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.

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. 

Antal Fekete on Rome and the Middle Ages (and some stuff about gold and real bills)

The Sunday interview at the Daily Bell was with Antal Fekete.  I was not going to comment, however many people have stopped by looking for my thoughts on the interview, so here goes.

Before getting into the monetary portion of my comments, I will first address the stereotypical view Dr. Fekete has regarding the Middle Ages.

DB: You also told us, "Today no university offers courses teaching the gold basis, the gold cobasis and their interplay, or the apocalyptic threat of permanent gold backwardation." Can you expand on what you meant?

AF: Here I am talking about the ominous and frightening parallel with the flight of gold into hiding in 476 A.D., the year when the Western Roman Empire collapsed − after centuries of monetary mismanagement, diluting the gold and silver coins of the realm by adding base metals to the alloy. The result was a disastrous return to barter and the breakdown of law and order…. Not one university in the world is sounding the alarm that the collapse of civilization may be in the offing comparable to that experienced during the "Dark Ages."

There is no doubt that the lack of a trusted “money” will result in the breakdown of the division of labor, resulting in a significantly lower level in standard of living for the portion of the population that benefited from the fruits of the division of labor.

However, this is no reason to idolize Rome and demonize the Middle Ages.  Consider Rome and its “law and order,” as suggested by Dr. Fekete:

Rome’s so-called “law and order” approved of slavery – Roman civilization was built on a foundation that included as a key pillar conquest and the enslavement of those conquered.

During the Middle Ages, slavery was greatly diminished.  Labor was replaced by technology – primarily the water wheel, but also other technologies.  The water wheel was available to Rome, yet not exploited – Rome found it appropriate to exploit slaves instead of technology.

Rome offered a law and order that allowed woman no more rights than those allowed for minor children.  Yet, under Medieval law, women were treated virtually as equals to men.  They could open businesses, sign contracts, vote and hold political office, and had rights not again seen for women until just the last one-hundred years.

Rome threw Christians to the lions.  In the Middle Ages, the church displayed tolerance toward those who were viewed as cultists.  With hunts and burnings only began to grow to a relatively significant position toward the end of the Middle Ages, and especially after the Reformation.

To describe the fall of Rome as “the collapse of civilization” is to look only through the lens of rich white males who held positions of political privilege.  For many in the population, the collapse of Rome was seen as a relief.

Finally, unlike Dr. Fekete’s use of the term “Dark Ages,” modern scholars no longer apply that term to the period.  It was a rich period with examples of great political decentralization, a very different (and in my opinion better) legal system, relatively powerless kings, technological breakthroughs, and a liberalization of society.

DB: Are you in the midst of a truce with the Misesians, or does the Cold War continue? You called the "altercation" a "tragic waste of talent" in the past. Status quo?

AF: I do mean it literally. There should be a dialogue instead of altercation. A dialogue, unlike that of mediaeval theologians, on the question how many angels can simultaneously dance on the tip of a needle. Ours would be a dialogue about something on which the future of all of us, and that of our children and grandchildren vitally depends.

Throughout this interview, when the subject has come up, Dr. Fekete has been respectful when commenting on his disagreements with Mises and Rothbard. This strikes me as quite a change from what I have read from him before.  Dialogue is a good answer, as opposed to dismissive comments.

Antal Fekete at The Daily Bell

DB: This is a great interview with Professor Fekete because in it he abandons some of the vocabulary that tends to confuse people who don't have a sufficiently high intellect to understand him, which means almost everybody.

BM: Agree, speaking as one of those who doesn’t have sufficiently high intellect.  Fekete also did a good job of remaining on good behavior.

AF: World trade is facing an avalanche-like transformation flattening out monetary economy into barter economy.

BM: If true, the majority of the population in developed economies is done for. 

AF: Gold is a monetary metal due to the fact that its marginal utility declines at a rate lower than that of any commodity.

BM: But, admittedly, it does decline.

AF: For this reason gold does not obey the Law of Supply and Demand.

BM: Fortunately, this was stated simply enough for me to understand.  It is statements like these that cause me to look askance at Dr. Fekete. 

Gold has been in the market for thousands of years – has no economist before ever noted that the law of supply and demand is not applicable to this commodity?

