rentenmark and the Reichsbank pledged to hold the supply of Rentenmarks stable. When the Reichsbank kept its word gradually the people regained confidence in their currency. But the damage had been done. The resources of the middle class had been wiped out, and, more importantly, the German peoples’ confidence in social institutions had been shattered, opening the door to the demagoguery of National Socialism.

It Can’t Happen Here

Americans are no less ruled by the iron laws of economics than are other, less fortunate peoples. Never in the history of the world has so dominant a world power engaged in such massive money debasement. The trillions of dollars held around the world represent claims upon the productive sector of the U.S. economy that simply cannot be met--at least not at today’s prices. The German hyperinflation of 1923 wiped out the German government’s war reparation debt, but at the stupendous price of ushering in the fascists. Likewise, the U.S. could technically pay its national debt by so devaluing the dollar that it effectively robs dollar holders of their good faith claims upon American resources. I would remind xenophobic Americans, who may believe that robbing foreigners is of no concern, that Americans hold dollar claims, too, and would suffer just as much, if not more.

At the present time there is no better market alternative to holding American dollars. All currencies are fiat currencies, managed by the whim of politicians buying votes with more entitlements. But forces are building to end American hegemony in monetary affairs. The Chinese, the Indians, the Arabs, and the Russians are floating rumors of issuing a gold-backed currency, and the market always rewards a better product. It would be the greatest tragedy to befall this nation, if our foolish government destroyed our currency at the height of our productive capacity, making indirect, peaceful, cooperative exchange an impossibility. It can happen here!

My Letter to National Review re: Two Excellent Book Reviews

2010-07-25T05:18:00.000-07:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Two Excellent Book Reviews
Date: Sun, 25 Jul 2010 08:15:10 -0400

Dear Sirs:
Congratulations on the two excellent book reviews in your August 2nd issue--James V. DeLong's review of The Next American Civil War by Lee Harris and Travis Kavulla's review of Prairie Republic by Jon K. Lauck. It isn't possible for most of us to read all the wonderful and important books that are written each year, so we must rely upon book reviews to distill the essence of these books, which your reviewers did so well. I was especially glad to see Mr. DeLong's defense of the Tea Party criticism of today's political class--Mr. Harris's "meritocrats". Most of the people in this class do not attain their power by merit but by rent seeking. They join the ruling class at low levels, adopt the arrogant outlook of the class and advance through the ranks through Soviet-style internal alliances. These people seldom are capable of earning a living in the private sector that comes close to their remuneration via government jobs and/or organizations that feed off of government grants. And herein lies the problem. Although the meritocrats may be a small percentage of our population, they buy the tacit support of the vast majority of Americans through their welfare and subsidy programs. For example, few Americans are willing to scrap Social Security despite the fact that it is nothing more than a government-mandated Ponzi scheme that will either fail or bankrupt the nation. Even our supposedly-independent farmers are little more than agents of the government, deriving much of their annual income through incomprehensible (to the rest of us) farm subsidy programs. The entire ethanol and wind power industries are completely dependent upon government subsidies. We are becoming a nation of pickpockets--all standing in a circle picking the pocket of the person in front of us...and who will be the first to cry "Stop"?

Patrick Barron

My Letter to National Review re: Discrimination

2010-07-22T12:30:00.000-07:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Re: Discrimination in Public Accommodations
Date: Thu, 22 Jul 2010 15:24:35 -0400

