Three questions for Andrew Haldane, chief economist for the Bank of England

Re: From ZIRP TO NIRP by Alasdair Macleod

1. What exactly is wrong with price deflation?

2. In a world of increasing productivity, are not lower prices inevitable?

3. Are not lower prices beneficial, in that all society enjoys an increasing standard of living on the same money income?

The problem with the "real bills" doctrine

Re: Free banking vs.the real bills doctrine

I wrote the letter below to Don Boudreaux of Cafe Hayek. Under the real bills doctrine, banks would be allowed to create demand deposits backed by promissory notes and not reserves. Those who adhere to this doctrine, such as Mr. White, author of the above essay, believe that money backed by "real bills" is superior to money backed only fractionally by reserves. I make the point that both fractional reserve banking and real bills adherents are advocates of the same fraud: i.e., that bankers' demand deposits are NOT backed by reserves but by debt that may or may not be collectible. PB

Dear Don,

What free banking advocates such as Mr. White are really saying is that a free banker operating under the real-bills doctrine must be careful not to perpetrate too much fraud and catch the attention of the public, who will make a run upon his bank. The point is not what the banker wants but what the recipient of the banker's supposedly demand note believes that he has. A banker's demand note promises the holder that it may be exchanged for real reserves that constitute a final claim upon money; i.e., gold, silver, or even Federal Reserve Notes. This is my main problem with those who claim that they would not be alarmed if their banker engaged modestly in fractional reserve banking. The account holder is passing a check to someone who has no way of knowing that he is receiving a check that is backed only fractionally by reserves. In other words, he is the victim of fraud. Under Rothbard's two bank system--the Deposit Bank and the Loan Bank--only the Loan banker would purchase commercial credits, because there is the possibility that the commercial credit may fail.

Respectfully,

Patrick Barron

My letter to the Philadelphia Inquirer re: the crude oil export ban

Re: Debate swirls over lifting crude-oil export ban

Dear Sirs:

The answer to your headline question on the front of Sunday's business section is self-evident. The crude oil export ban cannot be justified on any economic or moral basis. It is an economic myth that there can be rational economic calculation under socialism and that private property may be violated to achieve a more important common good. First the economic calculation myth. Over one hundred years ago in Economic Calculation in the Socialist Commonwealth, Ludwig von Mises proved that private property is required for rational economic decision-making. Only owners of private property can hold rational preferences of how best to manage resources. One hardly needs to point out that appointed bureaucrats and elected officials are NOT owners of the property that they presumptuously deign to control for some more altruist purpose. Without true preferences derived from ownership, the titular managers of resources would  not know what to produce, how much to produce, what quality to produce, or what factors to use in the production process. As for the moral basis, in section 27 of his Second Treatise of Civil Government, John Locke explained that property accrues legally to "he who hath mixed his labor with, and joined to it something that is his own, and therefore makes it his property." Austrian economists have labelled this the homesteading principle. Thereafter homesteaded property may be transferred only via social cooperation under the free market. All else is theft.

The owners, workers, and paid lobbyists of those American refineries who wish to maintain the crude oil export ban seek to employ the police power of the state to prevent consumers from improving their standard of living by purchasing similar goods from foreigners at lower prices. The weakness and vapidity of their argument is evident in their admission that American oil can be transported to foreign refineries, repatriated in the form of refined products, and still sold at lower prices on the US  market. Why must Americans be held hostage to inefficient, high cost domestic producers?

My letter to the NY Times re: New icebreakers to the Arctic for what purpose?

Re: Obama Calls for More Coast Guard Icebreakers to Gain Foothold in Arctic

Dear Sirs:

President Obama's call for Congress to fund new icebreakers for the Arctic is troubling. Whereas, most nations of the world see the receding icecap as an opportunity to gain cheaper access to previously inaccessible natural resources and/or a shorter path to markets, President Obama worries about endangering the environment. In other words, most of nations want to build a better world for mankind, whereas President Obama wants to prevent anyone from doing so. A true statesman would see that the real threat to the Arctic comes from the lack of an international agreement over who may claim what resources. The Austrian economists have long had the answer. Property rights attach to those who "mix their labor" with the previously unused resource. It does not matter to the people of the world whether an American, a Russian, or an international consortium obtains title to resources that they secure as long as these resources are brought to market.