All commodities, including money – the most marketable commodity – are subject to supply and demand; if not, how could money be money?  Fekete even suggests that gold has a declining marginal utility.  It does not have a constant marginal utility. It is subject to supply and demand.

AF:  My own position is that manipulation in the gold and silver markets, if that's what's been occurring, is far less important than it is made out to be by market observers.

BM: Agree.  It is difficult to even understand what market manipulation means when every financial market is subject to the non-market backstop of central banking and state-regulation.  All markets are manipulated – there is nothing terribly special about the gold market manipulation.

AF: I don't have much respect for Hayek's position that choosing the monetary standard should be "left to the free market". The market has already spoken.

BM: Then there is little to fear.  The only way to ensure a sound financial system is to allow the market to speak – any other avenue is central planning, and this cannot stand because it suggests no foundation of understanding by market participants.

AF: The value of gold, like the length of the yard, is not subject to individual preferences or to market forces.

BM: On this, I will simply disagree.  Suffice it to say, if this was true, everyone would clamor to own gold, regardless of price (and yes, I am differentiating “price” from “value”).

AF: Instead of saying that there is too much or too little gold, it would be more accurate to say that the rate of interest is too high or too low.

BM: I appreciate the simplicity by which this way of looking at it is stated.  I suspect there may be some differentiation (are long-term or short-term interest rates applicable?), but as far as the statement goes, it is outstanding in its simplicity.

AF: We may recognize ZIRP (Zero Interest Rate Policy) of Bernanke as an imitation of the scheme of Gesell.

BM: This is quite correct, and Bernanke has implemented greenbacker policy – the state is issuing the money to fund the state’s spending, at virtually zero cost.  For this reason, Brown turned from being a critic of Bernanke to a fan. 

Further, Fekete’s criticism of Gesell’s Freigeld theory is sound.

AF [regarding “Real Bills”]: This is not inflationary because the ephemeral cash arises together with the rise of the new merhandise in production, and it expires simultaneously with the removal of the merchandise from the market and with its disappearance in consumption.

BM: It is most certainly inflationary to the money supply, therefore it is distortive; it may or may not be inflationary to prices.

AF [regarding the state as necessary toward the market for “Real Bills”]: Absolutely not.

BM: Thank you!  I agree, the state is not necessary, and it is reasonable to expect that such a market would come forth naturally, through the actions of market participants.

AF [regarding state-mandated accounting standards]: If the government can make them, it can also scrap them, it can ignore them overtly or covertly.

BM: Thank you, again!

AF [regarding why the Rothbardian Austrians are dismissive of the “Real Bills Doctrine”] The Real Bills Doctrine is a thorn in the flesh of the Quantity Theory of Money to which the Rothbardians are uncritically committed.

BM: This comment confused me more than anything in the interview.  The Rothbardians are uncritically committed to the subjective theory of value.  How then can they also be uncritically committed to the Quantity Theory of Money?  Somewhere, there is confusion.

In any case, I believe the Rothbardian criticism is due to the fractional reserve nature of real bills.  That real bills are fractional reserve is without a doubt – Fekete even says so, in his reply to the Rothbardian criticism of fractional reserve banking, when he writes:

“Fractional reserve banking is fraud, in whatever shape and form it may come – they say. However, there is such a thing called self-liquidating credit that Rothbardians refuse to recognize. It is represented by real bills covering goods in most urgent demand and moving to the ultimate consumer with all deliberate speed.”

AF: The demise of the system of irredeemable currency is a foregone conclusion. Not only is it illogical; it is also immoral. A free society cannot be built on a coercive basis. Moreover, the regime of irredeemable currency is incompatible with the ideal of limited government.

BM: The truest words spoken in this interview.  A fabulous statement.

The Countless Fallacies of Ingo

http://thedailybell.com/3480/Adrian-Krieg-Emerging-Totalitarianism

To follow along:

Standard Font = My points regarding views of Ingo
Italics = Ingo's reply to these
Bold = my comments in reply

Well, what do you know? Something concrete... . Congratulations !!!

Something concrete???? Ingo, you and I have exchanged countless thousands of words on many of these subjects. Is this only now dawning on you?

1) No private property in land; all land is state / government owned.

CORRECT: there is NO private property in Land. It does not exist. (Read John Locke for the argument) People have exclusive use of Land in perpetuity through "fee simple" titles issued by Country Registrars.

