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Posts Tagged ‘Central Banks’

Prepare for Negative Interest Rates | The Libertarian Institute

Posted by M. C. on February 22, 2021

Inflation and growth are not low due to excess savings, but because of excess debt, which perpetuates overcapacity with low rates and high liquidity and zombifies the economy by subsidizing the low-productivity and highly indebted sectors and penalizing high productivity with rising and confiscatory taxation.

https://libertarianinstitute.org/articles/prepare-for-negative-interest-rates/

by Daniel Lacalle

Negative rates are the destruction of money, an economic aberration based on the mistakes of many central banks and some of their economists, who all start from a wrong diagnosis: the idea that economic agents do not take more credit or invest more because they choose to save too much and therefore saving must be penalized to stimulate the economy. Excuse the bluntness, but it is a ludicrous idea.

Inflation and growth are not low due to excess savings, but because of excess debt, which perpetuates overcapacity with low rates and high liquidity and zombifies the economy by subsidizing the low-productivity and highly indebted sectors and penalizing high productivity with rising and confiscatory taxation.

Historical evidence of negative rates shows that they do not help reduce debt, they incentivize it. They do not strengthen the credit capacity of families: the prices of nonreplicable assets (real estate, etc.) skyrocket because of monetary excess and because the lower cost of debt does not compensate for the greater risk.

Investment and credit growth are not subdued because economic agents are ignorant or saving too much, but because they don’t have amnesia. Families and businesses are more cautious in their investment and spending decisions, because they perceive, correctly, that the reality of the economy they see each day does not correspond to the cost and the quantity of money.

It is completely incorrect to think that families and businesses are not investing or spending. They are only spending less than what central planners would want. However, that is not a mistake from the private sector side, but a typical case of central planners’ misguided estimates, which come from using 2001–07 as “base case” of investment and credit demand instead of what those years really were: a bubble.

The argument of the central planners is based on an inconsistency: that rates are negative because markets demand them, not because they are imposed by the central bank. If that is the case and the result would be the same, why don’t they let rates float freely? Because it is false.

Think for a moment what type of investment, company, or financial decision is profitable with rates at –0.5 percent but unviable with rates at 1 percent. A time bomb. It is no surprise that investment in bubble-prone sectors is rising with negative rates and that nonreplicable and financial assets are skyrocketing.

Instead of strengthening economies, negative rates make governments more dependent on cheap debt. Public debt trades at artificially low yields, and politicians abandon any reformist impulse, preferring to accumulate more debt.

The financial repression of central banks begins with a misdiagnosis assuming that low growth and below-target inflation is a problem of demand, not of the previous excess, and ends up perpetuating the bubbles that it sought to solve.

The policy of negative types can only be defended by people who have never invested or created a job, because no one who has worked in the real economy can believe that financial repression will lead economic agents to take much more credit and strengthen the economy.

Negative rates are a huge transfer of wealth from savers and real wages to the government and the indebted. A tax on caution. The destruction of the perception of risk that always benefits the most reckless. It is a bailout of the inefficient.

Central banks ignore the effects of demography, technology, and competition on inflation and growth of consumption, credit, and investment, and with the wrong policies generate new bubbles that become more dangerous than the previous ones. The next bubble will again increase countries’ fiscal imbalances. Even worse, when central banks present themselves as the agents that will reverse the effect of technology and demographics, they create a greater risk and bubble.

When this happens, it becomes necessary for to protect one’s savings with gold, silver, inflation-linked instruments, and stocks in sectors that do not suffer from negative rates.

This article was originally featured at the Ludwig von Mises Institute

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Market Weekly: All Hail the Conquering Central Bankers – Or Else

Posted by M. C. on February 8, 2021

As I’ve said many times, the stakes are higher today than they were in 2016 for these people. The Obama Restoration that is the Fungal Presidency depends solely on the central banks taking control over the global economy, sidelining the traditional, and terminally corrupt, banking system.

Yes, I can hear you saying, “But they are one and the same.” But, not really, not anymore. In order to pull this off someone will have to be sacrificed to the incredibly angry mob that is brewing outside the capitols of every major western power.

https://tomluongo.me/2021/02/05/hail-conquering-central-bankers/

Author: Tom Luongo

If you are unclear what’s happening, frankly, you aren’t paying attention. The central banks, at the urging of the World Economic Forum, have come from behind the shadows to assert their will over the world.

In order to create the imprimatur of depth and sincerity Fungal President Joe Biden tapped former FOMC Chair Janet Yellen as his Treasury Secretary.

It doesn’t matter that Yellen was the architect of the worst recovery in history or that her incessant dithering on ending QE and raising rates. She’s a woman. Right?

The only good thing about Yellen at Treasury is that Steve “Mr. Goldman” Mnuchin is gone. All Mnuchin did at Treasury was ensure the outsourcing of monetary policy to Blackrock through the loan programs of the CARES Act and sanction anyone who didn’t pay Goldman enough Tribute.

So, from that perspective, I guess, Yellen is an upgrade. Because she’s just an incompetent career bureaucrat. But what this means is that since personnel is policy in D.C. the central banks will become the center of policy.

And that means full international coordination by them to implement not only MMT — Modern Monetary Theory — but also accelerate the adoption of digital-only versions of national currencies, CBDCs, to support the full takeover of the economy by central planners.

Given Biden’s first foreign policy speech last night and the very real smackdown issued by Russian President Vladimir Putin at this year’s Virtual Davos, expect nothing but more of what ailed us under Trump taken up another notch.

Putin’s speech was one for the ages, to be honest, and everyone should read it.

Why?

Because Putin openly declared his opposition to the brave new world of Klaus Schwab and his Davos Crowd. And that means he incurred the wrath of the policy-wonks in D.C, Brussels and London.

Not that he didn’t have that already, but again, I believe we ain’t seen nothin’ yet when it comes to aggression. The problem with that however is that it openly risks open military conflict not only in Syria where Biden immediately sent troops across the Iraqi border but also in the Black Sea

As I’ve said many times, the stakes are higher today than they were in 2016 for these people. The Obama Restoration that is the Fungal Presidency depends solely on the central banks taking control over the global economy, sidelining the traditional, and terminally corrupt, banking system.

Yes, I can hear you saying, “But they are one and the same.” But, not really, not anymore. In order to pull this off someone will have to be sacrificed to the incredibly angry mob that is brewing outside the capitols of every major western power.

This planned destruction of the West’s middle class is creating an unruly, #ungovernable mob. This week that mob attacked Wall St. at its heart. Going after the hedge funds who are nothing but fronts for the big banks.

They’ve used their market position and capture of the regulators (including Yellen herself) to create one-way trades, draining the vitality of the economy through fees, taxes and barriers-to-entry.

