Economics

Jim Rickards: Perpetual Quantitative Easing

You might remember a couple of months ago that Jim Rickards came up with the intriguing theory that the Federal Reserve in the United States would soon go bankrupt even according to its own rules (such as they are).

Remarkably, within a few weeks of that, the Federal Reserve released bizarre new accounting rules for itself, which involved negative liabilities, which to all intents and purposes made it impossible for them to go bankrupt if they can continue to apply their own ‘change-the-goalposts’ accountancy rules to their own books (rather than using any common-sense accountancy paradigm that the rest of the planet might have used for the past several hundred years).

One therefore suspects that the Federal Reserve watch Mr Rickards’ ongoing statements with a hawk-like eye.

In his latest interview with Eric King, Mr Rickards puts forward another fascinating possibility, that the Federal Reserve will be able to announce ‘truthfully’ on July the 1st this year, that it has ceased its QE2 money printing programme.

However, if you follow the implicit logic in the interview below, you may agree with Mr Rickards that on July the 1st they will still remain able to monetize $750 billion of US government debt each year, for the foreseeable future, on the basis of all of the money printing that they have already rolled off the Bureau of Engraving’s printing press.

In the apocryphal words of a certain Austrian lady in the French pre-revolutionary court of Louis the XVIth, they may indeed be planning to have their cake and eat it.

Obviously, with people like Mr Rickards around they will never be able to get away with it completely, and with the US government engaging in $1.5 trillion of deficit spending each year, ad infinitum — and arguing internally about a relatively paltry $60 billion dollars of ‘painful’ cuts — they may still need to rack up another $750 billion dollars a year from thin air, just to keep this party going a bit longer.  This will be especially likely with a presidential election coming up, in which the Great Pharaoh King Obama will come off the golf course and read us all some more folksy speeches off his teleprompter, to make us realise that one day real soon he will finally deliver the change ‘that you can believe in’.

No doubt, he will win again, this time against Mitt Romney, unless something unbelievably improbable happens with Dr Ron Paul.  (Well, I’ll keep with the dream until it becomes impossible to do so.)

However, what I like is the idea that the men and women at the Federal Reserve who gave us ‘negative liabilities’ — plus all of their satellite central banks around the world — still think they’re going to get away with all of these terminological inexactitudes and Byzantine subterfuges, and that they genuinely think the rest of us will still be fooled by their playground machinations, which involve the popular strategy of continually telling porky-pies to the teacher about what happened to the homework.

One day, the Great Big Dog in the sky that eats all such homework will regurgitate these endless excuses and reveal them for what they are; a forty-year blizzard of counterfeited lies. No doubt these same central bankers are already working out ways of how to blame the Libyan crisis and the Japanese crisis for everything that is about to go so very badly wrong with their Keynesian schemes, especially concerning the dollar, over the next few years.

But it will fail to wash, I’m afraid. Especially while splendid men like Mr Rickards are on their case:

You do, of course, have to wonder at the mentality of these people in the central banks, who are supposed to be the best and the brightest of us.  As Hayek would have said, no man or group of men, no matter how intelligent, can match the entire market of all interacting humans; but when will they get the message? And why, for such ‘intelligent’ people, do they appear so stupid?

QE1 failed, so they tried QE-lite to fix that. Then QE2 was needed to fix that. And now Perpetual QE is going to be needed to fix that. And no doubt QE3 will be needed to fix that, and then QE4, when that goes wrong too.

When are these Über Supermen finally going to realise that money printing fails to solve anything, but only makes things worse for everyone outside the feeding trough of government, and even eventually fails for them too, when nobody will take their paper scrip any more or obey their costumed regulation enforcers? Or, in the words of Richard Bandler:

“If what you are doing is not working, stop and try something else.”

You never know, one day they may even phone Professor Philipp Bagus and ask his opinion about 100% reserve commodity money, and how this could instantly remove all negative externalities and negative liabilities from their Gordian Knot money printing scam, plus get us back to an honest system of enforceable property rights and monetary freedom unencumbered with all the usual government ineptitude, from the same kind of people that built so many nuclear power stations on one of the world’s most active earthquake and Tsunami-causing fault lines.

We can but hope.

43 comments to Jim Rickards: Perpetual Quantitative Easing

  • chef

    Good post, but it’s a shame to see you still banging the drum about the “forty-year blizzard of counterfeited lies”. I don’t see why we should allow the availability of an incredibly expensive shiny metal determine how much money we’re able to create, it puts humans in the back seat and AU in the driving seat, the wrong way around imo. It certainly wouldn’t help expand human liberty, on the contrary, it would have a debilitating, limiting effect (which I guess is what you’re after in a way)

    The Austrians need to consider a paradigm shift. Our current economic problems can’t be addressed adequately by only analysing the money supply. It was the housing market that wrecked the economy, not because of central bankers’ fiat credit but because the nation’s rents have been privatised and the the poor left in a position where they have to pay their landLORDS monthly tributes. Acquiring these tribute rights commands a high price, leaving the economy with an unviable cost structure and an addiction to housing speculation. In short this is a land issue, not a money one. Solve the housing market welfare system and my belief is that the money “problem” would disappear overnight.

    • Simon Bennett

      “It was the housing market that wrecked the economy, not because of central bankers’ fiat credit but because the nation’s rents have been privatised and the the poor left in a position where they have to pay their landLORDS monthly tributes.”