I don’t need to read John Locke to understand this kind of thinking offers the road to slavery.

WRONG: No state, no government owns Land. Land cannot be owned, it can only be used. States have allodial title over land, which simply gives them juridiction over landed areas where no other sovereign can impose any kind of tax. Allodial title also obligates the State to administer equal access to Land for residents in their jurisdictions. They use the counties as their subdivisions to meet the obligation.

Control, use disposition. Do you have a different definition of “ownership”? Inherently SOMEONE gets to decide these things. Either I control, use, and can dispose of the land under my home, or someone else can. There is no third choice.

2) Lincoln's vision of keeping the union together under all circumstances must be maintained, ignoring the cost this exacted the first time.

CORRECT: Lincoln's decision to fight the Civil War amounted to instituting the concept of the "Insolubility of the United States". In other words, once a state joins the Union, it is stuck. Lincoln changed "These United States" to "The United States".

Yes, and this was the end of any idea that the states were to be a check and balance against federal over-reach. No 17^th amendment needed.

WRONG: I think the cost in lives the Civil War extracted was severe. The question is whether this great sacrifice in lives to fight the Civil War did not actually prevent a much greater loss of lives down the road. I will argue that it did.

The same (false) logic is used to defend the bombing of Hiroshima and Nagasaki. However, more important is this: a group of people decided that they no longer desired to be under a certain government, and instead chose to form a new one. The jilted government didn’t like this and decided to kill those who wanted to leave. How is this defensible?

3) The state is necessary for markets to function.

WRONG: There are only two "wealth distribution systems". One is the "free market" which distributes wealth by totally voluntary, uncoerced, private agreements. The other is "Socialism" which distributes wealth to one degree or another by government edict. I am against "Socialism", and I am full square for the "Free Market". The State is not necessary for markets to function.

Ingo, countless times you have stated you believe in the free market, followed by a list of state intrusions longer than my sleeve as “necessities” for the market to function properly.

4) Banking cannot properly function without state charter.

Wrong: Banks can function without state charter. However, States have an obligation to adhere to the U.S. Constitution. To validate a paper currency to be used as "legal tender" under the U.S. Constitution, the State issues bank charters requiring full redemption at any time of the paper currency issued by a chartered bank.

The State charter sets forth the bank's obligation in creating redeemable paper currency and the State's authority to check that the bank meets the obligation. Through State bank charters, the States insure adherence to Section 10, Article I of the Constitution.

Just because it is in (your interpretation of) the Constitution does not make it economically necessary. Contracts between individuals will suffice.

5) The original Federal Reserve Act of 1913 was a good and necessary act, done openly and with good intent.

CORRECT: While the big NY banks and their ally, Majority Leader Alrich (R) in the U.S. Senate did everything to award the contemplated franchise of a national currency to the NY banks, the majority of the U.S. Senators insisted on a franchise issued to each of twelve independent, regional reserve banks to create redeemable currency under the "Real Bills Doctrine". (See FRA of 1913, paragraph (a) and (c), Section 14.) Only after Senator Aldrich saw that he would be unable to pass the FRA in favor of the NY banks did he start to support the ratification of the 16th Amendment. It was the Income Tax which allowed the NY FRB to violate the 1913 FRA starting in the 1920s and eventually destroy the original FED system. The FRA of 1913 sought to effect control over the use of "idle currency" for speculative purposes.

There is nothing ggood that can come from legislation that establishes such a concentrated money power. Whatever the original intent, there is no doubt what this creature would become, and many people understood this even in 1913.

6) Legal form triumphs economic reality; for example, credit (real bills) is not credit if the legislature says it isn't.

WRONG: Real Bills have nothing to do with legislation. Real Bills evolved over hundred of years and are governed by a separate section of Common Law known as the Law of Bills and Notes. Real Bills are not credit. Real Bills are an asset which are immediately negotiable and can be discounted. The deciding party in a Real Bill is the signer, not the drawer. Credit instruments, or loans are not discounted. These instruments earn interest. Lenders want interest, not discounts. Real Bills are discounted, loans are not.

You misinterpret the point entirely. Whether based on legislation or common law, neither changes the underlying economics – payment later for goods delivered today. This is credit. On this point, we have exchanged too many words.

