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Posts Tagged ‘central banking’

Monetary Freedom Instead of Central Banking – The Future of Freedom Foundation

Posted by M. C. on December 29, 2022

The boom-bust cycles of inflations and recession and the political use of money-creation to serve the deficit spending needs of governments will never be effectively and permanently ended until central banking has been ended. Monetary matters must be fully returned to the market process of competitive supply and demand.

by Richard M. Ebeling

The United States and most of the rest of the world are, once again, in the midst of an inflationary crisis. Prices in general are rising at annualized rates not experienced by, especially, the industrialized countries of North America and Europe for well over 40 years. More than 50 percent of the U.S. population is under 40 years of age, meaning that half of the people in the country have never experienced in their life time a period of rising prices such as is now occurring.Monetary central planning is no more desirable or workable than any other form of government central planning.
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It is not surprising, therefore, the shock that it has had for so many. There was a period of time in the late 1970s when price inflation, as measured by the Consumer Price Index (CPI), was going up at an annualized rate of nearly 15 percent. That was the highest since during the American Civil War, more than a hundred years earlier. So, the nearly 9 percent price inflation in the summer of 2022 was something totally new for the average American family.

Prices do not all rise by the same amount at the same time

It is worth keeping in mind that the headline CPI number is only a statistical averaging of a selected group of individual prices chosen to reflect the representative purchases of an “average” urban American family in terms of the goods purchased and their relative amounts in a hypothetical “basket” of items. Break that down into the subcategories of different goods and services, and many of these subgroups of goods have been registered as rising much more or noticeably less than the general CPI number. For instance, in August of 2022, fuel oil prices were almost 69 percent higher than a year earlier, while food prices in general were between 11 and 13 percent above where they were in August of 2021. Housing prices were “only” 6 percent above 12 months earlier.

But any way that it is looked at, this is a new experience for most Americans used to an average rise in prices of only 2 to 3 percent a year for much of the last four decades. It is one thing to be a bit irritated because something that cost, say, $100 last year costs $102 today. But it is another matter entirely when what cost $100 last year may now cost $133 or even $169. When that is happening not to just one or two or three significant items in a basket of purchased goods but to many or most of what is regularly being bought, “inflation” becomes a budgetary crisis for many families across the country.

Rising prices are the effect of an earlier monetary action

What is missed in all of this is that the general rise in prices is a symptom and not the cause of the problem. We all know that if we take someone’s temperature, the number registered on the thermometer indicating a fever is not the cause of that fever; it is merely telling us that person’s body temperature is above what is considered “normal.” It does not explain or answer what is behind the “read” on the thermometer.

Suppose that someone has a regular income of $1,000 and that he spends, say, $500 on commodity “x,” $250 on commodity “y,” and $250 on commodity “z.” If this is all the money at his disposal and he wants to increase his spending on commodity “y” to $300, then he must reduce his purchases by $50 on either commodity “x” or commodity “z,” or some reduced combination of the two. He might draw down previously accumulated cash holdings or borrow the $50 from someone else. But in the former case, there will be a point at which he has drawn down all his available cash, and he must therefore restrict his overall purchases to his regular $1,000 income. If he borrows the money, it means that the lender must reduce a loan to another borrower by $50.

Whether it’s an individual or a community of individuals, the total sum of money available to that person or group of individuals sets the maximum of dollars offered in exchange for desired goods and services, as a whole. Only if the number of dollars in the hands of that individual or community increases can the demand for and prices of one or more goods rise without some complementary decline in money demand for some other good(s). Overall “price inflation” cannot occur over any sustained period of time without a preceding or contemporaneous increase in the total amount of money in the economic community of buyers and sellers.

