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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.
By John Phelan, on 27 May 11
“I’m mortified to have to pay 50%!” So said the phenomenally successful singer Adele in an interview with Q magazine. And why shouldn’t she be? Isn’t it unfair that a person can perform labour for which they get less of the reward than someone else who didn’t perform it? The right to work as you wish and dispose of the fruits of your labour as you wish are essential rights that differentiate free men and women from slaves. Agreeing with Adele seems a moral slam dunk.
Not if you write for or read the Guardian. They took Adele to task for criticising government spending on transport and schools elsewhere in her interview, remarks which are easily dealt with. But their rebuttal of Adele’s complaint about the 50% tax rate was bizarre; the Guardian simply said “The Beatles had to pay 95%”
This is true historically but the obvious response would be ‘So what?’ It’s worth remembering that the period when these penally high tax rates were in place wasn’t exactly a golden one for British economic policy making with the ‘stop – go’ spasms and sterling crises of the 1960’s giving way to the rampant inflation and economic mayhem of the 1970’s. High taxes are no better an idea now than they were then.
The reason high taxes were and remain the wrong policy prescription is a very obvious one; the more you tax something the less of that something there is. That is why governments pile taxes on cigarettes and alcohol, (they claim) they want there to be less smoking and drinking.
The problem the left had when it imposed high taxes before, and has now that it would do so again, is that while it accepts that this obvious and empirically proven proposition applies to fags or booze, it refuses to see it in action anywhere else. It was this economic blind spot which led Labour to campaign at the last election for a tax on jobs under the strange notion that it would not lead to fewer jobs being created.
Fundamentally, this problem stems from the left’s assumption that everyone is (or ought to be) just like them. Because they are happy to be servants of the state, seeing it as some benign Rousseauian manifestation of the General Will, they are happy to hand large chunks of their pay packets over to it.
The rest of us, however, are slightly more sceptical of the obviously crazy notion that every single copper coin of government spending is virtuous of itself. Thus, when taxes on our earnings go up, instead of redoubling our efforts and congratulating ourselves for supplying yet more income for the state we tend to be a bit annoyed and wonder what the point of putting any extra effort in is when more than half of the reward for that extra effort will be taken from you. Your effort slackens. You reduce your labour or you go and do it somewhere else. With less labour going on, the state’s income from taxes on labour falls. We saw all this back in the high tax Keynesian heyday of the 1970’s and look where it got us. Taxes went up and The Rolling Stones rolled off to the south of France with their millions and watched on TV as Denis Healey went to the IMF in 1976 to ask for a loan to pay the government’s bills.
It was all rather gracefully explained by the Laffer Curve which took this obvious insight and formalised it. With a tax rate of 0% the government would obviously receive no revenue. But, Laffer argued, with a tax rate of 100% the government would also receive no revenue as all activity would grind to halt because of the disincentive effect of taxes which took all the reward of your labour.
This was, and remains, a direct challenge to the left wing notion that because all public spending is good there is no disincentive effect from higher taxes; that despite receiving less and less of the reward for their labour, people will continue to provide the same amount of taxable labour regardless. To a left winger there would be no Laffer Curve, simply a diagonal line sloping upwards from bottom left at a 45 degree angle.
There is a Laffer Curve shaped mountain of empirical evidence to support this basic contention. Yet the statists’ opposition to this economic truism has often been simply hysterical, even from noted economists. This is because they understand the implications of the Laffer Curve. It sets a cap of t*, whatever the precise numeric value may be, beyond which the state’s share of the economy cannot advance. At some point taxes will rise so high that they will start to decrease revenue, the limits of statism are reached. That is why people like Adele, Philip Green or, indeed, anyone who questions even taxes of over 50% is considered not just wrong but evil. Adele can take comfort that she has morality and economic fact on her side as well as talent.
By Detlev Schlichter, on 26 May 11
From Paper Money Collapse, 23 May 2011.
The widely-read Lex column in today’s Financial Times ran an article on gold ETFs (exchange-traded funds) that regurgitates a couple of assumptions on gold that are popular in the mainstream media and financial market circles. They are: 1) gold must be in a bubble and 2) this bubble must soon pop.
As Lex put it:
“Predicting the top of the gold bubble is foolhardy. It is safer to predict that the bubble’s popping will be especially nasty.”
In order for gold to be in a bubble I would suggest that two conditions have to be met: First, some erroneous but popular belief as to the merit of and ongoing demand for this asset has to capture the general public. (“On the national level, house prices in the United States never go down.” “All dot.com stocks will have market caps of billions of dollars.” “Those tulips will always be in demand.” “Governments can and will always pay debt in their own currency.”) Second, the bubble has to be inflated with easy money. I would even argue that this second condition is the more important one. If you pump enough new money into the economy and provide enough cheap credit, some irrational belief will soon emerge and bubbles will get inflated.
There is obviously plenty of easy money around – and it is certainly the reason for the gold rally, but not in the way that cheap credit created the housing bubble or stock market bubble. Gold is not rallying because it is so easy to buy gold on credit and because banks are falling over one-another to put it on their balance sheets or use it as collateral for their fractional-reserve lending business. Indeed, a key message of the Lex article seems to be that gold ETFs are – contrary to some reports – indeed solidly gold-backed and thus pretty much as good as direct bullion investment. This means they are not over-inflated derivative structures around some small core gold holding, or in any other form the result of financial trickery. Whether this is indeed the case or not is a different topic. I do not want to comment on it here other than to point out that I personally still prefer direct investment in physical gold. Be that as it may, gold appears not to be rallying in response to financial leverage in the gold market, and that is an important difference to all other recent bubbles (such as real estate in the U.S. pre 2007, in Japan pre 1989, or in China today).
What I do find interesting, however, is that the Lex-writer uses the ETF story to argue that gold must still be in a bubble. The rationale seems to be as follows: ETFs have lowered the barriers to entry for gold investing. ETFs constitute a fairly low cost, liquid, and easily accessible way to bet on a rising gold price and thus have drawn a new set of investors to this precious metal. The new demand caused the price to rise, and the rising price has continued to attract ever more buyers. The rally is now feeding on itself. The latter point is not dissimilar to the one used by Warren Buffett to dismiss the gold rally when he
“…tells shareholders that he understands why rising prices can create excitement and draw in buyers, but it’s not the way to create lasting wealth.” (CNBC)
So according to this narrative, gold is not rising because of financial leverage but because of a fashion for ETFs. That fashion shows signs of petering out as – according to Lex – evidenced by the data from the World Gold Council that shows outflows from these instruments.
Yeah? So what?
According to the World Gold Council, in Q1 of 2011 outflows from ETFs and similar products totalled 56 tonnes.
At the same time, inflows into bullion and coins totalled —366.4 tonnes. That is a 52% year-on-year increase in physical demand and almost a doubling of demand if measured in rapidly declining paper dollars.
Continue reading at Paper Money Collapse
By Dr Frank Shostak, on 25 May 11
U.S. Treasury Secretary Geithner said in a letter to Senator Michael Bennet, a Colorado Democrat, that a default arising from failing to raise the $14.29 trillion debt limit could cause “irrevocable damage” to the economy and risk a “double-dip” recession and increase unemployment.
