Thursday, April 17, 2014

A typical EU solution

From today's Open Europe news summary:

Meanwhile, French Prime Minister Manuel Valls yesterday unveiled his plan to cut public deficit by €50bn between 2015 and 2017. The new leader of the party, Jean-Christophe Cambad√©lis, said this morning, “We need to change the Maastricht criteria [EU deficit and debt rules], which were elaborated before the crisis”, otherwise the French government’s planned budget cuts “will not be sufficient”. Separately, Martin Schulz MEP, President of the European Parliament, told Handelsblatt that, “We set the deficit criteria in the stability pact 22 years ago, and it must now adapt to the political reality.”
Les Echos: Montebourg La Tribune Le Figaro Le Figaro 2 Le Figaro 3 Le Monde Handelsblatt EUobserver EUobserver 2

This is a typical EU solution--if a country can't satisfy the rule, change the rule.  Problem solved.

Monday, April 14, 2014

More Intimations by the European Central Bank of Currency Confiscation

From today's Open Europe news summary:
Draghi suggests that the ECB could ease policy further to tackle strong euro
Speaking at the spring meetings of the IMF and World Bank over the weekend, ECB President Mario Draghi said that the further strengthening of the euro “requires further monetary stimulus”, with ECB officials suggesting that a negative deposit rate would be the most likely option if action was taken.
Reuters reports that Austrian Central Bank Governor Ewald Nowotny has suggested any action is unlikely before June, when the next round of inflation forecasts will be released.

Separately, in an interview with
Le Figaro
, French Central Bank Governor Christian Noyer notes that the euro is “abnormally strong”, and argues, “The ECB’s monetary policy does not at all explain the euro’s current level…That said, the stronger the euro, the more accommodating the monetary policy needs to be.”
FT WSJ FT 2 FT 3 FT 4 Reuters Handelsblatt FAZ Le Figaro: Noyer La Tribune

The term "negative interest rates" means that your deposit will be charged rather than earn interest.  The next step will be to restrict the amount of paper notes that people can hold, because that would be one way people could protect their hard-earned savings.  When that doesn't meet the ECB's goals, the notes will be replaced with ones that carry expiration dates.  It has happened elsewhere in the world and it will happen in Europe, if these inflationist policies are not abandoned.

The statement by M. Noyer that the euro is "abnormally strong" is preposterous.  How does he know the proper exchange rate of the euro?  An exchange rate today is a market phenomenon.  In the past it was a legal promise by the central bank to exchange currency for gold at a certain ratio and vice versa.  This made all currencies de facto substitutes for gold, and the world enjoyed FIXED exchange rates.

Saturday, April 12, 2014

The Source of Economic Progress--the Primacy of the Individual

Members of an Austrian school of economics forum to which I belong have been discussing the source of economic progress.  It began with the usual elements of capital, technological development, and managerial expertise before getting more philosophical when a member suggested the acceptance of rationality in all things.  I felt this was not a proper answer, because the definition of "rationality" is itself debatable and can be used by political authorities to suppress unpopular ideas.  For example, in the Soviet Union to question the inevitable victory of communism and the ultimate transformation of man's nature to communist man would land one in an insane asylum.  If you didn't believe all that communist propaganda, you must be crazy!  I prefer Murray N. Rothbard's definition of rationality as believing that one's actions will bring about the result desired.  Admittedly this is a narrow definition of the term and more suited to economics rather than psychology, but the Austrians are not big admirers of psychology anyway.  Rothbard's definition of rationality admits the possibility that rational men might disagree on the proper action to take to bring about the same goal, such as whether or not price fixing will bring about universal prosperity.  Men who believe in price fixing are not irrational according to Rothbard; they are simply wrong and must be shown the error of their ways.

In my search for the answer to the question of the foundation of economic progress, I used Mises' regression theory for my thought experiment.  I started with the assumption that a completely unhampered free market produces the most prosperity.  (If you do not agree, then stop right here.)  The primary elements of such an economy would be capital accumulation, defense of property rights, and the rule of law.  It would not include collectivism in an form, which elevates the group--rarely defined and a moving target when it is defined--above the individual.  But collectivism sounds so enticing to many, so something must have happened to elevate the individual over the group.  We are now on the right track, looking for some seminal event or idea that elevated the primacy of the individual, rather than some group, to position numero uno.

Man formed in the image of God

Immanuel Kant said that the recognition of man as an end and not as a means was the categorical imperative and that it could be discovered by reason alone.  But what is the origin of reason?  Enter religion.  Kant claimed that the existence of reason itself is an intimation of the existence of God.  All of ethics and, as it happens, all of economic progress flows from this one maxim.  Christianity teaches that man is formed in the image of God.  The implications of this have proven to be tremendous for economic progress.  It has taken a long time, and the process can be reversed, which it may be doing right now, as Christianity has been abandoned by huge numbers in the West.  Nevertheless, here's the argument: If man is formed in the image of God, then all individual men are equal to one another in their rights, which derive from God and cannot be derived from other men.  In the eyes of God, the lowest person on the social scale is equal in his God-given rights to the highest and most exalted anywhere in the world, whether he be captain of industry, king, or president.  The concept of the rule of law emerged in the West to protect the individual's natural rights by giving him equal protection under the law; i.e., equal with all other men, no matter how exalted.  Other protections of the individual followed, such as the right to government by representatives elected by the people themselves and trial by a jury of one's peers.  Magna Carta is the best known example of this statement, for the king was forced to admit that all men had rights that could not be taken away, regardless of social rank.

