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By John Phelan, on 2 September 11
A very intelligent friend of mine of markedly different political persuasions said the other day that he avoided “technical economic arguments” with me as I’ve just graduated with a degree in economics. I was rather sad to hear this.
The simple truth is that after doing a module called, say, ‘Introduction to Economic Principles and Policy’, you will not study very much more which will add greatly to your understanding of the subject. Beyond that, in an ‘Intermediate Microeconomics’ course for example, you are simply ladling mostly unnecessary algebra onto the subject.
Take this from a course in ‘Intermediate Macroeconomics’ for example:
This is actually some of the more accessible math involved in modern economics. Furthermore, the concepts it is dealing with, constant returns to scale and the per worker production function, are pretty straightforward. Yet many, including almost all university economics lecturers, will tell you that this is economics. It is, in fact, simply applied algebra – mathematics looking for a real world application. Economists eager to give their art the patina of science and mathematicians searching for real world relevance have combined to render economics impenetrable.
This trend also stems from the view of economics as the study of a mechanism. People may now laugh at the model of the economy A.W. Phillips built in the basement of the London School of Economics in 1949 with its gurgling pipes full of different coloured liquids representing money literally sloshing around an economy controlled by sluice gates. But it isn’t conceptually different from the computerised models that are in use today guiding research and government policy.
These models often fail. If your model is based on erroneous assumptions, such as the creation of phantom capital called Quantitative Easing actually stimulating an economy, you will get erroneous outputs; Garbage In Garbage Out as they say. But there is a more fundamental problem. There is no exogenous ‘thing’ called ‘The Economy’ which can be quantified and controlled, there is only each of us doing what we do every day. That is why Ludwig von Mises called his great treatise on economics ‘Human Action’. Or as Friedrich von Hayek rapped recently “The economy’s not a car. There’s no engine to stall. No experts can fix it. There’s no “it” at all. The economy is us”.
It is little wonder that even intelligent people feel themselves cowed and run in terror from the thicket of abstraction that shrouds modern economics. It needn’t be like this. The great works of the discipline, those of Adam Smith or Carl Menger for example, managed to lay the foundations of the subject without it.
And it is sad that people like my friend feel put off because the economy affects all of us and, to return to the point made by the rapping Hayek, it is the study of all of us. Given this we all have economic insights by virtue of being human beings, the very subject of economics itself. As von Mises wrote:
Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.
Do not leave economics to the abstract eggheads. Pick up Economics in One Lesson by Henry Hazlitt, Free to Choose: A Personal Statement by Milton Friedman or even Eat the Rich: A Treatise on Economics by P.J. O’Rourke: writers who, in these books and others, passed the economist Armen Alchian’s test of whether they truly understood the subject – they could explain it to someone who doesn’t know a darn thing about it.
Economics is about you. It is your subject. Reclaim and enjoy it.
Editor’s note: the Cobden Centre bookstore is here.
By Toby Baxendale, on 1 September 11
Phase 1: Greenspan, the arch money crank
The Greenspan “put”, and the collective adoption by most central bankers of low interest rates after the dot-com bust and 9/11, caused one of the largest injections of bank credit in history. Since bank credit circulates as money, we can say public policy has created the largest amount of new money in history.
This should never be confused with creating new wealth. That is what entrepreneurs do when they use the existing factors of production — land, labour and capital — in better ways, to make new and better products. The money unit facilitates this exchange.
Now to a money crank. He will assume that new money will raise prices simultaneously and proportionately, so the net effect of the economy is that all the ships rise with the tide at the same rate. He’ll say that money is neutral and does not have any effect on the workings of the economy.
One of the great insights of the older classical economists, and in particular the Austrian School, is that new money has to enter the economy somewhere. Injected money causes a rise in the price levels associated with the industry, businesses, or people who are fortunate enough to be in receipt of the new money. Prices change and move relative to other prices. It is often quite easy to see where the new money enters into the economy by observing where the booms are.
Suppose a banker sells government bonds to another part of the government (as has been the case with UK QE policy). For selling, say, £30bn of government debt to the Bank of England, he gets a staggering, eye-popping bonus. With his newly minted money, he buys a new £10m house in Chelsea, a £5m yacht in Southampton, some diamonds for the wife to keep her happy, and lives a happy and rich life. The estate agent spends his commission on a luxury car, and some more humdrum items that mere mortals buy. At each point in time, the prices of the goods favoured by the recipients of new money are being bid up relative to what they are not spending on. Eventually these distortions ripple through the economy, and the people furthest from the injection of new money — those on fixed income, pensioners, welfare recipients — end up paying inflated prices on the basic goods and services they buy. A real transfer of wealth takes place, from the poorest members of society to the richest. You could not make this up. I am no fan of the “progressive” income tax, but I certainly can’t support a regressive wealth transfer from the poor to the rich!
Even when the government was not creating new money itself, it was setting the interest rate, or the costs of loanable funds, well underneath what would naturally be agreed between savers and borrowers. Bankers are exclusively endowed with the ability to loan money into existence, so they welcome the low rates and happily lend, charging massive fees to enrich themselves in the process.
After the dot-com bubble, it was property prices that went up and up. Not only do we have the richer first recipients of new money benefiting at the expense of the poor, we have a massive mis-allocation of capital to “boom” industries that can only be sustained so long as we keep the new money creation growing.
Our present monetary system is both unethical and wasteful of scarce resources. We do not let counterfeiters lower our purchasing power, and we should not let governments and bankers do it.
Phase 2: Bush & Brown – private debt nationalised by the Sovereign
This flood of new money brought more marginal lending possibilities onto the horizon of the bankers.
They devised a range of exotic products whose names are now familiar: CDO, MBS, CDO-squared, Synthetic CDO, and many more — all created to get lower quality risk off the issuing bank’s balance sheet, and onto anyone’s but theirs!
In 2007/2008, bankers started to wake up to the fact that everyone’s balance sheets were stuffed with candyfloss money, at which point they suddenly got the jitters and refused to lend to each other. As we know, bankers are the only people on the planet who do not have to provide for their current creditors; they can lend long and borrow short. Thus, the credit crunch happened when the demand for overnight money to pay short-term creditor obligations ran dry.
Our political masters then decided that we could not let our noble bankers go bust; we had instead to make them the largest welfare state recipients this world has ever known! Not the £60 per week and housing benefit kind for these characters, but billions of full-on state support to bail out their banks. They failed at their jobs and bankrupted many, but they kept their jobs with 6, 7, or 8 figure salaries!
Bush told us that massive state intervention was needed to save the free market. Brown said the same. We were told that there would be no cash in the ATMs and society would most certainly come to an end if heroic action was not taken to “save the world”, as Brown so memorably put it (though he seemed to think he had accomplished this feat singlehandedly). Thank God for Gordon!
Now in Iceland, a country I was trading with at the time, their banks did go bust; no one could bail them out. But within days the Krona had re-floated itself and payments continued; within weeks they had a functioning economy.
Within days the good assets of Lehman Bros had been re-allocated, sold to better capitalists than they.
But with these notable exceptions, socialism was the order of the day. Bank’s inflated balance sheets were assumed by sovereign states. Like lager louts on a late night binge, after a Vindaloo as hot as hell itself, heads of government seemed to care little for the inevitable pain that would follow, as states tried to digest what they had so hastily ingested. Indeed, the failed organs of the nationalised banks survive only on life support, enjoying continuous subsidy through the overnight discount window.
But the sovereign governments, under various political colours, had a history of binging. In our case the Labour Party spent more than it could possibly ever raise off the people in open taxes, and the Tories offer “cuts” which in reality mean that the budgets of some departments will not increase as quickly as they were planned to.
Phase 3: King Canute, sovereign default
Default is the word that can’t be mentioned. In reality, we should embrace default. This debt is never going to be repaid. Never, that is, in purchasing power terms.
S&P ratings agency have hinted at this with the recent US rating downgrade. They know the American government can always mint up what it needs so long as it has a reserve currency. They also know that this is a soft default. In real terms, people seem likely to get back less than they put in.
Hard default should be embraced by the smaller nations like Greece and Ireland, so they can rid themselves of obligations they cant afford to pay. This will be good for taxpayers in the richer countries of Europe, as they will no longer be bailing out those who foolishly lent to these countries. It will be good, too, for the debtor nations, as they can remove themselves from the Euro and devalue until they are competitive again. They will, however, need to learn to live within their means. Honest politicians need to come to the fore to effect this.
Yes, this will be painful and the people who lent these profligate and feckless politicians the money will get burnt.
However, the FT has recently seen prominent advocates for a steady 4%-6% inflation target. This is the debtors’ choice and the creditors’ nightmare, with collateral damage for those on fixed or low incomes, for the reasons mentioned above. Should we let the Philosopher Kings have their way?
“Let all men know how empty and worthless is the power of kings. For there is none worthy of the name but God, whom heaven, earth and sea obey”.
So spoke King Canute the Great, the legend says, as waves lapped round his feet. Canute had learned that his flattering courtiers claimed he was “so great, he could command the tides of the sea to go back”. Now Canute was not only a religious man, but also a clever politician. He knew his limitations – even if his courtiers did not – so he had his throne carried to the seashore and sat on it as the tide came in, commanding the waves to advance no further. When they didn’t, he had made his point: though kings may appear ‘great’ in the minds of men, they are powerless against the fundamental laws of Nature.