Missing or delaying payments on various obligations, including those to businesses for goods and services and bond payments to investors, would result in a massive and abrupt cut in federal spending and aggregate demand, the letter warned.
‘The abrupt contraction would likely push us into a double-dip recession’, Geithner said. According to Geithner, he is currently using an emergency reallocation of funds so that the government can meet its obligations, including payments to Treasury bondholders.
Those measures are only expected to enable the government to operate normally until August 2 from when it will start defaulting on payments including those on Treasury debt, an event that could trigger chaos in world financial markets. Geithner is of the view that a default or any missed payments would not only increase borrowing costs for the U.S. government but also for average Americans, businesses and local governments.
Now, when a lender transfers his real savings to a borrower he expects to receive his real savings plus interest after an agreed period, i.e. on the maturity date. In order for the borrower to be able to honour his debt he must be able to generate real wealth that will be sufficient to cover the original debt plus the interest.
Government however, is not a wealth generator; it can only engage in a consumption of real wealth. How then does it repay the debt? – by borrowing again. It uses new borrowings to repay previous borrowings.
As long as the private sector is capable of supporting an expanding pool of real savings, this enables true real economic growth to stay in force. As long as this is the case, the government can engage in its endless borrowing game without ever being caught out – note that government borrowings result in the diversion of real savings from wealth generating activities, which in turn only weakens the economy. Obviously, then, if the ability of the government to borrow is curtailed this means that its ability to undermine the formation of real wealth is also curtailed – so what is wrong with this?
Once the ability of the government’s capacity to engage in non-productive activities is curtailed, various activities that are supported by government spending come under pressure – these activities cannot support themselves because they survive through a diversion of real savings from wealth generating activities. The emerging crisis then is not a crisis of the real economy as such, but a crisis of non-productive activities. On the contrary, now wealth generators will be able to retain more real savings at their disposal and expand the overall real pie.
The major threat to the economy is not failing to expand the debt limit but failing to arrest endless non-productive borrowings by the government.
By Detlev Schlichter, on 24 May 11
The main problem with having discussions about economics and financial markets is this: People look at these complex phenomena through entirely different prisms; they use vastly dissimilar – even contrasting – narratives as to what has happened, what is going on now, and what is therefore likely to happen in the future. Citing any so-called “facts” – statistical data, or the actions and statements of policymakers – in support of a specific interpretation and forecast is often a futile exercise: The same data point will be interpreted very differently if some other intellectual framework is being applied to it.
Blue pill or red pill?
There is what I call the mainstream view, the comforting view. That is the world in which the majority of commentators and almost all policymakers live. If you want to be part of this world, you have to take the blue pill.
In the words of Morpheus: “You wake up in your bed and you believe what you want to believe.”
Or, if you don’t want to take the blue pill, you can simply continue reading the main newspapers and watch CNBC – it’s the same thing. The perspective from inside the Matrix is this: We are facing cyclical challenges. The economy is an organism, and it is presently not performing to its full potential. It is still weakened by a terrible disease (financial crisis), but luckily it is now recovering. But because the disease was so severe, the recovery is slow. Thankfully, the doctors – the governments and central banks – have learned from Dr. Keynes and Dr. Friedman and are providing ample stimulus to aid this recovery. The medicine is applied in such strong doses that many observers are afraid the treatment itself could cause damage to the patient. There is, however, no alternative to such drastic medication, and we have to trust that, as the recovery proceeds, the medication will carefully be reduced.
This is the comforting narrative. Comforting, because it’s the cyclical view, which simply means, “we have been here before.” It also contains, at its core, a naïve view on money: injecting money into the economy has only two effects: it boosts growth (that is positive) and it lifts prices (that is sometimes positive, sometimes negative). No other effects of money-injections have to trouble us.
Alternatively…..you may take the red pill, and “I will show you how deep the rabbit hole goes.”
The economy is in reality not some organism or a machine that has a definitive performance potential. The acting parts are not some neat, statistically observable aggregates – but individuals, or groups of individuals who form households or companies. All these actors have their own personal aims and goals, and they all use the decentralized market economy to realize their plans as well as they can. For those stepping outside the Matrix, with its comforting idea that everybody wants higher GDP and that when GDP is higher, regardless of how this was achieved, everybody will be happy – this appears scarily chaotic: No unifying objectives but a multitude of separate and often conflicting wishes and plans. Yet, on closer inspection, it is not chaos, as the actors can use market prices to plan their actions rationally and coordinate them.
Market prices are essential for this extended and decentralized division of labor to work. But sadly, market prices are constantly being distorted.
Most importantly, the constant injection of new money in today’s system of fully flexible paper money tends to depress interest rates and fool the market participants into believing that more voluntary savings are available than really are, and that resource allocations and asset prices are therefore justified that correspond with a very low time preference (=high propensity to save) by the public. These distortions have been going on almost continuously for the past 4 decades but in particular over the past 20 years.
The result of such distorted market signals is the accumulation, over time, of a tremendous cluster of errors, visible in the form of unsustainable asset prices, excess levels of debt, and an under-collateralized pile of inflated paper assets.
For those outside the Matrix, the red-pill-crowd, there is only one solution: The printing of money and artificial lowering of interest rates has to stop. This allows the coordination of decentralized individual plans to make again use of correct market prices (importantly, that includes interest rates). The result will be the dissolution of the accumulated misallocations of resources and mis-pricings of assets – this is going to be painful for a while but necessary for markets to function properly again.
Those inside the Matrix can’t see it that way. For them, the recession is not the collective realization that a cluster of errors has piled up, and the drastic revision of a multitude of individual plans in response to this realization, but simply a drop in aggregate activity of the economic organism. This requires more money injections. More stimulus! More medication! Depressing interest rates further is an important part of the treatment.
The red-pill crowd knows that this will not work. It will slow the correction of past mistakes – which, ironically, the blue pill crowd will interpret as a sign of stability – and encourage new activities on the basis of wrong price signals, which must ultimately lead to an even bigger cluster of errors – but this activity will be interpreted by the blue-pill crowd as the green shoots of recovery.
With dislocations piling up, the creation of artificial growth becomes ever more difficult.
The red-pillers view money creation differently from the blue-pillers. The effects of money printing are not just higher growth and higher inflation but, much more importantly, the distortion of relative prices and, consequently, the misallocation of resources.
The present crisis is not a cyclical phenomenon – as the blue-pillers believe – it is a systemic problem. It is the process by which the paper money system approaches its endgame. The blue-pillers are in charge of the printing press and the government. They cannot but continue printing money.
Continue reading at Paper Money Collapse
By Dr Richard M. Ebeling, on 18 May 11
The following testimony was delivered before the House of Representatives Subcommittee on Domestic Monetary Policy and Technology, chaired by Congressman Ron Paul (R-Texas), on “Monetary Policy and the Debt Ceiling: Examining the Relationship between the Federal Reserve and Government Debt,” in Washington, D.C. on May 11, 2011. It was previously published on Northwood University’s blog In Defense of Capitalism & Human Progress
“I place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared . . . To preserve our independence, we must not let our rulers load us with public debt . . . we must make our choice between economy and liberty or confusion and servitude . . . If we run into such debts, we must be taxed in our meat and drink, in our necessities and comforts, in our labor and in our amusements . . . If we can prevent the government from wasting the labor of the people, under the pretense of caring for them, they will be happy.”
