Professor Fekete at The Daily Bell

Professor Fekete: The Rothbardian and Misesian prognostications are rooted in the Quantity Theory of Money (QTM), according to which, if it were correct, we would have inflation instead of deflation following the miraculous proliferation of money, credit and debt.

BM: Two thoughts.  First, there is inflation – using the professor’s own definition (and I will come to this shortly).  Second, the professor seems to be describing only one side of the QTM equation and then attributing this definition to the Austrians associated with Mises and Rothbard. 

Hans Hoppe defines the quantity theory of money: “whenever the quantity of money is increased while the demand for money to be held in cash reserve on hand is unchanged, the purchasing power of money will fall.”

Hoppe has read and studied far more Mises and Rothbard than I have, so I will take his word for this.  In any case, this more complete definition by Hoppe seems reasonable.

Professor Fekete: I recognize only one kind of deflation, namely the deflation of assets.

BM: It is interesting; the professor defines “deflation” in the price of assets.  Would it not follow that he would define “inflation” the same way, in the price of assets?  Yet he does not recognize today’s asset price inflation as inflation – see his quote at the top of my comment.

Using Fekete’s own definitions, Mises and Rothbard are correct, yet the professor chides them for this.

But why is there an expectation of a deflation of assets?  It can only be due to an artificially induced and maintained inflation in assets.  And why would this be?  Might it have something to do with the quantity theory of money and where / how that quantity was deployed?

Professor Fekete: A gold standard cum real bills is the right medicine to the moribund world economy.

BM: Unless it is advocacy for the free market, I get nervous when someone proclaims “the right medicine” for economic ills (aren’t we operating under the “professorial standard” today?) although I find no reason to disagree with “a gold standard cum real bills” as a possibility in a market of freely developed and accepted money and credit instruments.

More German “Trade Balance” Hysteria

Like clockwork, someone in the mainstream regularly pummels Germany for producing more than it consumes and for running a less insensible government fiscal policy than that of most other states.  Recently I commented on the tag-team laments of Ben Bernanke and John Mauldin on this topic; today it is Ambrose Evans-Pritchard.

As I must do on this topic or any other macro-economic topic, I offer a caveat; macro-economics as currently practiced in the mainstream is nonsensical.  The data aggregates are nonsense and the practice is nonsense.  Even the idea of a trade deficit is nonsense.

Specifically regarding this worrisome trade deficit: if I, as an individual, produce more than I consume I am considered a productive member of society (at least I think this view is still generally held).  If I and all of my neighbors who reside within an arbitrary line on a map produce more than we consume, it is considered a disaster.  It takes a Ph.D. to come to this conclusion.

With that caveat out of the way, let’s look at the laments of Ambrose:

Germany’s current account surplus is out of control.

Why should it be “in” control?  What does “control” even mean?  Like saying I should be only a little productive, but not too much; I should save only a little, but not too much; I should have little available for investment – not too much.  Of course, there is also the question: who should control it?  Macro-economic policy recommendations in today’s world require force.

Germany must be punished according to AEP; yet, he laments the weakness of the current punishment mechanism:

…cynics might justifiably conclude that big countries play by their own rules in Europe…

Instead big countries should play by the rules of a higher level of political authority:

The EMU punishment machinery is highly political, in any case.

Every political “punishment machinery” is “highly political,” in every case.  Why would the EMU punishment machinery be any different?  What does Ambrose expect?  You want non-political punishment machinery?  Try the free market – it is your only option.  But then what would Ambrose (and virtually every macro-economist) do for a living?

It isn’t merely that Germany is naughty; it is abusive – like wife-beating or something:

Germany’s surplus is not caused by a one-off shock…. It is a chronic structural abuse….

They aren’t even shy about using violence to deal with the situation; Germany should be punched.  Don’t believe me?

“The European Commission should stop pulling its punches: Germany should be fined,” said Simon Tilford, from the Centre for European Reform.

Since Germany is being abusive, such a punch could be considered an act of coming to the defense of another…I guess.  For some reason, I do not believe that the NAP is at the root of the thinking here.