King Canute, where are you today? We need honest politicians and brave men to step forward and point out the folly of trying paper over the cracks. Unless banks write off under-performing (or never-to-perform) securities from both the private sector and the public sector, we will progressively impoverish more and more people.
Let better business people buy the good assets of the bust banks, and let them provide essential banking services.
Let the sovereigns that can’t pay their way go bust and not impoverish us any further with on-going bailouts. In all my years in business, your first loss is always your best loss.
Yes, this will be painful. Politicians, fess up to the people: you do not have a magic bullet and you can’t offer sunshine today, tomorrow and forever.
I fear that if we do not do this, we approach the end game: the total destruction of paper money. Since August the 15th 1971, paper money has not been rooted in gold. It is the most extreme derivative product, entirely detatched from its underlying asset. Should the failure of this derivative come to pass, we will have to wait for the market to create something else. Will we be reduced to barter, as the German people were in the 20s?
A process of wipe out for all will be a hell of a lot harder than sensible action now. It is still not too late.
By Robert Thorpe, on 26 August 11
Recently, Paul Krugman claimed that the threat of an invasion by space aliens could bring the US economy out of recession in eighteen months. I expect many readers of this site found that both funny and worrying. It reminded me of an excellent science fiction novel I read years ago, “The Forever War” by Joe Haldeman.
Most political movements try to present themselves as positive about humanity. But privately their supporters often admit to seeing “noble lies” and social engineering more positively than they would publicly say. I don’t think libertarians or classical liberals are completely immune to this. In “The Forever War” a leftist author criticises conservatives, but also allows himself to think through the consequences of the ideas of American leftists.
Novels about interstellar war are often quite macho and conservative. “The Forever War” was seen as a response to one of those books, “Starship Troopers” by Robert Heinlein. It begins with an attack by aliens on starships travelling from earth to colonize other planets. It then follows a soldier, Private Mandella, through the ensuing war against the aliens. It becomes clear much later that the start of the war had been a mistake by jumpy humans, not a hostile alien attack. That is rather like the “Gulf of Tonkin Incident” in the Vietnam war. Haldeman wrote “The Forever War” in the early 70s after his own service in Vietnam; the interstellar war he describes is eerily similar to the Vietnam war and clearly a commentary on it.
When the soldiers first return to earth an army captain comes to meet them, he says:
“I’m twenty-three, so I was still in diapers when you people left for Aleph … to begin with, how many of you are homosexual?” Nobody. “That doesn’t really surprise me. I am, of course. I guess about a third of everybody in Europe and America is.
“Most governments encourage homosexuality – the United Nations is neutral, leaves it up to the individual countries – they encourage homolife because it’s the one sure method of birth control.”
Over the course of the book that policy becomes stricter and heterosexuality comes to be seen as a mental illness. It’s interesting to consider if future governments will try strategies like this. As the story progresses it hints that governments have encouraged recreational drug use too for the same reason.
The captain continues:
“… the population of the world is nine billion. It’s more than doubled since you were drafted. And nearly two-thirds of those people get out of school only to go on relief”.
“Relief”, it turns out, is the dole. Here we have the “Gloomy Keynesian” idea that as technology progresses unemployment becomes much greater. It turns out that jobs are rationed and only certain people are eligible so there is a thriving black market in faking this eligibility. Haldeman supposes that the war provides the Keynesian solution to this problem: producing the technology to fight the war creates employment and stimulates output.
Haldeman writes:
The main effect of the war on the home front was economic, unemotional – more taxes but more jobs as well. After twenty-two years, only twenty-seven returned veterans, not enough to make a decent parade. The most important fact about the war to most people was that if it ended suddenly, Earth’s economy would collapse.
And at the very end of the book when some ancient history is discussed:
… the old soldiers were still around, and many of them were in positions of power. They virtually ran the United Nations Exploratory an Colonization Group, that was taking advantage of the newly discovered Collapsar jump to explore interstellar space.
Many of the early ships met with accidents and disappeared. The ex-military men were suspicious. They armed the colonizing vessels, and the first time they met a Tauran ship they blasted it.
They dusted off their medals and the rest was going to be history.
You couldn’t blame it all on the military though. The evidence they presented for the Taurans having been responsible for the early causalities was laughably thin. The few people who pointed this out were ignored.
The fact was, Earth’s economy needed a war, and this one was ideal. It gave a nice hole to throw buckets of money into, but would unify humanity rather than dividing it.
Here we see the problems many leftists have with their own ideas. If Keynes is right about economics or if Malthus is right about population [1] then that has dark implications. Of course there’s nothing wrong with an idea that leads us to a dark place if that idea is right, but there’s no need to worry if it’s wrong.
Writing about the recent earthquake in Virginia, Steve Horwitz gave a very clear criticism of this kind of thinking:
… the problem with the ‘disasters are good for the economy’ nonsense, and GDP more generally, is that it confuses a flow with a stock. GDP measures a flow of activity, not a stock of wealth. Destroying things and then rebuilding them might increase economic activity in the area affected (by drawing resources from elsewhere), but leaves us with less wealth than we would have had without the disaster. That is the real meaning of the Broken Window Fallacy.
It’s a mistake to think that Keynesians want to waste resources in order to increase employment. Their argument is that it isn’t very important how efficient a spending project is during a recession. They would prefer it if the output of a project were useful because if it were, that would clearly be beneficial. But, they don’t require a project to be efficient; their view is that if no good spending projects are politically feasible, then bad ones will do. They believe that during a recession there are great spin-off benefits to spending on output. They believe that it will stimulate production and employment and make society wealthier in the long run.
Keynesian commentators often seem to believe that the level of GDP output proves that a certain amount of capital wealth exists to be used, so when GDP increases that means society is richer. GDP is certainly an indicator of wealth; output can only be produced because capital and labour exist to produce it. But, many different levels of output are possible with the same capital. The amount of existing stocks of goods that are processed into new outputs depends on the demand for those new outputs.
In the recent controversy over the Virginia earthquake some Keynesian commentators I’ve read have expressed the view that it’s all about “crowding out”. Crowding out is a macroeconomic idea often put forward by critics of the Keynesians. In its simplest form, the argument is that every pound the government tax from someone, or borrow from someone, is a pound that would have been spent on private sector output. So, according to this argument “stimulus” policies will have no beneficial effect. I agree with this idea to some extent. The problem with it is that the private sector doesn’t only sell GDP output; existing assets are also for sale, including financial assets such as bonds and share. That means a person may receive income and spend it on things that aren’t output. Also, once the seller of an asset receives the proceeds he may not spend them on output either; he may buy another asset. Eventually somebody in the chain will spend on output, though that may take a long time. This means a government could increase output by taxing people who are likely to spend their money on assets and using the proceeds to buy output goods.
I don’t think the crowding out explanation helps us very much. As Horwitz says, the important issue isn’t whether output falls, everybody know output falls during a recession. The important question is: what does a fall in output mean?
One possibility is that investors and businesses are being irrationally cautious. Instead of investing in new projects which could earn profits in the future for them and increase output to the benefit of everyone they rush into relatively secure investments such as money, bonds, blue chip stocks and gold. Keynesians are fond of the idea of the irrationality of the market because it supports this view (they aren’t particularly interested in disputing Austrian Business Cycle Theory as a cause of recessions). I think this possibility is a distraction; to the degree that markets can be irrational it’s close to impossible to say in which direction they’re being irrational [2].
There is an alternative view, though: investors may be making a sensible decision to avoid investing in new projects because the risk/reward ratio is too poor to make it worth their while. That decision may certainly reduce employment in the short-run, but that doesn’t show that it reduces society’s overall wealth. It may well be that this decision isn’t only sensible for investors. The processing of existing resources into new goods doesn’t necessarily add value from anyone’s point of view. Keynesian economists often assume that it’s always worthwhile to convert existing resources into output at the same rate that prevailed before a recession. There is no reason to think this is true.
[1] – Those interested in the history of economic thought will notice the influence of Malthus. Thomas Malthus was good at coming to unsettling conclusions. He suggested that real wages will fall in the long-run to the minimum necessary for subsistence, consigning the human race to poverty in the long term. Malthus also proposed a macroeconomic theory similar to Keynes’s, long before him.
[2] – This is the weakest form of the Efficient Markets Hypothesis.
By Jonathan Catalán, on 25 August 11
Banking theory remains one of the most heatedly debated areas of economics within Austrian circles, with two camps sitting opposite each other: full reservists and free bankers. The naming of the two groups may prove a bit misleading, since both sides support a free market in banking. The difference is that full reservists believe that either fractional reserve banking should be considered a form of fraud or that the perceived inherent instability of fiduciary expansion will force banks to maintain full reserves against their clients’ deposits. The term free banker usually refers to those who believe that a form of fractional reserve banking would be prevalent on the free market.
The case for free banking has been best laid out in George Selgin’s The Theory of Free Banking.[1] It is a microeconomic theory of banking which suggests that fractional reserves will arise out of two different factors,
- Over time, “inside money” — banknotes (money substitute) — will replace “outside money” — the original commodity money — as the predominate form of currency in circulation. As the demand for outside money falls and the demand for inside money rises, banks will be given the opportunity to shed unnecessary reserves of commodity money. In other words, the less bank clients demand outside money, the less outside money a bank actually has to hold.
- A rise in the demand to hold inside money will lead to a reduction in the volume of banknotes in circulation, in turn leading to a reduction of the volume of banknotes returning to issuing banks. This gives the issuing banks an opportunity to issue more fiduciary media. Inversely, when the demand for money falls, banks must reduce the quantity of banknotes issued (by, for example, having a loan repaid and not reissuing that money substitute).
