Saturday, May 2, 2015

Give the free market a chance!

Re: US jobs relapse raises fresh doubts on Fed tightening

This link to a recent Telegraph (of London) Ambrose Evans-Pritchard (AEP) report is typical of the trap that Keynesians have built for themselves. AEP well articulates their dilemma, stating:

"...the developed world has yet to shake off the legacy of the Lehman crisis, is struggling with record debt ratios and has already used up most of its fiscal and monetary ammunition."

The Keynesian tools of choice for escaping a recession are increased government spending and monetary stimulus. It must work, they believe, because their models tell them so. But when governments spend themselves to unsustainable debt levels and central banks expand base money and drive down the interest rate and STILL the economy refuses to budge, these Keynesians are trapped. And like all trapped animals, they are dangerous. But their conundrum is a mental trap only and one that is easily conquered, if only they have the courage to admit it and take appropriate action. The cure is simplicity itself. They must give the free market a chance. Governments must CUT spending, and central banks must STOP EXPANDING base money. This means that governments must tell their citizens that the welfare/warfare state is ending. And central banks must tell their governments that they will no longer monetize debt or intervene in any way to influence the interest rate. The resulting recession, perhaps even depression, is the necessary and inevitable workings of the free market to shed itself of what must now be massive malinvestment. It is the market working to realign the structure of production to economic reality. This will take time, but there is no other way.

Friday, May 1, 2015

A so-called "independent scrutiny board" still is not democratic

From today's Open Europe news summary:

European Commission considers independent scrutiny board to assess new EU laws – as proposed by Open Europe in 2009

A leaked European Commission document reveals plans for EU laws to require a green light from an independent scrutiny panel to ensure they do not impose unnecessary burdens on business before they can be tabled, as first proposed by Open Europe in 2009. The proposal envisages a six-person Regulatory Scrutiny Board, three of whom will come from outside the EU institutions, which will evaluate the cost of existing laws and assess the impact assessments (IAs) for new bills.
The initiative is part of EU Commissioner Frans Timmerman’s Better Regulation drive to cut red tape for businesses – which has been strongly backed by Open Europe. Open Europe’s Vincenzo Scarpetta is quoted by EUobserver as saying, “Time will tell if the new Commission is serious about substantively reducing the regulatory burden on businesses across Europe.”

This is a typical end run around democracy. An "independent scrutiny board" would be not be independent. Public choice theory tells us that there is no such thing as an altruistic politician or bureaucrat. Not only would members of such a board still be subject to political pressure, they would have no basis upon which to make their decisions. The so-called facts that they would collect and "scrutinize" are too numerous and controversial.

The EU can never be more than a consultative body of representatives from sovereign nations answerable to national governments who, in turn, are answerable to the electorate. Politics may be messy at the national level, but no one should harbor the illusion that they are absent at the supra-national level. If anything, politics at the supra-national lever are more dangerous because the appointees and bureaucrats are another step removed from the oversight of the people through their democratically elected representatives.

Thursday, April 30, 2015

My letter to the NY Times re: Rattle those bones, blow that smoke, and bleed the patient until he recovers!

Re: Is 2% Inflation enough?

Dear Sirs:
As you note, the Fed has held "its benchmark rate near zero...since December 2008", but without the result promised by econometric models. Therefore, those Keynesian economists you quote want even more money printing. They sound like witch doctors who have stood over a patient for six years, rattling bones and blowing smoke to no avail. Now they are consulting Colonial era specialists, who advocate bleeding the patient until he recovers. I recommend that they advance at least one hundred years to the era of the marginalist revolution of the Austrian school and stop money printing all together. Money is a medium of exchange and nothing more. Its uses as a means to settle accounts and as a store of value derive from this foundational utility. Printing more money simply reduces each unit's usefulness, what Austrians call its "diminishing marginal utility". The witch doctor and Colonial era physicians are going to drive the dollars marginal usefulness to zero, and America will experience the same wonderful benefits of cheap money as did the Germans of the Wiemar Republic and more recent Zimbabweans.

Tuesday, April 28, 2015

My letter to the NY Times re: Statism vs. Liberty

Re: In Japan, Bid to Stifle Criticism Is Working

Dear Sir:
In your chilling report of the Abe government's efforts to limit Japan's free press, you use the terms "right-leaning" and "conservative" to describe his government. May I suggest that a better term is "statist" vs. one of "liberty". The right/left and conservative/liberal descriptions do not convey real differences. An extreme example would be the usual references to Nazi Germany as right-leaning and conservative and Stalinist Russia as left leaning and liberal; whereas, both were statist regimes intent on grinding their citizens under the boot heal of government repression. Nobel Laureate F. A. Hayek characterized both regimes as two sides of the same coin in Road to Serfdom. The alternative to a statist regime is one dedicated to liberty, in which the individual is allowed complete freedom of expression.

Saturday, April 25, 2015

My letter to the WSJ re: Austrians understand why there is a commodity glut

Re: Glut of Capital and Labor Challenge Policy Makers

Dear Sirs:
The worldwide commodity glut is not a surprise to Austrian school economists. It is a wonderful example of the adverse consequences of monetary repression to drive the interest rate below the natural rate. Longer term projects, such as expansion of mineral extraction, appear to become profitable. But such is not the case for the simple reason that printing money does not represent an increase in real, saved resources. Eventually it will be clear that capital has been wasted, what Austrian school economists call "malinvested". No amount of further monetary repression can cure this problem, although I am certain that the Keynesian school economists in charge of central banks and governments all over the world will give it a good try. Akin to bleeding the patient until he recovers, we may not survive this Keynesian medicine.