Thomas Jefferson
Government Debt and Deficits
The current economic crisis through which the United States is passing has given a heightened awareness to the country’s national debt. After a declining trend in the 1990s, the national debt has dramatically increased from $5.7 trillion in January 2001 to $10.7 trillion at the end of 2008, to over $14.3 trillion through April of 2011. The debt has reached 98 percent of 2010 U.S. Gross Domestic Product.
The approximately $3.6 trillion that has been added to the national debt since the end of 2008 is more than double the market value of all private sector manufacturing in 2009 ($1.56 trillion), more than three times the market value of spending on professional, scientific, and technical services in 2009 ($1.07 trillion), and nearly five times the amount spent on non-durable goods in 2009 ($722 billion). Just the interest paid on the government’s debt over the first six months of the current fiscal (October 2010-April 2011), nearly $245 billion, is equal to more than 40 percent of the total market value of all private sector construction spending in 2009 ($578 billion)[1]
This highlights the social cost of deficit spending, and the resulting addition to the national debt. Every dollar borrowed by the United States government, and the real resources that dollar represents in the market place, is a dollar of real resources not available for use in private sector investment, capital formation, consumer spending, and therefore increases and improvements in the quality and standard of living of the American people.
In this sense, the government’s deficit spending that cumulatively has been increasing the national debt has made the United States that much poorer than it otherwise could have and would have been, if the dollar value of these real resources had not been siphoned off and out of use in the productive private sectors of the American economy.
What has made this less visible and less obvious to the American citizenry is precisely because it has been financed through government borrowing rather than government taxation. Deficit spending easily creates the illusion that something can be had for nothing. The government borrows “today” and can provide “benefits” to various groups in the society in the present with the appearance of no immediate “cost” or “burden” upon the citizenry.
Yet, whether acquired by taxing or borrowing, the resulting total government expenditures represent the real resources and the private sector consumption or investment spending those resources could have financed that must be foregone. There are no “free lunches,” as it has often been pointed out, and that applies to both what government borrows as much as what it more directly taxes to cover its outlays.
What makes deficit spending an attractive “path of least resistance” in the political process is precisely the fact that it enables deferring the decision of telling voter constituents by how much taxes would otherwise have to be increased, and upon whom they would fall, in the “here and now” to generate the additional revenue to pay for the spending that is financed through borrowing.[2]
But as the recent fiscal problems in a number of member nations of the European Union have highlighted, eventually there are limits to how far a government can try to hide or defer the real costs of all that it is providing or promising through its total expenditures to various voter constituent groups. Standard & Poor’s recent decision to downgrade the U.S. government’s prospective credit rating to “negative” shows clearly that what is happening in parts of Europe can happen here.
And given current projections by the Congressional Budget Office, the deficits are projected to continue indefinitely into future years and decade, with the cumulative national debt nearly doubling from its present level.[3] In addition, whether covered by taxes or deficit financing, these debt estimates do not include the federal government’s unfunded liabilities for Social Security and Medicare through most of the 21st century. In 2009, the Social Security and Medicare trust funds were estimated to have legal commitments under existing law for expenditures equal to at least $43 trillion over the next seventy-five years.[4] Others have projected this unfunded liability of the United States government to be much higher – possibly over $100 trillion.[5]
The Federal Reserve and the Economic Crisis
The responsibility for a good part of the current economic crisis must be put at the doorstep of America’s central bank, the Federal Reserve. By some measures of the money supply, the monetary aggregates (MZM or M-2) grew by fifty percent or more between 2003 and 2007. This massive flooding of the financial markets with huge amounts of liquidity provided the funds that fed the mortgage, investment, and consumer debt bubbles in the first decade of this century. Interest rates were pushed far below any historical levels.
For a good part of those five years, according to the St. Louis Federal Reserve Bank, the federal funds rate (the rate of interest at which banks lend to each other), when adjusted for inflation – the “real rate” – was either negative or well below two percent. In other words, the Federal Reserve supplied so much money to the banking sector that banks were lending money to each other for free for a good part of this time. It is no wonder that related market interest rates were also pushed way down during this period.[6]
Market interest rates are supposed to tell the truth. Like any other price on the market, interest rates are suppose to balance the decision of income earners to save a portion of their income with the desire of others to borrow that savings for various investment and other purposes. In addition, the rates of interest, through the present value factor, are meant to limit investment time horizons undertaken within the available savings to successfully bring the investments to completion and sustainability in the longer-term.
Due to the Fed’s policy, interest rates were not allowed to do their “job” in the market place. Indeed, Fed policy made interest rates tell “lies.” The Federal Reserve’s “easy money” policy made it appear, in terms of the cost of borrowing, that there was more than enough real resources in the economy for spending and borrowing to meet everyone’s consumer, investment and government deficit needs far in excess of the economy’s actual productive capacity.[7]
The housing bubble was indicative of this. To attract people to take out loans, banks not only lowered interest rates (and therefore the cost of borrowing), they also lowered their standards for credit worthiness. To get the money, somehow, out the door, financial institutions found “creative” ways to bundle together mortgage loans into tradable packages that they could then pass on to other investors. It seemed to minimize the risk from issuing all those sub-prime home loans, which we now see were really the housing market’s version of high-risk junk bonds. The fears were soothed by the fact that housing prices kept climbing as home buyers pushed them higher and higher with all of that newly created Federal Reserve money.
At the same time, government-created home-insurance agencies like Fannie Mae and Freddie Mac were guaranteeing a growing number of these wobbly mortgages, with the assurance that the “full faith and credit” of Uncle Same stood behind them. By the time the Federal government formally had to take over complete control of Fannie and Freddie in 2008, they were holding the guarantees for half of the $10 trillion American housing market.[8]
Low interest rates and reduced credit standards were also feeding a huge consumer-spending boom that resulted in a 25 percent increase in consumer debt between 2003 and 2008, from $2 trillion to over $2.5 trillion. With interest rates so low, there was little incentive to save for tomorrow and big incentives to borrow and consume today. But, according to the U.S. Census Bureau, during this five-year period average real income only increased by at the most 2 percent. Peoples’ debt burdens, therefore, rose dramatically.[9]
The easy money and government-guaranteed house of cards all started to come tumbling down in the second half of 2008. The Federal Reserve’s response was to open wide the monetary spigots even more than before the bubbles burst.