For Ambrose, the root of the problem appears to be that Germany presciently went through a significant labor restructuring more than a decade ago – wage freezes, wage reductions, more liberal work rules, etc.:

This was achieved by squeezing wages in the early years of EMU, undercutting the South.

The solution seems simple enough: wages and work rules in other European countries can be similarly reduced and liberalized.  Apparently, this solution is – for some reason – not possible today; it might cause…well, wait – let Ambrose tell you:

Efforts by France, Spain, Italy, Portugal and Greece (super-competitive Ireland is irrelevant to this debate) to claw back lost ground by doing the same at this late stage is precisely what pushed the EMU system as a whole into a quasi-deflationary slump from 2011 to 2014.

Deflation – the bogeyman of falling prices.  Someday, when the refining fire of the coming calamity has cleansed the world of nonsensical macro-economic thinking, people might once again discover the wonders that accrue in a world of falling prices (and bankruptcies).

Instead of falling prices throughout Europe, the German government should spend:

Berlin has refused to offset anemic demand with extra government spending.

Why not say “Paris has refused to liberalize labor regulations”?  Spend, spend, and spend some more.  For a macro-economist, the answer to almost every question: spend.

Finally, Ambrose comes to the bridge that must be either crossed or burned:

German surpluses did not matter in the days of the D-Mark. The country revalued from time to time, correcting the problem. How Germany ran its own internal affairs were largely its own business. But as the IMF has repeatedly stated, it is an entirely different matter in a monetary union. The German surplus lies at the root of EMU’s North-South divide.

Either all EMU nations join into a fiscal union, or the EMU comes apart.  These aren’t the only two possibilities – government bureaucrats could just allow market forces via bankruptcies and restructuring to do their Godly work.  So far, they are quite unwilling to allow this – at least when it comes to banks and sovereigns. 

In the meantime, the solution is force:

…the eurozone can order Germany to present an "action plan" to cut the surplus. If that fails, EU ministers then sit in judgment on Germany. They can force Berlin to pay a deposit of up to 0.1pc of GDP (€2.4bn) into a special account…

“…order…sit in judgement…force….”  Well, this comes with some risk:

Needless to say, any such sanction would cause outrage in the Bundestag and risk destroying German political consent for the euro.

If this comes to pass, that will be a glorious day of deliverance.

Ambrose concludes with a chastisement:

The sooner Germany abandons fiscal fetishism and invests its own money in its own country for its own good, the better it will be for everybody.

There is a good strategy – the British telling the Germans what is good for them.  How many times has that worked well in history?

One of many follies of mainstream macro-economics: there is no rational (meaning properly constructed) bridge that connects micro-economics to macro-economics.  The macro policy recommendations are almost always exactly the opposite of that which makes sense for the individual.

On what planet is this considered sensible?  Unfortunately for all of us, this one. 

But it won’t last for long.  Then people like Ambrose will have to restructure their own wages and work rules.  Maybe this is why they fear deflation!

Antal Fekete on Gold, Real Bills, and Deflation

Today’s Daily Bell interview is with Antal Fekete; it seems to be at least partially in response to earlier comments by Richard Ebeling.  I will post DB’s editorial introduction in full:

Editor's note: The following questions and responses are derived from recent articles of Dr. Fekete's. And some of them deal with a recent paper by Dr. Richard Ebeling. However, we wish to note that Dr. Ebeling's views are within the mainstream of a certain Misesian perspective. Not only do his perspectives represent the larger viewpoint of an element of his peers, his career shows him to be a staunch proponent of freedom and a courageous proponent of free-market thinking. Singling him out personalizes what is obviously a theoretical disagreement – and one, in fact, that might better have been better handled in a theoretical manner instead of an ad hominem one. We regret any offense taken by either party.

With that, let’s jump right in:

AF: …money must be not just a commodity; it must be the most marketable commodity, the marginal utility of which is virtually constant. Mises categorically stated that constant marginal utility is contradictory in that it indicates infinite demand. (emphasis added)

Here in a nutshell is one example of the confounding nature of Dr. Fekete.  Which is it: “virtually constant,” or “constant”?  The terms do not mean the same thing, yet he uses one to beat Mises over the head regarding the other.

AF: You cannot reconcile the variable demand for commercial credit with the idea of "100 percent gold standard."