Dear Sirs:
In his letter published in the August 2nd, 2010 edition Mr. Ken Jansen states that there is a "public accommodations principle" that requires Somali taxi drivers to pick up passengers who they find to be objectionable and that "we rightfully forbid many forms of discrimination". In a rhetorical slight of hand Mr. Jansen states that these taxi drivers should "get out of the public accommodation business." But the taxi drivers are not in the public accommodation business; they are in the taxi business. They have invested significant time and money in their businesses and have every right to defend their lives and property from those whom they deem objectionable. As a more powerful example, Mr. Jansen cites laws against discrimination in hotel accommodations. What Mr. Jansen overlooks in both cases is the sanctity of property rights and that failing to offer a service or buy a service does not cause anyone harm. The fact that I buy my groceries from A instead of B does not mean that I have harmed B. Likewise, by refusing to sell a product that I own to A and not B, no matter how objectionable the reason, causes no harm to B. Real harm is physical harm; but there is no physical harm in refusing to act in a manner that "society" dictates. In a truly free society, a business owner who discriminates for reasons that society finds objectionable would find his business in decline. My wife still refuses to eat at Denny's due to media reports years ago, whether true or not, that some restaurants discriminated on the basis of race. Our modern theory of justice has been so perverted that property rights are deemed to disappear as soon as one offers a product or service for sale. This is not justice but tyranny.

Patrick Barron

REAL FINANCIAL REFORM

2010-07-17T11:08:00.000-07:00

So Congress has finally passed its much-anticipated reform of the financial system. Like all modern pieces of legislation, it supposedly fixes a problem created by the free market but it actually is a problem that government itself caused. Its main tenets are pure demagoguery and would have the public believe that bankers are brainless. For instance, it proclaims that lenders must do sufficient due diligence to satisfy regulators that the borrower can pay back the loan. Wow! Now, who in the banking industry would ever have thought of that?

There is not sufficient space in an essay of this kind to explain all the easily identifiable adverse consequences let alone the likely unintended adverse consequences of this horrible legislation. Instead I will explain what real financial reform would look like. Now if you show this essay to most politicians or government bureaucrats, make sure they are sitting down, because my reform relies entirely upon the free market. Government’s role is restricted solely to the defense of property rights.

End Fractional Reserve Banking

Fractional reserve banking is the underlying problem. By allowing banks to hold fractional reserves, rather than requiring 100% reserves, more than one person has claim upon the same asset. Since the claims are identical--both owners hold dollars that must be honored “for all debts public and private”, according to our legal tender laws--eventually the market recognizes that there are not enough resources to complete the entrepreneurial projects that were started by the initial and sustained injection of new fiduciary media. This is the nickel explanation of the boom/bust business cycle. So, number one, the government must prohibit and prosecute the fraud of fractional reserve banking. This means that the only way the money supply can grow is by way of the entrepreneurial production of more standard money; i.e., gold or silver.

Deposit Banks and Loan Banks

A common confusion that emanates from our current fractional reserve banking system, especially with the Fed as lender of last resort and the FDIC as guarantor of bank deposits, is how banks would be able to loan money at all if required to maintain 100% reserves on one’s deposit. How can they lend out the money without committing fraud? Murray N. Rothbard offers the simplest explanation in The Mystery of Banking. Divide banking into deposit banks and loan banks. Only deposit banks must maintain 100% reserves.

Here’s how I explain it to my students at the University of Iowa. Suppose that over the summer each one of them earns money and places it in the deposit bank. Since the deposit bank must keep 100% reserves, there is no way that the bank can earn money to cover its operating expenses except by charging fees for its services. After a few weeks the student has built up a balance in his deposit account that exceeds his immediate spending needs. In other words, he has accumulated enough that he can SAVE in order to spend at some later time. Therefore, he writes a check against his deposit account and gives it to a loan banker. The deposit will carry a maturity date, exactly like today’s certificates of deposit. Next the loan banker will seek worthy borrowers for our student’s money. If the student wanted to give the banker his money for a short period of time, say three months, the banker would seek borrowers who wished to finance inventory accumulation or accounts receivable financing, for example, which liquidate fairly quickly. If the student felt that he could invest his savings for a much longer period of time in order to earn a higher rate of interest, he might buy a five-year certificate of deposit. Then the banker would find borrowing needs that correspond to this time frame, perhaps financing the construction of a factory. The interest rate is the mechanism that regulates the loan market. If depositors are short term oriented, businessmen cannot finance long term projects. If the depositors are more long term oriented, then these projects may become financially sound. In Austrian economics we call the depositor’s relative orientation to the shorter or longer term as his “time preference”.