Free bankers have been quick to tout a number of supposed macroeconomic advantages of Selgin’s model of fractional reserve banking. One is greater economic growth, since free bankers suppose that a rise in the demand for money should be considered the same thing as an increase in real savings. Thus, within this framework, fractional reserve banking capitalizes on a greater amount of savings than would a full reserve banking system.
Another supposed advantage is that of monetary equilibrium. An increase in the demand for money, without an equal increase in the supply of money, will cause a general fall in prices. This deflation will lead to a reduction in productivity, as producers suffer from a mismatch between input and output prices. As Leland Yeager writes, “the rot can snowball”, as an increase in uncertainty leads to a greater increase in the demand for money. This can all be avoided if the supply of money rises in accordance with the demand for money (thus, why free-bankers and quasi-monetarists generally agree with a central bank policy which commits to some form of income targeting).[2]
Monetary (dis)equilibrium theory is not new, nor does it originate with the free bankers. The concept finds its roots in the work of David Hume[3] and was later developed in the United States during the first half of the 20th Century.[4] The theory saw a more recent revival with the work of Leland Yeager, Axel Leijonhufvud, and Robert Clower.[5] The integration of monetary disequilibrium theory with the microeconomic theory of free banking is an attempt at harmonizing the two bodies of theory.[6] If a free banking system can meet the demand for money, then a central bank is unnecessary to maintain monetary stability.
The integration of the macro theory of monetary disequilibrium into the micro theory of free banking, however, should be considered more of a blemish than an accomplishment. It has unnecessarily drawn attention away from the merits of fractional reserve banking and instead muddled the free bankers’ case. Neither is it an accurate or useful macroeconomic theory of industrial misbalances or fluctuations.[7]
The Nature of Price Fluctuations
The argument that deflation resulting from an increase in the demand for money can lead to a harmful reduction in industrial productivity is based on the concept of sticky prices. If all prices do not immediately adjust to changes in the demand for money then a mismatch between the prices of output and inputs goods may cause a dramatic reduction in profitability. This fall in profitability may, in turn, lead to the bankruptcy of relevant industries, potentially spiraling into a general industrial fluctuation. Since price stickiness is assumed to be an existing factor, monetary equilibrium is necessary to avoid necessitating a readjustment of individual prices.
Since price inflexibility plays such a central role in monetary disequilibrium, it is worth exploring the nature of this inflexibility — why are prices sticky? The more popular explanation blames stickiness on an entrepreneurial unwillingness to adjust prices. Those who are taking the hit rather suffer from a lower income later than now.[8] Wage stickiness is also oftentimes blamed on the existence of long-term contracts, which prohibit downward wage adjustments.[9]
Austrians can supply an alternative, or at least complimentary, explanation for price stickiness.[10] If equilibrium is explained as the flawless convergence of every single action during a specific moment in time, Austrians recognize that an economy shrouded in uncertainty is never in equilibrium. Prices are set by businessmen looking to maximize profits by best estimating consumer demand. As such, individual prices are likely to move around, as consumer demand and entrepreneurial expectations change. This type of “inflexibility” is not only present during downward adjustments, but also during upward adjustments. It is “stickiness” inherent in a money-based market process beset by uncertainty.
It is true that government interventionism oftentimes makes prices more inflexible than they would be otherwise. Examples of this are wage floors (minimum wage), labor laws, and other legislation which makes redrawing labor contracts much more difficult. These types of labor laws handicap the employer’s ability to adjust his employees’ wages in the face of falling profit margins. Wages are not the only prices which suffer from government-induced inflexibility. It is not uncommon for government to fix the prices of goods and services on the market; the most well-known case is possibly the price fixing scheme which caused the 1973–74 oil crisis. There is a bevy of policies which can be enacted by government as a means of congesting the pricing process.
But, let us assume away government and instead focus on the type of price rigidity which exists on the market. That is, the flexibility of prices and the proximity of the actual price to the theoretical market clearing price is dependent on the entrepreneur. As long as we are dealing with a world of uncertainty and imperfect information, the pricing process too will be imperfect.
Price rigidity is not an issue only during monetary disequilibrium, however. In our dynamic market, where consumer preferences are constantly changing and re-arranging themselves, prices will have to fluctuate in accordance with these changes. Consumers may reduce demand for one product and raise demand for another, and these industries will have to change their prices accordingly: some prices will fall and others will rise. The ability for entrepreneurs to survive these price fluctuations depends on their ability to estimate consumer preferences for their products. It is all part of the coordination process which characterizes the market.
The point is that if price rigidity is “almost inherent in the very concept of money”,[11] then why are price fluctuations potentially harmful in one case but not in the other? That is, why do entrepreneurs who face a reduction in demand originating from a change in preferences not suffer from the same consequences as those who face a reduction in demand resulting from an increase in the demand for money?
Price Discoordination and Entrepreneurship
In an effort to illustrate the problems of an excess demand for money, some have likened the problem to an oversupply of fiduciary media. The problem of an oversupply of money in the loanable funds market is that it leads to a reduction in the rate of interest without a corresponding increase in real savings. This leads to changes in the prices between goods of different orders, which send profit signals to entrepreneurs. The structure of production becomes more capital intensive, but without the necessary increase in the quantity of capital goods. This is the quintessential Austrian example of discoordination.
In a sense, an excess demand for money is the opposite problem. There is too little money circulating in the economy, leading to a general glut.[12] Austrian monetary disequilibrium theorists have tried to frame it within the same context of discoordination. An increase in the demand for money leads to a withdrawal of that amount of money from circulation, forcing a downward adjustment of prices.
But there is an important difference between the two. In the first case, the oversupply of fiduciary media is largely exogenous to the individual money holders. In other words, the increase in the supply of money is a result of central policy (either by part of the central bank or of government). Theoretically, an oversupply of fiduciary media could also be caused by a bank in a completely free industry but it would still be artificial in the sense that it does not reflect any particular preference of the consumer. Instead, it represents a miscalculation by part of the central banker, bureaucrat, or bank manager. In fact, this is the reason behind the intertemporal discoordination — the changing profit signals do not reflect an underlying change in the “real” economy.
This is not the issue when regarding an excess demand for money. Here, consumers are purposefully holding on to money, preferring to increase their cash balances instead of making immediate purchases. The decision to hold money represents a preference. Thus, the decision to reduce effective demand also represents a preference. The fall in prices which may result from an increase in the demand for money all represent changes in preferences. Entrepreneurs will have to foresee or respond to these changes just like they do to any other.[13] That some businessmen may miscalculate changes in preference is one thing, but there can be no accusation of price-induced discoordination.
The comparison between an insufficient supply of money and an oversupply of fiduciary media would only be valid if the reduction in the money supply was the product of central policy, or a credit contraction by part of the banking system which did not reflect a change in consumer preferences. But, in monetary disequilibrium theory this is not the case.
None of this, however, says anything about the consequences of deflation on industrial productivity. Will a rise in demand for money lead falling profit margins, in turn causing bankruptcies and a general period of economic decline?
Whether or not an industry survives a change in demands depends on the accuracy of entrepreneurial foresight. If an entrepreneur expects a fall in demand for the relevant product, then investment into the production of that product will fall. A fall in investment for this product will lead to a fall in demand for the capital goods necessary to produce it, and of all the capital goods which make up the production processes of this particular industry. This will cause a decline in the prices of the relevant capital goods, meaning that a fall in the price of the consumer good usually follows a fall in the price of the precedent capital goods.[14] Thus, entrepreneurs who correctly predict changes in preference will be able to avoid the worst part of a fall in demand.
Even if a rise in the demand for money does not lead to the catastrophic consequences envisioned by some monetary disequilibrium theorists, can an injection of fiduciary media make possible the complete avoidance of these price adjustments? This is, after all, the idea behind monetary growth in response to an increase in demand for money. Theoretically, maintaining monetary equilibrium will lead to a stabilization of the price level.
This view, however, is the result of an overly aggregated analysis of prices. It ignores the microeconomic price movements which will occur with or without further monetary injections. Money is a medium of exchange, and as a result it targets specific goods. An increase in the demand for money will withdraw currency from this bidding process of the present, reducing the prices of the goods which it would have otherwise been bid against. Newly injected fiduciary media, maintaining monetary equilibrium, is being granted to completely different individuals (through the loanable funds market). This means that the businesses originally affected by an increase in the demand for money will still suffer from falling prices, while other businesses may see a rise in the price of their goods. It is only in a superfluous sense that there is “price stability”, because individual prices are still undergoing the changes they would have otherwise gone.
So, even if the price movements caused by changes in the demand for money were disruptive — and we have established that they are not — the fact remains that monetary injections in response to these changes in demand are insufficient for the maintenance of price stability.
Implications for Free Banking
To a very limited degree, free banking theory does rely on some aspects of monetary disequilibrium. The ability to extend fiduciary media depends on the volume of returning liabilities; a rise in the demand for money will give banks the opportunity to increase the supply of banknotes. However, the complete integration of monetary disequilibrium theory does not represent theoretical advancement — if anything, it has confused the free bankers’ position and unnecessarily contributed to the ongoing theoretical debate between full reservists (many of which reject the supposed macroeconomic benefits of free banking) and free bankers.