7) Repeal of the 17th amendment is a key to restoring the republic to the original intent of the founders', ignoring the events of 1861 - 1865

CORRECT: The events (Civil War) of 1861 - 1865 have absolutely nothing to do with the 17th Amendment. The 17th Amendment changed the selection of U.S. Senators by state legislators to a popular election by state voters. This was something which the founders were utterly opposed to judging from their four week long debate of the very subject during the Constitutional Convention in 1787.

Again, you misinterpret. I know Lincoln’s war had nothing to do with the 17^th amendment. The point is the states lost their voice in 1865. The deaths of 700,000 carried a far stronger message to the states to toe the line than did a few words on paper passed 50 years later.

By ratifying the 17th Amendment, the states surrendered their power in the U.S. Congress. The present concentration of power in the federal government is the direct result of the ratification of the 17th Amendment.

No, the concentration of power in the federal government can be much more logically traced to Lincoln winning the war.

8) The states lost their voice with the passage of the 17th amendment, again ignoring that the voice was lost in 1865.

CORRECT: The states resigned their voice in the U.S. Congress with the ratification of the 17th Amendment in 1913. The states did not lose their voice in the U.S. Congress in 1865. However, they did lose the freedom to seceed from the Union.

Without the ability to secede, the states lost their voice.

9) Capping property taxes in California through Proposition 13 was a bad idea

CORRECT: If land parcels are taxed on their actual value (Land value are County Assessor records) the use of those parcel must be put to their best and proper use. Capping this tax, or collecting a tax below value allows parcels to be used for speculative purposes. California is the only state which passed Proposition 13. It is the State which is in the greatest financial problems today. It is not widely reported, but California's real estate boom and bust has put the State into insolvency which is only staved off through federal funds, meaning the 49 other states pay for the survival of California.

Anything that limits the states ability to tax is a good thing. For one time, the citizens of a jurisdiction effectively set a limit, and this limit has stuck for over thirty years. That such successes could be achieved everywhere and for all forms of taxes.

10) Free markets = government legislation, government regulation, government charter, government audit, and government enforcement.

NONSENSE: See Item 3)

NONSENSE: See my response to item 3)

11) 'REAL BILLS ARE NOT BACKED BY GOLD. REAL BILLS ARE GOLD, almost.'

CORRECT: Real Bills are backed by the reputation of the signer and the ready demand for his goods by his customers. Banks create redeemable paper currency against Real Bills which they acquire by discounting them to the producer/seller. The State bank charters require that paper currency be readily redeemable into gold. Banks are required to hold certain amounts of gold as capital. If redemption requirements exceed gold on hand, a bank can always rediscount Real Bills for gold.

Mans’ dream, to create gold from nothing. It is called inflation.

12) If the courts decide something is Constitutional, it is Constitutional.

WRONG: Courts, including the Supreme Court, set precedence with their decisions. None of the court decisions have the power of a constitutional amendment. As a matter of fact, I propose a constitutional amendment to vacate all Supreme Court decision since 1937.

Fair enough. Now how about an amendment to destroy the idea of precedent.

13) 'The "State" came into existence to preserve the family.'

The "State" is a natural phenomenon which emerges form a group of people congregated in a certain area. "Government" is the legal body which enforces rules established by the group of people in a certain area to allow them to survive and to propagate. An "Administration" are the people who operate the government.

You do not address the statement, which is a direct quote of yours. However, there is certainly nothing natural about the “state.”

14) 'Would humans and families go extinct without the "State"? Yes, it is very likely that they would.'

CORRECT: It is better to say "Government", then to use the term "State". Without "Government" individual rights would be difficult to protect and the ability to secure families and other groups in their economic behavior would be threatened. There cannot be liberty without government, but government is also the greatest threat to liberty. The balance is found in a Republic under the Rule of Law.

I can live with the idea of government, as long as the association is voluntary and one is free to leave or secede. As you support Lincoln’s war, we obviously have different views on what constitutes a just government.

15) Congress established Social Security out of benevolence, in order to make up for the inability to save for retirement due to gold confiscation.

WRONG: Congress was "forced" to pass Social Security Legislation, because the nationalization of gold confiscated gold holdings from American savers in 1933. Without Gold, an individual cannot "save" to sustain himself in old age.