That’s what animated the GameStop Rebellion of the past couple of weeks and we’ll see more of these #ShortSqueezes going forward. The markets, thanks to the ocean of liquidity sloshing around and now the promise of another massive stimulus bill, are so thoroughly unbalanced that anything could become a trigger for another meltdown.

And that brings me to the next part of the story in the conquering of governments by the central banks. Mario Draghi (yes that guy!) has been given the right to try and forma government from the ashes of the last terrible government in Italy.

President Sergio Mattarella is as pro-EU and Italian Swamp as it gets. This will be the fourth time he has intervened far beyond his constitutional capacity since Five Star Movement and Lega shocked the world in 2018 with their bipartisan populist uprising.

Because those election results would never hold up today, Mattarella continues to shield Italy from new elections. It’s fascinating how a mostly ceremonial (mostly peaceful) position like his has become more powerful than any other, all because Brussels demands it be so.

So, Former ECB President Mario Draghi will likely become the next Prime Minister of Italy over the objections of everyone outside of the Rome Mafia.

“In my opinion, the 5-Star Movement has the duty to meet (Draghi), listen and then take a position on the basis of what our parliamentarians decide,” said Luigi Di Maio, the outgoing foreign minister and party big-wig.

“We did not seek the stalemate … but it is precisely in these circumstances that a political force shows itself to be mature in the eyes of the country.”

Former prime minister Silvio Berlusconi suggested he might be ready to support a Draghi government – a move that could cause a schism within the right-wing opposition bloc.

Now it was Di Maio who betrayed Lega leader Matteo Salvini in September 2019 to form the outgoing government which was never stable. It was a clear betrayal by Di Maio who I said at the time would become Italy’s version of Alexis Tsipras, the former Greek Prime Minister who folded to Brussels in 2015 if he did just that.

See the rest here

Published by Tom Luongo

Publisher of the Gold Goats n Guns. Ruminations on Geopolitics, Markets and Goats. View all posts by Tom Luongo

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Clown World Finance | Mises Institute

Posted by M. C. on January 29, 2021

In a sane market, where market fundamentals actually determine prices, this would not have happened. Short selling would simply be a way of quickly and efficiently determining the market price of stocks, and there would be no special profit to be had from this practice, beyond the arbitrage gain (in the case that the short sellers were correct). Similarly, investors angry at the short sellers could not have driven stock prices sky-high in defiance of reality. Both practices are only possible in a market flooded with ever-increasing amounts of new money freshly printed by the Federal Reserve.

https://mises.org/power-market/clown-world-finance

Kristoffer Mousten Hansen

The recent blowup of GameStop shares has revealed, if anyone was still doubting, that the center of clown world is not Washington, DC, nor Silicon Valley—but Wall Street. To be clear, this is not meant to refer to the gallant band of redditors from r/wallstreetbets—those few, those happy few, that band of brothers who, as of this writing, may very well be poised to force several hedge funds into bankruptcy. Rather, the clowns are those hedge funds and all those other institutional investors who have been propped up by central bank intervention for decades while congratulating themselves that their seven-figure earnings were all due to their own financial brilliance.

What Happened?

The story of what happened (so far) is briefly told. It was revealed that GameStop was one of the most shorted shares in Wall Street, with the fund Melvin Capital taking the lead in shorting it. While this may or may not be a sound position based on market fundamentals—I have not investigated and think it’s a mug’s game to waste time on fundamentals these days—people did not take kindly to the revelation. Specifically, redditors at the subreddit Wallstreetbets saw that the short sellers were vulnerable, and they organized a campaign to drive them into the ground. Suddenly, retail investors flooded the market, bought up shares and drove GameStop shares, which had been trading below $20, into the stratosphere, topping $365 Wednesday morning (January 27). Melvin Capital suffered huge losses, up to 30 percent, and had to be saved by an infusion of $2.75 billion Tuesday afternoon.

That’s Not the Whole Story, Though…

In a sane market, where market fundamentals actually determine prices, this would not have happened. Short selling would simply be a way of quickly and efficiently determining the market price of stocks, and there would be no special profit to be had from this practice, beyond the arbitrage gain (in the case that the short sellers were correct). Similarly, investors angry at the short sellers could not have driven stock prices sky-high in defiance of reality. Both practices are only possible in a market flooded with ever-increasing amounts of new money freshly printed by the Federal Reserve.

For decades the central banks of the world—chief among them the US Federal Reserve—have had really only one mission: interest rates cannot ever be allowed to rise and everything must be done to prevent even the mildest of corrections in financial markets. They were able to get away with it clandestinely, so to speak—who now remembers the good ol’ days of the Greenspan put?—but after the financial crisis of ‘08 they had to come out into the open. Interest rates were forced lower and lower and markets were flooded with a tsunami of credit. Stocks and bonds responded, as could be expected, by reaching new all-time highs year after year. Of course, there were always economists ready with ever more whacky theories as to why this bare-faced inflationism was really sound policy dictated by the science of modern economics, but the result for anyone to see is financial markets that are completely divorced from reality and whose only purpose seems to be securing cheap funding for the US government and enormous earnings for the financial elites.

Then, of course, came corona, and the government, in its wisdom, chose to destroy the economy. To placate the plebs they offered them a few handouts—first $1,200, then $600—all financed by that incredible machine, the central bank printing press. According to Keynesian orthodoxy, this should have stimulated the economy to no end, ensuring a rapid recovery. Unfortunately, since most of the world was shut down, there were precious few opportunities for people to actually spend their money, and since the man in the street is wiser than most government-employed economists, he probably understood that an unprecedented shutdown of all society is not the best time to engage in a bonanza of consumer spending. So, he saved and invested his money, which thanks to the advances in modern technology he could now do directly, without going through savings banks or brokers.

Yet inflation is still inflation, even if it does not show up in government statistics, and the infusion of such an ocean of liquidity naturally drove stocks, bonds, bitcoin, and now GameStop sky-high. The beneficiaries this time were not the banks or Wall Street investors, however, but the many retail investors who now ganged up on Melvin Capital and the other “sharks” of Wall Street. It is all animal spirits, or rather, it is driven by the desire of those who feel themselves shortchanged to see the high lords of finance come crashing down. This latest round of inflation gave them the means to bring about just that.

Is This the End?

It’s impossible to tell what will happen next. Maybe the flood of liquidity is spent and Wall Street will weather the storm; maybe the Fed will again step in with new credit lines to save them, which seems most likely—again, the prime directive of the Fed has always been to save the big shots in finance. It is possible that financial markets are now so broken, central bank officials so worried about the effects of their money printing, that nothing will be done and we are now seeing the beginning of the end of the Big Bubble of 1980–2020. However, if recent history and mainstream economic orthodoxy are any guide, the Fed will stop at literally nothing to “save” the markets.