The Federal Reserve has dramatically increased its balance sheet by expanding its holding of U.S. government securities and private-sector mortgage-back securities to the tune of around $2.3 trillion. Traditional Open Market Operations plus its aggressive “quantitative easing” policy have increased bank reserves from $94.1 billion in 2007 to $1.3 trillion by April 2011, for a near fourteen-fold increase, and the monetary basis in general has expanded from $850.5 billion in 2007 to $2,242.9 billion in April of 2011, a 260 percent increase. The monetary aggregates, MZM and M-2, respectively, have grown by 28 percent and 21.6 percent over this same period.[10]
In the name of supposedly preventing a possible price deflation in the aftermath of the economic boom, Fed policy has delayed and retarded the economy from effectively readjusting and re-coordinating the sectoral imbalances and distortions that had been generated during the bubble years.[11] Once again interest rates have been kept artificially low. In real terms, the federal funds rate and the 1-year Treasury yield have been in the negative range since the last quarter of 2009, and at the current time is estimated to be below minus two percent.
This has prevented interest rates from informing market transactors what the real savings conditions are in the economy. So, once again, the availability of savings and the real cost of borrowing is difficult to discern so as to make reasonable and rational investment decisions, and not to foster a new wave of misdirected and unsustainable private sector investment and financial decisions.
The housing market has not been allowed to fully adjust, either. With so much of the mortgage-backed securities being held off the market in the portfolio of the Federal Reserve, there is little way to determine any real market-based pricing to determine their worth or their total availability so the housing market can finally bottom out with clearer information of supply and demand conditions for a sustainable recovery.
This misguided Fed policy has been, in my view, a primary factor behind the slow and sluggish recovery of the United States economy out of the current recession.
Federal Reserve Policy and Monetizing the Debt
Many times in history, governments have used their power over the monetary printing press to create the funds needed to cover their expenses in excess of taxes collected. Sometimes this has lead to social and economic catastrophes.[12]
Monetizing the debt refers to the creation of new money to finance all or a portion of the government’s borrowing. Since the early 2008 to the present, Federal Reserve holdings of U.S. Treasuries have increased by about 240 percent, from $591 billion in March 2008 to $1.4 trillion in early May 2011, or a nearly $1 trillion increase. In the face of an additional $3.6 trillion in accumulated debt during the last three fiscal years, it might seem that Fed policy has “monetized” less than one-third of government borrowing during this period.
However, the Fed’s purchase of mortgage-backed securities, no less than its purchase of U.S. Treasuries, potentially increases the amount of reserves in the banking system available for lending. And since 2008, the Federal Reserve had bought an amount of mortgaged-backed securities that it prices on its balance sheet as being equal about $928 billion.
The $1.4 trillion increase in the monetary base since the end of 2007, from $850.5 billion to $2.2 trillion, has increased MZM measurement of the money supply by $2,161.1, or an additional $769 billion dollars in the economy above the increase in the monetary base. This is an amount that is 83 percent of the dollar value of the $927 billions in mortgage-backed securities.
Due to the “money multiplier” effect – that under fractional reserves, total new bank loans are potentially a multiple of the additional reserves injected into the banking system – it is not necessary for the Fed to purchase, dollar-for-dollar, every additional dollar of government borrowing to generate a total increase in the money supply that may be equal to the government’s deficit.
Thus, it can be argued that Fed monetary policy has succeeded, in fact, in generating an increase in the amount of money in the banking system that is equal to two-thirds of the government’s $3.6 trillion of new accumulated debt.
That the money multiplier effect has not been as great as it might have been, so far, is because the Federal Reserve has been paying interest to member banks to not lend their excess reserves. This sluggishness in potential lending has also been affected by the general “regime uncertainty” that continues to pervade the economy. This uncertainty concerns the future direction of government monetary and fiscal policy. In an economic climate in which it difficult to anticipate the future tax structure, the likely magnitude of future government borrowing, and the impact of new government programs, hesitancy exists on the part of both borrowers and lenders to take on new commitments.
But the monetary expansion has most certainly been the factor behind the worsening problem of rising prices in the U.S. economy and the significant fall in the value of the dollar on the foreign exchange markets.
The National Debt and Monetary Policy
It is hard for Americans to think of their own country experiencing the same type of fiscal crisis that has periodically occurred in “third world” countries. That type of government financial mismanagement is supposed to only happen in what used to be called “banana republics.”
But the fact is, the U.S. is following a course of fiscal irresponsibility that may lead to highly undesirable consequences. The bottom line truth is that over the decades the government – under both Republican and Democratic leadership – has promised the American people, through a wide range of redistributive and transfer programs and other on-going budgetary commitments, more than the U.S. economy can successfully deliver without seriously damaging the country’s capacity to produce and grow through the rest of this century.
To try to continue to borrow our way out of this dilemma would be just more of the same on the road to ruin. The real resources to pay for all the governmental largess that has been promised would have to come out of either significantly higher taxes or crowding out more and more private sector access to investment funds to cover continuing budget deficits. Whether from domestic or foreign lenders, the cost of borrowing will eventually and inescapably rise. There is only so much savings in the world to fund private investment and government borrowing, particularly in a world in which developing countries are intensely trying to catch up with the industrialized nations.
Interest rates on government borrowing will rise, both because of the scarcity of the savings to go around and lenders’ concerns about America’s ability to tax enough in the future to pay back what has been borrowed. Default risk premiums need not only apply to countries like Greece.
Reliance on the Federal Reserve to “print our way” out of the dilemma through more monetary expansion is not and cannot be an answer, either. Printing paper money or creating it on computer screens at the Federal Reserve does not produce real resources. It does not increase the supply of labor or capital – the machines, tools, and equipment – out of which desired goods and services can be manufactured and provided. That only comes from work, savings and investment. Not from more green pieces of paper with presidents’ faces on them.
However, what inflation can do is:
- Accelerate the devaluation of the dollar on the foreign exchange markets, and thereby disrupting trading patterns and investment flows between the U.S. and the rest of the world;
- Reduce the value, or purchasing power, of every dollar in people’s pockets throughout the economy as prices start to rise higher and higher;
- Undermine the effectiveness of the price system to assist people as consumers and producers in making rational market decisions, due to the uneven manner in which inflation impacts of some prices first and affects others only later;
- Potentially slow down capital formation or even generate capital consumption, as inflation’s uneven effects on prices makes it difficult to calculate profit from loss;
- Distort interest rates in financial markets, creating an imbalance between savings and investment that sets in motion the boom and bust of the business cycle;
- Create incentives for people to waste their time and resources trying to find ways to hedge against inflation, rather than devote their efforts in more productive ways that improve standards of living over time;
- Bring about social tensions as people look for scapegoats to blame for the disruptive and damaging effects of inflation, rather than see its source in Federal Reserve monetary policy;
- Run the risk of political pressures to introduce distorting price and wage controls or foreign exchange regulations to fight the symptom of rising prices, rather than the source of the problem – monetary expansion.
What is To Be Done?
The bottom line is, government is too big. It spends too much, taxes too heavily, and borrows too much. For a long time, the country has been trending more and more in the direction of increasing political paternalism. Some people argue, when it is proposed to reduce the size and scope of government in our society, that this is breaking some supposed “social contract” between government and “the people.”
The only workable “social contract” for a free society is the one outlined by the American Founding Fathers in the Declaration of Independence and formalized in the Constitution of the United States. This is a social contract that recognizes that all men are created equal, with governmental privileges and favors for none, and which expects government to respect and secure each individual’s right to his life, liberty, and honestly acquired property.