      The housing market was wrecked by central bank ineptitude. By continuously mispricing money on the downside they fuelled an unrestrained credit boom. This was further aided by the irresponsible (and sometimes fraudulent) activities of banks who, seeking to bolster their profits, issued more and more loans to people who couldn’t repay them, if the interest rates ever returned to a more normal level.

      Boom and bust cycles are always caused by central bank interventions, and fuelled by credit expansion by the banks. People confuse rising prices with inflation (which is actually an increase in the money supply), and therefore do not understand the cause of the rising prices. They therefore blame everybody but the real culprits, i.e. the banks and central bank. the real cause of the problem is never dealt with, and the ship of fools continues to sail endlessly around the world, running aground every 10 years or so, and completely sinking every 80-100 years.

      What is absolutely essential is to get interest rates set by market activity, not central bank planners. Then pernicious feedback loops which fuel the booms will become automatically snuffed out, as interest rates inexorably rise when the demand for money increases.

      It is all quite simple really. However, banks and governments don’t like the solution, since it prevents them acting in an irresponsible and profligate way with other peoples’ money.

      • chef

        If you have a look at interest rates during the 1980’s you’ll notice that they were exceptionally high, despite this we still experienced a housing boom/bust because Ricardo’s Law (a land pricing theory) was allowed to undermine the economy unchallenged. That cycle was closer to the Austrian ideal than this one, yet it still didn’t eradicate the boom/bust process, far from it in fact.

        The Austrians have sold you a pup with their monetary definition of inflation, inflation means rising prices, end of. Only measuring the money supply strikes me as a particularly blinkered (and dare I say it, fanatical) approach.

        • Simon Bennett

          “If you have a look at interest rates during the 1980′s you’ll notice that they were exceptionally high, despite this we still experienced a housing boom/bust…”

          The effect of interest rates on prices is determined by the level of interest rates in relation to the general rate of price inflation, not on how high the rate of interest is. So, if price general price inflation is running at 15%, whilst interest rates are set at 10%, there is a negative real interest rate of -5%. In this circumstance it makes sense to borrow as much money as possible and buy anything tangible, e.g. houses, gold, oil, etc. This gives rise to a continued and sustained rise in prices, unless the credit expansion is curbed by raising rates above the general rate of price inflation.

          Have a look at the gold price and interest rate spikes in 1980-1981 on these links:

          http://goldprice.org/30-year-gold-price-history.html

          http://mortgage-x.com/trends.htm

          What was happening at that time was that the US dollar was about to succumb to a complete meltdown due to the effect I describe above. By raising the rate to 21% the Fed was able to prevent the complete collapse of the dollar.

          Remember it is not the rate of interest taken in isolation that matters, it is the real rate of interest in relation to how fast money is losing its value. Money loses its value when more of it is in circulation. This happens when interest rates are too low, or central banks print more of it. This is reality, not an arbitrary view.

          • chef

            Are those U.S stats? While interesting I don’t see how they’re relevent to the debate (it’s like when people quote the repeal of Glass-Steagal as a reason for the UK boom, which always makes me chuckle).

            Here’s the relevent data:

            http://safalra.com/other/historical-uk-inflation-price-conversion/

            http://www.bankofengland.co.uk/statistics/rates/baserate.pdf

            As you can see, rates were either just below official inflation (i.e 1980) or they dwarfed it (the rest of the decade) yet despite this disconnect we still experienced the housing bubble that was impossible according to Austrian theory.

            I have to say I would be more convinced if everything rose in price equally, but for some reason it’s only housing that tends to hyperinflate, from which I can only deduce that there’s something wrong with the housing market. Not the money market.

        • Simon Bennett

          Hello chef, sorry I can’t reply to your latest response below, so I have replied here. Can I just say that I am enjoying this debate. I am not necessarily disagreeing with your position regarding housing and land values, but I am taking issue with your assumptions regarding price inflation, interest rates, and the money supply.

          Your basic point appears to be that my argument regarding the inflation rate in relation to the interest rate is fallacious, based upon the official inflation figures. However, rather than supporting your argument, you have inadvertently stumbled across the primary mechanism by which central banks and governments obfuscate their creation of price inflation, by massaging the figure upon which their interest rate decisions are made. If you read my comment I was careful to refer to the general rate of price inflation and not to the official figure, which is almost always adjusted downwards.

          Governments always try to understate inflation figures because it is in their interest to do so. It enables them to erode away their liabilities, whilst appearing to behave correctly. This link will show how the current inflation measure, CPI, is being manipulated:

          http://www.investopedia.com/articles/07/consumerpriceindex.asp

          As for your comment about housing tending to hyperinflate, I do agree that housing tends to be much more sensitive to interest rate induced credit expansion. But let us think why this should be so. Firstly, for the main residence, there is no capital gains tax to be paid on any increase in values, thus creating a massive skew in the market. Secondly, we all need to have somewhere to live, so our interest payments on a mortgage are, to some extent, offset by rental payments we would need to make if we chose to invest our surplus earnings in other asset classes. Therefore, there is a huge bias towards housing as a hedge against inflation induced by credit expansion.