As Zero Hedge remarked on Twitter, “What is remarkable is how many people are “surprised” by what is going on in the “market” You throw $20 trillion stimulus at it, you nationalize the bond market, you break all links between price and fundamentals…what do you think happens.” Indeed. It would be wholly fitting in clown world, however, if the Great Stock Market Crash of 2021 were begun by day-trading teenagers, flush with helicopter money (thanks, Uncle Milty!) and with nothing else to do, forming a mob on reddit in order to break a hedge fund.

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Why Mainstream Economic Forecasts Are So Often Wrong | Mises Wire

Posted by M. C. on January 11, 2021

The final lesson for us as investors is simple: take with a pinch of salt those estimates that place too much positive impact on government and central bank stimuli. Remember that things that have never happened and multipliers that have never occurred are not going to happen, even less so with all-time-high levels of debt and widespread overcapacity.

https://mises.org/wire/why-mainstream-economic-forecasts-are-so-often-wrong

Daniel Lacalle

Every end of the year, by the end of the year, we receive numerous estimates of global GDP growth and inflation for the following year. Historically, almost in all cases, expectations of inflation and growth are too optimistic in December for the following year.

If we look at the track record of central banks, it is particularly poor in predicting inflation, while large supranational entities tend to err on the side of optimism in GDP estimates. The international Monetary Fund or the Organisation for Economic Co-operation and Development, for example, have been particularly poor at estimating recessions, but mostly accurate at making long-term trend estimates. Contrary to popular belief, it seems that most forecasts are better at identifying long-term economic dynamics than short-term ones.

Forecasting is a dirty job, but somebody has to do it. Economic forecasting is exceedingly difficult because there are numerous factors that can drastically change the course of a global economy that is increasingly complex and subject to important uncertainties. However, macroeconomic forecasting is also essential to provide a frame of reference for investors and policymakers. It should not be considered the revealed truth nor entirely dismissed, just an important framework that allows us to at least identify the major points of discrepancy as well as the areas to look at for positive or negative surprises as the year unravels. Yes, macroeconomic forecasting is essential.

The first lesson is that independent forecasts are almost every year more accurate than those of supranational bodies and central banks. There is a logic behind it. Independent forecasters do not feel the political pressure to use a benign view of government policies in their estimates. This is one of the main reasons why investors increasingly use their own economic forecasting teams alongside truly independent firms. While it is always worth paying attention to investment banks and international bodies’ forecasts, most investors have learned to understand that the estimates of these large entities are often blurred by political correctness and a tendency to be overly diplomatic. Notice how even in countries where governments have destroyed the economy with wrong policies, one-year-ahead forecasts tend to be diplomatically optimistic.

The second lesson, particularly after years of financial repression, is that most forecasts tend to assume an optimistic and extraordinary multiplier effect from government spending and central bank stimulus plans. In most cases, when we look at the estimates of large central banks and international entities, the biggest mistakes in forecasting come from expecting a surprisingly large positive impact on consumption, growth, employment, and investment from demand-side policies. In my experience, the two largest divergences between forecast and reality tend to appear in capital expenditure (capex) and inflation. This is not a coincidence. When the forecaster places too much weight on demand-side policies while ignoring the accumulated debt, overcapacity, and poor track record of most of these measures, the mistakes in capex and inflation forecasts are almost inevitably going to be enormous and much larger than the mistakes on output and employment. Likewise, the tendency of large forecasting entities of ignoring or dismissing supply-side policies leads to forecast errors on the side of caution. This was particularly evident in the recovery of some eurozone countries in 2014 and in the estimates for jobs and growth of 2018–19 in the United States. One of the clearest examples is the almost annual slump in growth in the eurozone relative to early estimates.

The third lesson is that forecasts tend to be significantly more accurate when negative news is already consensus. Even when considering risks that may erode significantly the estimates for the next year, large entities tend to consider a lower probability of occurrence of those events in order to maintain a “positive” outlook. There are still too many politicians and economists who believe that the economy is a matter of sentiment and animal spirits and that, as such, one should maintain a healthily optimistic outlook to support the economy. This has obviously been debunked by reality. Being too optimistic has impacted the credibility of very valuable forecasts while doing nothing to lead economic agents to see a brighter prospect in a recession.

In the past nine years we have seen important improvements in economic forecasting. Some investment banks have stepped out of their historical role of painting rosy outlooks where next year is always a “this time is different” story, and we have seen a more realistic approach. Unfortunately, there is still an eyebrow-raising tendency to end global outlook reports with the same recommendations every year: carry trade your way into the next twelve months.

International bodies have also improved. We have are seeing a much more realistic approach to forecasting than ten years ago, but inflation and GDP estimates still err on the side of figures that governments will be happy with. However, the intense and rising pressure from governments that these bodies are receiving is actually a sign that forecasting is becoming more independent.

The final lesson for us as investors is simple: take with a pinch of salt those estimates that place too much positive impact on government and central bank stimuli. Remember that things that have never happened and multipliers that have never occurred are not going to happen, even less so with all-time-high levels of debt and widespread overcapacity.

Reading only mainstream macroeconomic reports, even if coming from different entities, can lead to a massive confirmation bias, and I learned many years ago that we may get dozens of different sources that ultimately just say the same thing: government spending is always good and central banks always get it right.

We must also remember that mainstream bodies are almost entirely populated by Keynesian economists, and there is a tendency to adopt the messages of pressure groups in the economic debate, as we are witnessing with things like the Great Reset, the whitewashing of MMT (modern monetary theory) and the adoption of concepts like inequality, stakeholder investment, and social spending in ways that are uncomfortably close to the political agendas of some interventionist parties. Mainstream bodies should have understood by now that adopting political mantras does not combat wrong economically radical agendas, it only undermines the entity’s credibility.

Independent research and forecasts have become increasingly important precisely because of the lack of pressure from governments or central banks to produce a predesigned estimate. And this rise of the independents has been absolutely critical to spur international bodies and investment banks to step up their game. That is why it is so important to use different sources of research.

The best way to use forecasts is to do what many of us learned to do, for example, with brokers’ equity and fixed-income research, forget the first page and read the data, the details and the deep content. The headlines and recommendations of brokers and international entities should be the last thing to read in outlook reports.

Forecasting is essential. Independence is key. Independent forecasting will be even more important in 2021 than it was in 2020. Author:

Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020),Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

He is a professor of global economy at IE Business School in Madrid.

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The Most Violent Demonstration Ever to Occur at the White House – Foundation for Economic Education

Posted by M. C. on January 11, 2021

The issue, believe it or not, was a bank.

https://fee.org/articles/the-most-violent-demonstration-to-ever-occur-at-the-white-house/

Lawrence W. Reed
Lawrence W. Reed

After months of violent demonstrations—especially in New York, Seattle, Minneapolis, and Portland—many Americans might not want to learn of yet another. This one, however, dates back long before any living person’s memory and ranks as the worst ever on the grounds of the White House in Washington. The issue, believe it or not, was a bank.