The gold standard served as a “check” on inflation

See the rest here

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Sanctions against Russia Are the Lockdowns of 2022 | Mises Institute

Posted by M. C. on March 9, 2022

As Austrian economists have long pointed out, it is no coincidence that the century of total war rose at the same time as the era of central banking. By relying on debt and the printing press rather than direct taxation, nations could hide from the public the immediate costs of war. Over time, global powers have turned central banks into weapons themselves. America’s abuse of its power has even forced longtime allies to speak out.

Tho Bishop

Russia’s invasion of Ukraine is nearing its second week. Vladimir Putin’s military continues its push west, with clear attempts to encircle Kyiv. To date, thankfully, America and its North Atlantic Treaty Organization (NATO) allies have held off pleas from President Volodymyr Zelenskyy to enforce a no-fly zone, which would risk the eruption of a new hot world war. So instead, along with supplying arms, intel, and—potentially—runways and planes to Ukraine, the focus of the West has been economic warfare.

What is not clear is whether the West is prepared to deal with the actual consequences of this approach.

It seems that with every passing day, America and its allies find tools to escalate financial pressure on Putin. What began with targeted sanctions on the Russian leaders and oligarchs has expanded to cutting off Russian banks from SWIFT, broad attacks on Russian industries, and now complete bans on Russian oil and other exports by some—though not all—NATO countries. Moreover, Western corporations have reinforced these policies by indiscriminately banning Russian customers from various services.

This coordinate blanket canceling of Russia is not a tool crafted by the necessity of the situation, but rather a new application of the form of warfare that the West has become the most comfortable with. America’s weaponization of the dollar-backed financial system began with the war on terror, utilized against rogue state actors like North Korea, Iran, and Venezuela (the latter two Washington is now seeking assistance with for oil) and is increasingly used against domestic enemies.

Even the Swiss historical tradition of neutrality has failed to hold in an era of financial war.

Unfortunately for the West, Vladimir Putin is a far shrewder adversary than Kim Jong Un or Nick Fuentes. Russia is not only a major energy provider to global—and, in particular, European—markets but is a globally important exporter of wheat, fertilizer, metals, and other strategically important resources. To add to these concerns, the West has become increasingly frustrated by the refusal of other global powers—including India, Brazil, Mexico, and China—to follow their lead.

None of this should be particularly surprising. China’s interest in using Russia as a foil against American global hegemony has been clearly illustrated for years—even prior to Trump-era escalation and the covid outbreak. Nations like India, Brazil, and Mexico have seen the rise of nationalist political parties that have echoes Putin’s critiques of the globalist West.

Already Putin has demonstrated a willingness to wield his natural resources as a wedge to pull traditionally subversive global actors away from America’s leadership. The Russian government has made a list of countries that have been hostile to its military actions and has directed trade to favor countries that have remained neutral. Meanwhile, Russian nationalists have celebrated the West’s economic response to the Ukraine invasion, identifying the possibility of shifting consumer trends away from America- and Europe-based companies toward Eurasian products.

As a result, it is precisely the Russians that are the most culturally aligned with the West that are the most penalized by the American response to Putin’s actions. This is similar to the way American sanctions against Iran most victimized the most liberal members of their society.

While the West has made vividly clear its sense of moral self-righteousness in imposing this financial warfare, it is less obvious whether there are any planned off-ramps to deal with the shock back home. In America, gas has already hit all-time highs, while market signals indicate that the cost of food, energy, and other vital resources is soon to follow. In response, the Biden White House and its allies have lectured Americans on the virtues of electric vehicles and other forms of “green energy.” Not even Tesla’s Elon Musk believes this line of logic holds up.

Ultimately any attempts by Western governments to soothe the concerns of their citizens depend upon convincing them that the very same expert class that believed preconflict inflation was “transitory” is intellectually equipped to handle this new conflict. It is uncertain how successful they will be.

The question largely left unasked as firefights continue to play out on Ukrainian streets is what the long-term consequences of the West’s financial war on Russia will be. If peace were to break out tomorrow, what would that mean for market actors?