Who “forced” Congress to pass Social Security? Why did they feel “forced”? You believe it is because Congress felt somehow obliged because people could no longer save for retirement – you say it again here. Hence the term benevolence.

However it was passed as one more tool to gain constituency.

16) In 2012 Republican election, believes Newt Gingrich would be better than Ron Paul in re-establishing Constitutional limits on the Federal state.

CORRECT: Gingrich has a proven political record. He went up against the FED central banking system by passing balanced budgets He pushed through welfare reform against stiff opposition. Best of all, he brought about the power change in the U.S. House. He made no friends by doing this either with the Democrats, nor with the Republican Party Establishment. It didn't take those two long to oust Gingrich as the Speaker of the House.

On the other hand, Ron Paul is a politician who talks a lot about restraining the federal government, but in his decades as a member of the U.S. House he has shown an inability to built coalitions or to cut the power of the federal government in any way. As an educator and "Pied Piper" for the "cause", Ron Paul is commendable. As a politician, he is unremarkable.

Your belief here is so far outside reality I don’t know where to begin. So I won’t.

17) 'John Bolton would make an excellent Secretary of State.'

CORRECT: I see John Bolton as a logical, knowledgable individual who can express himself well on a wide range of foreign affairs. He would make an excellent Secretary of State under a President Gingrich.

We can agree that he would be a perfect Secretary of State for Gingrich. The result will be a continuation of the same horrendous foreign policy that we have lived for several decades.

18) "The greatest nightmare for the central bank crowd is a "President Newt Gingrich"."

CORRECT: See Item 16)

STUNNING: See my response to Item 16)

19) "The Republican establishment... is hell bent to prevent Newt Gingrich from changing the monetary system to return to "free market" capitalism."

CORRECT: The Democrats and the Republican Party Establishment see a "President Gingrich" as someone who would threaten their FED central banking system by promoting the establishment of a parallel redeemable currency. This would be to the of benefit of the average American, but it would be to the detriment of the monetary elite.

Newt Gingrich has never said a single word against the Fed, unless it was to parrot Ron Paul in this election campaign. To believe he would somehow be a challenge to the power of the Fed is dreamland cubed.

"Slop not fit for a pig, I would say."

This particular comment potrais you to have the brain of a mosquito, which I suspected long ago. You just proved it again.

We will each stand in judgment one day, Ingo. One of us for supporting force and coercion, the other for voluntary relationships. I will take my chances.

Hey, BM... ..I like to squish bugs... .. (Bionic Mosquito, what a joke... ..)

Ingo, I have been squished many times. Being bionic, they are able to put me back together again….

Dr. Fekete, Please Help

http://thedailybell.com/3109/Antal-Fekete-What-Chinese-Unemployment

Dr. Fekete

I am writing to you in order to bring to your attention the fact that you have at least one very confused disciple – but then I repeat myself.

Please contact Ingo Bischoff. He needs remedial coursework in your “school” of economic thought. While I find myself in disagreement with some concepts for which you are well known (for instance the fallacious monetary theories behind real bills), I often find myself in agreement with you on more traditional topics. It is to these that I refer here.

I quote from the above commentary:

“Many a gold bug has the wrong strategy. He buys high and sells low. He cannot kick the bad habit. He should buy low and sell high.”

In reading this statement (as well as the general tone of your commentary) it seems you are quite comfortable with the idea that gold has a price. Of course, I am also comfortable with this idea as well. I see the price quoted 24 hours a day in such places as, well…this site, for example.

Please sit down before reading the next statement: Mr. Bischoff believes gold has no price. Yes, I too am flabbergasted by his statement. However, approach him with caution on this, as he can turn verbally abusive when he finds he has no logical response to his beliefs of fantasy…but again, I repeat myself.