The Impossibility of a Boom/Bust Business Cycle

Notice that no matter what the depositor’s time preference he gives up his ability to spend for some defined period of time. His standard money has been moved from his deposit bank to the loan bank for further transfer to a borrower. Eventually the borrower pays back the loan and the loan bank has funds to honor the depositor’s matured time deposit. At no time was more than one person claiming the right to spend the money; therefore, there is no way that two people can claim the same physical asset. No projects will be started for which there are inadequate resources for their completion. A boom/bust business cycle is impossible under such circumstances.

The Role of the Loan Banker’s Capital Account

Notice that the depositor understands perfectly that his savings is at risk. If he did not wish to risk his savings, he could hold standard money certificates (paper claims upon real money—gold or silver—held in the banker’s vault), a book entry on the deposit banker’s records—a checking account--, or the physical gold or silver itself. As long as the government prosecutes fractional reserve banking as fraud, there is no risk that the depositor will lose his money, because he holds an audited claim upon the physical money itself. But what about the saver who deposits his money with the loan banker? What guarantee does he have that he will get his money back, with interest, when the time deposit matures? This is where the banker’s capital account and, just as importantly, his reputation for probity enter the picture.

The higher the percentage of the loan banker’s capital account to his loans outstanding, the safer are his depositors’ funds. The safest loan bank would be one in which the banker’s capital account EXCEEDS his deposit obligations. Let us assume that Mr. Rockefeller capitalizes his new loan bank with $10 million and will accept savings deposits up to only $5 million. Let us assume that Mr. Rockefeller invests his $10 million in very safe short term Treasury bills. He accepts $5 million from savers and finds borrowers who will pay enough to cover Mr. Rockefeller’s interest expense to his depositors, his operating expenses, and a small provision for future loan losses. The excess of his interest revenue, obtained from his borrowers, over these three expense categories is his profit. One can see that, even if he lost all $5 million of his depositors’ money, his capital account will cover the loss by a factor of two! As time goes by and the market realizes that Mr. Rockefeller is a good banker, who suffers very few loan losses, they will be willing to accept that the capital account may be a smaller percentage of the loans outstanding. Mr. Rockefeller may accept (and the public will decide to deposit) MORE than his capital account can cover. This is NOT fractional reserve banking, since there still is only one claim upon each dollar. But let us say that Mr. Rockefeller now takes deposits up to $20 million. Now he can suffer a loss of half of his loans and still be able to meet his depositors’ claims out of his $10 million capital account.

One can see that the interest rate offered by Mr. Rockefeller and accepted by his depositors will be influenced by how safe is Mr. Rockefeller’s bank, as exemplified by his capital account and his history of sound lending. The market will have room for many lenders, each with varying percentages of capital to loans and different histories of banking success. Poorly capitalized loan banks with bad loan histories will fail to attract depositors and will be taken over by better bankers. Since there is nothing to trigger the destructive boom/bust business cycle, bad loans will be very few and loan banking will be safer than our current FDIC insured system, in which moral hazard has been institutionalized by bailouts of failed Go-Go, risky bankers.

This is not to say that a bank could not suffer loan losses in excess of its capital account, but there would be no systematic reason for widespread bank failures, as is the case now with inflationary fractional reserve banking. The unprofitable bank would attempt to liquidate before running its capital account dry; therefore, it probably would still meet its depositors’ matured time deposit claims. In other words, loan bankers might go out of business but most likely they would pay off their depositors out of what remained of their capital accounts before closing their doors. They would act out of simple self-interest to preserve as much of their capital as possible.

The only role for government in such a free market banking system is to ensure that deposit banks do not violate their requirement to keep 100% reserves. Government would have no role whatsoever in regulating or examining the loan banks. The army of regulators armed with thousands of pages of regulations would not be needed…the free market would regulate banking the same way it regulates the availability and price of any other product. The era of the boom/bust business cycle would be a thing of the past. The only barrier to this simple, common sense, free market system is the hubris of government that it can regulate banking better than the unhampered forces of the free market.