The reform agenda for deficit and debt reduction, therefore, must start from that premise and have as its target a radical “downsizing” of government. That policy should plan to reduce government spending across the board in every line item of the federal budget by 10 to 15 percent each year until government has been reduced in size and scope to a level and a degree that resembles, once again, the Founding Father’s conception of a free and limited government.[13]
A first step in this fiscal reform is to not increase the national debt limit. The government should begin, now, living within its means – that is, the taxes currently collected by the Treasury. In spite of some of the rhetoric in the media, the U.S. need not run the risk of defaulting or losing its international financial credit rating. Any and all interest payments or maturing debt can be paid for out of tax receipts. What will have to be reduced are other expenditures of the government.
But the required reductions and cuts in various existing programs should be considered as the necessary “wake-up call” for everyone in America that we have been living far beyond our means. And as we begin living within those means, priorities will have to be made and trade-offs will have to be accepted as part of the transition to a smaller and more constitutionally limited government.
In addition, the power of monetary discretion must be taken out of the hands of the Federal Reserve. The fact is, central banking is a form of monetary central planning under which it is left in the hands of the members of the Board of Governors of the Federal Reserve to “plan” the quantity of money in the economy, influence the value or purchasing power of the monetary unit, and manipulate interest rates in the loan markets.
The monetary central planners who run the Federal Reserve have no more or greater knowledge, wisdom or ability that those central planners in the old Soviet Union. The periodic recurrence of the boom and bust of the business cycle demonstrates that there is no way for them to get it right – in spite of them saying, again and again, that “next time” they will get it right.
It is what the Nobel Prize-winning, Austrian economist, Friedrich A. Hayek, once called a highly misplaced “pretense of knowledge.” That is why in a wide agenda for reform, the goal should be to move towards a market-based monetary system, the first step in such an institutional change being a commodity-backed monetary order such as a gold standard.[14]
And in the longer-run serious consideration must be given the possibilities of a monetary system completely privatized and competitive, without government control, management, or supervision.[15]
The budgetary and fiscal crisis right now has made many political issues far clearer in people’s minds. The debt dilemma is a challenge and an opportunity to set America on a freer and potentially more prosperous track, if the reality of the situation is looked at foursquare in the eye.
Otherwise, dangerous, destabilizing, and damaging monetary and fiscal times may be ahead.
[1] The 2011 Statistical Abstract: The National Data Book (Washington, D.C., U.S. Census Bureau, 2011), Table 669.
http://www.census.gov.compendia/statab/2011/tables/11s0669.pdf.
[2] Richard M. Ebeling, Why Government Grow: The Modern Democratic Dilemma,” AIER Research Reports, Vol. LXXV, No. 14 (Great Barrington, MA: American Institute for Economic Research, August 4-18, 2008); James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (New York: Academic Press, 1977); and earlier, Henry Fawcett and Millicent Garrett Fawcett, Essays and Lectures on Social and Political Subjects (Honolulu, Hawaii: University Press of the Pacific, [1872] 2004), Ch. 6: “National Debts and National Prosperity,” pp. 125-153.
[3] The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (Washington, D.C.: Congressional Budget Office, January 27, 2011)
[4] Richard M. Ebeling, “Brother, Can You Spare $43 Trillion? America’s Unfunded Liabilities,” AIER Research Reports, Vol. LXXVI, No. 3 (Great Barrington, MA: American Institute for Economic Research, March 2, 2009), pp. 1-3.
[5] Michael D. Tanner, “The Coming Entitlement Tsunami.” April 6, 2010. http://www.cato.org/pub_display.php?pub_id=11666 (accessed May 5, 2011).
[6] For more details, see, Richard M. Ebeling, “The Financial Bubble was Created by Central Bank Policy,” American Institute for Economic Research, November 5, 2008, http://www.aier.org/research/briefs/667-the-financial-bubble-was-created-by-central-bank-policy (accessed on May 5, 2011).
[7] See, Richard M. Ebeling, “Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies,” in Richard M. Ebeling, Timothy G. Nash, and Keith A. Pretty, eds., In Defense of Capitalism (Midland, MI: Northwood University Press, 2010) pp. 57-60; http://defenseofcapitalism.blogspot.com/2009/12/market-interest-rates-need-to-tell.html
[8] Thomas Sowell, The Housing Boom and Bust (New York: Basic Books, 2010); Johan Norberg, Financial Fiasco (Washington, D.C.: Cato Institute, 2009).
[9] Richard M. Ebeling, “Is Consumer Credit the Next Bomb in the Economic Crisis?” American Institute for Economic Research, October 22, 2008, http://www.aier.org/research/briefs/599-consumer-credit-the-next-qbombq-in-the-economic-crisis (accessed May 5, 2011).
[10] Monetary Trends (St. Louis, MO: St. Louis Federal Reserve, May 2011)
[11] See, Richard M. Ebeling, “The Hubris of Central Bankers and the Ghosts of Deflation Past” July 5, 2010, http://defenseofcapitalism.blogspot.com/2010/07/hubris-of-central-bankers-and-ghosts-of.html (accessed May 5, 2011)
[12] See, Richard M. Ebeling, “The Lasting Legacies of World War I: Big Government, Paper Money, and Inflation,” Economic Education Bulletin, Vol. XLVIII, No. 11 (Great Barrington, MA: American Institute for Economic Research, November 2008), for a detailed example of the German and Austrian instances of monetary-financed inflationary destruction following the First World War.
[13] See, Richard M. Ebeling, “The Cost of the Federal Government in a Freer America,” The Freeman: Ideas on Liberty (March 2007), pp. 2-3; http://www.thefreemanonline.org/from-the-president/the-cost-of-the-federal-government-in-a-freer-america/ (accessed May 5, 2011).
[14] See, Richard M. Ebeling, “The Gold Standard and Monetary Freedom,” March 30, 2011, http://defenseofcapitalism.blogspot.com/2011/03/gold-standard-and-monetary-freedom-by.html
[15] See, Richard M. Ebeling, “Real Banking Reform? End the Federal Reserve,” January 22, 2010, http://defenseofcapitalism.blogspot.com/2010/01/real-banking-reform-end-federal-reserve.html
By Sean Corrigan, on 16 May 11
Inspired, among others, by the typically apocalyptic, ecological maunderings of Jeremy Grantham (the renowned investor here providing us with classic evidence of the general non-transferability of specific expertise from one metier to another), the recent overwrought oil market has brought the Exhaustionists out in full force, each plaintively wailing of the dangers of Peak Oil (as well as Peak Copper, Peak Corn, etc.—though never, thankfully, Peek Freans).
As is always the case at such times, the name of M. King Hubbert has been given a great deal of air, as if the old rhetorical trick of argumentum ad verecundiam should be decisive in this matter.
Yes, to give this particular devil his due, he did accurately predict that US onshore oil production would top out in the late 60s/early70s, so assuring his prophethood for ever, especially since the validity of the estimate became recognised amid the traumas caused by the first Oil Shock.