We know that an increase in the demand for money will not lead to industrial fluctuations, nor does it produce any type of price discoordination. Like any other movement in demand, it reflects the preferences of the consumers which drive the economy. We also know that monetary injections cannot achieve price stability in any relevant sense. Thus, the relevancy of the macroeconomic theory of monetary disequilibrium is brought into question. Free banking theory would be better off without it.
This suggests, though, that a rejection of monetary disequilibrium is not the same as a rejection of fractional reserve banking. It could be the case that a free banking industry capitalizes on an increase in savings much more efficiently than a full reserve banking system. Or, it could be that the macroeconomic benefits of fractional reserve banking are completely different from those already theorized, or even that there are no macroeconomic benefits at all — it may purely be a microeconomic theory of the banking firm and industry. These aspects of free banking are still up for debate.
[1] George A. Selgin, The Theory of Free Banking: Money Supply under Competitive Note Issue (Totowa, New Jersey: Rowman & Littlefield, 1988). Also see George A. Selgin, Bank Deregulation and Monetary Order (Oxon, United Kingdom: Routledge, 1996); Larry J. Sechrest, Free Banking: Theory, History, and a Laissez-Faire Model (Auburn, Alabama: Ludwig von Mises Institute, 2008); Lawrence H. White, Competition and Currency (New York City: New York University Press, 1989).
[2] Leland B. Yeager, The Fluttering Veil: Essays on Monetary Disequilibrium (Indianapolis, Indiana: Liberty Fund, 1997), pp. 218–219.
[3] Ibid., p. 218.
[4] Clark Warburton, “Monetary Disequilibrium Theory in the First Half of the Twentieth Century,” History of Political Economy 13, 2 (1981); Clark Warburton, “The Monetary Disequilibrium Hypothesis,” American Journal of Economics and Sociology 10, 1 (1950).
[5] Peter Howitt (ed.), et. al., Money, Markets and Method: Essays in Honour of Robert W. Clower (United Kingdom: Edward Elgar Publishing, 1999).
[6] Steven Horwitz, Microfoundations and Macroeconomics: An Austrian Perspective (United Kingdom: Routledge, 2000).
[7] Some of the criticisms presented here have already been laid out in a forthcoming journal article: Phillip Bagus and David Howden, “Monetary Equilibrium and Price Stickiness: Causes, Consequences, and Remedies,” Review of Austrian Economics. I do not support all of Bagus’ and Howden’s criticisms, nor do I share their general disagreement with free banking theory.
[8] Yeager 1997, pp. 222–223.
[9] Laurence Ball and N. Gregory Mankiw, “A Sticky-Price Manifesto,” NBER Working Paper Series 4677, 1994, pp. 16–17.
[10] Horwitz 2000, pp. 12–13.
[11] Yeager 1997, p. 104.
[12] Yeager 1997, p. 223. Yeager quotes G. Poulett Scrope’s Principles of Political Economy, “A general glut — that is, a general fall in the prices of the mass of commodities below their producing cost — is tantamount to a rise in the general exchangeable value of money; and is proof, not of an excessive supply of goods, but of a deficient supply of money, against which the goods have to be exchange.”
[13] Joseph T. Salerno, Money: Sound & Unsound (Auburn, Alabama: Ludwig von Mises Institute, 2010), pp. 193–196.
[14] This is Menger’s theory of imputation; Carl Menger, Principles of Economics (Auburn, Alabama: Ludwig von Mises Institute, 2007), pp. 149–152.
By Gerardo Coco, on 23 August 11
The advent of a European Union with a single currency was hailed by Nobel laureate Robert A. Mundell as
a great step forward, because it will bring forth new and for once meaningful ideas about reform of the international financial architecture. The euro promises to be a catalyst for international monetary reform.
Unfortunately, by underwriting member countries’ financial risk with impunity, the EU made the euro the catalyst of unsound monetary policies that are now leading the Union into an economic maelstrom. Still less has euroization set the pace for an international reform of the monetary machinery.
Milton Friedman was more cautious about this super currency. The euro’s real Achilles heel, he said, would prove to be political: a system under different governments subject to very different political pressures could not endure a common currency. Without political integration, the tension and friction of the national institutional systems would condemn it to failure. Indeed the problem is always political, but not in the sense meant by Friedman. Regardless of the degree of political integration, governments’ spending and dissipation, which are unalterable tendencies of any political organism, make irredeemable paper monies act as transmission belts for financial and economic disruptions.
At the outset of the 2010 Greek crisis that triggered the European domino effect, Professor Mundell pointed out that there was nothing inherently bad in the euro as such; the problem lay in the country’s public debt spiralling out of control. However, being a strong advocate of financial and monetary “architectures” as means for pursuing monetary and non monetary ends, he should have acknowledged that irredeemable currencies cannot be examined independently of the political framework in which they are embedded, because politics inevitably extends the role of money beyond its original function as a medium of exchange, making it trespass into the field of “economic policies”. Official theory does not see money as a neutral device, but as an instrument of policy for purposing ends which conflict with its primary goal: to retain the value of the monetary unit. Failing this primary goal, monetary architectures no matter how they are framed make for economic devastation.
Is a monetary order a constitution?
Robert Mundell’s assertion — that a monetary order is to a monetary system what a constitution is to a political or electoral system — unintentionally sheds light on the authoritarian nature of today’s irredeemable money governance and its fraudulent practices. Where is the flaw in this catching parallel? The flaw is that if a monetary order stands for a constitution, i.e. a democratic framework of laws and regulations, it does not provide for a separation of powers. The money order as a legislative system coincides with the executive power, the money system, embracing the range of practices and policies pursued for monetary and non monetary ends. Moreover, the judicial system is concentrated in the same hands because monetary authorities are not accountable to anyone. With the exception of governments that, being their source of power, may be considered “ghost writers” of monetary constitutions, no one else can influence money legislation. In other words, in this framework there is no room for an “electorate” (producers and consumers). What basic law regulates the relationships between individuals and their monetary orders by guaranteeing fundamental rights?
The basic law of the gold standard was the free convertibility of currencies, allowing individuals to redeem paper into gold on demand. This acted as protection against money misuse by banks or governments. Convertibility was for producers and consumers the means to express their vote on the degree of money reliability. Money was an instrument of saving. Paper money, or fiduciary circulation, as opposed to the banknote which was a title of credit, could be issued too but it had to comply with the law of gold circulation whereby the total volume of currency, coins, banknotes and paper notes had to correspond exactly to the quantity of metallic money necessary to allow economic exchanges. This being the purpose of the monetary system, banks, to avoid insolvency risks and gold reserves outflow had to adjust, through the discount rate policy, the issue of fiduciary papers to the real needs of economy.
Therefore gold was a barrier against the use of money as an instrument of power. Its value was fixed on the world market where gold was always in demand. Gold then had the same value in each country, and that’s why it was a stable international means of payment. Finally exchange rates were stable, not because they were arbitrarily controlled by government but because they were always gravitating towards the gold parity, the rate at which currencies were exchanged, and this was determined by their respective gold content. Roughly stated, the gold standard was an order providing for a separation of powers: the fundamental law of metallic circulation was the constitution, the banking system was the executive power which was controlled by producers and consumers representing the judicial power to sanction abuses. In today’s monetary order, producers and consumers have become legally disarmed victims of monetary legislation, deprived of the weapon of defence against money manipulation.
A trail of broken monetary arrangements
Central banks are the pillars of the monetary order because they are the source of the world’s supply and they regulate it. They control circulation, expand and restrict credit, stabilize prices and, above all they act as instruments of State finances. They are both “anvil and hammer”, trying to adapt the system to all occasions, remedying abuse by a still greater abuse, and considering themselves immune from the consequences. For these reasons, the leading architects of the world financial order should explain how the very same institutions that are pursuing unsound policies domestically might realistically think to establish a sound monetary order at a higher level.
The most important architecture, after the Second World War, was the Bretton Woods Agreement (1944). A “managed” form of gold standard was designed to give a stable word monetary order by a fixed exchange rate system with the dollar as the key currency, redeemable in gold only to central banks, and with member countries’ currencies pegged to the dollar at fixed rates and indirectly redeemable in gold. But the huge balance of payments deficit and high inflation in the US should have made gold rise against the dollar. A crisis of confidence in the reserve currency pushed foreign countries’ central banks to demand conversion into the metal, panicking the US, which promptly closed the gold window.
After the end of Bretton Woods in 1971, fiat currencies began to rule the world
The Smithsonian Agreement (1971-1973) which followed Bretton Woods was hailed by President Nixon as the “greatest monetary agreement in the history of the world” (!). It was an order based on fixed exchange rates fluctuating within a narrow margin, but without the backing of gold. Again, countries were expected to buy an irredeemable dollar at an overvalued rate. The system ended after two years.
Within the West European block, fixed exchange rates remained, but floating within a band against dollar. “The snake”, as the arrangement was called, died in 1976. Major shocks, including the 1973 oil price spike and the 1974 commodity boom, caused a series of currency crises, repeatedly forcing countries out of the arrangement. But this did not persuade them to abandon the dream of intra-European currency stability. The snake was replaced in 1979 by the European Monetary System (EMS) with its basket of arbitrarily fixed-but-adjustable exchange rates floating within a small band and pegged to the European currency unit (ecu), the precursor of euro.
Yet the arrangement ultimately failed, again due to a series of severe shocks (a global recession, German economic and monetary unification, liberalization of capital controls). Rather than abandoning the system, European governments adopted much wider fluctuation bands, reaffirming their commitment to an order based on fixed rates and irredeemable currencies.