The political liberation of man that stems from accepting that he is made in the image of God has gradually been extended to include economic liberation.  In the West it gradually came to be accepted that economic rights were protected under the banner of political rights.  This makes sense, since taking away a man's economic rights cannot be justified without taking away his political rights.  In communist Cuba all legal jobs are owned and controlled by the state.  One of the ways the Cuban tyrants keep people in line is to place them on an economic blacklist, prohibiting their employment anywhere in the country.  Since the state owns all businesses, such a penalty can be a death sentence.  There is no way such an ostracized person can earn a living; he must become either a beggar who lives off the handouts of others or he starves.

It is no wonder that most communist regimes forbid organized religion.  They must deny that man has any God-given rights, only state-given rights, which, of course, may be taken away at any time and for any reason, even for no reason at all but just to terrorize the populace into fearful submission.  Some totalitarian regimes recognize state-controlled or state-authorized religion, in sometimes elevating the tyrant to god-like status.  This is not real religion.  The state uses such religions for purposes of internal control, outlets for their propaganda.  The pharaoh was a god and the people were treated as beasts of burden.  The "official" religions of the Middle Ages come to mind, too, proclaiming that the king was placed on his throne by "divine right" and to oppose him was to oppose God .  In modern times Shinto Japan elevated the emperor to god-like status, which the Allies forced the Japanese to abandon at the end of the war.  Today communist North Korea requires its population to worship the Kim family, and Red China forces Roman Catholics to take orders from its own Chinese Patriotic Catholic Association. These state religions do not elevate man to enjoying equal political and economic rights; they are used as a tool of the state to set up a privileged, parasitic class, whether one calls them aristocracy or vanguards of the proletariat.


In summary, in the West men believed that they were formed in the image of God, that they were equal at all other men as a result, that their rights were "natural rights" and not given to them by a king with divine rights, and that these natural rights included economic rights.  It was an ethic of individual rather than group rights, so man had a right to the product of his labor and did not have to surrender it to a collective.  This gave rise to capital formation by ordinary men, whose property was protected by the rule of law, which also was derived from natural law and was affirmed over the centuries by such documents as Magna Carta.  Immanuel Kant explained in philosophical terms what had been increasingly accepted for fifteen hundred years by all strata of society, including the political elite; i.e., the primacy of the individual, who is formed in the image of God.  This view led eventually to what Ludwig von Mises called modern economics, which led to the industrial revolution in the first country, England, that liberated the individual politically and economically.  Whether the West and the rest of the world can remain economically liberated in the absence of a belief that man is made in God's image remains to be seen.  I have my doubts.

My new get-rich-quick scheme

David Stockman on the Draghi Put

The ECB can paper over the disaster that is the EU only so long.  Eventually there is no hiding the fact that production is down and what is produced is not what is demanded by the market anyway.

My new get rich quick scheme is to form my own country of Barrontonia, apply for membership in the EU, and float a few billion euros worth of Barrontonian bonds, guaranteed by Draghi's ECB.  They will sell...there is no doubt...and at a good price.  Of course, I do not intend to repay the bonds, but Keynesian economics assures us that this is not necessary.  Printing the money and spending it is what is important.  It is a win-win situation.

Thursday, April 10, 2014

The real source of our economic problems--government regulation

Re: U.S. Gas Tantalizes Europe, but It's Not a Quick Fix

Multiple approvals from regulatory bodies has U.S. business tied in knots.  This story is typical. The U.S. has natural gas that it wants to sell and that foreign users want to buy, but multiple regulatory bodies have yet to give their approval to build the necessary facilities and environmental groups oppose most projects.  The same is true of American coal.  The U.S. has coal that it wants to sell and that foreign users want to buy. The U.S. has the means to extract the coal and the railroad capacity to get it to the coast.  But environmentalists have stopped all new coal loading facilities and expansions of existing ones.  It is clear that our own government is the cause of our economic problems.  It creates bureaucracies whose only jobs are to find reasons not to do something; it gives veto power to environmental groups with no standing; and it treats the environment as if it were an individual rather than a resource owned by someone with rights to use it.  Our government is destroying our country and our liberty.

Wednesday, April 9, 2014

My letter to the NY Times re: Ignoring the Elephant in the Room

Re: Cities Advance Their Fight Against Rising Inequality

Dear Sirs:
The latest assault on economic science is led by the usual suspects--politicians, labor unions, intellectuals, and not-for-profit advocacy groups--who clamor for raising Seattle's minimum wage to fifteen dollars an hour.  The irrefutable economic law of the marginal utility of labor explains that no wage can be paid above the value of one's contribution to the business. To do so will destroy capital and lead to business failure.  To avoid this outcome, firms will, to the best of their ability, replace workers with machines.  If they cannot, they will go out of business.  Of course, no where in your report is this elephant in the room even discussed as a possibility.

The Greatest Economic Myth in the World Today

From today's Open Europe news summary:

New French PM calls for greater ECB action and criticises strong euro French Prime Minister Manuel Valls yesterday won a vote of confidence in the lower house of the French parliament by 306 to 239. In his keynote speech, Valls stressed that the exchange rate of the euro is “too high”, and that “the ECB carries out a less expansionary monetary policy than its American, English and Japanese counterparts”. He also announced €50bn of budget savings between 2015 and 2017, and a series of tax cuts aimed at reducing labour costs by €30bn by 2016.
FT WSJ Irish Times Reuters Independent Le Figaro Les Echos Le Monde Le Figaro 2 Libération
Monsieur Valls expresses his belief in the greatest economic myth in the world today--that debasing one's own currency is the path to economic recovery and prosperity.  I cannot say this often enough--no nation can force another, against its will, to pay for its economic recovery. Debasing one's own currency leads to an external transfer of wealth to one's trading partners and to an internal redistribution of wealth from the non-exporting sector of the economy to the exporting sector of the economy.