Economic Blindness: Is It Willful?

John Mauldin’s current “Thoughts From the Frontline” includes excerpts from two outside sources, and I find both worthy of comment.

Mauldin introduces the first:

Last Monday an op-ed in the Wall Street Journal, penned by five PhDs in economics, among them a former Secretary of the Treasury and an almost-guaranteed Nobel laureate (and most of them former members of the President's Council of Economic Advisors) minced no words in excoriating the current policy.

The five referenced by Mauldin are George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor.  “The authors are senior fellows at Stanford University's Hoover Institution. They have served in various federal government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers.”

They begin by listing various imbalances of government treasury and Federal Reserve policy:

Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion?

Did you know no remaining candidate for President is suggesting concrete policies that will result in anything different?  This will not change, except when it has to be changed.

Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve?...The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.

Did you know the world is awash in government debt, much of which is now being supported by central bank action, and no politician is offering a concrete solution?  This will not change, until the Fed is faced with mass- or hyper-inflation.

Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process?...The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year.

Did you know it is the Fed’s primary responsibility to ensure the survival of the large money-center banks?

This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation….If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.

Did you know there is no possibility of unwinding without causing a deflationary depression, and there is no possibility of continuing without causing an inflationary depression?

More Macro Quackery

Quack:

Noun: 2. A person who pretends, professionally or publicly, to skill, knowledge, or qualifications he or she does not possess; a charlatan.

Adjective: 3. Being a quack: a quack psychologist who complicates everyone's problems.

4. Presented falsely as having curative powers: quack medicine. 

5. Of, pertaining to, or befitting a quack or quackery: quack methods.

Verb (used with object): 7. To advertise or sell with fraudulent claims.

Physical science offers observable phenomena.  The temperature when water boils is observable and provable.  Water freezing?  Check.  Wing design is subject to various laws of lift and drag.  Automobile fuel efficiency is determined by engine size, vehicle weight, and drag, among other physically observable factors.

In the life sciences, while there is more variation than in physical sciences, it is still possible and expected that tests are designed to determine the efficacy and safety of various pharmaceutical and other interventions (of course, rather subject to political influence – however, this does not change the nature of the science and the possibility of testing).

Free markets offer opportunities for experimentation, without running the risk of devastation to the entire economy.  Every new product is subject to success or failure – without causing systematic harm.  Even success or failure of Apple’s new iPhone, as large a story as this is, will result in relatively little impact to the overwhelming majority of market participants.

Not so in macro-economics.  The practice of macro-economics has been structured such that the experiments are conducted on the entire population in real-time.  The economy is the experiment.  Via central banking and state-intervention in the economy, there is little opportunity for trial and error in an isolated environment.

The most devastating such practice is that of central banking.  The single most important factor in the division of labor (and the standard of living this makes possible) is the factor of money and credit.  Yet this factor is not subject to trial and error in a limited and controlled environment.  It is offered a monopoly position, virtually everywhere throughout the world.

Further, it is a field where every practitioner has an opinion, and most of these opinions are subject to nothing more than argumentation and debate.  None of the opinions is subject to testing in the market – in the way that even a simple candy bar must prove tasty, for instance, before it provides a return to the manufacturer.

With this in mind, I offer the following quotes and statements from today’s Ambrose Evans-Pritchard commentary.  Note the number of different opinions offered, none of which are subject to a market test.  Those offering such quackery – hoping to directly or indirectly influence policy – do so in the laboratory that is human life, effecting billions with these unproven and un-provable prescriptions and recommendations.  Keep in mind: it is quackery, and such quackery has led to devastations up to and including total war.

Lew Lehrman and Jim Grant: Manage the Fed!

Ron Paul recently held another hearing on monetary policy, this one to explore the importance of interest rate signals in free markets.  This is a very worthwhile topic, as interest rates are the key signal to markets in identifying the market’s views of consumption now vs. consumption later – how much of current consumption goods are to be consumed today vs. used in means meant to support consumption in the future.

The two witnesses were Jim Grant and Lew Lehrman.  There were perhaps a half-dozen congressmen in attendance.  I could not find a transcript, so I offer no quotes from the hearing – all comments from the hearing are paraphrased from the testimony.  Any errors, therefore, are mine.