His other glances in the crystal ball have, alas, not borne out quite so well, however.
World oil production was to reach its apex in 1995, he foretold in 1974: so far he is 16 years and 30% out. Nuclear energy would provide most of America’s need by around the turn of the new century, he assured us: as of 2009 the proportion was under 9%. Solar power was next seen to be the answer: 1970s technology was already deemed to be good enough to serve the entire world’s industrial needs within ‘a couple of decades’ – Oops! US production of natgas would also peak in 1970 at 14 Tcf a year: four decades on and we are rising through almost double that and with no apparent end in sight.
Even more startling, this worthy was indeed a leading light of the crank-ridden Technocratic School which, with an almost Marxian degree of stubborn denial, has been predicting the demise of the Price System—i.e., the repudiation of the process of market exchange—since the mid-1930s and pushing for an unit of energy effort expended to replace money in our reckoning, plainly not realizing that this breakthrough concept is not much more than the long-discredited labour theory of value, albeit at one remove.
At the height of their brief sway, the grey-and-scarlet clad acolytes of this Utopian movement were heard clamouring that they would sweep away ‘production for profit’ in favour of ‘production for use’ (a slogan that also has a certain familiar ring to it) and to cast out the moneylenders and politicians in favour of a rational government conducted by a Platonic elite of scientists and technicians, naturally trusting that one of these latter could never turn out to be either Pol-Pots or peculators and confident that the world and all its people’s needs and aspirations are no more than a big, juicy simultaneous equation just begging to be solved by an inner sanctum of assiduous eggheads.
No wonder that other twisted genius, H.G. Wells took to Hubbert so avidly.
By now you may be thinking that the US Peak thing was a stopped-clock-right-twice-a-day fluke committed by a man who seems to have personified what Hayek called the ‘Fatal Conceit’ of the planners, namely that they—and they alone—can truly know how best to order production and distribution, replacing grubby commercialism with an exact calculus of abstract mass utility as carried out by a hushed order of white-coated Olympians in complete defiance of the individual subjective ordering of wants which each iota of a teeming humanity uniquely seeks to express.
But Hubbert was not the only public figure to try to apply a false, pseudo-scientific rigour to the issue of human fulfilment, nor the only one to declare that ’soon all the oil is going to be burned and all the metals mined and scattered’ or to insist that the only way out of an putative exponential growth trap of our own making is to stop people (in the impersonal abstract, of course) from having too many babies.
But, surely, your author has been recently asked, you can’t see Peak Oil theory as contentious? Is it not a mathematical inevitability, for goodness’ sake? How can you find it within yourself to demur at such trendy millennialism?
Because – oh, let me see – the planet has not yet been fully explored, much less exploited—only those bits of it which have showed the most promise given the prospect of profit (that dirty word!) and the constraints of existing technology? Because reported ‘reserves’ are, in any case, largely an accounting identity, not a hard, geological limit?
Because there is increasing evidence that abiotic, deep oil generation may be a thermodynamic reality, implying, if so, that at least some hydrocarbons would not be just a ‘fossil’ fuel, but an ongoing planetary process, i.e., ‘renewable’ in the real sense of the word?
Because it is not physical oil we want, in any case, but the energy services it provides and the state of the art today—much less that which we can realistically expected to hold good in the future—is such that, where it becomes cost-effective to do so, oil use can be cut dramatically in providing those very same services (think what the widespread US adoption of diesel cars would achieve, or the greater application of light plastics, advanced ceramics, and special alloys in their fabrication)? Indeed, we have already proved this in living memory for the West and Japan did exactly this for nigh on two decades after the second oil shock, all without the need for Green Soviet directives on what sort of light bulb we are permitted to use.
Because, that art will itself advance, the moreso that we allow market incentives to direct resources towards doing just that, meaning we might expect similarly exciting developments to continue in the fields of exploration, production and refining, not to mention in combustion, transmissions, aerodynamics, and tyre hysteresis, etc.?
Because of the phenomenon of shale gas with its enormous potential to confine oil to a narrow, mobile fuel role and even to substitute for it there, given sufficient means and motivation? (Which of the wild-eyed Doomsayers predicted its advent, by the way?)
Because, ditto—and I know no-one will want to hear this after Fukushima (despite the as-yet unquantified nature of the damage wrought there, which may even – so it please the Gods! – turn out to be as limited as it ultimately was at Chernobyl)—we can readily build a great number of new generation, uranium-cycle nukes and, better yet, fail-safe, non-pressurised, smaller-scale, non weapons-producing, thorium ones instead?
Because (admittedly in extremis, given today’s matrix of possibilities), there exist unimaginably vast, ocean-floor deposits of bacterially-generated methane clathrates all over our continental shelves (by one guess, equivalent to twice the known conventional hydrocarbon resource): when needs must, does anyone want to bet on our not being able to find a way to use them?
But, even having made all these objections – none of them exactly exercises in hare-brained futurology – there comes next the stock response: aaah, so you may deny Peak Oil, per se, but what you are admitting at least is the end of cheap oil?
Well, only to a certain point, for the laws of economics surely do apply to oil as they do to everything else to which we attach a value.
But I have yet to have someone tell me that, because an unforeseen burst of demand may require previously unprofitable, less cost-effective productive means to be temporarily applied to satisfy it, we have reached the end of ‘cheap beer’, or ‘cheap socks’, or ’cheap toilet rolls’ and that civilisation is therefore in imminent danger of collapse!
Even were we to close our eyes and allow for a moment that this most improbable of ‘certainties’ does indeed eventuate, we must beware of carrying an engineering argument over to the realm of economics where it is of no actual relevance. The putative end of ‘cheap oil’ does not mean we will henceforth have to live for ever using ‘dear oil’, just that a new dynamic will take over which will rapidly begin to compensate for the change.
After all, we don’t still fill our cars at a mark-up to the price of whale oil, or dispel the darkness from our homes on a beeswax-linked electricity tariff, now do we?
Nor does this possibility of having to find either a complete or partial substitute for oil at some indeterminate future date imply that it is at all sensible to prepare for it by squandering our scarce, present resources on such pitiable, non-sustainable, non-renewable, sub-optimal boondoggles as wind and solar.
Contrary to the Ecostormtrooper hype, we categorise them as such because – apart from the societal blight inherent in the flagrant rent-seeking and fledgling dictatorship which their forcible imposition entails – does anyone really believe that the equipment for collection, distribution, and storage of what piffling and unreliable amounts of energy are captured from such diffuse sources does not need manufacture, maintenance, repair, and replacement, in addition to the provision of a necessarily under-utilised, conventionally-powered back-up capacity and an intrusive infrastructure of access? Are we to ignore the fact that these infernal engines come complete with a huge, environmentally-significant ‘footprint’ themselves – whether it be in the concrete foundations, the rare earth magnet components, the polysilicon, or the composite materials of which each is built?
Nor should it go unrecognised that the subsidy glut in which they wallow actually prevents genuine progress being made, rather than advancing it, by making it highly lucrative for companies to swill deep and long from the public trough in return for churning out these economically sub-marginal and energetically dubious contraptions in vast profusion here, today, instead of them spending time and money seeking ways to make these systems – or any other alternatives which human genius can meanwhile discover – truly competitive and therefore unequivocally beneficial.