So we arrive at an arrangement without historical precedent: sovereign nations with a single legal tender issued by a common central bank — the Euro entered into function in 1999. The stated aims of the single currency were noble: to facilitate trade and freedom of movement, providing for a market large enough to give each country better insulation against external shocks. Unfortunately, it couldn’t provide the member states with a system of defence against the internal shocks inherent to any irredeemable currency.
History confirms that currencies cannot rest on stability pacts and similar restrictions. Mainstream economists have long argued that the euro crisis has arisen from the lack of common social and fiscal policies, but the architects of the European currency were also well aware of this. Their aim was always to forge a European people, and a socialist European superstate, on the back of the euro. They had not the patience for a European state to naturally emerge in the same manner as the US, from a population sharing the same culture and language. “Europe of the people and for the people” was a misleading disguise to give an economic prison the honest appearance of a democratic and liberal project.
So in the end, Euroland has been working as a hybrid framework of institutions to which members countries delegate some of their national sovereignty in exchange for access to a larger market, capital, and low interest rates. But they entered an region of anti-competitive practices, antitrust regulations, redistributive policies, lavish subsidies, and faux egalitarianism — a perfect economic environment in which to run astronomical debts. The euro system represents one of the most significant attempts to place a currency at the service of political and social objectives, and it is for this reason that it will remain a source of problems.
Descent into the maelstrom
Today’s monetary orders are shaped to pursue what Rothbard has called the economics of violent intervention in the market. They are, in essence, based on a socialist idea of money. Accordingly they make for a framework of laws, conventions, and regulations fitting the interests of the rulers. In this framework it is the public debt that has utmost importance. Indeed, it is the monetary order that has developed the concept of debt in the modern sense. Because the management of public finances have become the supreme direction of economic policy, treasuries are now in charge of the national economies. Through the incestuous relationships they maintain with central banks, they are able to create the ideal monetary conditions in which to borrow ad libitum. Purely monetary considerations such as providing a stable currency are disregarded. Political, fiscal and social ends prevail over everything else.
In the last eighty years, monetary orders have allowed an abnormal increase in finance, banking, debt, and speculation completely unrelated to a development of sound economic activity and wealth production, but due instead to government’s overloading of central banking responsibilities. Unfortunately, the outcome is the de facto insolvency of the world monetary order. The ensuing adverse effects may be still delayed with the aid of various measures, interventions and expedients, but not much time is left. The stormy sea of debt has already produced a whirlpool that will be sucking major economies into a maelstrom, and the larger they are, the more rapid will be their descent. It remain to be seen what shape they will take after the shipwreck. Gloomy as the situation may appear, it is not hopeless because such an event might be the sole opportunity to cause a decisive change. It might be that instead of resuming the art of monetary expedients to create irredeemable money, governments and banks let them fade into oblivion. This would allow people to take their monetary destiny back into their own hands.
By Ralph Benko, on 18 August 11
A view from America, previously published at Forbes.com on August 15th
Is it possible that the ghastly unemployment, stagnant growth (and possible double-dip recession), and financial market convulsions all can be traced back to one single decision? Perhaps.
Monetary policy is the most recondite yet most pervasive and powerful of economic forces. Keynes, in The Economic Consequences of the Peace, wrote, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
The converse also is true. Restoring real monetary integrity engages all the hidden forces of economic law on the side of prosperity. And forces for monetary reform are very much in motion.
The dollar has fallen in value by more than 80% from the day when Richard Nixon took the world off the tattered remnants of the gold standard. Aug. 15 marks the 40th anniversary of the avowedly “temporary” abandonment of the gold standard by President Richard Nixon.
“Closing the gold window” was part of a series of dramatic but shocking and destructive tactics by Washington, including wage-price controls, a tariff barrier, and other measures, all leading to economic and financial markets hell. All such measures save one stand discredited. The only piece of the Nixon Shock still in force was the piece most ostentatiously designated as temporary. Nixon: “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold….”
Suspending convertibility was no trivial matter. Nixon speechwriter William Safire recalled: “On the helicopter headed for Camp David, I was seated between [Herb] Stein and a Treasury official. When the Treasury man asked me what was up, I said it struck me as no big deal, that we would probably close the gold window. He leaned forward, put his face in his hands, and whispered, ‘My God!’ Watching this reaction, it occurred to me that this could be a bigger deal than I thought….”
It proved to be a very big deal. How ironic that the most staunch defenders of a pure paper standard, the sole remnant of Nixonomics, are a few influential “progressives” such as Paul Krugman, Joseph Stiglitz and Thomas Frank. Call them “the Nixonians.” The poor jobs growth and stagnation of today’s “world dollar standard” are not, unsurprisingly, dissimilar to the results of the Nixon Shock.
There is ample evidence that restoring gold convertibility would put the world back on the path of jobs, growth, and a balanced federal budget. Politicians do not like messing around with monetary policy. But gold, recently rediscovered by the Tea Party, has an impressive technical, economic, and political pedigree. Gold convertibility has a very well established track record of job-creation, properly applied, during many eras.
The silver lining to the whipsawing Dow is that it makes politicians open to new ideas, even new old ideas. Monetary statesmen from Alexander Hamilton forward have faced circumstances far more dire than those of today and turned things around. Modern example? The German economic miracle, the Wirtschaftswunder.
That miracle was founded in currency reform. On the very day when Ludwig Erhard’s currency reform was put into place, the economic paralysis ended. The “rightest” economist of the 20th century, Jacques Rueff, wrote (with André Piettre) about the turnaround beginning on the very day of the reform:
Shop windows were full of goods; factory chimneys were smoking and the streets swarmed with lorries. Everywhere the noise of new buildings going up replaced the deathly silence of the ruins. If the state of recovery was a surprise, its swiftness was even more so. In all sectors of economic life it began as the clocks struck on the day of currency reform. Only an eye-witness can give an account of the sudden effect which currency reform had on the size of stocks and the wealth of goods on display. Shops filled with goods from one day to the next; the factories began to work. On the eve of currency reform the Germans were aimlessly wandering about their towns in search of a few additional items of food. A day later they thought of nothing but producing them. One day apathy was mirrored in their faces while on the next a whole nation looked hopefully into the future.
Rueff took a similar approach, including a dramatic currency reform, to reviving the French economy. As economist and Lehrman Institute senior advisor John Mueller summarizes:
Despite the unanimous opposition of his cabinet, de Gaulle adopted the entire Rueff plan, which required sweeping measures to balance the budget and make the franc convertible after 17.5% devaluation – though not without qualms. ‘All your recommendations are excellent,’ de Gaulle told Rueff. ‘But if I apply them all and nothing happens, have you considered how much real pain it will cause across this country?’ Rueff replied, “I give you my word, mon General, that the plan, if completely adopted, will re-establish equilibrium in our balance of payments within a few weeks. Of this I am absolutely sure; I accept that your opinion of me will depend entirely on the result.’ (It did: ten years later, de Gaulle awarded Rueff the medal of the Legion of Honor.)
Today, on this the 40th anniversary of the closing of the gold window, a group of Americans issued a statement reading, in its conclusion:
[W]e support a 21st century international gold standard. America should lead by unilateral resumption of the gold standard. The U.S. dollar should be defined by law as convertible into a weight unit of gold, and Americans should be free to use gold itself as money without restriction or taxation. The U.S. should make an official proposal at an international monetary conference that major nations should use gold rather than the dollar or other national currencies to settle payments imbalances between one another. A new international monetary system, based on gold, without official reserve currencies, should emerge from the deliberations of the conference.
Many of the signatories are associated with the American Principles Project, chaired by Sean Fieler, and the Lehrman Institute (with both of which this writer is professionally associated), chaired by Lewis E. Lehrman. Signatories also include such important thought leaders as Atlas Foundation’s Dr. Judy Shelton and Forbes Opinions editor John Tamny.
Politicians may have forgotten the power that real money, such as currency convertible into gold, has to reverse an economic crisis. But the people have not. Earlier this year, the government of Utah restored, to international attention, the recognition of gold and silver coins as legal money. Now news emerges that the largest and most respected political party in Switzerland is supporting the work of the Goldfranc Association, led by citizen Thomas Jacob, to introduce a gold-convertible Swiss franc as a parallel currency.
Proponents are using the Swiss political process to put the creation of a gold franc in the Swiss Constitution. Jacob finds himself in the very distinguished company of Rueff and Erhard.
While London burns Switzerland thrusts gold-based currency reform toward the center of the international debate on how to rescue the euro, end the debt crisis, and turbocharge economic growth and job creation with integrity, not Nixonian manipulation.
Will a world Wirtschaftswunder — an economic miracle — follow a restoration of gold convertibility? History shows how practical such a miracle can be.
By Detlev Schlichter, on 17 August 11
Apologies if the title of this Schlichter-file sounds somewhat arrogant but after the events of the past three weeks I may perhaps be forgiven for feeling a bit emboldened in my views. Of course, this is often the point at which the pendulum swings in the other direction and developments take a slightly different turn, if only for a short time. After all, big trends almost never go from A to B in a straight line. So let’s stay modest and nimble. But there can be no denying that the events of that past two to three weeks have been very supportive of my views: signs are accumulating everywhere that we are in the twilight of the fiat money era. The system is fairly beyond repair. And its demise is accelerating.