I believe you can, although human nature might struggle with the necessary price adjustments.  In any case, this problem likely isn’t terribly significant, as generally, I expect, in a free-market economy, the demands for credit would slowly and somewhat steadily increase. 

Dr. Fekete will tie the significant fluctuation involved in bringing crops to market in the form of consumption goods.  But turning wheat into flour into bread is not the only market in which credit is necessary – and certainly not as meaningful in the economy today as it was in the heyday of real bills.

DB: Why is there a prejudice among Misesians against real bills?

AF: That is a mystery.

As best as I can tell, the reason is inflation.  Dr. Fekete will protest – real bills are not a source of inflation.  But he would be wrong.  It is a mathematical truism: if he states that 100% gold standard is not sufficient – and some form of paper demand on future gold must be created – then there is more currency circulating than the gold backing it.

However, inflation is not reason enough to be “against” real bills (or “gold bills” as Dr. Fekete now names these).  If this is demanded in the market, there is no justification to stop it by force.  There is no reason to reject the practice.

AF: On the other hand, Dr. Ebeling obviously thinks that gold bills are inflationary and therefore detrimental to the public interest…. Please ask him why he thinks he knows better than the producers of goods of higher order did who accepted payment in gold bills and did not insist on getting paid in gold coins.

That’s what I said.

AF: Further problems with central banks arose during World War I, especially in the United States. The Federal Reserve (F.R.) banks started putting their credit at the disposal of the Entente powers to finance their purchases of war materiel in violation of the F.R. Act of 1913, to say nothing of the Neutrality Act, practically the same day as war broke out in Europe in August, 1914.

There is a hidden corner within the new-Austrian community that looks at the initial Federal Reserve legislation as sound.  This ignores the reality that monopoly will always lead to corruption.  Dr. Fekete has identified one of the earliest corruptions of central banking within this statement.

                                                   

DB: What will the nature of the deflation be – a collapse of the monetary system?

AF: Much more than that. It will be a repetition of the deflation and depression of the 1930s, but on a much larger scale. Falling-domino-style bankruptcy of firms, devastating waves of unemployment, falling prices induced by falling interest rates are just some of the consequences.

It may be all of the things Dr. Fekete states; but these are not “Much more” than the “collapse of the monetary system”; they are much less.

A true collapse of the monetary system will result in the death of perhaps 95% of the people in the developed world. Is this the future Dr. Fekete predicts?  Has he planned accordingly? If not, I will suggest he doesn’t truly believe in the possibility of a collapse. 

They Admit Default

The sovereign defaults in industrialized western nations have begun, at least according to Ambrose Evans-Pritchard:

Britain has just carried out one of the greatest victimless crimes in modern financial history. It is in effect wiping out public debt worth 20pc to 25pc of GDP – on the sly – without inflicting serious macroeconomic damage or frightening global bond markets.

Let me check yields on British sovereign debt…mmm, AEP is correct; there seems to be no reaction to this significant event.

Governor Mark Carney more or less acknowledged this morning that the Bank of England will never reverse its £375bn of Gilts purchases.

Sure – why reverse?  There has been no visible harm to date from the explosion of central bank balance sheets.  Hold the sovereign debt until maturity, and even roll it over at that point.

An entity created by the state creates monetary digits from nothing and then uses these digits to fund the state.  Repayment is not necessary, and as long as inflation as measured by consumer prices stays tame, most stay content.

The Bank has come a long way from the early days of QE when any such suggestion was treated as an outrageous smear. There was a mantra that helicopter money requires a hoover afterwards to vacuum it up.

Yes, it was obvious that all the hand-wringing was for show.

But in a deflationary world there is no clear imperative to do so. The Bank can sit on its Gilts forever. These can be switched in zero-coupon bonds in perpetuity. The certificates can be put in a drawer and left to rot. The debt is eliminated in all but name.

They don’t even need zero-coupon bonds – at least in the US, the Fed returns income to the Treasury: a closed-loop system of embezzlement.

Puritans and Calvinists are certain that there must be sting in the QE tail for Britain in the end. Perhaps so, perhaps the expanded money base will come back to haunt us, but such arguments mostly smack of religion, dogma, and psychological obsession. There is no such determinist force at work.