          Coupled with the inducements for normal people to hedge against inflation using housing, there are similar inducements to the banks to make loans to these people. The first, and most important inducement, is that the house is a solid asset that they can hold on their books, i.e. the loan is secured. This means that even if the loan is not repaid they can repossess the house, and get their money back this way. And, now, in the age of the economic bailout, it is a one way bet. In effect they cannot lose. The banks all believe the central banks will bail them out if there is a problem with their loan portfolios, which encourages them to lend even more money. The reason that the housing market has not collapsed recently in the UK is due solely to the interventions of the BoE. However, these interventions are now creating a real problem with inflation in other asset classes e.g. oil, food and precious metals.

          The thing about inflation is that it rarely works on every asset class and item equally in a coordinated fashion. Other factors such as taxation, people’s preferences for risk, and other factors also influence how the various prices rise over time.

          To show you why price rises are a reflection of monetary policy, have a look at this price of oil versus gold:

          http://bigpicture.typepad.com/comments/2005/09/real_gold_versu.html

          The oil and gold price tend to track one another, as does gold and other commodities.

          When prices for things go up, it is generally not because they have increased in value, it is that the value of money has gone down. The price of gold in relation to other commodities remains relatively static over time, whilst the value of fiat currencies just nose dives continuously.

          So, in conclusion, there may be issues in relation to housing and land values that need addressing. I personally think that the current system, and prices, are lamentable. However, we must not lose sight of the fact that monetary debasement is probably the biggest and most pernicious problem that is currently destroying our economy. And to think that rising prices are not caused by artificial credit expansion is just plain wrong.

          • Simon Bennett

            Oh, and one final point. Do you think it is a coincidence that when housing was taken out of the official CPI figure (here in the UK), our housing prices shot up in real terms? We now have the highest earnings to house price ratio in living memory. This shows the connection between inflation figures, interest rates, and asset price inflation.

          • chef

            Thanks for the kind response, at least you’ve been prepared to defend your position instead of telling me to just go away, I consider the later retort most unhelpful!

            If Austrian economists don’t believe that the headline rate of inflation is accurate then at the very least I’d expect some form of alternative measure. Depending on what you’re measuring inflation could just about be anything, but Austrians are asking me to take a leap of faith and just accept the inflation/IR relationship is always what they say it is because that’s what it says in the textbook. I’d personally like to see a bit more evidence before I started advocating macro-economic policy of the back of this assumption. But the core claim that I made earlier still holds true, housing boombusts have occurred when IRs were both “high” and “low”, which weakens the Austrian’s position imo.

            Also it’s not the government that measures inflation but the ONS, this may seem like I’m splitting hairs but these two bodies don’t always see eye to eye, and as far as I’m aware there’s been no evidence of the government forcing the ONS to manipulate the inflation data. In a way they don’t need to, they could just halt index linked payouts if they were that concerned.

            I don’t think you’ve captured the true spirit of the British economy when you talk about inflation hedging, if you think back to boom this wasn’t the motivation at all. People weren’t worried about inflation, they were actually loving it, which is why every man and his dog wanted to take out a jumbo mortgage and ride the property bubble. Again I would say that this is a case of textbook Austrian theory distorting our understanding of the economic reality. Other than a few housepricecrash evangelists nobody was concerned with inflation, if they were gold would have rocketed throughout that period instead of bumping along the bottom until the crisis hit. The point I’m trying to get across is that we’re reacting to the housing market rather than controlling it, QE, bailouts, precious metal inflation and the oil spike of 08 (or 09 can’t quite remember) are all symptoms of a wider systemic imbalance, one that is rooted in the instability of land market.

            Ok, we could alleviate the most visible aspects of the bust by contolling credit, but this would be working against the grain the market rather than with it, and as such would be yet another inefficient distortion of economic reality.

          • chef

            According to Alice Cook house prices have reduced considerably from their all time high:

            http://ukhousebubble.blogspot.com/2011/03/up-or-down.html

            But no, it’s no coincidence that assets that generate a yield rise in value when IRs are slashed, this is covered comprehensively in Georgist theory.

          • Simon Bennett

            Just one specific response to your comment chef.

            Inflation hedging works both from a positive and a negative subjective perspective. People continuously pile into a bubble as it is expanding because they do not want to miss out on the gains that they are seeing others enjoying.mWhen the bubble is deflating people panic and try to protect themselves against the central bank interventions, e.g. by buying gold, when they see their monetary store of value disappear before their eyes.

            Had the central banks responded to the last bust by raising rates, then no one would have bought gold, because the value of their money would have increased and not decreased in value.

            The problem with interest rate interventions is that they divert people’s efforts away from productive economic activity, towards protecting themselves against the inflation caused by banks and central banks. This is wasteful and counter-productive. As you noticed house prices are now unaffordable, and thus crippling our economy. All we disagree about is the mechanism and the cure.

        • Simon Bennett

          I will have to get going now, but just a couple of points for you to consider chef.

          I can’t speak for all Austrian economists, but there is a general tendency in the Austrian school to believe in a hard currency like one backed up by gold, and for interest rates to be set by the market. In this situation the need for inflation measuring disappears because it is no longer necessary or even meaningful. Prices should reflect market conditions and people’s individual subjective choices, and not be driven by soviet style central planning, which always sends false signals to the market and wrecks the natural equilibrium that markets find themselves. Inflation is meaningless when the money supply stays constant, since prices adjust up and down in relative terms according to people’s choices and market conditions.

          Austrian economics is so alien to mainstream economics that many people do not understand it. The basic idea in Austrian economics is that prices need to be set in a free market, controlled by each individual making individual choices.