And to a second point from your commentary:

“At this point the Friedmanite bunk was announced by professors who were the beneficiaries of the purge of old-line economists at American universities that a "weak" currency is boon to the country. It makes exports cheap while making imports dear….to see the Friedmanite bunk in the true light of science we need only recall that devaluation always makes the terms of trade of any country deteriorate. The euphoria of exporting more will last only as long as the stockpiles of imported ingredients used by the exporting industry last. Ever after, the country will have to pay more for the imported ingredients and will also get less value for units of its exports…”

I, course, agree completely with your line of reasoning, and have written so before on this subject here at the pages of DB:

http://thedailybell.com/2501/Ways-to-Invest-as-Faith-in-Fiat-Money-Withers.html

I have extracted my earlier comments here:

http://bionicmosquito.blogspot.com/2011/06/weak-currency-is-good-for-exports-not.html

I will cite only one exchange from the DB thread:

BM: What good is it to an exporting firm to have a week currency, when most of the inputs to production (commodities) have global prices?

IB: What kind of ridiculous statement is that...??? How can you even try to deal with it...???

You can see, Dr. Fekete, that Mr. Bischoff considers your statements on this subject as ridiculous, as you are today saying nothing different than what I wrote several months ago.

Please help him before it is too late.

Kind regards

Bug

Real Bills and Flying Elephants

http://thedailybell.com/2623/Antal-Fekete-You-Have-Never-Ever-Seen-an-Elephant-Fly

Comments in response to Dr. Fekete's editorial today at The Daily Bell.

AF: The bill and the cloth appear simultaneously and will disappear simultaneously. The former disappears when it matures, and the latter disappears when it is purchased by the ultimate consumer.

BM: So a real bill is not backed by gold (money), but is backed by merchandise. I know of no true hard money economist that the supports the view of money being backed by cloth (or flour).

AF: An increase in purchasing media that is matched by an increase of merchandise in urgent consumer demand is not inflationary.

BM: This is another theory that the central bankers use as an excuse to increase the money supply: the money supply must increase with the level of activity in the economy. It is a reason for man to substitute easily produced paper for true money.

As to not being “inflationary”, this is another trick of the monetarists. They speak of “inflationary” in terms of prices, but the true inflation (with all of the corresponding distortions and boom / bust cycle) come with changes in the money supply. Dr. Fekete is speaking of inflation measured in price increases, it seems.

Price increases are only one of the negative effects of monetary inflation, and perhaps not the worst. The worst is the transfer of purchasing power from the saver to the person who has first access to the funny money. This is called theft in normal society. It is apparently called real bills when one wants to hide the fact of this theft.

AF: The nature and origin of the discount rate are entirely different from that of the rate of interest.

BM: To the merchant, the economic effect is identical. Trying to make the legal distinction is irrelevant to the merchant’s cash flow.

AF: The two rates [the discount rate and the rate of interest] are completely independent of one another.

BM: No two rates are ever independent of each other in a relatively modern economy. All rates are relative to other rates. If the rate of one is significantly different than the other (adjusted for risk), the market will resolve this through pricing.

AF: Tradesmen processing semi-finished goods hardly ever pay cash for supplies to their suppliers. The prices they are quoted are not cash prices. They are "90 days net". The credit is part of the deal: you need not even ask for it. On the rare occasion when you don't need the credit you pre-pay your bill, having applied the discount to its face value.

BM: I am glad Dr. Fekete, at least, can see that real bills are credit, as he says so himself. He should teach his students accordingly. Some of his students do not learn very well.

Credit, not backed by gold (money). This is inflation.

All the Monetary Pixie Dust in One Place

http://thedailybell.com/2494/Should-Public-Banks-Print-Money-Without-Holding-Reserves.html

Posted by bionic mosquito on 06/14/11 09:41 AM

"Anything that confuses people about money and banking is probably helpful to Anglosphere elites in their quest to keep their Money Power franchise intact - which in turn funds their quest for a new world order."

Quite true. We will see many of the confusing (and false) theories posted here today:

1) There is not enough gold to fund modern production

2) Money is created for the principal, but not for the interest

3) A gold standard won't work, as the elite have all of the gold

4) Politicians can control the money supply better than central bankers can

5) The money supply must grow with the size of the economy

6) The source of commercial credit is not saving but consumption

7) Gold and silver should be the only money, but the state must operate the mint

8) Why limit the growth of the economy to the growth in gold?

9) Access to credit needn't be contingent on someone else's agreement to give it up

10) The growth of the money supply doesn't matter, as long as prices are stable


It should be a fun day.

In the end, free-market competition in money and credit is the only proper answer, as DB often suggests. No legal tender laws, no government monopoly of money, no adverse tax consequences based solely on the type of money chosen for use.