It isn’t religion (although there is certainly a moral issue); there is damage being done (as has been obvious ever since 1971), but mainstream economists and mainstream press will blame it on something else (as they have done since 1971).  Middle-class disposable income has been stagnant at best ever since the world’s reserve currency came unhinged from any pretense of discipline.

But the blame is always placed elsewhere – cheap labor in Mexico, China, or eastern Europe; oil cartels jacking up prices, etc.

Can there really be such a thing as a free lunch in economics? We will never be able to prove it either way, but on balance it looks like the answer is yes.

The answer is no, and it must be no.

The amount of resources at any given moment is fixed.  When chits are created and handed to non-producers (the state and their crony-capitalists), they are able to compete for those resources – taking them from the productive sector into the unproductive sector.

This, slowly but surely, will lower the average standard of living – or keep the increase lower than it otherwise would have been.

The logic is simple.  Give a measure of copper, tin, and electricity to a budding entrepreneur, or give the same resources to some guy living under the bridge.  Under whose stewardship of these resources will society likely gain greater benefit?

The sovereigns will default, in many ways.  This will be done in manners intended to preserve the system.  Continually expanding central bank balances sheets will do just that, at least until price inflation becomes politically unsustainable or the relative decline in standard of living becomes unbearable.

If there are any deflationists remaining out there, perhaps you might finally pay heed.

Inflation: The Cure for a Slow Economy

The young store clerk was having a hard time of it.  He had been working at the Save-Mart for a few months, bagging groceries, stocking shelves, sweeping the aisles, and compressing and baling the cardboard boxes.  It bothered him only a little that this last duty seemed to be the most enjoyable – perhaps because it required the least interaction with people.

It wasn’t supposed to turn out this way.  He was a very bright, if not well-adjusted boy.  He always got the best grades in school, and tested out the highest on his standardized tests.  He was accepted at one of the finest universities.  Unfortunately, he majored in one of those degrees that offer little in the way of a meaningful career opportunity.

Now he was a store clerk at the Save-Mart, the local grocery store in a town best known for…well, not much of anything.  There was the paper mill, but it shut down a while back.  The semi-pro hockey team was about the best excitement around, but this would be their final season here – they were moving out of state.  Unfortunately, times were slow, and there was little reason to expect that this sad truth would change anytime soon.

Save-Mart was not immune to this malaise.  As one shop after another closed, the owner of Save-Mart saw his sales dwindle.  Sure, people always had to eat – and liquor sales had never been higher.  But people stopped buying steak – it was now ground beef.  And no one visited the “locally grown” section of the produce aisle anymore – iceberg lettuce was the vegetable of choice for many.  People still bought soda-pop and cereal, but more often than not it was now the generic variety – lower sales, and lower margins.  In every aisle, the lower priced substitute was always the most popular.  The store was barely holding on.

The young clerk knew that something had to be done; sales were slowing, and soon even this job would be at risk.  He considered the possibilities – what can be done at the Save-Mart to improve the situation?  How can we improve our sales?

Sadly, little in his formal education was helpful in his quest – he truly mastered a subject that was of little use in the real world, a condition that he shared with many of his generation.  Try as he might, he could not find an answer.  Two-hundred thousand dollars, clearly gone to waste.

He decided to go through his class notes – remember, he was always a smart student and he certainly was proud of his notes.  His notes were very thorough.  Perhaps he could find some clue.  Every evening after work, he would spend hours poring through his class notes.

Several weeks went by.  Then one day he found it – the answer to his problems, or more accurately, the problems at the Save-Mart.  He found the sure-fire way to increase sales. 

He could not sleep that night – he couldn’t wait to get to the store in the morning and tell the owner.  He was quite sure that the owner would reward this insight with a promotion and an increase in responsibility…well, as long as he could keep compressing and baling the cardboard, that would be OK.

Don’t Underestimate the Creativity and Shell Game Trickery of the Central Planners

(Updated below)

From the interview: “MI: What do you expect central banks to do going forward?”

Franklin: “I say, you underestimate the creativity and shell game trickery of the central planners…”

I have come to conclude this is quite correct.  And we may be living in this quagmire for far longer than seemed likely in 2008 / 2009.