          Some people want to lend money, and others want to borrow it. By these parties coming together, interest rates are set by individual preferences. If money becomes too cheap or too expensive, the market naturally self-corrects, and thereby eliminates the continual boom-bust economics inherent with central planning.

          The problem with discussing Austrian economic principles in a completely non-Austrian environment, means that much confusion arises since there are so many assumptions as to what a monetary system must contain based on the way that our current monetary system is constructed.

          Speaking personally I would like to see the entire current monetary system scrapped, since it has more than amply demonstrated that it was never fit for purpose. Any system which creates continual booms and busts, and continuously misprices money, is fatally flawed and will have to be replaced sooner or later.

          • chef

            I agree that free markets should be integrated into society wherever possible and to that end would happily welcome the abolition of the MPC, but for me that’s as far as it goes. I don’t see the monetary system as a major problem so it would be reform for the sake of it, and most likely make things worse.

            I’m a bit taken aback by your views on inflation though, if we are going to measure the prices of things it makes sense to actually go out and jot down their prices, not ask the BofE how many ten pound notes they’ve knocked up this month. If the economy grew 10% and the money supply grew 10% I’d expect little in the way of inflation (all else being equal), using the Austrian method though inflation would be running at 10% even if every single price in the High Streets stayed the same. This is just another example of Austrianism being out of kilter with economic reality because of their narrow focus on the money supply. Here’s another example:

            http://www.moneyweek.com/investments/property/gold-price-and-uk-house-prices-04909

            Scroll down and you’ll see a graph of gold in ounces vs UK housing. Austrian theory dictates that the relationship between these two commodities should stay more or less constant (i.e your oil graph) as gold is “hard money”. This didn’t happen, housing ballooned in price when measured in both money and gold and finally retreated (in both) after the market started crumbling, so what’s to stop this happening again if we adopted the Gold Standard for example? Doesn’t this form of inflation count as it isn’t being manipulated by central banksters?! I don’t think the man on the street would accept that when his has has gone up from 300oz to 700oz in only a few years. I’d say that’s some serious inflation.

          • Robert Thorpe Current

            Austrian theory dictates that the relationship between these two commodities should stay more or less constant (i.e your oil graph) as gold is “hard money”

            As far as I am aware no Austrian theory says that gold and houses should have a more-or-less equal long-run price. No Austrian theory says that gold and oil should have a more-or-less equal long-run price either.

          • Simon Bennett

            Hello chef.

            “If the economy grew 10% and the money supply grew 10% I’d expect little in the way of inflation (all else being equal), using the Austrian method though inflation would be running at 10% even if every single price in the High Streets stayed the same.”

            You are right here. The reason being that if the real economy grew by 10% and the money supply stayed the same, then the general level of prices should fall by 10%. Keynesians call this deflation and seek to rid the economy of it.

            However, Austrians call it a gain in productivity and welcome it. This is how wealth is generated. By increasing productivity whilst holding the money supply constant, prices fall and everyone gets richer. By seeking to keep the money supply and growth expanding together the central banks fritter away productivity gains on useless and counter-productive bubbles like the housing bubble. That is, they are needlessly creating inflation and distorting the market economy, by transferring the productivity gains to undeserving regions of the economy.

            As I said, it is difficult for non-Austrians to appreciate Austrian economics, as it is so alien to the mainstream way of thinking.

          • Simon Bennett

            And finally chef,

            Over the last 15 years or so there have been huge productivity gains (for the World as a whole) realised by transferring manufacturing to the far East. These productivity gains should have been reflected in a sustained fall in prices, i.e. price deflation.

            However, the western central banks manufactured inflation to counter this “deflationary threat”, by keeping interest rates artificially low. These low interest rates fed mainly into the housing market creating the huge burst of inflation which you have already identified.

            However, by making housing more expensive, and keeping other prices rising more slowly (around +2%), the central banks unwittingly destroyed our economy. This destruction came to light in 2007/2008 when the credit induced bubble burst. However, rather than taking it on the chin, they have created more inflation, to counter the last lot of inflation. The central bank planners are therefore much like the old woman who swallowed a spider to catch a fly. Unfortunately for us they are now in the process of swallowing horse…

          • chef

            Simon, of course I welcome productivity gains but I don’t think they should be equated to a static money supply, they’re quite seperate concepts.

            I think you have a point but I’m going to take a different angle, if output rose by 10% but the money supply stayed the same then it’s not unreasonable to assume that money would become 10% more valuable, I’m sure you’d agree. But that’s little more than a transfer of wealth from the productive to those that own our means of exchange, in other words it’s a form of rent seeking, one that reduces the value of goods and services. Those doing the producing now have to work 10% harder to acquire the same amount of money, their labour has been devalued all because the money supply wasn’t allowed to be created when needed.

            I agree that the decrease in the cost of imports gets recycled into higher house prices, as that’s a fundamental economic law (known as Ricardo’s Law) that Georgism seeks to address. This cannot be rectified with money manipulation though, all we could do is jack up IRs and up people’s fixed costs, which to me isn’t a solution. It would just be another transfer of wealth from the productive to idle owners of financial capital.

          • Simon Bennett

            Hi Chef

            “I think you have a point but I’m going to take a different angle, if output rose by 10% but the money supply stayed the same then it’s not unreasonable to assume that money would become 10% more valuable, I’m sure you’d agree.”