Many of the same leaders that have engaged in an increasingly vicious economic conflict with Russia supported debilitating lockdowns in the face of covid. In the case of the latter, many seemed to act as if the economy could simply be turned on and off with relative ease—like a computer suffering from an operating malfunction. The world is still dealing with the consequences. How long will the scars from this last?

What if Russia and China are serious about undermining America, the dollar, and its subservient allies? What if Putin recognizes that the economy of the debt-saturated West is far weaker than our policy makers believe it is? Is there any reason for Americans to question the judgment of the decision-makers at the Fed or Treasury?

As Austrian economists have long pointed out, it is no coincidence that the century of total war rose at the same time as the era of central banking. By relying on debt and the printing press rather than direct taxation, nations could hide from the public the immediate costs of war. Over time, global powers have turned central banks into weapons themselves. America’s abuse of its power has even forced longtime allies to speak out.

In 2020, global powers ignored the economic consequences of lockdowns in order to “boldly” respond to the perceived risks of covid. The damage done was catastrophic, and the impact of the policies was minimal.

In 2022, many of those same global powers are destroying the lives of innocent Russians to signal their virtuous opposition to invasion. Unfortunately, when the dust settles, the underlying damage done to their nations may be far worse.  

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To Attack the Root of Evil, Fix the Money | The Libertarian Institute

Posted by M. C. on January 14, 2022

by Jp Cortez

After the Consumer Price Index surged last year to its highest level since 1982, politicians are feeling pressure from constituents to do something about it.

Last Monday, President Joe Biden announced $1 billion in grants, loans, and other assistance for small meat producers. Another costly government program will, supposedly, help tame rapidly rising beef and poultry costs.

Four giant companies control 85% of the market for meat—raking in massive profits while families pay higher prices. I’m glad @POTUS is taking steps to create a more competitive beef and poultry industry. We need to break up Big Ag and lower prices.

— Elizabeth Warren (@SenWarren) January 3, 2022

Massachusetts Senator Elizabeth Warren has been on a tear lately, and there is a startling commonality between all these ideas:

Prices at the pump have gone up. Why? Because giant oil companies like @Chevron and @ExxonMobil enjoy doubling their profits. This isn’t about inflation. This is about price gouging for these guys & we need to call them out.

— Elizabeth Warren (@SenWarren) November 20, 2021

Consolidation in the semiconductor industry is causing shortages and supply chain bottlenecks that increase consumer prices and hurt workers. I’m urging @SecRaimondo to act swiftly to increase competition.

— Elizabeth Warren (@SenWarren) December 17, 2021

This is your brain on fiat monetary systems and central banking: price inflation is caused by everything except for printing loads of new money.

If Senator Warren believes that prices increase because of the greed of price gouging companies, does she believe that when prices fall, it is the result of corporate benevolence?

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bionic mosquito: Objective Truth

Posted by M. C. on May 7, 2020

Kuhn would observe that once a paradigm has been accepted, it remains accepted until the unavoidable crisis forces its adherents out of their worshipful stupor. No matter the evidence against it in the meantime, nothing will sway this institutional acceptance.

We see this all around us. It certainly exists in economics and central banking. Despite the obvious flaws (to put it mildly), the only answer that mainstream economics can allow is more of the same, at exponentially-increasing rates. We see it in science, with climate change, the corona, and vaccinations.

David Gordon has introduced a new weekly series at the Mises site, called Friday Philosophy. Every week it is a real treat. His recent post, entitled Murray Rothbard and Thomas Kuhn, contained interesting observations. The post focusses on Rothbard’s look at Kuhn’s book, The Structure of Scientific Revolutions (1962):

Though people differ about what Kuhn meant, many take him to deny that science gives access to the real world. Truth is relative to a “paradigm,” another much disputed word.

Gordon would comment that while Rothbard rejects Kuhn’s philosophy, he accepts much of what Kuhn says about the history of science. So, what does Kuhn say? Citing Rothbard:

The continual progress, onward-and-upward approach was demolished for me, and should have been for everyone, by Thomas Kuhn’s famed Structure of Scientific Revolutions. …Kuhn demolished what I like to call the “Whig theory of the history of science”.