My Letter to National Review re: State Capitalism

2010-07-14T08:17:00.000-07:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: State Capitalism
Date: Wed, 14 Jul 2010 11:10:40 -0400

Re: Perils of State Capitalism

Dear Sirs:
In Mr. Gordon G. Chang's excellent review of The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer, Mr. Chang points out that state capitalism weakens markets.

"They (the despots and dictators) can, for instance, buy off elites by granting them monopolies and placate populations with the prosperity this system can generate. By bending markets, however, rulers ultimately make them less efficient. Over time, state-capitalist systems erode."

A better explanation is that by "bending markets" the authoritarian governments consumer capital or, at a minimum, prevent its accumulation even to the small extent needed to maintain the current capital base. For awhile an economy can display the appearance of prosperity as capital is spent on bailing out unprofitable businesses and sustaining those industries, like housing, that are already over-built. This is the destructive Keynesian prescription adopted by all the world's leading governments right now in their misguided attempt to "stimulate" the economy out of recession. But economies cannot be stimulated out of recession; they must liquidate the previous malinvestment and replenish the capital base upon which to build a new, true recovery. This requires savings--so spending must be reduced, not increased. Reduced spending will result in lower prices, the dreaded "deflation" that governments under the spell of Keynes vow to fight. But deflation is part of the cure--the inflationary bubble has burst and good riddance to it. The world's economies will not recover until governments cease their fruitless interventions.

Patrick Barron

My Letter to National Review re: The Real Cause of the Business Cycle

2010-07-09T10:31:00.000-07:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: Roubini's Reputation and the Real Cause of the Business Cycle
Date: Fri, 9 Jul 2010 13:27:00 -0400

Re: The Real Cause of the Business Cycle

Dear Sirs:
In his review of "Crisis Economics" by Nouriel Roubini and Stephen Mihm, Mr. David M. Smick calls Mr. Roubini a "media superstar" for his 2006 claim that the U.S. was in a housing bubble. If one goes to Mises.com and searches on "housing bubble", one will find over 1,200 entries, many of which go back to 2003. Austrian economists have been right about this crisis from the beginning, because they understand the true nature of the business cycle, so ably explained by Professor Gary Wolfram elsewhere in the same NR issue. (See "Your Money Back") According to Mr. Smick's review, Mr. Roubini claims that "Crises--unsustainable booms...are hard-wired into the capitalist genome." Wrong. The boom/bust business cycle is caused by an extension of bank credit not backed by real savings. Banks are tempted to extend credit in an unsustainable manner due to their right to engage in fractional reserve banking. This is the primary source of the boom. In the nineteenth century two crucial court cases in England gave banks unprecedented legal protections. British courts ruled that bank demand deposits were loans and not bailments. In other words, the banker was not required to keep standard money in his vaults equal to the amount of money entrusted to him by his depositors. Unlike a grain elevator operator, for example, the banker could lend out his customers' demand deposits for his own benefit, meaning that there can be two or more claims upon the same money. Of course this is the very definition of fraud, but the British courts ruled otherwise, and the American courts followed British precedence. Although fractional reserve banking may be legal it is not immune to the law of economics, which punish bankers for making loans with demand deposits and not savings deposits. As Michael McKay explains in his wonderful little book, "Secrets About Money that Put You at Risk", it is as if the bank creates multiple owners of the same horse, who may have no conflict until they decide to have a horse race. The real problem is one of a violation of property rights, which is not just a legal problem but also an economic one. Expansion of the money supply not backed by a commodity creates claims upon existing property for which no one has given consideration. It is theft through the banking system, and eventually it becomes apparent that there are not enough resources to honor all the claims. This is the beginning of the bust phase, and attempts to keep the bubble inflated are futile and cause even more damage. Therefore, don't expect a recovery until the government stops manufacturing claims via its inflation machine par excellence; i. e., the Fed.