That’s right, a bank. Not racism. Not corruption. Not even an unpopular war. The mob that broke windows and nearly stormed the residence of the highest US official in August 1841 demanded a government-sponsored central bank from a president who refused to give them one. Here’s the story.

The 1840 election pitted incumbent Jacksonian Democrat Martin van Buren against Whig Party challenger and Battle of Tippecanoe hero William Henry Harrison. Four years earlier, Harrison had lost to Van Buren but this time he prevailed. His running mate was former Democrat John Tyler of Virginia, giving rise to the famous campaign slogan, “Tippecanoe and Tyler Too!”

Harrison assumed the presidency on March 4, 1841 at the age of 68. He term-limited himself by dying just 31 days later. The Whigs expected Tyler to faithfully implement the big-government Whig program designed by Kentucky Senator Henry Clay but were quickly disappointed. Even as the party’s vice-presidential candidate, Tyler never disguised his skepticism for Clay’s schemes of a central bank, corporate welfare and high tariffs.

Clay ran the Senate and his fellow Whigs controlled the House, where Clay had previously served a decade as Speaker. While president Tyler cautioned against creating a new central bank (Andrew Jackson had killed the last one a few years before), Clay pressed forward with it in the summer of 1841. A bank bill passed both houses and went to Tyler’s desk, where it died by veto on August 16. The president regarded it as unconstitutional in part because it would force the states to accept branches of the central bank within their boundaries, in direct competition with state-chartered banks.

Tyler began his veto message by reminding Congress that his opposition to a federal bank was longstanding. For 25 years, he pointed out, he expressed this view as a state and federal legislator. He had just sworn an oath to preserve, protect and defend the very Constitution that Clay’s bank scheme would undermine. To turn his back now on both the Constitution and his own conscience, wrote Tyler, “would be to commit a crime which I would not willfully commit to gain any earthly reward, and which would justly subject me to the ridicule and scorn of all virtuous men.”

A central bank would enhance the power of the federal government at the expense of the states, bestow benefits on a financial elite, and undermine the cause of sound money. Tyler wisely wanted nothing to do with it.

The Whigs erupted in a fury of indignation. In his biography of Tyler, historian Gary May describes what happened next:

At 2:00 a.m. on the morning of August 18, a drunken mob gathered outside the White House portico. They blew horns, beat drums, threw rocks at the building, and fired guns into the night sky. Tyler and his family were awakened by the noise…Someone in the mansion’s upstairs quarters lit candles and the light scared the crowd off. Another group arrived a few hours later, dragging a scarecrow-like figure. They set it afire and John Tyler was burned in effigy. It was the most violent demonstration ever to occur at the White House complex.

Security at the executive mansion was minimal in those days. It was not uncommon, in fact, for visitors to walk right in unescorted. A drunken painter even threw rocks at President Tyler as he walked the south grounds. When an odd-looking package arrived by mail at the White House, Tyler feared a bomb, but it fortunately turned out to be a cake.

Clay urged the Senate to override the president’s veto but he failed to get the required two-thirds vote. A new central bank bill with minor adjustments then passed both houses. On September 9, Tyler vetoed that one too. The second veto prompted a stream of invective from Whig-friendly media that lasted for the rest of Tyler’s term. From May’s biography again:

“If a God-directed thunderbolt were to strike and annihilate the traitor,” the Lexington Intelligencer wrote, “all would say that ‘Heaven is just.’” Tyler was called “His Accidency”; the “Executive A**”; “base, selfish, and perfidious”; “a vast nightmare over the republic.” One writer claimed that the president was insane, the victim of “brain fever.” Another, borrowing from Shakespeare, called “for a whip in every honest hand, to lash the rascal naked through the world.” There were anti-Tyler rallies and demonstrations everywhere and numerous burnings in effigy, including in Richmond and at the Charles City County courthouse, where the young John Tyler had practiced law. Angry letters poured into the White House; many proffered threats on the president’s life. What happened next was also expected, but it was still shocking because it had never before happened in American history: the president’s entire cabinet, save [Secretary of State] Daniel Webster, resigned.

On Monday, September 13, angry congressional Whigs formally expelled President Tyler from their ranks. Henry Clay pronounced to his political comrades that Tyler was “a President without a party.” Unlike the opportunistic and ambitious Clay, Tyler was a man of steadfast principles—and those are things that too many politicians (then and now) neither possess themselves nor can abide in others.

Whig vitriol dogged Tyler for the remainder of his term. In the months after the bank vetoes, he also nixed Whig bills to hike tariffs. In response, his congressional opponents formed the first-ever committee to explore whether the president should be impeached and named former president John Quincy Adams as its chair. Its final report, released on August 16, 1842, concluded that Tyler had committed “offenses of the gravest character” and deserved to be impeached. Fearing a political backlash in the country, the committee’s majority stopped short of recommending it.

The report of the Adams committee was partisan political theater at its worst. Tyler had done utterly nothing impeachable. His “offenses of the gravest character” amounted to nothing more than failure to advance the flawed big government agenda of Henry Clay and the Whig Party.

A few years later when Clay realized his own life-long lust for the presidency would never materialize, he famously declared in a speech to the Senate, “I would rather be right than be President.” Time and again, he was neither.

So a firestorm in the Congress produced a riot at the White House. It was all about a bank which the country did not need and which the president rightly used his constitutional authority to thwart. By any measure, it was not our finest hour. But Tyler’s vetoes stand, in my view, as great moments in presidential courage.

One final note regarding President John Tyler: His two grandsons are still around today, at ages 96 and 92. It sounds incredible that two men are living right now whose grandfather was President of the United States almost 180 years ago. You can read the details here.

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How Central Banks Made the Covid Panic Worse | Mises Wire

Posted by M. C. on August 3, 2020

There are many reasons for the corona crisis and the present almost total government control of the economy and society. But if we want to understand why states across the Western world have met virtually no resistance in their quest for power, we need to understand the role of inflation in enabling governments: directly through hiding the real costs and pain of the shutdowns, but also more fundamentally by distorting culture and personal character.

https://mises.org/wire/how-central-banks-made-covid-panic-worse

Introduction

Historical events are complex phenomena, and monocausal explanations are therefore by definition wrong when explaining history. Many factors go into explaining why people and the world’s governments reacted as they did to the coronavirus. It is, however, my contention that examining the inflationary policies pursued by central banks and governments are fundamental to understanding how the current corona hysteria developed.

Calling it hysteria may sound harsh. When the coronavirus first started to draw attention back in February, and when most Western countries instituted extremely restrictive measures in March, one could make a plausible argument that the world was dealing with an unknown and seemingly catastrophic disease and that therefore extreme measures were justified. To be sure, this does not mean that the measures implemented were in any way effective, nor that the sacrifices imposed were morally justified; but there was at least an argument to be made.