By “Whig theory,” Rothbard means the idea that “science marches onward and upward, each year, decade or generation learning more and possessing ever more correct scientific theories.” Kuhn has taken this notion to task. Rothbard notes that Kuhn’s idea is perfectly applicable to the Whig theory of history, that things are supposedly always getting better.

At any point in time, we are closer to whatever is right, or true, than at any point in the past. The liberal west certainly embraced this notion with the Enlightenment, and the deplorables are regularly told to get on the right side of history any time we question one iota of the progressivist agenda.

While Kuhn is writing of scientific progress, Rothbard applied Kuhn’s concept to economic thought – noting the faulty belief held by many who assume this ever-advancing notion of progress toward the true:

There can, then, be no such thing as gross systemic error that deeply flawed, or even invalidated, an entire school of economic thought, much less sent the world of economics permanently astray.

Kuhn would observe that once a paradigm has been accepted, it remains accepted until the unavoidable crisis forces its adherents out of their worshipful stupor. No matter the evidence against it in the meantime, nothing will sway this institutional acceptance.

We see this all around us. It certainly exists in economics and central banking. Despite the obvious flaws (to put it mildly), the only answer that mainstream economics can allow is more of the same, at exponentially-increasing rates. We see it in science, with climate change, the corona, and vaccinations.

We see it in the sweep of history, with every empire’s rise until its inevitable fall – never changing course until a course-change was violently forced upon it (with the one notable exception, perhaps, of the Soviet Union, which went down rather quietly).

Rothbard separates his appreciation of Kuhn’s comments regarding progress from Kuhn’s overall philosophical views:

One need not adopt Kuhn’s nihilistic philosophic outlook, his implication that no one paradigm is or can be better than any other, to realize that his less than starry-eyed view of science rings true both as history and as sociology.

It is a tremendously meaningful point, and it is the point that prompted my thoughts here. Just because we run into institutionally-defended “truths” regardless of the facts, does not mean that there is no such thing as “truth.”

Rothbard takes Kuhn’s observations regarding hard science, and applies it to what we now consider the softer sciences – to include economics. Rothbard offers the example of Greek Fire, a seventh century technology – a type of a flamethrower – that remains baffling to modern scientists. He also adds to this the varnish of a Stradivarius violin, “which nobody can duplicate.”

We know less about certain areas of optics than they did in the 18th century. At any rate, when we get to the social sciences and philosophy, this is much more true.

David Gordon would neatly tie together what some might see as a conflict in Rothbard’s thought, making clear that Rothbard’s views were logically consistent. Acceptance of Kuhn’s take-down of the Whig history of scientific thought does not require acceptance of Kuhn’s relativist philosophy:

…doesn’t this make truth in science relative after all? But this doesn’t follow. Truth and universal agreement aren’t the same thing.

Which leads me to the comment I made at the Mises site:

There are objective truths, in hard sciences, social sciences, philosophy, theology, etc. These lie at the center of a circle. We discover them, we lose them, if we are lucky we discover them again.

When we lose them, we pay a price, whether a collapsed bridge or a collapsed society.

Throughout our history, we have moved closer or farther from these truths; sometimes advancing toward objective truth, at other times regressing from objective truth.

But at the center lies objective truth.

The one thing I will add: there are some objective truths which I believe man does not have the ability to grasp perfectly. Like Plato’s forms, there are some that we cannot even picture perfectly in our mind. Yet, even for these, we can grasp what is closer and what is farther from the true form.

It isn’t a question of looking back longingly to some favorite point in history: The Constitution, the Declaration of Independence, the Magna Carta, or the relationship of Church and king in the Middle Ages.

It isn’t a question of going back or going forward on a timeline. We are not moving along a line; we are moving around the center of a circle. It is a question of moving toward the center of the circle.