I was disappointed in this hearing, especially the testimony of Lehrman.  My disappointment centers on the answers to questions raised around the propriety of having a central bank.  Both witnesses found reason to support a role for an institution granted government monopoly protection in an area of the market where government intervention causes the most havoc and is the most destructive.

I will begin with Grant.  He suggests that the Fed ought to be in business to support an objective definition of the value of the dollar.  He did not say, but presumably by objective definition, he is suggesting the value of the dollar should be held constant to some underlying commodity or basket of commodities.  He went on to add that the Fed should not be shooting for specific target interest rates for various types of credit.  He would let the marketplace determine this.  Having said this, he would not get rid of the Fed, but the Fed should be doing much less than it is doing.

This is an impossibility that Grant is looking for.  The minute a non-market actor – introduced by the government and with all the protections both real and implied that this government backing provides – begins to act, there is no way to know what market interest rates would have been absent the introduction of this non-market actor.  If Grant is looking for the market to set the interest rate signals, why not just allow the market to set the interest rate signals?  Why is it necessary to have a non-marketplace actor involved in setting market derived interest rates?  There are no true market signals once this government-backed actor is introduced.

However, of the two witnesses, Lehrman was far more vocal.  It is not only that I disagree with his view on this subject, but his own words betray the possibility of successfully achieving this wishful objective.

Lehrman suggests that the Fed is an appropriate institution if it stays focused on buying business loans instead of government and mortgage loans – just like what Carter Glass intended when the system was designed in 1913.  As part of this charter, the Fed should maintain the value of the dollar to gold, and limit the commercial paper to maturities of 90 days or less.  Lehrman is describing the centralization of Real Bills.

Why is it necessary for the government to establish an institution to provide commercial credit, or even to facilitate the market?  Is there some reason this market cannot function without the government’s involvement?  And if it cannot, does it not suggest that the market does not view this means of extending credit as efficacious or efficient?

Lehrman emphasizes that the solution today is to embrace the original Federal Reserve Act of 1913.  He then immediately recognizes that the Fed followed this prescription for only a “very few moments” where it conducted itself in accordance with Article 1 of the Constitution sections 8 and 10. 

Here Lehrman enters into his own version of cognitive dissonance.  He recognizes that the original Fed charter was violated almost from the beginning.  Every apologist for the Fed, and specifically those who point to the original act as a good act, ignore this most basic issue: centralization and monopoly protection will lead to corruption of the system.  Once granted monopoly power, it was certain that the authorization would be expanded.  It was certain that the institution would be used for means beyond that which was intended.  There is no way to establish a monopoly and expect that the monopoly will remain within its fence – especially a monopoly over money, the most powerful monopoly on earth.

Lehrman then adds that the Federal Reserve should be guided by very careful rules, conducting its policies consistent with the activities of the free market and a free people.

How is this possible?  How can a few men, armed with statistics and data that do not in any case capture the possibilities of the human actors supposedly being measured, act in a manner consistent with the free market?  Proportionately, the power concentrated in these few men is far greater than they would enjoy in the free market.  How can this not be distortive?

Upon questioning by Ron Paul, Lehrman argues these purchases of short-term commercial paper would not be monetary inflation because the purchase of commercial bills goes to solvent firms.  They sell the goods and then repay the loans, which mature in not more than 90 days.   Further, this activity would not affect interest rates beyond what the markets would have done absent the Fed. 

I know Ron Paul doesn’t buy this.  First to the simple item – how can the Fed enter the market for commercial bills and NOT affect interest rates beyond what would have happened in a free market?  This is nonsensical.  As to the inflationary aspects, Mises dealt with this.  Expansion is expansion.

The issue of the Federal Reserve specifically, and central banking generally, is the monopoly.  There can be no rules designed that will withstand expansionary pressure by the institution and the constituents that would benefit from the expansion.  There can be no chance that the designers of the rules will not succumb to the temptation of gains to be had by allowing the rules to be bent, then stretched, then broken.