At this point in time, however, the Centers for Disease Control and Prevention (CDC) has repeatedly cut the COVID-19 fatality rate, and it is now comparable to a bad year of the seasonal flu (see the useful aggregation of studies and reports by Swiss Propaganda Research). The glaring question therefore is: Why do governments across the West act as if they were still dealing with an unprecedented threat? It is no good to simply reply that what politicians really want is power and that they are just using coronavirus as an excuse for extending government control. While a plausible claim, it does not explain why vast majorities in most countries support whatever policies their rulers have thought good. Given the extreme restrictions placed on social and economic life and the mendacious, ever shifting narrative used to justify them, one would think that there would be widespread opposition after four months. So why is there practically none?

Inflation in the Age of Corona

We can better understand this strange phenomenon if we consider the inflationary policies pursued by central banks across the world. I’ll here cleave to the old definition of the term inflation and the one still favored by Austrian school economists: an increase in the quantity of money. The rise in prices which is commonly referred to as inflation is simply the effect of such an increase. While the complexities of modern central banking can sometimes obscure the realities of the process, there can be no doubt that the last couple of months have seen very high levels of inflation.

Modern central banks are no longer content with the classic role of lender of last resort. As the financial system has evolved, central banks have assumed the role of market maker of last resort—that is, they have either implicitly or explicitly assumed the responsibility of making sure that there is always a buyer for financial assets—and first of all government bonds. Thus the Federal Reserve’s balance sheet has ballooned from just over $4 trillion at the beginning of March to now just below $7 trillion; the Bank of England’s has increased from about £580 billion in March to about £780 billion; and the European Central Bank has increased its holdings from about €4.6 trillion to about €6.3 trillion. The balance sheets of the largest central banks thus expanded by between 35 and 75 percent in about five months.

Inflated central bank balance sheets suggest inflation is coming, but actual inflation of the money supply naturally lags behind, since central bank purchases of bonds and securities do not necessarily result in an immediate expansion of the stock of money. The American money stock (measured by the monetary aggregate M2) grew from $15.5 trillion to $18.4 trillion (March–July 13), the British one from £2.45 trillion to about £2.67 trillion (January–May) and the euro area money stock from €12.4 trillion to almost €13.2 trillion (January–June). The annualized rates of inflation in the major monetary areas during the corona episode is then between about 13 (eurozone) and about 50 (USA) percent, well above the norm.1 If we look at the Austrian, “true” measure of the money supply (TMS) for the United States, we see a similar picture, as the TMS in June grew 34.5 percent year over year (YOY).

The Effects of the Present Inflation

Inflation is not an act of God; it is the outcome of a determined policy on the part of governments and central banks. Such a policy has both long-run and short-run effects, which brings us to the first and most obvious way in which inflation has fueled corona hysteria: by essentially putting freshly printed money at the disposal of governments, these latter have been able to first shut down their countries and then pose as saviors as they distributed largesse to workers and businesses. The states have often reimbursed the costs of furloughing employees, either directly or through (sometimes forgivable) loans to companies, or they have distributed generous unemployment benefits to the workers. This, and not any economic collapse, is the story behind the unprecedented spike in unemployment claims in the United States. The central bank has also created facilities to lend to municipal governments and the Main Street Lending Program to “support lending to small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.”

The effect of these programs and policies and others like them in other countries has been to mitigate the direct impact of government-imposed shutdowns. Businesses may have no revenues, but government aid and loans allow them to meet their contractual payments; workers may be unemployed, but generous unemployment subsidies allow them to maintain themselves comfortably; government support of furloughing schemes hides the true extent of unemployment caused by the shutdowns. And all this seemingly at no cost, since no one notices the inevitable dilution of the purchasing power of the monetary unit.

In the absence of these inflationary policies, the consequences of the shutdown would be much more immediately apparent. Workers would have to spend out of their saved cash and liquidate their savings, while businesses earning no revenues would start to default on their contractual payments. A drastic fall in the prices of real and financial assets would have resulted. The pressure to end the restrictions would have been much stronger. Instead, it looks to most people as if they can go on at their old standard of living indefinitely—or at least as long as they continue to receive their government checks. The economic effects of the shutdown are still the same, however: dislocation of the production structure and capital consumption on a vast scale, but these have been hidden—papered over by inflation and government support.

To the individual business owner and worker, the economic reality is hidden. Inflation leads to a fundamental disconnect with reality. Paul Cantor has previously described “the web of illusions endemic to the era of paper money” and how inflation destroys people’s sense of reality.2 In our case, inflationary monetary policy has hidden the costs of engaging in pandemic hysteria, and hence people do not—indeed, cannot—take account of economic realities when assessing the coronavirus and the shutdowns. Governments at all levels can continue to pose as saviors, inventing new mandates and restrictions to combat the nonexistent threat. Germophobes and busybodies can obsess over other people trying to go about their normal lives, since both the costs to them personally and to society as a whole are completely hidden. How many Karens would have the time to boss peaceful citizens around if they had to actually work to earn a living?

Eventually and pretty quickly, these policies will result in price inflation and a hollowing out of the standard of living. Not only has production been severely restricted, as seen in the drastic fall in US GDP figures; insofar as the newly printed money is used on unemployment compensation in different forms, it will quickly reach normal consumers and be spent on consumer goods. If the programs go on much longer, consumer price inflation, as a result of the fiat money inflation, cannot be far off. Once that happens, only increased rates of inflation can keep the programs going—for a time.

The Effects of the Inflationary System

Read the rest of this entry »

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Why Central Banks Are a Threat to Our Savings | Mises Wire

Posted by M. C. on June 26, 2020

When money is printed—that is, created “out of thin air” by the central bank or through fractional reserve banking—it sets in motion an exchange of nothing for money and then money for something. This results in an exchange of nothing for something.

An exchange of nothing for something amounts to consumption that is not supported by production. When money “out of thin air” gives rise to consumption that is not supported by preceding production, it lowers the amount of real savings that supports a wealth producer’s production of goods.

This, in turn, undermines his production of goods, thereby weakening his effective demand for the goods of other wealth producers.

https://mises.org/wire/why-central-banks-are-threat-our-savings?utm_source=Mises+Institute+Subscriptions&utm_campaign=f5aac35c2e-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-f5aac35c2e-228343965

The US personal savings rate jumped to 33 percent in April from 12.7 percent in March and 8 percent in April last year. An increase in savings is regarded by popular economics as less expenditure on consumption. Since consumption expenditure is considered as the main driving force of the economy, obviously a rebound in savings, which implies less consumption, cannot be good for economic activity, so it is held. Saving and wealth—what is the relation?

To maintain their life and well-being, individuals require access to consumer goods. An increase in various consumer goods permits an increase in individuals’ living standards. What allows an increase in the production of consumer goods is the maintenance and the enhancement of the infrastructure of an economy. With better infrastructure, a greater quantity and better quality of consumer goods could be generated and more real wealth can be produced.

