Friday, January 30, 2015

I beg to differ...

Re: CAT CEO says strong dollar bad for US economy

Here come US exporters, right on schedule, complaining that a strong national currency is bad for them and for the US economy. Not so. When a nation debases its currency in order to make its exports cheaper to foreigners, the result is not an increase in wealth but a transfer of wealth within a monopolized currency area. In the short run exporters are able to secure resources at current prices; however, the necessary increase in the nation's money supply causes prices to rise. Eventually the exporters' international market advantage vanishes, creating calls for another round of currency debasement. This is a sure path to capital destruction and overall impoverishment. No nation can make others subsidize its economy and increase its wealth by debasing its own currency.

Monday, January 26, 2015

Why the welfare state grows, and grows, and grows...

Re: George Will on the mushrooming welfare state

Columnist George Will puts recent research into the adverse consequences of the welfare state into words that we all can understand. However, I do not think that he gets to the heart of the problem. The welfare state grows because there is no clear line (and there can be no clear line) between those who are supposedly "entitled" to benefits and those who are not. There will always be those who fall just fractionally outside the needs-based entitlement. So the entitlement line gradually gets moved to include more and more recipients. The real issue is how state welfare can be justified in a society based on the rule of law that ensures individual liberty. Welfare entitlements are a "taking" from Peter to give to Paul at the point of a supposedly legal gun. But how is state confiscation any different or more just than private robbery? That amorphous entity called the state decides that it will shirk its duty to protect our property and do exactly the opposite. No majority can make such an unjust act legal through the legislative process.

Saturday, January 24, 2015

My letter to the NY Times re: Not really a favorable market reaction

Re: Stimulus for Eurozone, but it may be too little or too late

Dear Sirs:
Your analysis of the likely effect of the European Central Bank's proposed massive quantitative easing program is full of economic fallacies that, unfortunately, masquerade as conventional wisdom. One often stated fallacy is your statement that "...the initial market reaction was favorable." The nature of the ECB intervention is to buy assets above their current market prices with money that it will create out of thin air. Of course market prices will rise! But one can hardly characterize such a market response as favorable.

Get ready for negative interest rates in the US

Re: Dollar rise puts Fed under pressure

I predict that the Fed will start charging negative interest rates on bank reserve accounts, which will ripple through the markets and result in negative interest rates on savings at banks. I make this prediction only because it is the logical action of the Keynesian managers of our economy and monetary policy. Our exporters will scream that they can't sell goods overseas, due to the stronger dollar. So, what is the Fed's option? Follow the lead of Switzerland and Denmark and impose negative interest rates in order to drive down the foreign exchange rate of the dollar.

It is the final tool in the war on savings and wealth in order to spur the Keynesian goal of increasing "aggregate demand". If savers won't spend their money, the government will take it from them.

Friday, January 16, 2015

Switzerland Leaves the European Monetary Union

Oh. You didn't know that Switzerland was part of the European Monetary Union? You thought that the Swiss used their own currency, the Swiss franc? In a definitional sense only, you are correct. Within its monopolized currency area, the political boundaries of Switzerland, the Swiss franc is legal tender. But for approximately three years the Swiss National Bank has maintained a Swiss franc to euro ratio of 1.2 francs per euro. The usual suspects, exporters, were the driving political force behind the SNB's policy. They feared fewer sales to eurozone countries should the franc cost more in euro terms. This policy made the European Central Bank (ECB) the determinant of monetary policy in Switzerland and relegated the Swiss National Bank to the mechanical role of currency board. When the Swiss franc started to appreciate against the euro, meaning that buyers were willing to accept fewer than 1.2 francs per euro, the Swiss National Bank printed francs and bought euros. Over the last three years as demand for Swiss francs from euro holders increased, the SNB's balance sheet exploded with new euro reserves. However, as the world now knows, in a surprise move the SNB abandoned its currency peg policy. Today the franc exchanges approximately one for one with the euro, meaning that the franc has appreciated by approximately twenty percent against the euro.

As far as I know the SNB has made no official announcement of the reason for its surprise move. I suspect that the Swiss people had made themselves heard that they feared inflation from the ECB's imminent quantitative easing policy.  The Swiss gold referendum on November 30 would have required their central bank to hold a fixed percent of reserves in the form of gold. It was defeated only after the major political parties and the SNB amounted a concerted anti-referendum blitz. Still in control of their own currency, it was a relatively simple matter for Switzerland, in effect,  to veto the ECB's proposed policy by abandoning the currency peg. This shows the rest of Europe that at least one nation does not fear returning to full control of its currency nor does it fear the consequences of a temporary drop in exports. (The drop will be temporary, because Swiss import prices will fall and eurozone users will be awash with depreciated euros and willing to pay more for the Swiss franc.)

The lesson is clear. If Switzerland can retake control of its money, so can any eurozone nation. The process may take longer, as the country reissues is own currency and re-denominates its bank accounts in local currency terms, but it can be done. Already there are reports that the Danish central bank is contemplating abandoning its currency peg of approximately 7.5 krone per euro.  If the sky does not fall on Switzerland and Denmark, other nations may follow. Does anyone know how to say deutsche mark?

Wednesday, January 14, 2015

From the "You can't make this stuff up" department

From today's Open Europe news summary:

Irish Finance Minister Michael Noonan said yesterday that he would not dismiss the idea of a European conference to discuss a possible debt write-down for crisis-hit Eurozone countries such as Greece, Ireland and Spain.

So, the Irish Finance Minister just might be persuaded to allow investors to write down his own country's debt! Did he say this with a straight face?

Tuesday, January 13, 2015

Maastricht Treaty? We don't need no stinkin' Maastricht Treaty!

From today's Open Europe news summary:

Bank of France Governor Christian Noyer told Handelsblatt that, if the ECB were to buy government bonds, he would favour “a cap” in terms of percentage of the market which the ECB can buy.

Le Figaro reports that the European Commission will today unveil a communication detailing the “exceptional circumstances” under which Eurozone countries can be granted more flexibility on the achievement of their deficit and debt reduction targets.

Both of these actions--European Central Bank purchases of sovereign debt and allowing some countries to exceed their national deficit limits--are violations of the Maastricht Treaty, supposedly the founding legal basis of the European Union and the European Monetary Union (eurozone). This should be a warning to all nations who foolishly believe that they can give up their sovereignty to supranational organizations that will abide by their founding law. These supranational governments will behave no differently than national governments; i.e., they will take whatever power they can regardless of the law. But unlike the potential remedies to restrain those who violate national constitutions, supranational governments that violate their constitutions are restrained only by threats that members will leave. The EU and EMU governing boards act with impunity because they believe that lingering war guilt will keep Germany as a member even though it is against German national interest.