We look back on medieval science, and mockingly call the Church to task for defending what we moderns see as several crazy notions. One regularly noted example is that of Copernicus and Galileo, with the Church standing in the way of scientific advance. This is often played as the trump card by the scientistic crowd. Well, it turns out even this example isn’t as black and white as moderns would like to believe.

Religion has stood in the way of science, and since the Enlightenment dumped religion science has been freed to advance toward truth, unhindered by superstition.  This is the worldview we are taught to believe.

But how will the future look back on our time? We are in the grip of a scientism that has taken on many disciplines – from medicine, to climate, geopolitical considerations, social sciences, economic sciences, gender understanding, etc.

These notions are sillier than most ideas held institutionally during the Middle Ages. Sillier, and infinitely more dangerous. If there is a future for human beings as human beings, we will look back on our time as…dare I say it…barbaric.

If in the future we aren’t human beings (insert your favorite reference to one of dozens of dystopian novels or movies)? Well, then none of this really matters. But the objective truth I hold to about the future tells me not to fear this.

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War, Economic Ruin, and Liberty Destruction Will Never End – LewRockwell

Posted by M. C. on October 4, 2019

“The Federal Reserve System is not Federal; it has no reserves; and it is not a system at all, but rather, a criminal syndicate.” ~ Eustace Mullins


“Sneaky and underhanded, the Federal Reserve has been sucking the life blood out of the United States since 1913. Like a black widow spider, it weaves a web of corruption and deceit. Unknown to its prey, the FED’s bite is poisonous, deep, long-lasting and brings financial upheaval and misery to Americans.” 
~ Jim McCarthy, The Money Spiders, the Ruin-NATION of the United States by the Federal Reserve

Do any of the common people ever question the driving force of corruption, financial destruction, and war that is the basis of most all United States domestic and foreign policy? Do any understand that those who control the money control the entirety of government and commerce? Do any understand that wars of aggression cannot be fought without the power to create an unlimited supply of money? Do any understand that those few elites that control the banking system also control the politicians? The central planning of money is anathema to freedom and all that is honest and right.

The general population has never understood the real importance of money beyond the boundaries of its everyday function. And so-called intellectuals, those who pontificate about economic affairs, rarely have any ability to grasp the massive scope of its effects on every aspect of life and power. Money existed long before government, and the only reason for it to become the business of government was for the sole purpose of control of the people. The government is the middleman in a fascist relationship with the real power, the banking magnates.  Without outside interference, money would have remained a private matter of individuals, and could not have been used to empower the state and its controllers.

The construct of central banking in the United States, culminating in the creation of the Federal Reserve, was the single most damaging legislation affecting freedom and free market economics. For without the ability to print and control money at will, the banking system and its pawns in the political class could never have gained such massive power over the people as exists today.

Current monetary policy, better referred to as the criminal takeover of money for the benefit of the few, is what drives the many nefarious activities of the ruling class of this country. These policies are responsible for uncontrolled spending, uncontrolled debt, almost total economic manipulation and ruin, and continuous war. The general populace at this stage is mostly dependent on this system of largesse deliberately created for the purpose of control, and almost none understand it. This of course is by design. It was rather an easy task for the elite bankers to turn the concept of money into complicated economic theory that the average citizen could never comprehend.

The Federal Reserve is private but is in business with the governing system. To solidify this point, the Supreme Court ruling in 1928 stated: “Instrumentalities like the national banks or federal reserve banks, in which there are private interests, are not departments of the government. They are private corporations in which the government has an interest.” The Fed states openly that “Its monetary policy decisions do not have to be approved by the president or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.” These rulings and admissions expose the conspiracy that exists between private banking and the government in the mission to control all of politics and economics through a corrupt monetary system. (See the video: Century of Enslavement: The History of the Federal Reserve by James Corbett.)