            That is exactly what I said, so yes I agree.

            “Those doing the producing now have to work 10% harder to acquire the same amount of money, their labour has been devalued all because the money supply wasn’t allowed to be created when needed.”

            No they don’t. I didn’t say their wages went down, I assumed they stayed the same. They therefore are earning 10% more, as the money they are earning is worth 10% more. This is the whole point that I am making.

            If the money supply stays constant, then price fluctuations are due to relative subjective preferences and productivity gains and falls. If you measure the general price level this should remain constant if productivity remains flat. Prices fall as productivity goes up, and rise when it goes down. In this way productivity gains are distributed fairly amongst everyone. By artificially inflating the money supply through interest rates, money becomes too cheap and assets like houses soak up the central bank generated inflation.

            “I agree that the decrease in the cost of imports gets recycled into higher house prices…”

            This is only because interest rates are set too low by central banks. With hard money the perverse incentives to protect yourself against central bank generated inflation disappear.

          • Simon Bennett

            Hi chef

            “This cannot be rectified with money manipulation though, all we could do is jack up IRs and up people’s fixed costs, which to me isn’t a solution. It would just be another transfer of wealth from the productive to idle owners of financial capital.”

            You are confusing the tail with the dog. Hard money involves no money manipulation, and no one should jack up interest rates. Austrians want to get rid of central banks altogether and allow the markets to dynamically set interest rates.

            According to Austrian theory interest rates are, in reality, a measure of people’s time preferences. If you want something before you have the money to purchase it then you borrow the money. If the price of money is too high you then delay the purchase. If money becomes too cheap, less people want to save and so money becomes more scarce,it therefore becomes more expensive, thus incentivising people to save once again.

            Markets are dynamic and self-correcting. The horrendous money supply manipulations created by central banks, destroy the economy and destroy the markets natural self-correcting mechanisms. It also robs ordinary people. This is because when the money supply is increased, the initial holders of the freshly printed money profit at the expense of everybody else. This is typically banks and governments.

            Nobody has to borrow money, it is a choice. The only reason people must borrow money in today’s world is because houses are too expensive. If interest rates were higher, these prices would be lower. And if money didn’t continuously lose its value, because of central bank generated inflation, we could all save up to buy a house.

            I agree with your desire for the freedom of ordinary people. But I don’t think you realise the serfdom that is inherent within an inflationary monetary system. It is such a subtle trap very few people realise how they are being enslaved.

            Austrian economic theory is about freeing people and not enslaving them. Keynesian economic theory combined with the malicious monetary manipulations of the central banks is enslaving all of us, enslaving us to banks and governments, the great counterfitters and slave masters of today.

          • chef

            No they don’t. I didn’t say their wages went down, I assumed they stayed the same. They therefore are earning 10% more, as the money they are earning is worth 10% more. This is the whole point that I am making.

            Imagine if your boss tried that one on you though, “come into my office Bennett, we’re making a couple of changes. We want all our staff including you to start working 10% harder and in return we’re keeping you wages static. I know what you’re thinking but it’s ok, we’ve had some Austrian economists in and they’ve said something about increasing the value of the £’s you’re earning which means this is an effective payrise, so if you’ll just sign here…”

            As I keep saying, Austrianism is completely at odds with economic reality. I can accept this process happening naturally over time, but only as a byproduct of efficiency, it doesn’t cause productivity in itself.

            If the money supply stays constant

            In a free market the money supply will constantly fluctuate though, what you’re alluding to here is more akin to price fixing. I say let the market decide the value of goods relative to money, central targets (i.e 2% inflation) never work and worse, undermine the free market pricing mechanism. “Inflation” isn’t bad per se, it’s economic information. The market can then act on that information if it wants to make a profit, central targets -including well intentioned money supply ones- scramble that info and would lead to a misallocation of resources.

            This is only because interest rates are set too low by central banks. With hard money the perverse incentives to protect yourself against central bank generated inflation disappear.

            This wouldn’t be true if you were a renter and the price of housing was inflating, you’d would be forced to jump on the bandwagon to protect yourself against future costs. I dispute the your assertion that people were protecting themselves against inflation during the boom though, they were speculating in housing, the £ was becoming more valuable against many other goods so it would have paid to keep cash in the bank (as long as you didn’t want to buy a house!)

          • Simon Bennett

            Chef

            I give up. There is none so blind as those who choose not to see.

          • chef

            You are confusing the tail with the dog. Hard money involves no money manipulation, and no one should jack up interest rates.

            Inroducing hard currency alone is manipulation enough. You’re swapping a currency that can be created on demand for one that is fixed in supply, fixing the supply of something is always very dangerous because it can lead to hoarding, shortgages, inflation(!!) and speculation. You’d be introducing the very dynamic that wrecked our economy (the fixed nature of the land) into the money supply, double bubble.

            If interest rates were higher, these prices would be lower.

            Agreed, but you’d be paying more interest to the banks so your monthly costs would stay the same. If the price of food -or anything else- increased massively it would have an impact on house prices, but that doesn’t mean we should pursue rising prices, aka consumer inflation as a solution. We need to find a way of reducing costs and ensuring that the surplus gets back to those that produce them, not the economic rentiers, whether they be landowners, banks, or multi-national corporations.