Wednesday, April 22, 2015

Critiquing a Monetary Reform for Iceland

The Prime Minister of Iceland recently commissioned a report by Frosti Sigurjonsson (henceforth referred to as "Mr. S") to recommend a better money and banking system for Iceland. (I'm sorry, but isn't Frosti a great first name for someone from Iceland!) The recently released report recaps Iceland's sorry history of money and banking disasters and lays the majority of the blame for the 2008 collapse on the institution of fractional reserve banking, which caused an out of control increase in the money supply. Mr. S recommends its abolition. For this I applaud Mr. S and hope that the prime minister accepts the report and urges the Icelandic legislature to act upon it.

My endorsement of the report's primary recommendation does not mean that I believe that Mr. S fully understands money and banking from an Austrian perspective. Nevertheless, his recommendation, limited as it is, is a huge step in the right direction. To this extent it is compatible with my recommendations, delivered at the recent Mises Canada's "Prices and Markets" conference, that called for the abolition of fractional reserve banking, the separation of deposit and loan services, and an end to deposit insurance. Mr. S recommends the same for Iceland.

Mr. S is correct that the central bank lost control of the money supply in the years leading up to 2008 as the banks leveraged their excess reserves into new loans, which created new deposit money out of thin air. Sounding very much like Weimar Republic and Zimbabwean central bankers, he states that it was the duty of the Central Bank of Iceland (CBI) to "provide banks with reserves as needed in order to not lose control of interest rates or even trigger a liquidity crisis between banks." He accuses the banks of lending for speculative rather than worthwhile purposes, whereas he has no such concern over government control over this powerful economic lever. He is confident that the central bank would expand and contract the money supply in a fashion that would be beneficial to all society and that government would spend new monies only for purposes that would benefit the nation. Whew!

The resultant monetary regime in Iceland would be very similar to that of America during our Civil War (1861-65), when the North introduced fiat paper money. The Greenbacks--so named due to their color on one side--were pure irredeemable fiat monies issued by the Treasury Department. At that time America had no central bank, thanks to the foresight and courage of President Andrew Jackson, who was able to block the renewal of the charter of the Second Bank of the United States in 1837. When the North won the war, it did eventually buy back the Greenbacks for gold. The lesson here is clear--one of the main reasons that governments debase money is to fight wars. The North found it impossible to finance the war with taxes and honest debt, so it resorted to confiscation via the monetary printing press. Are Iceland's leaders any different? They may not want to fight a war, although they did get into a naval shoving match with Great  Britain in the 1950s through 1970s over fishing rights, the so-called "Cod Wars". So one never knows.

Mr. S believes that government needs the power to introduce new money to meet the needs of an expanding economy and that the central bank and government will do so for the good of the nation as a whole and not for private purposes. At a minimum he believes that the money supply must expand in order for the economy to expand. In this regard he is a full-fledged Friedmanite, who little understands the adverse impact of even a low level of money growth on the structure of production. On the contrary, he sees money growth as necessary for economic growth and has full confidence that government will spend any newly created money only for good. It is obvious that either he's never heard of public choice theory or does not subscribe to its conclusions. Really, who today believes that government, which after all is manned by some of the most fallible humans in society, can (1) be completely altruistic in its spending decisions and (2) would know what is best anyway? I refer Mr. S. to F. A. Hayek's wonderful Nobel speech in which he clearly articulates his theory of the pretence of knowledge.

Mr. S concludes his proposal with a call for what he terms the "sovereign money system". Right away we know that he is not an Austrian when he states "The CBI will create enough money to promote the non-inflationary growth of the economy." He would separate money creation from money allocation. A money creation committee would decide how much money to create and then the parliament would decide how to spend it. New money would serve five purposes--fund new government spending, reduce taxes, pay off the public debt, provide a citizen bonus, and increase lending to business. Money would not be backed by debt, but would be a sovereign asset created at will. The proposal does remove the ability of banks to increase the money supply through the lending process. All to the good so far. But it transfers this power to government. It allows government to spend what it wishes, as long as the money creation committee goes along, by counterfeiting whatever amount is desired. Government would not be required to increase taxes or issue new debt. Halleluja! A counterfeiter's dream! Also a government dream. Somehow I have little confidence that the money creation committee will not go along with whatever spending plans the parliament desires, a sure path to hyperinflation.

Be that as it may, I hope that Iceland implements that aspect of Mr. S's proposal that requires banks to maintain one hundred percent fiat reserves on checking accounts. Then separating deposit banking from loan banking would negate the need for deposit insurance. Perhaps Iceland's central bank and government will exercise their money printing power with discretion long enough for the rest of the world to see the benefits of abolishing fractional reserve banking and moving to a one hundred percent fiat reserve system. After that we can fight the next battle--prohibiting central banks from expanding the fiat money supply and then finally tying money to specie at a legally enforceable ratio. At that point money production can be turned over completely to private hands and the central bank abolished.

Sunday, April 19, 2015

My letter to the WSJ re: One trillion dollars, not $200 billion

Re: China Central Bank Cuts Reserve Requirement

Dear Sirs:
Your statement that the reserve requirement cut to 18.5% by the PBOC will free up $200 billion for new lending probably is understated. Assuming that the $200 billion refers to new excess reserves (admittedly, not made clear), the amount of new lending that can be supported by this action is just over one trillion dollars--the additional reserves divided by the new reserve requirement.