The Federal Reserve rules were written in secret by the banking heads themselves at Jekyll Island, and passed into law by the Congress through collusion in 1913. This banking cartel regulates itself, and has the sole power to issue and control the entire supply of money in the U.S. The Federal Reserve actually has a monopoly on the money in this country. It began with conspiracy, and continues to operate as a conspiracy, even more so today…

The Federal Reserve System causes economic chaos and financial ruin. This has always been the case. It harms liberty, and is largely responsible for almost unlimited funding of the military state and its wars of aggression. It enriches the elite class of rulers, while affording them power over all others. It is the bane of any free society. It should not be “reformed” or audited by its creators; it should simply be abolished.

“The Federal Reserve System is not Federal; it has no reserves; and it is not a system at all, but rather, a criminal syndicate.” ~ Eustace Mullins

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Larry Summers Comes Clean Ahead Of J-Hole, Admits Central Planners Are Impotent | Zero Hedge

Posted by M. C. on August 22, 2019

by Tyler Durden

Larry Summers is not one to be shy about sharing his opinion on any and every media channel about just how bad President Trump’s policies are, and how much better everything was in the world under President Obama.

However, in an epic thread of apparent honesty, the former director of the National Economic Council for President Obama took to Twitter to dispel any myths about the omnipotence of central planners and to confirm there’s nothing anyone can do to save the world from doom (especially Jay Powell’s speech tomorrow).

Mea Culpa? Or partisan political pandering to reinforce the “recession is imminent and there’s nothing to stop it and it’s Trump’s fault and that means Trump’s unelectable” narrative?

You decide…

Summers begins his diatribe by addressing the big imminent issue ahead of us:

“Coming into Jackson Hole, economists are grappling with a major issue: Can central banking as we know it be the primary tool of macroeconomic stabilization in the industrial world over the next decade?

His worry – they are running out of ammo and what ammo they have is losing its mojo…

This limited space for interest rate cuts is true of the US, which has the highest interest rates in the industrialized world. It is even more true of Europe and Japan. 3/

QE and forward guidance have been tried on a substantial scale. We are living in a post QE and forward guidance world. It is hard to believe that changing adverbs here and there or altering the timing of press conferences or the mode of presenting projections is consequential. 4/

Then, Summers goes after central planner over-confidence…

Black hole monetary economics – interest rates stuck at zero with no real prospect of escape – is now the confident market expectation in Europe & Japan, with essentially zero or negative yields over a generation. The United States is only one recession away from joining them. 6/

Everywhere in the industrial world, the risks of a sharp upturn in unemployment appear greater than the risks of a sharp upturn in inflation (even though market expectations of inflation are clearly below 2 percent targets). 7/

The one thing that was taught as axiomatic to economics students around the world was that monetary authorities could over the long term create as much inflation as they wanted through monetary policy. This proposition is now very much in doubt. 8/

Wait, what!!!??

Call it the black hole problem, secular stagnation, or Japanification, this set of issues should be what central banks are worrying about. 10/

In our forthcoming paper, we argue that it minimizes our predicament to see it – as is current consensus – simply in terms of a falling neutral rate, low inflation, and the effective lower bound on nominal rates. Secular stagnation is a more profound issue. 12/

Limited nominal GDP growth in the face of very low interest rates has been interpreted as evidence simply that the neutral rate has fallen substantially. There may well be more to it than that. 13/

We believe it is at least equally plausible that the impact of interest rates on aggregate demand has declined sharply, and that the marginal impact falls off as rates fall. 14/

And then Summers drops the real hammer – rate cuts are useless… or worse, are actually worsening the situation.