          • chef

            Sorry Simon, Austrians have something to say when they’re talking about the free market but the currency stuff is very misguided. I’ve encountered loads of Austrians over the past 3-4 years so I’m certainly aware of your arguments, I just disagree with them because I feel another ideology (georgism)is more convincing.

          • Simon Bennett

            Hi Chef

            There is a difference between ideology and market mechanisms. I honestly don’t think you have grasped the essence of what I am saying here. I don’t think it is worth me saying any more than I already have, as it will be simply rehashing what I have already said.

            If you really do want to understand the Austrian position on money you could start by reading this book:

            http://mises.org/money.asp

            I think we both believe in freedom for the ordinary person, but we have very different ideas of how this may be achieved.

            I think you need to go back to first principles and imagine a simple society with no government whatsoever, and imagine how this system would operate. A good book to help with this is Peter Schiff’s book “How an economy grows, and why it Crashes”. It is a very simple book which explains very clearly how markets function and how banks and governments interfere and wreck economies. I really enjoyed reading it, and I am sure you will too.

            I always have respect for people who believe in the common good, regardless of whether I agree with their particular beliefs in how this common good is to be achieved. This is because I think their heart is in the right place. And ultimately that is all that matters.

            Have fun in your search for knowledge and enlightenment.

            Kind regards

            Simon

          • chef

            Hi Simon,

            coincidentally I finished off that book only last night, I enjoyed it but feel that Schiff would benefit from an understanding of Ricardo’s Law.

            If you use Itunes, type in Lew Rockwell and then search for Peter Schiff you’ll find a speech made by him (it’s about 60-90 mins long iirc) that’s well worth a listen to. He doesn’t hold back and debunks many a economic myth, my kinda guy.

            I’ve had to get to grips with money supply economics because it’s all reformers want to talk about these days, I certainly havn’t written off Austrianism lightly, but feel advocates are more concerned with the money supply than they are humanity. This for me is problem.

            I suppose we’ll jus have to agree to disagree,

            Regards,

            Dave.

  • Andy Duncan Andy Duncan

    > Our current economic problems can’t be addressed adequately by only analysing the money supply…In short this is a land issue, not a money one.

    chef, you appear to be reading the wrong web site. This is an Austrian-based one, based upon the idea that our current economic problems are explainable via an analysis of money, and its control, rather than one postulating land as the problem.

    Perhaps you’d be much happier, at the site below, rather than wasting any more of your time on the Cobden Centre:

    => http://jockcoats.me/

    • chef

      I don’t believe I’m wasting my time by picking apart your thesis and pointing you in the right direction, ultimately we’re all after the same thing: stability and bit of economic justice, but this will never be achieved using the Austrian economic tool kit alone. You’re not addressing the source of the problem so your “solutions” will always fall short and cause unintentional and unquantifiable side effects, but Austrians however aren’t prepared to admit this.

      Thanks for the sarky reply (again) btw, appreciated. For what it’s worth I don’t believe that we should all seperate into our own little groups and shut ourselves off from external criticism, I know socialist websites like to do this by vetting their members and banning non-conformists but I had a little more hope for the Austrians.

      You’re not scared of a little bit of debate, are you? I’m currently learning a lot from Peter Schiff, but I think that he and others would benefit from a proper education in Geolibertarian economics.

  • waramess

    Was it not Henry VIII who was prone to re-call from time to time all the gold sovereigns in circulation, chip a bit of each and then re-issue them?

    What a wheeze, whoever it was. Eventually the population got wind of this and ended up weighing gold coins before accepting them in payment for goods.

    With the USA now in a state of perpetual QE., I wonder how small the sovereign would now be had Henry followed this example?

  • Erm – I don’t know whether to be flattered or not, but given this recent post of mine I’m not sure that I am in any way in opposition to Austrian theory (though I am a free banking person rather than a gold bug).

    • Andy Duncan Andy Duncan

      I thought you were England’s leading Georgist? If not, do you know any good Georgist sites that chef can frequent, rather than wasting his/her time here?

      Freebanking? Dear Lord. Come across to the Rothbardian hard core, Jock.

      • How flattering, maybe. I don’t think I ever could claim to have been England’s leading Georgist though. Perhaps at one time its leading blogging Georgist, maybe. I still do not think that Rothbard, Block and others, when they criticise Georgism, actually understand economic rent, but I cannot countenance the existence of a state to collect it, even if it is harmful (and we are enjoined even in Rothbardian ethics not to use our own property to harm others).

        Still, http://markwadsworth.blogspot.com/ http://lvtfan.typepad.com/ and http://gco2e.blogspot.com/ should be good starting points for chef!

        I’m not *unsympathetic* to hard money (not in the same way as the likes of George Selgin argues against even the theoretical possibility of 100% reserve banking) and by “free banking” I don’t really mean the Selgin, Dowd modern “New Free Banking” faction. I just mean that the market must be open to innovation in providing the medium of exchange. I would like to see more work done for example on Proudhon/Greene’s mutual banking ideas (and at the moment am thinking of doing so as a PhD thesis myself in a few years’ time. Gold may still win that competition of course, but unless it wins in a market competition we will never know if it is actually best, will we?

        • Andy Duncan Andy Duncan

          Gold, silver, fish, tobacco, oil futures, Manchester United tickets, shares in Vodafone, it really makes no difference to me. So long as the government are out of the way and are stopped from their criminal counterfeiting racket. Then people will trade whatever they want to trade, whether that’s cocoa pods, conch shells, camels, heads of cattle, or baseball cards, as a medium of exchange.