The (relatively) free market has solved "money" in the past; the (relatively) free market has solved the problem of the production and distribution of far more complex goods than money today.

"Money" is a relatively simple problem for a free market to solve. Leave it to the market.

More (sur) real bills

http://thedailybell.com/2060/Shrinking-Greatness-of-Congressional-Budget-Cuts.html

Posted by Bionic Mosquito on 4/13/2011 5:39:57 PM

@Ingo Bischoff

Apparently you are referring to a dialogue from some other thread, as I see nothing of the history here. Could you reference this please?

Now, on to this comment:

"...referring to Real Bills as credit instruments is either willfully mistating a fact or it is ignorance of the fact."

The supplier of raw material, who cannot otherwise sell his goods because of the lack/shortage of gold (ability to pay) of the next level producer, sells the raw material based upon a real bill. This is credit; you may call it whatever you want, but you will continue to be wrong.

The baker says to the miller: "I have no money, but I want your goods. Please give them to me. You will get paid later." This is credit. And as Fekete says that the source of commercial credit is not savings, but production, he is an inflationist and an advocate of funny money.

"Dr. Fekete's point is that Fed banks have to present actual FRNs in the form of Treasury paper to the Fed Agent to receive "credit"."

Check the Fed's balance sheet. There is every kind of garbage on it, almost to the exclusion of Treasury paper. If the Fed wanted to buy my 1964 VW Beetle, they could do it. Prove me wrong. Your assertion is stunning given the reality.

"The law does not allow the Federal Reserve banks to purchase Treasury paper directly from the U.S. Treasury because that would make money creation through the Federal Reserve banks a charade, reserve requirements a farce, and the dollar a sham."

While technically the Fed buys in the secondary market, when the primary market KNOWS the Fed will buy $600 billion of paper, and the Fed announces it as such, your distinction is meaningless in economic terms. I assure you, the banks understand the game.

"These comments by Dr. Fekete can best be understood by reading the statement made by George R. James, member of the Federal Reserve Board before the U.S. Senate hearing on the Banking Act chaired by Senator Glass in 1935."

I appreciate your grasp of the history of these institutions. However, your continued reliance on statements and statutes from 80 years ago is baffling. We see what the Fed is. It seemed obvious to many in 1913 what the Fed would become. That Fekete's statements can be understood by understanding a world that ceased to exist decades ago (if it ever existed at all) makes the statements rather unimportant in understanding the truth of the system today, setting aside the numerous economic fallacies contained in his statements.

Posted by Bionic Mosquito on 4/13/2011 9:22:05 PM

@Ingo Bischoff

My neighbor (call him Joe) owns a donkey. He insists it is a thoroughbred. Now, in our neighborhood, their are many farms that raise thoroughbreds, so we know one when we see one. Joe's donkey is no thoroughbred.

But Joe's brother-in-law (Frank) sits on the town council. Frank got tired listening to Joe complain at every family gathering about his so-called thoroughbred being called a donkey. So Frank had the town council pass a law. Joe's donkey was now a thoroughbred, by law. Except everyone knew it was a donkey.

"What in fact happens is that the miller says to the baker: "I am offering you my flower so you can produce bread, IF YOU PAY ME WITHIN 90 DAYS [emphasis added]. I know you will sell the bread since people must eat. I have no doubt, nor will any subsequent holder of this Real Bill, that you will pay on maturity. Please sign here.""

Ingo, once again, using your own words as my evidence, it is clear that real bills are credit. To pay in 90 days, instead of on delivery, is credit. That someone passed some law that defines or governs bills of exchange does not change the economic reality; this is credit.

You are trying to peddle your donkey as a thoroughbred. Just because Frank passed a law doesn't change the nature of the donkey.

"Dr. Fekete understands this, and I understand this."

That you and Fekete understand this says more about cognitive dissonance than it does about your (or his) understanding of economics. Your explanations give away the reality that Real Bills are another promise of pixie dust: wealth from nothing, the same voodoo sold by Ben Bernanke.

Posted by Bionic Mosquito on 4/14/2011 8:26:25 AM

@Ingo Bischoff

I make no assumption about who is wealthier, the baker or the miller. Wealthy individuals, even cash-rich individuals, utilize credit in their business dealings. That they may not require credit makes it no less credit. Why do you introduce a strawman?