If, seized by a sudden fear that the world will one day lack for sufficient bicycles, our rulers summarily decide to tax both their existing makers and their heretofore satisfied users and to funnel the resulting booty to some favoured corporate giant which promises to equip us with a modestly-rejigged shopping trolley and a bargepole to propel it, we have hardly made progress, now have we?
Nor if we cut off every man’s right leg and then set up shop to sell him a prosthetic replacement can the resulting ‘Green jobs’ be said to have advanced the common weal. No. actually, we do not want another bloody Manhattan Project or any Apollo mission phallicism: we want a few more Rockefellers, Fords, and Teslas, left alone to work out how to enrich themselves by serving us instead!
To return to our original theme, the happenstance of a higher price for some good (and actually only a higher relative price, at that) should—if the market is being allowed to work properly—set in train the iterative search for a new balance which we have previously characterised as I²E²S² – that is to say, Innovation, Economisation, and Substitution, followed by Investment guided by Entrepreneurship, funded by Savings.
In this way, if left to their own devices, those despicably venal profit grubbers whom our lofty Philosopher Kings so despise will soon be busily arbitraging away their fleeting excess returns, reducing costs and increasing satisfactions for us, their customers, as they do.
Why do we think that oil—or, more broadly, energy—should prove an exception to this rule? Only, in truth, because the market is NOT being allowed to work.
Because, rather than being a true indicator of genuinely, increased scarcity or a mark of dwindling physical reservoirs, expensive oil may be nothing other than an artefact of the policies of the many governments who routinely suppress, penalize, or clumsily monopolize its production; who simultaneously subsidize its consumption—whether directly, or through general, Provider State, soft-budget outlays, or via the over stimulus of what passes for economic ‘growth’; and who—above all—routinely debase the numeraire in which the price of the stuff is reckoned.
All of these latter are, indeed, compelling reasons to invest in oil (and in any other raw materials where similar arguments apply), but they are in no way a vindication of Hubbert or Grantham or any other latter-day Malthus, crying that poor old Mother Gaia is being despoiled in the pursuit of filthy lucre!
It is much better to forget all that Sierra Club/WWF elitist, anti-mankind, horse manure about ‘the call on the planet’ exerted by us members of the ‘plague species’ and to take a little Bjorn Lomberg, a smattering of Julian Simon, and a riffle-through of Matt Ridley, regarding the minuscule size of the impact which our tiny little ilk – unimaginably outweighed by living forms we cannot even see – can really expect to exert on the vast, negatively-feedbacked rock which we inhabit—and to glory in the sustained quality of our response to the challenges which confront us, even under the far-from-ideal conditions under which we are usually asked to make it.
For example, just as an exercise in contextualisation, consider the following:-
The population of Hong Kong: 7 million. Its surface area: 1,100 km2
The population of the World: nigh on 7 billion, i.e., HK x 1000
1000 x area of HK = 110,000 km2 = the area of Cuba or Iceland
Approximate area of the Earth’s landmass = 150 million km2
Approximate total surface area = 520 million km2
So, were we to build one, vast city of the same population density as Hong Kong to cover the entirety of Fidel’s little fiefdom (not necessarily a Blade Runner vision of hell), this would accommodate all of humanity, and take up just 0.07% of the planet’s land area and 0.02% of the Earth’s surface.
Add in another patch or two for energy generation and maybe another few for growing food – perhaps by building super-efficient, CO₂-enriched, drip-irrigated, skyscraper hydroponics factories, by exploiting the potential of the surrounding oceans more fully, or by bioengineering photosynthetic bugs to grow us pure nutrients – and this would partition dear old Spaceship Earth thus: six or seven bits for us weakling, co-operative mutualists and 4,720 bits for all the unimaginable cornucopia of other species to wax and wane at each other’s red-in-tooth-and-claw expense, undisturbed by human hand.
Not such a bad ratio, you might think, even if you are a Marquis de Sade, equal-rights-for-plants-and-animals (plague bacilli and malarial parasites?), super-egalitarian nutcase.
So, rather than pestering the shoppers outside Oxford Street tube as you pace up and down with your ‘End is Nigh’, FSC-approved, sandwich board about your neck, you should ponder the innate ability of an unhampered, entrepreneurially-biased humanity to discover solutions to its problems.
Nor is this to indulge in some unswerving, fingers-crossed optimism: it is a realistic philosophy based on sound (Austrian) economics and one endowed with a pretty good empirical/historical track record, into the bargain
Yes, if our political institutions were better and ideally much, much less intrusive in their scope –and, yes – if the intellectual gurus who help shape them were not so (a) conceited; (b) statist; (c) given to quack economics; (d) devoted to fashionable, Bloomsbury pessimism; and (e) prone to practice Munchausen-by-proxy denialism on the masses to whom they condescend, we would be much further along this track than we are now.
Indeed, this is the crux of the matter for if there is even a scintilla of truth to the scare stories with which the sinister SPECTRE of today’s Bio-Blofelds bombard us, what we lack is not space or resources but capital, time, property rights, and the free market exchange networks within which to exercise them.
The most pressing of our problems are not climatological or ecological, certainly not geological, but political and we will find no answers to these by dreaming wet dreams of a multi-billion genocide so the blessed residuum can potter about building composting toilets, permanently at danger of seasonal starvation, death by tooth decay, and high childbirth mortality in a cod Iron Age village (as half the Greens do), or of instituting a globally-monitored, strictly-rationed, top-down, totalitarian tyranny (what the other half get off on).
By way of contrast, consider instead that every member of that seven billion strong ‘drain on the planet’ is hard-wired with the best computer in the known Universe, one which its individual possessor is both incentivised and enabled to link up in a massively parallel, distributed process of discovery and improvement as long as he or she has even the smallest vestiges of a market structure to guide them and a certain minimum of property rights to protect them.
Consider, too, that if the proportion to the whole of Mozarts, Michelangelos, and Maxwells is even roughly constant, their likely incidence is greater now than ever it was.
That means that we might even look forward to being liberated from a tedious diet of hip-hop, installation art, and string theory, as well as to paying less to travel more miles at a faster pace in the fabulously-equipped and remarkably inexpensive, new set of wheels, sold to us by the recently–empowered entrepreneurial gentleman to our right.
And some people think we Austrians can never look on the bright side of anything!
By Steven Baker MP, on 18 April 11
 In October 2009, Toby and I attended the Ludwig von Mises Institute’s Supporters Summit in Salamanca, the birthplace of economic theory:
One of the great discoveries of the 20th century concerns the origins of economic science in the late middle ages in Spain and Italy. Long before Adam Smith wrote, many scholastics from the 14th through the 17th centuries were writing systematic economic theory.
No spot on the planet was as fruitful as the School of Salamanca in Spain. Here was the world center of economic research. The writings by the intellectuals gathered here explained price, value, money and its function, saving, entrepreneurship, inflation, contract and exchange, and so much more – and they closely engaged the modern world that was being born at that time, providing at theory and a rationale for the rise of prosperity.