Patrick Barron

My Letter to National Review re: $130 trillion debt

2010-07-08T15:31:00.001-07:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: $130 trilliion debt
Date: Thu, 8 Jul 2010 18:22:47 -0400

Re: The Other National Debt by Kevin D. Williamson

Dear Sirs:
Kudos to Kevin D. Williamson and NR for "telling it like it is", in the immortal words of Howard Cosell, about the REAL state of our nation's finances. It is clear that the national debt cannot be paid in anywhere near the purchasing power of today's dollar. To try to do so would require the imposition of such high taxes that the productive sector of the country would revolt. To so debase the dollar so as to pay the debt in nominal terms only would be to create hyperinflation. Mr. Williamson gives a hint to our salvation, though. The federal government has NO constitutional authority to run a pension system or a national healthcare system. Both are unjust, and, as is the case whenever an injustice is recognized, both should be terminated immediately. Either that or national economic chaos. I choose the former.

Patrick Barron

My Letter to National Review re: The Sources of the Crisis

2010-07-08T05:33:00.000-07:00

From: patrickbarron@msn.com
To: letters@nationalreview.com
Subject: The Sources of the Crisis
Date: Thu, 8 Jul 2010 08:30:39 -0400

Dear Sirs:
A grad school professor on mine many moons ago said that a good book review makes one believe that he does not need to read the book. That is my conclusion after reading John Steele Gordon's excellent review of Judge Richard A. Posner's new book on the current financial crisis, The Crisis of Capitalist Democracy. Although I will not read the book, Mr. Gordon's recap of Judge Posner's analysis and recommendations lead me to the conclusion that Judge Posner's prescription is just more of the same failed regulatory tinkering that has brought us to the brink of financial collapse. The very fact that Judge Posner has "high praise for John Maynard Keynes" is enough for me. Combine that with the judge's recommendation that the U.S. establish a "well-funded inquiry into the causes of the crisis...conducted by an elite presidential commission" and my gut feeling is confirmed. (Gee, I wonder who could possibly be persuaded to head such a "well-funded" commission...let's see...oh, how about Judge Posner!) This is ironic since the judge himself states in the first line of his book that the crisis was caused by the Fed. I'll save the overly burdened U.S. taxpayer some more boondoggle commission money and give my prescription in one word--FREEDOM. The U.S. needs economic freedom. This means ending the Fed. The only role for the government would be to prevent fraud, something that it now PROTECTS in its devil's bargain with the Fed by allowing it to print as much fiat paper money as it deems necessary...and, oh, how it deems it necessary! In a free economic market place no one would accept fiat paper money. The market would accept only commodity money or commodity money substitutes (certificates backed 100% by commodity money). The government's sole responsibility--charged to it by the Constitution, by the way--would be to prosecute as fraudulent any bank that issued certificates in excess of its commodity holdings. Furthermore, rather than separate commercial banking and investment banking--the Depression Era Glass-Steagall law so loved by Judge Posner--the government should insure the separation of deposit banking and loan banking. For a simple and yet powerful explanation of this sound banking practice, see Murray N. Rothbard's The Mystery of Banking. It's all there. We need look no further and require nothing more than to regain our freedom and charge our government with protecting our property.

Patrick Barron

My Letter to the NY Times re: Krugman's "Myths of Austerity"

2010-07-06T18:05:00.000-07:00

From: patrickbarron@msn.com
To: letters@nytimes.com
Subject: Letter re: Myths of Austerity
Date: Mon, 5 Jul 2010 09:32:55 -0400

Re: Myths of Austerity by Paul Krugman

Dear Sirs:
In his attempt to belittle those G-20 nations who spurn more wasteful stimulus spending, Mr. Paul Krugman resorts simply to name-calling and labeling (fantasy, prejudices, sheer speculation), with no substantive empirical or theoretical analysis. His evidence that more stimulus spending is the "...safest bet in a stumbling economy..." is a vague quote by the director of the Congressional Budget Office that "There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential." Well, now, that is a real ringing endorsement for more paper money stimulus if ever I heard one. And equating Ireland as an example of a failed attempt at austerity is hardly convincing. It is clear that Mr. Krugman is determined to pump more paper money stimulus into the all-ready addicted U.S. economy until it collapses, at which time he undoubtedly will claim that even this was not enough.

Patrick Barron