During the 1930s, Congress had a choice regarding the Federal Reserve and the violations committed almost from its introduction in 1914.  They could have punished it for the by-then-obvious fact that it greatly exceeded its charter, or they could have authorized it to act in the manner it had been doing in violation of its charter.  They chose the latter.

Jim Grant and especially Lew Lehrman somehow believe it will be different this time.  It will not.  To advocate any role for an institution with money-monopoly power, granted special privileges to compete in the market, is asking to be walked down the path we have already tread – with equal, disastrous results.

Either you believe in markets or you don’t.  Either you believe in price signals from markets, or you don’t.  There is no middle ground that will remain tame.  To varying degrees, these two witnesses are suggesting there is a middle ground.

Ron Paul wrote the book “End the Fed.”  He did not write “Manage the Fed.”  It is disappointing, and somewhat curious, that his singularly unique career in Congress would come to an end on such a note.

The Continuing Break-up of the Nation-State

Ambrose Evans-Pritchard has written about the meeting between Catalan leader Artur Mas and Spanish Premier Mariano Rajoy in Madrid on Thursday.  The purpose of the meeting was to present to Rajoy the demands of Catalan secession.  They demand a treasury independent of the national treasury (and somehow all of Europe is going to be joined fiscally…).

Needless to say, this idea went over like a lead balloon in Madrid.  Emotions, charges of Franco, impossibilities, “Spain is not Yugoslavia or Belgium.”  After such rejection, Mr. Mas retreated to consider the next steps: “Constitutions may or may not be modified, but they do not subjugate the will of the people.”

There is much concern that we are headed toward world government.  I believe that has already occurred, and what we are now living through is the breakup of this – as evidenced by the fracturing of various nation states.

The USSR broken into a dozen component parts.  Yugoslavia into a half-dozen.  Czechoslovakia in two.  Belgium will likely split in two.  The EU will likely lose states before it adds any - and, as is possible in Belgium and now Spain, some of the subject states may further divide.  There is outbreak of violence in many of the regions of the Middle East and North Africa bound by artificial borders created by western powers after the wars of the last century.  These, too, will not survive with the current borders – at least not in any practical sense.

It seems rather difficult to fully realize one-world government if existing attempts at one-state governments are falling apart.

Besides the facts on the ground, two books have influenced my thinking on this.  “From Dawn to Decadence,” by Jacques Barzun, and “The Rise and Decline of the State,” by Martin van Creveld.  Coming at the story from two different angles, both authors conclude that the nation-state as we know it will become less relevant, not more.  The decentralization will continue.

Dr. North has written reviews of these two books, along with a third that have shaped his thinking on this subject.  The review of all three can be found here.

The promises of the state are breaking, everywhere throughout the world.  Cradle to grave safety and security will not be delivered – because these cannot be delivered.  As the promises of the all-benevolent state are broken, faith in state-solutions will disappear.  Absent the faith, there will not be consent.  Withdraw consent, and the emperor will be seen in his natural state – just as he was born, and with about as much power.

German Expulsions: Door Number One or Door Number Two?

(Door Three Comes Later)

Orderly and Humane: The Expulsion of the Germans after the Second World War, by R.M. Douglas

As Douglas explains, the Allies made no plans for dealing with the issue of the Germans in countries such as Czechoslovakia and Poland (including the to-be-assumed new Polish regions of Germany’s east).  Despite the fact that Germans had lived in these regions for generations, it was agreed that there would be expulsions, but the Allies basically left to circumstance the fate of the German people – most of whom were women, children, and elderly – remaining in these lands, with no serious attempt at separating the guilty from the innocent.

In the time encompassing the final year of the war and the subsequent year or so after the war, in the period of the advancing Red Army and the subsequent occupation of these regions by Stalin’s soldiers or appointed leaders, many Germans in Central Europe were being forced out.

In this time, there was some combination of possibilities awaiting the unwanted Germans.  There were the so-called “wild expulsions,” called wild because they were supposedly organized locally with no central government authorization or oversight, and there were the camps.  Not all Germans were immediately caught up in one or the other, and many were caught in both.