Rothbard, from the final chapter of his book “For a New Liberty”:

“Indeed, we can confidently say that the United States has now entered a permanent crisis situation, and we can even pinpoint the years of origin of that crisis: 1973–1975.  Happily for the cause of liberty, not only has a crisis of statism arrived in the United States, but it has fortuitously struck across the board of society, in many different spheres of life at about the same time.”

This was almost forty years ago – and it has been more than forty years since Nixon dumped gold.  Yet, “the creativity and shell game trickery of the central planners” has found no limits.  In the grand sweep of economic history, is 2008 a bigger shock than 1971?  I think not.  In a couple of centuries, when the follies of this time are chronicled, which chapter will get more attention?  Yet the world has continued spinning, for 42 years and counting.

What stops central banks from monetizing more debt?  Only politically unsustainable price inflation (and perhaps someday enough of a destruction in the average standard of living, e.g. a global Greece).  Yet, they have found ways to create virtually unlimited monetary inflation without any politically painful price inflation.  As the global economy now perpetually stands on the precipice of recession / depression, with the impact on prices that the lower demand implies, monetary inflation has more leeway. 

One of the biggest costs of the current path is the lower standard of living driven by resources consumed in bad investments – both government and corporate: an almost continual mal-investment without the necessary intervening correction. Yet, by many measures, we have been living in a stagnant standard-of-living condition for several decades…and it goes on.

The central planners have many options and possibilities to prolong and extend the system.  Ultimately, when all else has run its course, what stops central banks from writing off sovereign debt?  A system re-set, all within the sanitary walls of the system.

I try to think of the negative ramifications of such an act by central banks – I don’t mean theory, I mean real ramifications to how individuals act day in and day out.  If my bank account still functions (why wouldn’t it?) and if the government can still borrow (why not, with less outstanding debt and a central bank to monetize it?), what changes?

I can’t find any negative practical, day-to-day ramifications of a central bank “forgiving” any asset on its balance sheet, but I am open to suggestions.  Eventually, inflation or stagnation will force the issue – but if the write-off happened tomorrow, would it end the world?

In the meantime, I will quote Franklin once again, as I believe his suggestion should be given weight: “I believe it would benefit the libertarian movement, small a group as we are, to focus, rather, on the inequities of cronyism and the evils of oligarchical evolution.”

The issue of inflation is as much a moral and ethical one as it is a pragmatic, economic one.  This was the value of Rothbard over many of his Austrian predecessors – he introduced an ethical component to liberty.

To close on a positive note: this will eventually end, as it must – with a breakdown of the state and centralized control.  It just may not be as fast as many advertise or hope, but it is certain to come.  Again, from Rothbard:

“But such long-run considerations may be very long indeed, and waiting many centuries for truth to prevail may be small consolation for those of us living at any particular moment in history. Fortunately, there is a shorter-run reason for hope….

“The clock cannot be turned back to a preindustrial age….We are stuck with the industrial age, whether we like it or not.

“But if that is true, then the cause of liberty is secured.  For economic science has shown, as we have partially demonstrated in this book, that only freedom and a free market can run an industrial economy.  In short…in an industrial world it is also a vital necessity.  For, as Ludwig von Mises and other economists have shown, in an industrial economy statism simply does not work.”

Sooner or later, this centrally planned economy will not be able to avoid some terrible combination of inflation and stagnation – perhaps age demographics will end up forcing the issue.  But, as Franklin put it so well: don’t underestimate their creativity.

It may be much “later” not “sooner.”

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 “…if the debt is forgiven, there will be consequences - namely, for those who relied on this as income…”

But if it is only the debt held by the Fed, how does this apply? The Fed doesn’t need the income; they have many sources of possible liquidity.

“…and potentially for the ability of governments to continue financing their borrowing in this way…”

This might be true, for a time. Italy and Argentina have never had to wait long to borrow after one of their many defaults. Then again, the Fed can keep buying without concern of the credit history of the borrower – can’t it?

It seems to me that the solution to this possibility of a perpetual motion money machine might only come when there are too many dependent relative to the number of independent – largely, but not solely, driven by demographics.