          My hunch though, based on several thousand years of history, is that either gold or silver will win the competition, because of all the old hoary reasons of divisibility, fungibility, high value per unit volume, etc, etc.

          Perhaps in the modern age, with plastic being the access medium, to guaranteed amounts of metal verifiably stored in nuclear vaults in Switzerland, it might even be palladium or platinum.

          The trick is to get the government out of the way. Simple to say, of course, and much harder to carry out in practice, but I have hope that one day we’ll get there.

          The funny part of that, is that they are so incompetent, that they’ll probably fall out of the way themselves, just as their postal services fell away from Federal Express, UPS, and the rest. In the end, people are just going to move back to commodity money anyway (probably), especially once their fiat rubbish ends up totally worthless. What we have to do is get the government off their backs in doing so, by removing all taxes from monetary metals (or conch shells), and getting courts to enforce contracts written up in the monetary metals (or conch shells). Once that’s done, the rest will take care of itself.

          • chef

            The state feels that it has to engage in the widespread fraud that is QE to fix the fallout generated by the housing market.

            If you took the blinkers off for a second you might realise this.

  • Of, I see the argument now, for what it’s worth I think the money issue is first and the land one second. Land/rent was just a convenient place for all the counterfeit money to end up so it didn’t hit headline price inflation – or the government counterfeiters would have been rumbled. It helped of course that everyone, or nearly everyone, felt good about rising house prices.

    I do know Georgists who think that if you solve the problem of rent first the money problem will pale into insignificance but I certainly no longer believe that. The counterfeit money system is the biggest crime being perpetrated on us. That it is done by those “nice, well meaning” people in the government and not by “evil landlords” is probably why it commands less attention.

    • chef

      It’s really weird that AD recommended your blog, I first come across it about 3 years ago, but found the layout a bit confusing and didn’t really ‘get’ the whole blogosphere thing so never stuck around.

      Then we crossed swords on a libertarian website forum a few months back, you backed me up in the face of an onslaught from a bunch of Royal (or faux, as Mark Wadsworth calls them) Libertarians.

      And then I typed in “land value tax” into google yesterday and came across your blog again, so added it and was listening to your audiobook only this morning before I checked back to see the comments here.

      I agree that a free market in interest rates is desireable, and have some sympthathy for a free banking system (with the caveat that it’s not used to undermine the tax base) but believe that fundamentally this is an economic rent problem, one that Rothbad and Mises et al misunderstand and worse, deliberately misrepresent to their audience. You only have to look at the results of Georgism to see that it works, a piece in the FT last week scorned Hong Kong’s land based tax regime for creating too large a finanical surplus! We never enjoyed those sorts of “problems” during the 80’s, no matter how high we jacked up IR’s. As far as I know Hong Kong’s monetary system is a conventional Western one, and their managing to scrape by with a partial(!) LVT system and a 16% net gov’t surplus.

      Georgism has been tried, tested and proven to work. Where’s the evidence from the Austrian camp?

      • Well the audiobook on there that best describes my own position (most are done for fun and you shouldn’t read into them any particular loyalty to an author’s opinion) is the one of Clarence Lee Swartz’s “What is Mutualism?” which does quite closely express my current ideological position.

        The individualist anarchists and mutualists did have a problem with land in a way that the Rothbard and co don’t, but still the money system is the greatest monopoly of the four, followed by land. Read or listen to Swartz to see why.

        Hong Kong is able to work because the state owns all the land, except for that occupied by the Anglican Cathedral. The land tax is, therefore, a lease arrangement. From where we are now, creating a similar system nywhere else would effectively fulfil Rothbard et al’s criticism of Georgism, that it effectively nationalises land.

        I won’t go on about it here. I have been working for months on a blog post about an idea I have that might just resolve the differences between the Georgist, Rothbardian and Proudhonist views of land ownership in a way that does not need a state. My antipathy toward Georgism right now is that whichever way you cut it it involes a state-like entity to collect it, even if it merely redistributed the entire collected economic rent, and there is no known way of achieving a limited state that remains limited: no constitutional magic paper can bind politicians as we see from the USA.

        I would accept something akin to Fred Foldvary’s “cellular democracy” operating by collecting land rent revenue on a local basis, but to me that would just be a part of a free market within a statreless society – it ay prove the best way to do some things, it may not.

        • chef

          I suppose it depends on what your motivation is. If it’s to abolish the state entirely then I can understand why Georgism doesn’t appeal, anarchism/enlightened mutualism is the order of the day. But this approach is tantamount to throwing the baby out with the bathwater, Georgism imposes a free market discipline that would encourage the state to act responsibly, it’s a reformist approach that seeks to keep the good parts of living in a democracy whilst getting rid of all the special privileges that makes life intolerable for the rest of us. Measuring the success of Georgism by looking at how much state is left after the reform is like using a tape measure to gauge weight, ideally the state would be reduced (by a lot!), but’s it’s not completely necessary.

          The Austrian philosophy is just a cover for home-ownerism though, the idea seems to be to give landowners unlimited rights while ignoring the plight of everyone else. That’s great if you’re one of the lucky few, but not so “libertarian” if you happen to be on the receiving end of this deal. It seems the Austrians, Faux liberatrians and others expect the landless to sacrifice themselves so that the rest can live in a libertarian utopia.