I have not been following events and market debate quite as closely as usual as I have been in Italy for the past three weeks, from where I am writing this. Italy is, of course broke, but it is still a lovely place and, thankfully, so far riot-free. I should probably correct the last sentence: the Italian state is broke, the tax-funded overinflated public sector, not the individual Italians. This is a difference that the politicians and the statist media tend to ignore. Private citizens are often income producing and even wealthy and quite capable of looking after themselves. Most of them never signed up for all this state debt. It seems beyond doubt to me that the productive part of society – and thus, in the long run, all of society – will benefit greatly when the ever-growing, overspending, taxing, meddling, regulating welfare state finally meets its well-deserved demise in a string of spectacular sovereign defaults. Of course, the political establishment have a vested interest in constantly portraying their financial plight as a massive problem for the entire nation. The Swiss novelist Duerrenmatt famously said that the state calls itself “fatherland” whenever it is set on waging war. It may be added that it does so too when it is set on expropriating more in taxes, or when it debases the money in order to fund its profligate ways.
Remember, the state is not the people! Therefore, embrace default!
What we have learnt in the past weeks?
In any case, even from the comfortable distance of the sunny hills of Tuscany it is clear that the past three weeks must have driven home the following points to even the most starry-eyed Pollyanna out there:
First, this is not a cycle, at least not in the way that it is portrayed so lazily in the mainstream media. It is now four years since the U.S. subprime market nosedived. The economy’s statistical bean-counters (sometimes incorrectly referred to as economists) tell us that the recession ended two years ago. Yet, the Federal Reserve last week promised near-zero interest rates for years to come. Wake up! This is no cycle! We are not just in another economic downturn. This is not just another recession, or even – oh stupid phrase! – a double dip. We cannot say that ‘we have been here before’, and that it will just take a bit longer till we get out. ‘All this great stimulus will ultimately kick-start the economy into higher gear.’ Rubbish! We are witnessing systemic disintegration! A dysfunctional economic architecture – built on the quicksand of ever-expanding fiat money, artificially low interest rates and ever-higher piles of debt – has reached its logical endgame. This is systemic failure, not cyclical fluctuation.
Second, there is no exit strategy. The central banks are firmly boxed in. They are trapped. Back in April, when the ECB enacted its first rate hike and the market commentary was awash with predictions of a coming tightening cycle, I wrote Don’t believe the hype! Why the ECB rate hike doesn’t mean anything. Don’t be fooled by some verbal sabre-rattling and some cosmetic rate adjustments. The ECB cannot and will not remove monetary accommodation. The balance sheet of the central bank will not shrink. It will grow. The ECB will not be allowed to pull the rug from under the European banks and governments. Banks and states can sustain the mirage of solvency only with the help of the ECB’s printing press. I also predicted that the ECB would buy more government bonds. All of this received ample confirmation in recent weeks. The ECB’s statement that it does this to maintain liquid markets and to effectively conduct its monetary policy is such a laughably thin-veiled attempt at keeping face that it borders on insulting our intelligence.
Paper money systems are always creations of the state, and fiat money is always a tool of the state. Hence, ‘central bank independence’ is always an oxymoron but never more so than when the paper money inflation is reaching its tipping-point and the printing press becomes the last line of defence against sovereign default and bank collapse.
Even the U.S. Fed, among the major central banks the most enthusiastic monetary inflationist and blower of bubbles, a few months ago enjoyed a brief spell of openly contemplating a return to tighter money. That moment has clearly passed. After the events of July and early August, we know that Wall Street will now have to be continuously funded at zero cost, and that QE3 is practically around the corner.
Third, it is now all but official that the major states are bust. Public finances are firmly beyond repair. The modern state – legitimized by electoral majority of the one-man-one-vote type and endowed with the privileges to tax all income generators in its territory and to print money without limit – cannot live within its means, it cannot shrink and it cannot save. It is destined to become ever bigger, until it chokes on its own inconsistencies. If you needed any evidence it was provided by the childish theatre of the U.S. debt-ceiling debate, the outcome of which had never been in doubt. U.S. politicians agreed with themselves that they were not broke and that they could spend more. Anybody surprised? The so-called spending cuts that resulted from all those tough negotiations are simply a bad joke. The U.S. state machinery has casually accumulated another $ 2.7 trillion in debt over the past 2 years, yet those at the head of this out-of-control Leviathan now give themselves 10 years to cut a mere $2.4 trillion from the ever-growing pile of liabilities. How can anybody outside Planet Washington take this nonsense seriously?
I hear that S&P is getting a lot of flak for cutting Uncle Sam’s credit rating. And they should! AA+? What are they thinking? That is still way to high! U.S. government finances are simply out of control. Not only is Washington unable and unwilling to repay this debt, it will not even manage to stabilize it. By the logic of the modern democratic welfare state, ‘saving’ means spending less than one would like to and has previously decided to.
So, to summarize, there is no recovery, no exit strategy and no fiscal stabilization. Debt accumulation continues, increasingly funded via central bank debt monetization. The system staggers on, increasingly relying on the printing press. Needless to say, I feel entirely vindicated. I may also add that this is just the beginning.
Continue reading at Paper Money Collapse.
By Sean Corrigan, on 16 August 11
The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt. Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven…
Modern fiscality, whose pivot is formed by taxes on the most necessary means of subsistence (thereby increasing their price), thus contains within itself the germ of automatic progression. Overtaxation is not an incident, but rather a principle… The destructive influence that it exercises on the condition of the wage labourer concerns us less however, here, than the forcible expropriation, resulting from it, of peasants, artisans, and in a word, all elements of the lower middle class. On this there are not two opinions, even among the bourgeois economists.
— Karl Marx, ‘Das Kapital’, Vol I, Ch 31
In Elgin Groseclose’s magisterial ‘ Money and Man’, the following, eerily contemporary quote appears in his chapter on paper money:-
The administration of the finances appears to have practised a subtle and ingenious tactic… [and] by modifications in the monetary unit, attempted to influence economic phenomena. Changes… were made to prepare for the issue of loans or to audit the circulation of the treasury notes, or to regulate exchange, to modify the balance of trade… to effect a redistribution of wealth, to influence the price level of commodities, perhaps to attenuate economic crises and famines…
So, we are told, wrote Albert Despaux of the practices of the French regime under Louis XIV during the final, disastrous twenty-five years of his reign. Indeed, upon first examining the accounts, after seven decades of chronic warfare and costly ritual, the incoming administration was to discover that matters were even more dire than they had originally been led to believe – even without a helpful Wall St. broker-dealer to help anyone cook the books beforehand.
As the Duc de Noailles – the new chief of the Council of Finance– wrote to the dead king’s chief concubine, in the autumn of 1715:
We have found matters in a more terrible state than can be described; both the king [i.e., the ‘public sector’] and his subjects ruined; nothing paid for several years; confidence entirely gone. Hardly ever has the monarchy been in such a condition, though it has several times been near its ruin.
Plus ça change, one cannot refrain from remarking.
Though we must factor a larger margin of error into his accounts than we must apply to even our own governments’ dubious estimates, it seems that the sunset of le Roi Soleil was accompanied by an annual expenditure of the order of 236 million livres – of which some 86 million was interest payable on the debt – against which revenues of only some 150 million livres could be found. Total debt amounted to perhaps 3 billion livres, implying an average interest rate just south of 3% which is, ironically, much the same as that enjoyed by Uncle Sam today.
The annual deficit, therefore, amounted to some 43% of revenue, or 30% of outlays – still below the Bernholz accelerating inflation threshold of 66% and 40%, respectively, even if not exactly a testimony of rude fiscal health. Things had been deteriorating for quite some time before this, so that, overall, the grand Bourbon’s debt rose twentyfold in thirty years. By way of comparison, the imperial presidency in Washington has allowed its own count of obligations to climb a not wholly incomparable fifteenfold in a like period of time.
It is of note, then, that the abject financial state to which Louis’ vainglory had reduced his realm compares fairly favourably with that produced by a similar threescore years-and-ten of military welfarism in his successors’ populist republic, where the latest €150bln deficit represents 54% of receipts and 35% of expenditures – and the old satyr’s performance looks even more attractive beside the newly ex-AAA United States’ tally of 60% and 38%.
Moreover, whereas the currency doctoring of which Despaux so disapproved was the culmination of a 66-year process during which the livre was devalued 40% in terms of gold and 35% in terms of silver (for a mean inflation rate of 0.8%!), that same proportionate loss of gold value has occurred to the livre’s paper descendants in just the last sixteen to eighteen months – much less the last six to seven decades. Moreover, in the same, two-generation period up to the present, the US dollar has lost 98% of its gold and over 99% of its silver value, with the franc putting up an even poorer showing beside it.
Even in CPI terms, the US dollar buys only 8% of what it did in 1945, a 3.8% annualized drop whose overall extent it has taken successive French governments something of the order of fifty years to accomplish at the compounded 4.7% rate prevailing in l’Hexagone.
The consequences of the penury of the early eighteenth-century French state are well known to students of human folly, for these were the all-too familiar circumstances in which the regent, the personally extravagant Duc d’Orleans – eschewing both politically unpalatable alternatives of swingeing austerity or outright default – turned to the twisted, Scots genius of John Law, that patron saint of underconsumptionist currency quacks and the honorary founding-father of latter-day central banking.