The implications of a reduction of Chinese holdings of US government debt

Dear Readers,

Below is my response to a reader of my blog, who asked about the implications of China reducing its holdings of US treasury debt.

Pat Barron

Dear Lawrence,

I think that in the simplest terms, China is exiting the market for US Treasuries, which means that the US government must offer a larger yield in order to entice buyers who are still in the market to make up for the loss of Chinese demand. That means that US interest rates would have to rise, because the T Bill is the base upon which all other rates are set. Why would someone buy a corporate bond at a lower yield when he can buy a T Bill, which has less risk, for the same or even higher yield? Alternatively, the Fed could monetize the debt, which would cause US prices to rise (eventually) due to the increase in the money supply.

I have contended for some time that this event would lead to a crisis. When the world market eschews T Bills, the government is left with difficult choices. It can raise taxes to pay off the debt that it can't roll over. It can cut spending to decrease the amount of debt that is required to fund all the government's programs. It can increase interest rates to suck more money out of the private economy and into government bonds. Or it can monetize the whole thing. Of course, it could do a combination of all these things. My least favorite option is that the government monetizes the debt; i. e., prints more money. My favorite option is for government to drastically reduce its expenditures, but this is probably the most politically difficult option.

Pat

My letter to the Financial Times, London re: The FT sides with counterfeiters and confiscators

Re: The case for retiring another barbarous relic

Dear Sirs:

I was appalled at your supposed "case" for eliminating cash, which you yourselves describe as the peoples' "go-to safe asset". And what IS your case?

One, "cash...limits the central banks' ability to stimulate a depressed economy." Really? Although I am not in favor of debasing money as a path to prosperity, I see no limit to the central banks' ability to hit the "enter" key on their computer screens in order to manufacture out of thin air as much money as they dare. Two, banks cannot impose a negative interest rate--what we common folk call stealing--on the cash in one's pocket. Your preposterous goobledygook that a negative interest rate is required by central banks in order to have sufficient "ammunition" when tightening from a "lower band" is as vacuous a statement, although often heard, that one can imagine. Three, that unlike electronic money, cash cannot be tracked...to which I answer "so what?" and "thank God for that!" Four, that former chief economist of the International Monetary Fund, Kenneth Rogoff, thinks eliminating cash is a wonderful idea. Let's set the record straight. The IMF gets its money from sovereign states, who tax their people against their will in order to give the money to the IMF to squander and give bad advice around the world. Any self-respecting economist would try to hide the fact that he had anything to do with such an institution; therefore, I find little comfort in Mr. Rogoff's endorsement of the cash-confiscation scheme. Four, the state can more easily levy a Value added tax in order to make tax collection easy. Oh, how nice! Here...let me put my cash in the bank in order to make it easier for government to tax it away. Ah, but then you conclude your support of the cashless society with the caveat that we minions might, just might, be allowed to carry some cash...but at a cost. Our cash could carry an expiration date, for example. As you state: "The benefits of cash are significant--but they need not be offered for free." A more Orwellian statement would be hard to find.

My letter to The Times, London re: Legal tender laws protect unsound money

Dear Sirs:

I will not take the time required to refute point-by-point Mr. Ed Conway's latest attack upon a gold-backed currency. It is obvious that he is completely ignorant of monetary theory and history. Rather, I will ask Mr. Conway why governments must erect legal tenders laws around their fiat currencies, using the police power of the state to force citizens to use their currencies? The answer is obvious: were it not for legal tender laws, sounder private monies would drive governments' fiat monies out of the market. I do not advocate a gold-backed, government currency, because I know that all governments will suspend specie redemption for any myriad of reasons, all of which can be placed into two general categories: fund wars or buy votes with welfare payments. Only private monies can be trusted, because they would be subject to the rule of law. Money issuers who did not surrender specie upon demand would be declared bankrupt and thrown in jail. When governments do the same thing, they are lionized as patriots and philanthropists of the public purse. I repeat--if Mr. Conway believes in the superiority of government issued fiat money, then abolishing legal tender laws would have no effect upon the pubic's demand to use government money. I dare Mr. Conway to recommend such a policy.