The enhancement and the maintenance of the infrastructure becomes possible because of the availability of final consumer goods that sustain the various individuals who are busy expanding and maintaining the infrastructure. It is the producers of final consumer goods who pay the various individuals engaged in maintenaning and enhancing the infrastructure. The producers of final consumer goods pay these individuals (i.e., the intermediary producers) out of the saved or unconsumed production of final consumer goods.

Note that when a producer of final consumer goods decides to save more, i.e., to consume less, the fall in his consumption is offset by the increase in the consumption of individuals who are engaged in the intermediary stages of production. This means that overall consumption is not declining because of an increase in saving—as popular thinking has it.

What keeps the flow of economic activity going is the fact that the producers of final consumer goods—the wealth generators—invest part of their wealth in the expansion and maintenance of the production structure. It is this that permits the increase in the production of consumer goods, which in turn makes it possible to increase the consumption of these goods. Out of a greater production of wealth more can be now consumed. So, the motor of the economy is actually not consumption but rather savings.

Since savings enable the production of capital goods, savings are obviously at the heart of the economic growth that raises people’s living standards.

Note that people do not want various means as such, but rather want final consumer goods. In order to sustain themselves people require access to consumer goods. Only once there has been a sufficient increase in the pool of consumer goods can people aim at enhancing their well-being by seeking other things such as entertainment- and service-related products such as medical treatment.

Saved goods support all the stages of production, from the producers of final consumer goods down to the producers of raw materials, services, and all other intermediate stages.

Government Data on Saving

In the National Income and Product Accounts (NIPA), the saving rate is established as the ratio of personal saving to disposable income. Disposable income is defined as the summation of all personal money income less tax and nontax money payments to the government.

Personal income includes wages and salaries, transfer payments, income from interest and dividends, and rental income. Once we deduct personal monetary outlays from disposable money income, we get the personal saving.

The NIPA framework is based on the Keynesian view that spending by one individual becomes part of the earnings of another individual. Each payment transaction has two aspects—the spending of the purchaser is the income of the seller. From this it follows that spending = income.

So if people maintain their spending, this keeps overall income going—hence why consumer spending is the motor of the economy.

Observe that the total amount of money spent is driven by the increase in the supply of money. Consequently, the more money that is created out of “thin air,” the more of it will be spent and therefore the greater the NIPA’s national income is going to be. In the graph we see that the year-over-year change in the money supply tracks with the savings rate:

It shouldn’t be surprising that the so-called personal savings rate closely resembles the momentum of money supply. In this way of thinking there is no need to worry about savings, as the central bank can always boost them.

But contrary to the NIPA framework, increases in the money supply in fact lead to the destruction of savings. Here’s how it works.

How an Increase in Money Supply Destroys Savings

In the real world, one has to become a producer before one can demand goods and services. It is necessary to produce some useful goods that can be exchanged for other goods.

For instance, when a baker produces bread, not everything he produces is for his own consumption. In fact, most of the bread he produces is exchanged for the goods and services of other producers, implying that through the production of bread, the baker generates an effective demand for other goods. In this sense, his demand is fully backed by the bread that he has produced.

When money is printed—that is, created “out of thin air” by the central bank or through fractional reserve banking—it sets in motion an exchange of nothing for money and then money for something. This results in an exchange of nothing for something.

An exchange of nothing for something amounts to consumption that is not supported by production. When money “out of thin air” gives rise to consumption that is not supported by preceding production, it lowers the amount of real savings that supports a wealth producer’s production of goods.

This, in turn, undermines his production of goods, thereby weakening his effective demand for the goods of other wealth producers. The other wealth producers are then forced to curtail their own production of goods, thereby weakening their effective demand for the goods of yet other wealth producers. In this way, money “out of thin air” that destroys savings sets up the dynamics of the consequent shrinkage of the production flow.

To conclude: what enables the expansion of the flow of production of goods and services is savings. It is through savings, which give rise to production, that demand for goods can be exercised. No effective demand can take place without prior production. If it were otherwise, then poverty in the world would have been eradicated a long time ago.

Is it Possible to Quantify Total Real Savings?

Now, even if there were any compelling reason to establish what the status of savings is, the relevant savings measure should be the real one—after all, it is real savings that grow the economy. To be able to calculate real savings one must first establish total real income and total real personal outlays. However, this cannot be done, since it is not possible to add potatoes and tomatoes into a meaningful total. All that one can establish is the amount of money spent, or total monetary expenditure.

It is tempting to suggest that we could ascertain real income and real expenditure if we could somehow establish an average price paid for various goods and services. Such an average, however, cannot be established—try and establish an average from dollars per liter of milk and dollars per ton of iron.

Various mathematical methods employed by government statisticians that supposedly provide the solution for separating the real total from total monetary expenditure are an exercise in wishful thinking.

On this Rothbard writes in Man, Economy, and State,

All sorts of index numbers have been spawned in a vain attempt to surmount these difficulties…arithmetical, geometrical, and harmonic averages have been taken at variable and fixed weights; “ideal” formulas have been explored—all with no realization of the futulity of these endeavors. No such index number, no attempt to separate and measure prices and quantities, can be valid.

According to Mises,

In the field of praxeology and economics no sense can be given to the notion of measurement. In the hypothetical state of rigid conditions there are no changes to be measured. In the actual world of change there are no fixed points, dimensions, or relations which could serve as a standard.

Even government statisticians admit that the whole thing is not real. According to J. Steven Landefeld and Robert P. Parker of the Bureau of Economic Analysis (BEA),

In particular, it is important to recognize that real GDP is an analytic concept. Despite the name, real GDP is not “real” in the sense that it can, even in principle, be observed or collected directly, in the same sense that current-dollar GDP can in principle be observed or collected as the sum of actual spending on final goods and services in the economy. Quantities of apples and oranges can in principle be collected, but they cannot be added to obtain the total quantity of “fruit” output in the economy.1

Now, since it is not possible to quantitatively establish the status of the total real goods and services, obviously various data like real income, real personal consumption expenditure, or real GDP that government statisticians generate shouldn’t be taken too seriously. The data that is generated by means of mathematical methods is just a fiction.

  • 1. J. Steven Landefeld and Robert P. Parker, “Preview of the Comprehensive Revision of the National Income and Product Accounts: BEA’s New Featured Measures of Output and Prices” in Survey of Current Business, July 1995.

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bionic mosquito: A Run on Revolvers

Posted by M. C. on March 30, 2020

If the bank doesn’t survive, money on deposit at the bank might be worse than having undrawn capacity on a revolver. Money on deposit sits on the bank’s balance sheet; a depositor becomes nothing more than an unsecured creditor to a bankrupt institution …

Looks like a bank run to me too.

https://bionicmosquito.blogspot.com/2020/03/a-run-on-revolvers.html

Bionic Mosquito

You think this is about the run on firearms and ammunition. Nope.