The broad thrust of the insanity and wastefulness unleashed by this pecuniary Pandora are perhaps too well known to bear overmuch repetition here, but what should be emphasised is that Law – like Bernanke – at first tried to argue that he was not some crude inflationist, but merely arranging an asset-swap of paper money for mortgages. He also held, like all of his ilk who have succeeded him, that the panacea for a nation groaning under an insupportable burden of debt and famished for a lack of productive capital was the emission of more and more money.
This age old error of confusing the medium of exchange with the object of exchange is one we continue to commit. It as if a man’s thirst can be slaked by giving him a box of drinking straws or his appetite sated by kitting him out with a shopping basket.
Soon enough, for all his astuteness, the malign side-effects of Law’s scheme made themselves felt, not the least of them, the distress occasioned to the ordinary household by the rising price of necessities in a world simultaneously subject to the blatant vulgarities of the rising mob of instant, speculative ‘millionaires’ (as the new phrase had it). Just as we have learned all over again, such disadvantages came rapidly to overwhelm the largely incidental fillip the inflation accorded to genuine economic activity.
Unabashed, our Caledonian conjuror could only plunge ever further into a maze of bewildering – and often contradictory – expedients of his own construction. In a flurry of on-the-hoof policy-making of the kind so eagerly practiced today, he unavailingly sought to remedy his earlier mistakes by blurring the lines between state debt and public equity, between common stock and bank money; banning, then re-instating the use of gold and silver and altering their official parities with mind-numbing speed until all trust in his System – its specious virtues so recently extolled to the heavens – collapsed and France lay broken alongside it.
So, too, do we – the voluntary legatees of John Law – face a world which is seemingly broken, in its turn.
Sauve qui peut!
With the PR-man’s trained ear for a catchy phrase, that emptiest of empty suits, UK PM David Cameron declared, in the aftermath of last week’s appalling display of mass barbarism, that society in the unhappy land over which he shakily exercises power was ‘broken’ – to the ill-concealed schadenfreude of much of the continental press, many of whose own cities still bear the scars of similar irruptions of the Noble Savages whom their Provider States have so successfully reared in the moral wasteland of their sprawling favelas and seething bainlieues.
Painted in oscillating shades of red and green on our dealing screens, we can also see the full, epileptic frenzy of our broken financial markets, no longer evidence of the rational allocation of hard-spared capital to the enriching process of patient and diligent entrepreneurship, but a wild, computer-driven video arena where countless billions swarm into and out of the sea of tickers from one micro-second to the next, with each successive ebb and flow of this leveraged flood further reducing the informational content of the associated prices and so defeating the very purpose of the capital market itself.
Many disparate classes of ‘assets’ had spent eight months trading ever more closely bound to one another on the wave of Bernanke’s last, fatuous, Rooseveltian ‘experiment’ of QEII. So it was that the expiry of that nakedly cynical programme, at a time when the underlying macro-data had rather predictably started to turn sour, left a vacuum behind the broken-record promises of the stock promoters. Unfortunately, the milling Herd to whose members they exist to whisper their blandishments – much like Nature herself – absolutely abhors a vacuum.
A long time ago, we first wrote about what we had come to recognise as the bipolar tendency of financial orthodoxy to undergo opposing, Kuhnian revolutions of its Groupthink every six to twelve months, or so.
Typically, the players first persuade themselves of the validity of an often arbitrary, but usually bullish, scenario which, by dint of constant repetition and uncritical mimicry comes not only to serve as a dogma, but one which each believer professes to have discovered for himself. Along the way, all objective data and governmental statistics which can possibly be construed to support this scenario are talked up and re-transmitted in confirmation of the first idea: those which cannot be so re-interpreted are simply ignored as ‘outliers’ by all except the small cluster of much-derided contrarians and habitual Cassandras.
Eventually, as the trend matures and its espousal becomes near universal, it begins to lose its onward momentum. Now, for the first time, the dissonant evidence, which has long been accumulating, begins to excite a certain uneasiness in the Jungian mass consciousness.
Finally, the trend turns – sometimes to, but often absent, the accompaniment of some unanimously-recognised trigger event – and the first losses start to be taken by those latecomers caught in the reversal. As each successively lesser, Greater Fool sells out, cursing himself that he always buys the top, as he does, he encourages another of this time’s Smart(er) Money men to quit while he’s ahead, too. So, each initial trickle dislodges more and more of those clinging precariously to the edges of a now-vertiginous slope below, until the first, trivial setback snowballs its way into a screaming avalanche of head-in-the-hands liquidation.
Now, at this point of maximum dislocation and mental discomfort, all those inconvenient developments which should have long since called the move into question are suddenly rediscovered and – lo! – they crystallise instantly into the foundational themes of a counter-trend of equal and opposite conviction.
Sadly for them, the earlier naysayers will find no belated applause for being right, being despised for their pusillanimous refusal to play the game if they say, ‘I told you so’ and being anyway doomed to seeing their premature insights co-opted shamelessly – and without the slightest attribution – by the post hoc rationalisations of a consensus-hugging crowd soon avidly blowing themselves an anti-bubble to replace the inflated soapskin of ill-starred hope which has just imploded all around them.
So it has been here, too, with the Shock! Horror! Hoocoodanode? of the downwardly-revised US GDP numbers; the farce of the WWE grand slam which was the Federal budget dispute; and the ritual slaying of the sacred cow of that nation’s undeserved prime credit rating.
Up until that point even the yawning cracks opening up around the foundations of the Eurozone could largely be ignored in the eagerness to buy a small section of Blue Sky, but, once sufficient self-doubt was ignited in some corner of that Gordian tangle of correlated and cross-margined trade in which the near-free leverage of QE-II had enmeshed everyone, that ongoing turmoil also became one of the defining features of the new bearishness and its expression in market pricing became violently intensified as a result.
So the first sparks of panic were struck to find a ready kindling among the garish paraphernalia of illusion piled high behind the flats and tableaus which comprised the backstage clutter in the Theatre of the Absurd where the ‘Great Global Recovery’ play had been enjoying its unbroken, 15-month run.
In time-honoured fashion, a mad rush for the exits soon followed.
The Wasteland
So, here we stand, exactly eighty years on from the collapse of CreditAnstalt, the run on the Danat bank, and the disastrous abrogation of Britain of sterling’s gold standard status which turned an earlier stock market setback into an enervating slough of Depression.
Here, we stand, almost forty years to the day from Nixon’s abandonment of the dollar’s pivotal membership of the bastardized gold-exchange standard and the horrifying decade of rampant inflation which followed.
And here we stand, a week shy of four years after the Fed’s first, tentative response to the looming CDO/wholesale funding disaster which would threaten to sweep away not just those hocked up to the eyeballs in America’s grotesque sub-prime bubble itself, but feckless borrowers and risk-insensitive lenders – both public and private – right around the globe.
So let us take stock of what exactly we have wrought in the meanwhile by following mainstream economic exhortations to emulate what we think the hallowed FDR may have enacted or the venerable Keynes may have ordained, were these two leading lights of cynical expedience and wilful interventionism each alive today.
With over $2 trillion in excess reserves parked with the Fed, the ECB, and the BoE; with unsecured, interbank loans for anything other than the shortest of terms all but impossible to obtain; with the thirst for security sporadically driving rates on T-bills, general collateral – even deposits – below zero; with the benchmark LIBOR rates increasingly inoperative and their replacement OIS rates barely standardised – with the spread between the two varying widely and with the latter diverging from supposedly stable official base rates which thy are supposed to reflect – it is clear that the money market is broken.
With even short-date basis swaps between the major currencies wandering far, far from their near-zero, normal levels; with countries like Brazil attracting peer group interest for imposing taxes on inflows into and bets on the appreciation of its currency; with the Swiss trying to stem a 7.8 sigma, one-in-300-trillion, two-week move in the currency by aiming to swell sight deposits by 10% of GDP and by showering hapless East European carry-traders with precious francs; with EUR-USD risk reversals at their most extreme ever, both in absolute terms and as a percentage of underlying volatility – what can we say but that the FX market is broken?
With the DAX – for example – undergoing its own, 6.3 sigma, 7-in-a-billion chance, two-week move – one only exceeded in its compressed magnitude during the Crash of ’87; with the peak five days of frantic selling seeing record volume, thanks in part to the less-than-benign influence of the high-frequency trading which hummed along the fibre-optic cabling at triple the normal rate and accounted for up to 75% of overall trades, according to the Nasdaq’s biggest execution broker, it is no wonder the VIX doubled in only four days, a jump only exceeded by last May’s HFT-led ‘flash crash’. No wonder either that several European and Asian authorities saw fit to intervene, either to prop up prices or to outlaw short selling, or both. The only inference to be had – the equity market is broken.
With the ECB being forced to take drastic – and arguably illegitimate – action to cap the 3-month, 225bps rise in the Spanish-Bund and the concomitant 270bps rise in the Italy-Bund spread; with US Treasury bonds plunging amid the rout to record low nominal and negative implied real yields, all the way out to 10-years; with record low mortgage rates forcing duration-hungry investors and hedgers to receive long-dated swaps at minus-40bps; with record levels of junk issuance having been conducted at record low yields, before a frozen market saw spreads explode a 5.6sigma, 218bps to stand 50bps wider in just ten days – to cite just a few instances of a widespread disruption – it is fairly evident that the bond market is also broken.
