Posts
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
Wednesday, August 17, 2011
Saturday, August 6, 2011
Tell the Truth and Risk Jail!
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!
"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!
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.
"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.
Monday, August 1, 2011
Why Were There Boom/Bust Business Cycles During the Gold Standard Era?
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.
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.
Monday, July 18, 2011
Corn, Corn Everywhere But Not an Ear to Eat
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.
Tuesday, July 12, 2011
My letter to the Wall Street Journal re: How to Cure the Housing Slump
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
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
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.
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.
Subscribe to:
Posts (Atom)