From ZeroHedge: “Revolver Run”: Banks Suffer Record $200BN In Outflows As Frenzied Companies Draw Down Revolvers:

…as of last Friday, corporate borrowers worldwide, including Boeing, Hilton, Wynn, Kraft Heinz and literally thousands more, had drawn about $60 billion from revolving credit facilities this week in a frantic dash for cash as liquidity tightens.

For those unfamiliar with this term, think of a revolver like an open line of credit with a ceiling. A company will have some permanent forms of financing in place (equity, long term debt, bond debt); it will also have a revolver from which it can draw (typically) temporary needs, for example, seasonal or inter-monthly fluctuations in working capital, etc.

Confirming the unprecedented revolver drawdown scramble of 2020, JPMorgan reports that its tracker of known corporates that have tapped banks for funding rose further to a record $208 billion on Thursday, up $15 billion from $193 billion on Wednesday and $112BN on Sunday.

Banks offer revolvers up to some limit – for example, a company could have a revolver of up to $5 million (or $5 billion); at any one time, none, some, or most of it might be drawn. JPMorgan reports that revolvers are currently drawn, in aggregate, at something approaching 80% of their limit.

Why are companies doing this now?

As a result what was a revolver “bank run” has become a spring for the ages as virtually every company has rushed out to draw down its revolver for two reasons i) with the CP market still locked up, even blue chips have no access to short-term funding…

CP = commercial paper market; this market is still not functioning well, despite the Fed recently announcing a backstop for it.

…ii) increasingly more companies are concerned their banks may not survive…

This one is interesting. If the bank doesn’t survive, money on deposit at the bank might be worse than having undrawn capacity on a revolver. Money on deposit sits on the bank’s balance sheet; a depositor becomes nothing more than an unsecured creditor to a bankrupt institution (for any amount above the FDIC limits).

Meanwhile, the borrower will owe the balances drawn on the revolver to whatever institution has taken over the assets of the bankrupt bank – and these assets include loans made to companies who drew down their revolvers.

…so why not just draw down the facility and hold the cash instead of being subject to the whims of some fickle bank Treasurer who may not have a job tomorrow, or who decided to abrogate all revolver contracts with the blink of an eye…

This would be interesting: banks not meeting their commitments. It is certainly possible, but if this happens in any substantial quantities, the banking system would be called into question just as if bank deposits were not made available.

Conclusion

I suspect that all of this can be papered over again by central banks, not forever, but for a time. It will take central banks a few weeks or months to figure out how to handle this new normal, just as it took them some months the last time (2008-09).

Until consumers suffer unbearable price inflation, nothing prevents central bank balance sheets from growing to whatever number desired or necessary. For the Fed, now at something around $5 trillion, $10 or $20 trillion can likely be had.

Prior to 2008, that number was something around $800 billion.

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Why Deflation Can Be a Good Thing | Mises Wire

Posted by M. C. on March 7, 2020

The supply of money determines the price level in the long run. Whether prices will rise or fall depends on the relative variation of the money in circulation…

What sense does it make to expand the money supply and then try to control it by raising the interest rate? The result of such a policy is market turmoil and confusion.

Yet if central banks had left the system alone, such a deflation would be very gradual and not only be not harmful but beneficial for the economy.

https://mises.org/wire/why-deflation-can-be-good-thing?utm_source=Mises+Institute+Subscriptions&utm_campaign=ed8fcb5bf8-EMAIL_CAMPAIGN_9_21_2018_9_59_COPY_01&utm_medium=email&utm_term=0_8b52b2e1c0-ed8fcb5bf8-228343965

[André de Godoy, a Brazilian journalist from the Mackenzie University of São Paulo, interviews economics professor and Mises scholar Antony Mueller about the causes and consequences of credit expansion and the relations between credit, money, and price inflation.]

André de Godoy: Please explain the relationship between the money supply, the price level, and economic activity.

Antony Mueller: The supply of money determines the price level in the long run. Whether prices will rise or fall depends on the relative variation of the money in circulation compared to the relative variation of the supply of goods. However, one must take into account that the process from the creation of money by the central bank, the so-called monetary base, and the impact on the economy in terms of demand is long and contains a series of variables. These transmitters of the monetary impulse can work in tandem and strengthen the original impulse or, say, may counteract each other. Let me give you an example: over the past fifteen years, the main central banks have practiced the policy of “quantitative easing,” which has expanded their balance sheet by a factor of over five. In the United States, the monetary base rose from $830 billion in January 2008 to over $4 trillion in September 2014 and stands as of now, in January 2020, at $3.4 trillion. Yet this drastic increase has not led to a price inflation and has stimulated economic activity only moderately. The reason for this is that the commercial banking sector did only transform a part of this base money into money in circulation and that the economic agents reduced the transaction velocity. For the monetary aggregate M1, the velocity halved from 10.6 in early 2008 to 5.5 in the fourth quarter of 2019.

Godoy: Authors like Ludwig von Mises and Milton Friedman hold that inflation is a monetary phenomenon. However, I have heard that it is possible to expand the amount of money in circulation without causing negative effects for the economy because inflationary effects could be controlled by the adjustment of the interest rate. Is this true or just a remedy?

Mueller: This is a very confused view. What sense does it make to expand the money supply and then try to control it by raising the interest rate? The result of such a policy is market turmoil and confusion. It is interventionism of the worst kind. Why should the money supply increase anyway? If the supply remains fixed, and productivity rises, prices will fall. That is beneficial deflation. Why should one complain when the goods become cheaper for the consumers? The point is whether price deflation happens slowly according to productivity increases in the economy or abruptly as a hefty liquidity contraction due to a financial market crisis.

Godoy: Why do central banks try to manipulate the money supply?

Mueller: Central bankers have a deep-seated fear of deflation. They presume that a price deflation will lead to an economic contraction. Yet if central banks had left the system alone, such a deflation would be very gradual and not only be not harmful but beneficial for the economy. If the central banks intervene and expand the money supply and implement, as it is the case today, a “zero interest rate policy“ (ZIRP), or even a “negative interest rate policy” (NIRP), a tension builds up between the natural tendency of the prices to fall because of productivity increases and the inflationary money supply. A deep discrepancy builds up between the human time preference and the monetary rate of interest which would converge in a free market without central bank interventions.

Godoy: Would a stable money supply not be too rigid for the economy?

Mueller: One must remember that a falling or rising price level is the result of the difference between the rate of variation of the supply of goods and the rate of variation of the money stock and the velocity of economic transactions. The monetary system has a natural elasticity. Even when the money supply is linked to a fixed supply of central bank money, expansions and contractions of nominal spending will take place. Money has loose joints, but when the monetary base is stable, the system has a definite anchor. There is elasticity of money under a gold standard even when the stock of gold is constant. Different from what we observe today, no long-term and extreme divergences were possible. We must change our present monetary system which is highly dysfunctional.