With the ratio between the two main oil benchmarks – WTI and Brent – having crashed from its well-behaved, long-term, pre-crisis ratio of 1.07:1 +/-0.2, to hit 0.79:1; with gold trading to a 5% premium to platinum for only the second time in at least the past quarter-century; with base metals showing less and less correlation between price, curve shape, and visible inventory as funding games and warehouse manipulations distort trading patterns; with industrial commodities being driven more by CB inflationary-‘Risk On’ considerations than by the specifics of usage and production – perhaps we must admit that the commodity market is broken, too.
With the widespread frustration of the masses spilling out onto the streets of the Maghreb, Egypt, the Levant, the Gulf, Spain, Greece, Eastern Africa, Bangladesh, Chile, and others; with even the mighty Chinese Communist Party quailing before the popular wrath excited by the divisive symbolism of the high-speed rail crash; with 80% of surveyed US voters saying the country is ‘heading down the wrong track’; with the widespread unease in Germany at the executive’s dismissal of the citizens’ understandable reluctance to bankroll the wider EU; with the emerging realisation that three generations of an ever-encroaching, ‘tutelary deity’ welfarism have not only sapped the vitality out of the economic organism, but have bred out all vestige of responsibility and self-restraint from the teeming, unweanable mass of perennial dole-puppies it has whelped – it is therefore undeniable that politics-as-usual is broken, too.
With the glaring failure to predict even the possibility – much less the circumstance – of the recent Crash and with the even more foreseeable failure of its tired old, rehashed nostrums of ending the slump by means of an inequitable programme of corporate welfare, inflationary ‘unorthodoxy’, and the unleashing of the debt-spewing monster of the state to gorge itself upon such things as individuals and private concerns no longer care to consume, it should hardly be controversial to assert that mainstream macroeconomics – and the reputations of the many panderers to power who practice it – are equally broken.
Breaking the mould
Whatever our individual pre-occupations with the specifics of this collapse, we must bear in mind that, amid all the wreckage, there are countless millions of hard–pressed souls, each trying to earn an honest living by first identifying and then satisfying the needs of their fellow men in the best, most cost–effective manner they can accomplish. In the attempt to do so, the overwhelming majority of these strivers cannot fail to provide a living to others, too – whether by employing their labour directly in their own factories and offices, or indirectly, by buying in the goods and services these latter work to supply at the workbenches and computer docks of other hirers of their effort.
In their constant struggle to peer into an uncertain future so as to estimate whether anyone will buy their output and, if so, at what price; and then to decide what they can afford to pay in turn for the necessary means to meet this potential market, they cannot in any way be assisted by the ramifications of all the multiple breakages outlined above.
If they cannot trust the signals being sent to them about the cost of inputs or the acceptable charge for outputs; if they cannot assume a certain stability in the rent and availability of working capital, or rely on the calculus of securing longer term funding; if they and everyone with whom they deal are being subject to wild swings in currency rates and commodity prices; if there is no clarity about the framework of regulation, the structure of legislation, or the outlook for taxation – but only a well-founded pessimism that none of these are likely to change for the better; if they begin to see themselves as the targets both of material expropriation and pseudo-moral condemnation – are they then likely to give full reign to their innate spirit of enterprise, to fully express their characteristic get-up-and-go and, by so doing, give the rest of us a greater opportunity to sell our wares in the marketplace for skill and sweat?
Hardly and therein lies the rub. For if we are to pull ourselves out of the quagmire into which we have stumbled, it will be to little purpose to take three short, backward steps before hurling ourselves deeper into the morass, not just with renewed energy, but while carrying the growing weight of mud which clings to our clothes as the result of each previous failed attempt.
Debt cannot be the cure for over indebtedness, nor a more rapidly debased currency the antidote to its ongoing debasement. We must forgo the intellectual conceit that we can impose some higher order on the seeming chaos of the world and instead we must simply smooth the way so that its own emergent properties can seek out a better constellation of interconnections, all by itself.
We must recognise that there are no workable macroeconomic solutions which can be laid down: that everything is a matter of functioning microeconomics building things up; that the diamond takes on its lustrous geometry, atom by atom; that the masterpiece hanging in the Louvre came into being brushstroke by painstaking brushstroke.
Only get the microeconomics right and all else will follow.
Make labour once more affordable and its terms no longer an indentured servitude for the employer. Ensure that entrepreneurship is no more risky than it has to be and that it reaps the full fruits of its success – as well as seeing that it bears the full responsibility for its failure – by clarifying law, minimising red tape, and, once this is achieved, by resisting the bureaucratic urge to tinker any further. Set prices free to perform their function, insist that markets are able to clear, and see to it that titles to property are both secure and simple to transfer.
Under such conditions, we will each help to build a lasting recovery for the other, one job and one company at a time, much more certain of our success – however much patience will be required in its achievement – than if we were to heed the thundering decree of some sweeping, Collectivist Five-Year Plan emanating from the mouths of the tin gods who frequent the Platonic centres of world power.
Financial markets may be broken, politics and mainstream economics may be broken, but, fortunately the economy of men is a robust, highly redundant network, furnished with its own immune system and self-repair mechanism, consisting of unhampered entrepreneurial search and action.
As Adam Smith famously remarked, ‘there’s a lot of ruin in a country’ - though, contrary to what our present rulers seem to believe, he was not issuing a challenge to them to seek to quantify its limits.
If we are to avoid that final ruin, if we are to properly rectify much of what is broken and not merely smother it in an inflationary balm and patch it over with a plaster of false accounting for a further, brief, electoral half-life, there are three things which we could and should usefully add to the list of the downcast and destroyed.
These are, namely: that unsound money which is truly the root of all evil; the unfunded mountains of government debt with which such bad money engages in a poisonous symbiosis of executive tyranny and political corruption; the duty-free but rights-encrusted, all-pervading Provider State which waxes fat on that unholy alliance of illusory finance and which not only robs Peter piecemeal to pay Paul, but empowers Pericles to oversee the theft, and so suffuses the commonwealth with a miasma of perverse incentives, ethical degeneracy, and irreconcilable conflicts of interest.
What lies broken, we can surely fix, but only if we break in turn the habits of mind and the tyranny of the man-made institutions which we first allowed to break the things we value – our freedom of association, our independence of action, and our individual chance of prosperity.
By Dr Tim Evans, on 15 July 11
This morning, I addressed on behalf of TCC twenty young people at a ‘Balkans and Eastern Europe Regional Youth Conference’, hosted in London.
Under the heading, ‘Creating a Framework for Economic Progress in Europe and Beyond’, I spoke about the Austrian School of Economics, the financial crisis and how a genuine market in banking and currencies would facilitate more robust and sustainable prosperity.
It was a fun and memorable event and I would like to take this opportunity to thank the participants for such excellent engagement: Ilir Azizolli and Ujezi Brecani from Albania; Hristo Hristov Panchugov and Veronika Dimitrova Gyurova from Bulgaria; Jasmin Spahic and Nina Mehic from Bosnia; Nikola Srebro and Jelena Elcija from Bosnia-Herzegovina; Archil Tsertsvadze and Ana Samsonia from Georgia; Hristina Runceva MP and Stojan Lazarov from Macedonia; Viorel Garaz and Ion Butmalai from Moldova; Mila Jasovic and Nikola Bajcetic from Montenegro, and; Marina Kvrzic, Nenad Todorovic, Sanja Bogosavljevic and Mihajlo Zdravkovic from Serbia.
By Dr Tim Evans, on 30 June 11
A few days ago I represented The Cobden Centre by speaking at an International Leadership Summit in Opatija, Croatia. It was a grand affair, held in association with the Adriatic Institute for Public Policy, and involved more than fifty opinion formers.
They included an interesting and varied array of politicians such as the Czech MEP, Jan Zahradil; the British MEP, Geoffrey Van Orden; the Polish MEP, Adam Bielan; the former Bulgarian Foreign Minister, Nadezhda Neynsky; US Senator, Jeff Sessions, and; the former New Zealand Cabinet Minister, Maurice McTigue (to name but a few).
The session in which I spoke was headed ‘The Sovereign Debt Crisis and the Crisis of Sovereignty’ and my partners for the occasion were the British MEP Danniel Hannan and the former Prime Minister of Republika Srpska, Mladen Ivanić.
Now, beyond the content of our presentations and the debate that ensued, what was really interesting to me about this venture was how every time I or Dan Hannan mentioned the Austrian school of economics, a majority in the audience nodded as if in ‘knowing approval’. Clearly, a small minority of those present were familiar with Austrian school ideas but I suspect the overwhelming majority were not; yet all nodded.
To me, what is interesting about this is that if the gathered selection of people were in anyway representative of similar audiences further afield then maybe Austrian school ideas are starting to spread in such a way that even those ignorant of its details are starting to feign appreciation.
If so, then this all strikes me as being reminiscent of that time in late 1950s when across Western Europe and parts of North America it suddenly became fashionable for’ leaders’, ‘intellectuals’ and ‘opinion formers’ to ‘know’ and be able to comment on Socialism and Marxism. By the time of all the political and social upheavals of the late 1960s, few guests at any smart dinner party in London, Paris or New York wanted to admit that they knew absolutely nothing about these paradigms. So often they gave the impression that they did and in so doing aided a self-fulfilling prophecy much to the advantage of genuine and learned Marxists.
Maybe with the undermining of banking and monetary socialism, a similar whisper is emerging to the great benefit of Austrian ideas. In providing powerful diagnoses and explanations perhaps its ideas are now slowly starting to become fashionable even amongst elements of the so called smart set. Who knows? Only time will tell. But it is an interesting thought.
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