It is even plausible that in some cases interest rate cuts may reduce aggregate demand: because of target saving behavior, reversal rate effects on fin. intermediaries, option effects on irreversible investment, and the arithmetic effect of lower rates on gov’t deficits. 15/

If the central problem for macroeconomic stabilization is a falling neutral real interest rate – what might be called “old new Keynesian” economics – monetary policy can achieve full employment if it can get the interest rate low enough. 17/

In contrast under the secular stagnation view we have outlined – what might be called “new old Keynesian” economics – interest rate cuts, even if feasible, may be at best only weakly effective at stimulating aggregate demand and at worst counterproductive.  18/

First, financial instability. The financial crisis had roots in bubbles & excessive leverage caused by efforts to maintain demand after the 2001 recession. Japan’s late 1980s bubble had roots in a low interest rate tight fiscal environment after the 1987 stock market crash. 20/

Second, risks of zombification of firms. Firms that do not face debt service payments are like students who do not have to take tests. They can drift along complacently & ultimately unsuccessfully. And low rates may contribute to increased monopoly power and reduced dynamism. 21/

Third, risks of bank failures. Low rates crowd bank profits and franchise value, making them more vulnerable to adverse shocks at any given level of regulatory capital. 22/

Fourth, risks of further reducing monetary policy effectiveness. To the extent to which rate cuts now “borrow” demand from the future as firms and consumers bring forward investment and durable purchases, low rates now may imply less effective monetary policy in the future. 23/

Summers then goes further – blasting Central planners for claiming they can “contain” the issues…

Obviously fiscal policy needs to be a major focus, especially given what low or negative interest rates mean for the sustainability of deficits. 25/

But the level of demand is also influenced by structural policies: e.g. pay-as-you-go social security, higher retirement ages, improved social insurance, support for private infrastructure investment, redistribution from the high-saving rich to the liquidity-constrained poor. 26/

The high inflation and high interest rates of the 1970s generated a revolution in macroeconomic thinking, policy and institutions. The low inflation, low interest rates and stagnation of the last decade has been longer and more serious and deserves at least an equal response. 27/

But at least he ends on an upbeat note ahead of Jay Powell’s speech tomorrow…NOT!

So, after that 28 tweet thread of self-flagellation, wouldn’t it have been more interesting if Summers had said all that oh, ten years ago?

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Powell Spills the Beans – LewRockwell

Posted by M. C. on July 17, 2019

Followers of Austrian economic theory like Stockman, Murray Rothbard or Walter Block will tell you deflation is the ideal. Lower prices brought by efficiency and innovation.

When has government been efficient and innovative (in the good sense)?


David Stockman’s Contra Corner

Thursday was a Red Letter day for that old “you don’t say!” riposte. We are referring to the obvious response to Powell’s black and white confession to the Senate Banking Committee yesterday that more people working doesn’t cause inflation.

“The relationship between the slack in the economy or unemployment and inflation was a strong one 50 years ago … and has gone away,” Powell said Thursday during his testimony before the Senate Banking Committee. He added the strong tie between unemployment and inflation was broken at least 20 years ago and the relationship “has become weaker and weaker and weaker.”

Why, yes, it apparently has disappeared entirely per the graph below.

Since the recessionary jobs bottom in 2010, the unemployment rate (brown bars) has plunged from just under 10% to a 50-year low of 3.7% at present. Yet despite the apparent massive evacuation of labor “slack” from the US economic bathtub, real weekly earnings of prime age males (purple bars) have essentially flat-lined during the last eight years.

So you could put a stake in the so-called Phillips Curve and be done with it. But actually the story is far bigger and Powell’s confession implicates much more than merely the wage/employment equation.

To wit, it actually crushes the core tenant of Keynesian central banking. Namely, that Fed policy operates largely in a closed bathtub of domestic GDP and that by raising or lowering the water level of “demand” therein, the Eccles Building can bend domestic inflation, employment and economic growth to its will.

Self-evidently, it cannot. And the reason for that starts with Powell’s incorrect claim that the relationship between wages and employment “has gone away”.

In fact, what is implicated here is the fundamental law of supply and demand, which did not mysteriously disappear into some monetary Stranger Things realm. No, it simply migrated from the Lower 48 to a planet-wide venue…

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