Godoy: Some prominent Brazilian economists mention the post-Keynesian theory as a counterpoint to the classical quantity theory of money and claim that the so-called modern monetary theory would provide a better model for the present.

Mueller: As I explained above, even when the money supply stays fixed the use of money is volatile, and thus even a gold standard has monetary elasticity. It is wrong to claim that only fiduciary money would provide financial flexibility. The point, rather, is that with an anchored monetary system, the degree of deviation is limited, while under the current fiat money regime there is no constraint. That is the problem with the modern monetary theory. Its adherents praise an anchorless system, because it would allow unlimited funding of government expenditure. Even these theorists, however, recognize the problem of price inflation when the money supply is excessive. In this case, they believe, the government could control price inflation through taxation and then siphon off the excess money. Yet while the adherents of this “new” monetary theory praise anchorless money as a boon because they live under the illusion that the economy is in permanent need of macroeconomic management, the truth is that it is not the free market that produces booms and busts but the intervention of the governments and their central bankers.

Godoy: Could you cite a few examples of how inflation comes about in our day because of the monetary policies that governments have recently pursued?

Mueller: Venezuela is currently a sad example along with the very tragic case of Zimbabwe. Let’s concentrate on Brazil’s neighbor country. Massive government spending, foolish interventionism, and the expansion of the money supply are behind the gigantic price inflation in Venezuela. These policies form part of the grander plan of implementing a “Socialism of the Twenty-First Century.” But what they got was not prosperity and equality but even sharper social divisions, a brutal hyperinflation, and mass misery. Venezuela is the empirical verification of what we have discussed: the process begins with the false promises of social justice and comprehensive welfare. Private property is no longer secure, government intervention is on the rise, and business investment falls. Yet instead of the deteriorating economy inducing the political leadership to change course, government expenditures, based on credit expansion, increase even more and with them rises the money supply. While more regulation and interventionism suffocate the supply side, inflationary demand is on the rise. The country enters a deadly spiral of economic, political, and social crises that reinforce each other. At the very beginning of this process, some illusionary benefits appear, yet after a short while the poorest people are those who suffer most until it also brings down the whole rest of the society in a cataclysmic collapse.

Godoy: From what I’ve gathered, monetary inflation itself is not the problem that causes a raise in the price levels. The problems are people’s expectations and the speed with which transactions happen, is that correct?

Mueller: Well, let us put it this way: the reason for obesity is not the food but how much one eats. The expansion of the money supply is the food. Whether the economic actors take the offer is another question. In this decision expectations play a major role. Here, however, we must consider that expectations do not come from nowhere. They have a point of reference in the economic reality and in the public discourse, including the media. The laissez-faire approach to money does not mean the absence of control. It is rather the present monetary system, with constant central bank intervention and the craving of governments for deficit spending, that is out of control. In contrast to a fiat money system, a gold standard or a similar system with a strong anchor would combine short-term flexibility with long-term stability.

Godoy: The mechanism that uses interest rates to control inflation is actually a way to try and contain price raises in a fiat money system, right?

Mueller: For the policymakers, interest rates are an instrument of intervention while for Austrian economics they should reflect time preference and as such would be the natural rate. Policymakers can only manipulate the monetary rate of interest. What matters is the money supply and the expectations. A higher interest rate makes borrowing more expensive and thus may stop the expansion of the circulation of money in the economy. Furthermore, higher interest rates may change expectations about future price inflation and thus reduce the velocity of circulation. The main point, however, about raising the interest rate is that the central bank has to reduce the monetary base in order to obtain higher interest rates. Central banks cannot just raise the interest rate and leave the monetary base as it was. When central banks target a certain level as their policy rate of interest, they must manage the monetary base accordingly.

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The Next Curse – LewRockwell

Posted by M. C. on November 26, 2019

Rather, it is Austrian economics and the Austrian Business Cycle theory that shows how sustained artificially low interest rates are a precondition for both record setting skyscrapers and the Skyscraper Curse

Easy money funds projects that shouldn’t happen and we don’t need.

https://www.lewrockwell.com/2019/11/mark-thornton/the-next-curse/

By

Zero Hedge reports “China’s Skyscraper Boom Comes Crashing Down Amid Developer Default,” noting reports that construction work was recently halted on the nation’s potentially tallest skyscraper, after the developer defaulted on a payment to the construction company.

They then invoked the Skyscraper Index which they describe: “The index is simple; the world’s tallest buildings are often constructed or completed at economic turning points, right before or just as the downturn gets underway.” The Skyscraper Curse is the economic crises that ensues with every new world record.

As I describe in my book, The Skyscraper Curse: And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century, the Skyscraper Index has a remarkably accurate record dating back to the late 19th century.

The book is actually two short books, the first one on the Skyscraper Curse, which explains the theory and history of the Skyscraper Index. The second half demonstrates that Austrian economists also have a remarkable record of predicting economic crises, but one that is not based on the Skyscraper Index. Rather, it is Austrian economics and the Austrian Business Cycle theory that shows how sustained artificially low interest rates are a precondition for both record setting skyscrapers and the Skyscraper Curse

The theory is that artificially low interest rates induce more borrowing for longer term investment projects such as research and development on new technologies, pharmaceutical drug projects, and of course long-term real estate projects, like skyscrapers. My book provides a detailed analysis of how low rates impact skyscrapers, but the most important point is that skyscrapers are just a good example of what is going on throughout much of the economy.

The article is correct that there is a great deal of building super tall skyscrapers in China, but is unclear if the stalled construction would have set a new record in China and certainly it would not set a world record. If it would have set a new Chinese record, then it would still indicate an economic crisis is coming to China soon.

No matter, the stalled Jeddah Tower in Saudi Arabia was set to become a new world record skyscraper, originally expected to be completed in 2020, which is when we can expect the next Curse to begin.

The fundamental case for an economic crisis in the near future should be obvious. Central banks around the world have implemented ultra-low interest rate policies.  In fact, a large portion of government bonds are now being financed at negative nominal rates, which is unprecedented. Many people manning Wall Street, hedge funds, and banks have never experienced a Federal Funds rate of 3%, which was the norm the previous half century.

Debt levels are at historic highs whether it is government debt, business debt, or individual debt. Debt levels tend to rise with low interest rates and expending economies, i.e. the artificial boom phase of the economy, only to become the most painful aspect in the economic crisis, i.e. government austerity budgets, corporate restructuring and bankruptcy, and bankruptcy, foreclosure, and unemployment for individuals.

Anecdotally, I am seeing buildings built taller, more spending on research and development, and newer companies poaching employees and customers from older companies.

The crisis usually begins when we see more stories about unexpected higher costs and lower revenues. While nothing about the next crisis is obvious to all—it never is–the stock markets will render their judgements.

 

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