You and Fekete are peddling a donkey but calling it a thoroughbred. In your case, the reason seems to be because bills of exchange are governed by "law X" while commercial credit is governed by "law Y." This may offer a legal distinction, but there is no economic or monetary distinction.

As to there being a difference of interest charged as opposed to taking a discount on a note, economically there is none.

Exchanging goods for final payment (final payment requiring money, not a money substitute) to be made at some future date is credit. Interest charged or taking a discount is economically identical. It requires lawyers to come up with different methods and means to complicate the matter. To the businessman, the net result in the cash flows are identical.

That some might prefer taking a discount on a bill of exchange as opposed to utilizing interest in a conventional note does not matter. This is what makes a market.

Posted by Bionic Mosquito on 4/14/2011 2:39:10 PM

@Dave Jr

"Monetary inflation is moot."

This is incorrect. It always results in misallocation of resources, and therefor a) overall wealth destruction and b) a transfer of wealth toward the first recipients of the inflated money supply. It is true with real bills, as resources are taken from consumers and savers in favor of producers.

"Price inflation is what matters."

This, of course, is also the defense claimed by central bankers. "Watch price inflation [a thing impossible to measure] and ignore the theft going on via debasement of the money supply." As to real bills and price inflation, there is no doubt that with real bills prices are higher than they would have been absent real bills, as inherently demand would be lower.

Your words are the words of those supportive of central banking and fiat money. To the extent you speak knowledgeably regarding real bills, you demonstrate that the philosophy underlying central banking is the same philosophy underlying real bills.

Mises and Real Bills

As might be obvious from several of my posts here, I enjoy a robust discussion about Real Bills / Bills of Exchange. Mises addresses this topic in this section of Human Action (Chapter 17, section 12).

"The notion of "normal” credit expansion is absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle."

Mises makes the statement that there is no such thing as a "normal" credit expansion. This statement strikes me to mean that there is no "rule" that can be applied to money supply growth; no standard increase that can be viewed as normal. No Taylor rule. No Milton Friedman acceptable range of 3% to 5% per year.

Inherently, this must be so. There is no formula that can better determine the necessary supply of money and credit better than the market can. The market determines appropriate supply and demand for countless products, most of which are far more complex than the "product" of money and credit. Why is it that somehow credit is too difficult to be left to market forces, when it is nothing more complex than one actor with excess savings making his savings available to another who requires credit.

"The Banking School taught that an over issuance of banknotes is impossible if the bank limits its business to the granting of short-term loans. When the loan is paid back at maturity, the banknotes return to the bank and thus disappear from the market."

From what I understand from proponents of Real Bills, the over issuance is not impossible; banks can over issue notes, but will soon be disciplined by the market when it becomes clear that this is the practice, or when the notes cannot be redeemed.

"However, this happens only if the bank restricts the amount of credits granted. (But even then it would not undo the effects of its previous credit expansion. It would merely add to it the effects of a later credit contraction.)"

Here Mises recognizes that the bank must remain disciplined in its issuance of notes. The more important point is in the second sentence. Proponents of Real Bills do not see inflation because they state the notes are redeemed within a short period; in the case of Real Bills, 90 days.

Mises makes the point that expansion is expansion. The negative ramifications of expansion may be limited, due to the short time window, but it is still expansion, with all of the potential distortions this will cause.

"The regular course of affairs is that the bank replaces the bills expired and paid back by discounting new bills of exchange. Then to the amount of banknotes withdrawn from the market by the repayment of the earlier loan there corresponds an amount of newly issued banknotes."

But it is worse. The individual notes may disappear in 90 days, but the expansion does not end. Redeemed notes are replaced with new notes; this, the expansion is permanent.

In these few sentences, Mises lays bare what should be obvious to all about Real Bills. They are expansionary to the money supply and credit. The expansion, even if of a limited duration, will result in all the negative consequences of any credit expansion. Further, the expansion is not limited, and redeemed bills are constantly replaced by newly issued notes.

I go into much greater detail about these criticisms in many of my previous posts at this site. I feel it would be redundant to go further in this post reviewing the work of Mises. For those interested, look under labels for Fekete or real bills.

I am pleased that Mises agrees with me!