For me, it was a particularly memorable and moving trip. I took the call informing me that I had been shortlisted for the Wycombe Parliamentary selection procedure, against all expectations, while sitting in the departure lounge at Girona after a week’s skydiving in Empuriabrava. I arrived at the Summit, knowing it was suddenly possible I would be an elected politician within the year.
Moreover, it’s no secret that I am a Christian, so it was reaffirming to discover that classical liberalism can be traced to men of God who developed their theory on the basis of morality, jurisprudence, theology and reason. An early speaker at the Summit was a contemporary Spanish friar whose passion for the poor and whose commitment to liberalism transcended the barriers of language. He knew as I know that the proper formula for widespread prosperity and the improvement of mankind is the doctrine of liberty: peace, equality before the law, freedom from arbitrary government, property and the family. In Cobdenite language, we might call for honest money, free markets, free trade, peace and the classical rule of law.
And so as I write on this Palm Sunday, we come to the Telegraph’s report “Catholic church: Big Society is failing“:
The Archbishop of Westminster, Vincent Nichols, criticised the Prime Minister’s flagship policy as lacking “teeth”. The archbishop has been one of the most prominent supporters of the Big Society, but he told The Sunday Telegraph that he feared communities hit by the economic downturn would suffer if they did not get support.
The head of the Catholic Church in England and Wales said Catholics were afraid the Coalition was “washing its hands” of its responsibilities to communities and expecting volunteers to fill the gap.
“It is all very well to deliver speeches about the need for greater voluntary activity, but there needs to be some practical solutions,” he said.
The Archbishop asks,
“Has the Conservative part of the Coalition simply seized the economic crisis as an opportunity to push through the unfinished neoliberal agenda of the last Conservative administration? We should not forget the enormous social division that was entailed in this. It signalled the end of a humanist and humane consensus in British society.”
How far the Archbishop has come from the scholastics of Salamanca. Yet the Archbishop is on to something:
“The poorest are taking the biggest hit while at the same time you see huge bank bonuses and profits and this is not right,” he said.
Now we have a point of agreement. We know we have the worst of all possible banking systems – the Governor of the Bank of England has told us so – and one of its effects is to distort the economy into unsustainable patterns thereby unjustly widening wealth inequality, driving the business cycle and precipitating banking crises, such as the one from which we are apparently recovering and at enormous cost to society. It is a statist banking system characterised by government monopoly, central planning, legal privilege and the socialisation of risk.
That very statism is the origin of the injustice the banking system is meting out to the rest of us.
The various doctrines of statism have failed. For those of us who wish to live in an ethical society which benefits all its members, it is time to rediscover that moral tradition of social thinking which began formally in Salamanca. It is time to refine and apply the doctrine of justice, peace, prosperity and fulfilment which is humble about the uses of coercive power and optimistic about the potential of individuals cooperating in society.
It may be true that those who wear the badges of ethical authority reach often for the coercive power of the state, but those of us with an intellectual, moral and practical basis for another way would do well to remember both the origins of our school of thought and the motto of one of our inspirations, Ludwig von Mises:
Do not give in to evil but proceed ever more boldly against it.
By Dr Tim Evans, on 13 April 11
In today’s Daily Telegraph, there is a good letter on inflation, ‘quantitative easing’ and the Bank of England.
Commenting on institutional processes in which the centrally planning blind lead the politically blind, the author – one Quentin Pain – concludes:
The Osborne bubble may seem attractive to a government that is having to make significant cuts to the public payroll and which is desperate to reduce debt. But like all bubbles it will eventually burst – and with a general election likely in 2015 it may, for the Coalition, come at just the wrong time.
Indeed. But such is life for those who endlessly love to fondle and play with the loaded gun of economic socialism. Every now and then, you are liable to shoot yourself in the foot!
By John Phelan, on 13 April 11
“The trouble with our liberal friends is not that they’re ignorant”, Ronald Reagan once said, “it’s just that they know so much that isn’t so”. If we forgive the Gipper for his misuse of the ‘L’ word, we can see the truth in his remark. Nowhere do we see it more clearly than in the writings of Johann Hari, a man who doesn’t let his complete ignorance of economics prevent him from spouting off about it.
He was at it again last week when he called the idea that government borrowing of £450 million per day was anything to get worried about ‘The biggest lie in British politics’. He revealed an ignorance of history to match that of economics.
Take Hari’s claim that “As a proportion of GDP, Britain’s national debt has been higher than it is now for 200 of the past 250 years”. He challenges us to “Check it on any graph by any historian”. OK then.
Indeed, you see an awful lot of debt. But if you put in a few historical events you start to get a different picture. Context is everything, as they say.
Starting just before 1700 the British national debt does indeed rise at a fair rate. But consider that, in 1694, the Bank of England had been set up for the sole purpose of funding Britain’s frequent wars against France. So you see a steep rise in the debt to pay for the War of the Spanish Succession (1701 – 1714), the War of the Austrian Succession (1740 – 1748), the Seven Years War (1754 – 1763), the war in America (1775 – 1783) and then the various wars following the French revolution (1793 – 1815). And that’s just the major ones.
Indeed, 1815 and the battle of Waterloo stand out clear as day on the graph with national debt peaking at over 250% of GDP. After that, with the exception of the Crimean war (1853 – 1856) and possibly the Boer war (1899 – 1902), Britain didn’t fight a major war again until 1914. Resting on the twin Cobdenite pillars of peace and economic liberalism the British economy grew and the national debt collapsed.
The story in the twentieth century is similar. Debt rocketed when we went to war in 1914 and again in 1939.
So yes, in the narrow sense Hari is correct, our debt is low compared to 1815 or 1945 and many of the years after those dates. The difference, as some basic history shows, is that back then we had the defeat of tyrants like Louis XIV, Napoleon and Hitler to show for it, now we just have a bloated public sector and engorged welfare state.
This is where the claim made by Hari and others that our debt is not so bad historically is thoroughly disingenuous. There is a world of difference between running up debt to stop the country being conquered by Nazis and running up debt to insulate an already well funded public sector from the effects of a recession which has ravaged the private sector.
It’s not a difference supporters of vast government spending are able to see. Taking their cue from the Spender in Chief, Gordon Brown, they think that any money spent by the government is investment, which is a good thing. But ‘investment’ and ‘government spending’ are not interchangeable terms. Investment has a quite specific meaning; it is capital, usually money, put into an enterprise with the expectation of a return in the future. Thus, government building a road or improving education is investment. Government paying out for public sector workers to retire earlier than their private sector counterparts, for people to live in expensive houses in Kensington, for top rate tax payers to receive Child Benefit or teenagers to download music for their iPods is not investment. It produces no return. It is just spending.
Fortunately this crucial difference is understood better by the man and woman in the street than by many self proclaimed experts. This explains the recent finding of 57% support for at least the coalition’s measures.
We are not fighting a world war so there is no justification for wartime levels of debt and not all government spending is a good thing. This shifty argument is yet another desperate cry from people who still don’t want to give up their belief in visits from the Money Fairy.
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