          In other words I don’t believe they’ve covered all the bases adequately.

  • Chef, a deal of what you say/write sounds very similar to what I used to think about libertarian (I probably didn’t even know about “Austrian” until 2008) ideas, such as about being a shill for home ownerism etc but I now think/know that to be wrong.

    The problem as I see it is that those of us who want to see a fully stateless society are looking at something significantly different from today. Georgism, and I suppose credit is due for being pragmatic at least, starts from where we are.

    Clearly a world without the various structures and centres of political power, of more distributed ownership and even production, is going to be a less screwed up place, land wise. The state maintains land values high through tactics such as zoning and restrictive planning consents – if any body is the bastion of home-ownerism it is the state.

    Can I commend to you an essay on property by a Jesuit cited by Rothbard, James Sadowski – http://www.anthonyflood.com/sadowskyprivateproperty.htm – which I think does much to “soften” the apparent “hardness” of the academic Austrian/anarchist position on land.

    Get the state out of controlling what people can do with land, where they can homestead, power structures that make concentrations of high value land more likely, add in some way of expropriating any land that can be shown to have been unjustly acquired (lots of Britain as well as what Rothbard described as countries dominated in the past by feudalism and latifundia) and you will get rid of much economic rent (even though not all of it).

    From that point it becomes a matter of balance whether it is worth having a coercive state system to collect the rest or whether the damage done by coercion like that would exceed the damage done by the remnants of economic rent.

    On whether land or inflated money is the chicken or the egg, and what the 80s house price boom actually proves, I think you are also missing the fact that other things were going on in money supply at the time, and in banking. Credit was being extended to many people for the first time. Changes in banking (including Thatcher government’s insistence that salaries went into banks not cash) were extending the ways in which bank credit money could be created, so to focus purely on the relationship between interest rates and money supply is insufficient I feel.

    • chef

      Jock, I’m of the opinion that Georgism offers the most predictable economic gain for the least pain (economics 101!), and as it could adapted to fit our current deomocratic structure wouldn’t be a totally alien concept for the majority of the British public. Almost everyone has paid rent at some point during their life, so the only difference would be who collects the payment (it would be ourselves in a way). What happens to that money would then be subject to The Rules, they’d be little room for immoral practice as long as The Rules stated clearly that we all had an equal share in the financial surplus. I believe that this step alone would stop a lot of the corruption that currently takes place. Government taxation eats into the landowners’ surplus and is effectively a form of redistribution, lobbiests and quangos etc then have to justify their crackpot schemes because otherwise they’d be thrown into the market and made to compete for poverty wages like everyone else. If the surplus was redistributed anyway they’d be little need for this dog and pony show and those resources could be put to more productive use.

      If Georgism was implemented in the way that Georgists advocate then it would be a fairly harmless (but mostly beneficial) transformation, ok we could argue that the state would veer off on a tangent and implement some Big Brother style reforms, but that’s not a criticism that’s uniquely applicable to Georgism, all “isms” are capable of being manipulated so in this sense they’re all equally defective, even anarcho-capitalism. Interstingly though you suggest that the flaw isn’t contained within the Georgist ideology itself, just the possible implementation, which surely sets it apart from it’s rivals.

      As for the interest rate thing, it’s the Austrians that constantly bring it up, not me! They claim that “low” IRs caused the boom, well we don’t have to look back very far to prove this claim false. Or we can look at different countries in the Eurozone to see how their economies reacted to the ECB’s monetary policy, some fared much better than others, which tells us that IRs aren’t the driving force that Austrians claim, there are other factors at work. If it were a proper scientific experiement Austrianism would have been discarded long ago, the only thing that keeps it going is belief and repetition, but just like religion no matter how hard you believe your ideolgical foundations are always going to be built on sand.

      • Hmm, I actually think that we say that excess money supply creates booms. That doesn’t to me assume only absolute low interest rates but could have a lot of other factors – interest rates below the prevailing rates of return on assets at the time, changes in the way money is created, perhaps changes in reserve requirements, an expansion of credit to people previously unable or unlikely to get it and so on.

        If you remember the eighties well, you will recall virtually every budget for a few years various chancellors altered the monetary aggregate their policies were trying to track/control which suggests to me that money supply was growing. Certainly M4 growth was already well under way in the 80’s (see my chart here from before I had ever really heard of Austrian economics that I refer to in this recent post).

        • chef

          I would say that excess money supplies are a symptom of rent privatisation rather than the cause of housing bubbles. I accept that our balance sheets would look a lot better if credit creation was curtailed, but this alone wouldn’t be enough to solve poverty and wealth maldistribution. The landless would just be lumbered with a series of endless monthly debts that weren’t allowed to accumulate into a mortgage, which would give us a sort of grinding stability. That’s not a future worth fighting for imo because it’s not that different to what we have now.

  • Thinkor

    Rickards’ thesis about perpetual QE is wrong. Not only is it wrong, it’s obviously wrong. His plan is to use principal payments on rollover debt to monetize the deficit. In this way, he contends, the Fed can pursue QE indefinitely without expanding its balance sheet. What he is missing is that you cannot apply the principal payment both to roll over the debt AND to monetize the deficit. There must be a net purchase of securities to increase the monetary base, but a net purchase of securities will necessarily expand the Fed’s balance sheet.