Wild Expulsions – Door Number One

Potsdam, in July 1945, called for an “orderly and humane” transfer of these populations.  By this time, both in Poland and Czechoslovakia, Germans were being displaced.  The same was occurring in Yugoslavia and Romania. The respective governments claimed ignorance for much of this activity; however to Douglas it is clear that this ignorance was feigned.

Disorganized and crude as these operations were, they were neither spontaneous nor accidental.  Instead they were carried out according to a premeditated strategy…devised by each of the governments concerned well before the war had come to an end.

Despite assurances from the Big Three at Potsdam that the expulsions would take place, leaders in Poland and Czechoslovakia did not want to let the opportunity presented by the chaos of the last months of the war and the collapse of the German army to go to waste.  They also had concerns that, as time went on, sentiment for such a massive population relocation would wane – especially as the focus on the war ended and the magnitude of the expulsions took center stage.

This is not to suggest that the governments of Poland and Czechoslovakia, respectively, gave any more thought to the details of the transfer than did the western Allies.  “Instead, most relied almost exclusively on the use of terror to try to stampede the German minority across the frontiers.”   These were not so-called “wild expulsions” as the leaders in the two states would suggest – signifying expulsions by decentralized, uncoordinated mobs.  In almost every case, the expulsions were “carried out by troops, police, and militia, acting under orders and more often than not executing policies laid down at the highest levels.”

Douglas highlights many atrocities committed during this time in Czechoslovakia, for example.  Every violation and atrocity you might expect occurred during these so-called “wild expulsions.”  The revenge and abuse was not limited to those compliant with the Nazis – an old woman thrown from a window, a member of a visiting German orchestra beaten to death because he could not speak Czech, patients in hospitals chosen due to the helpless nature of the targets.

I Was Wrong About Daily Bell Comments

I have decided to write this only because my earlier post regarding my speculation regarding the Daily Bell’s comments section is one of the highest read posts on this site.  It is appropriate that I recognize publicly what appears to be an error in my thinking on this widely-read topic.

I have previously given my speculation about why the Daily Bell stopped taking comments several months ago.  In summary it seemed a remarkable coincidence that the comments section was taken down shortly after one of countless rants by one specific troll – followed a few days later with an Anthony Wile editorial on topic regarding the subject of those same rants.

About two weeks ago the comments returned at the site.  As always, I visit the site regularly, spending time on the articles I find of interest – this usually includes Anthony’s Saturday column and the Sunday interview, as well as any article about money, banking, etc.  At the same time, I check on the comments, in order to see the flow of the dialogue.

It seems I was wrong about my speculation regarding why the comments section went away in the first place (while the reason why I stopped posting two months before that event continue.  The reason behind both events is the same).

A perusal of the comments in this thread will explain this better than anything more I could say.

German Expulsions: Having No Plan IS the Plan

Orderly and Humane: The Expulsion of the Germans after the Second World War, by R.M. Douglas.

The forced migration of Germans after the war was certainly the largest forced migration in history, and likely the largest migration of any kind in such a short period of time.  For Allies that were supposedly fighting for the Four Freedoms and the Atlantic Charter, it is striking how many of these commitments were abandoned when it came to the affected populations.

In any case, it is worth considering the preparations that were made by the Allies in advance of this event, given that the subject was considered and discussed several years before the end of the war.  The Allies had even recent precedent to draw upon – Hitler and Stalin each executed similar population relocations – in order to take measure of the lessons learned.  Giving consideration to the preparations made by the Allies will not take long.  Little if any attention was paid to even the most basic issues that would eventually need to be confronted if these objectives were to have any meaning.

Among the most remarkable aspects of the expulsion was the deliberate refusal of those who carried it out either to seek to learn the lessons of those previous examples or to make any preparations, of however rudimentary a character, for an enterprise whose disruption to the normal life of central Europe was second only to that caused by the war itself.

For the war, entire populations of the warring countries were mobilized.  Every department of the state was set on war footing.  For the expulsions, virtually nothing.  So many questions, so little attention. 

Who was a German?  What of guilt or innocence.  How do we concentrate the populations in preparation for transport?  How much personal property can the expelled population take with them?  What would happen to the property left behind?

How would they be moved?  The Allies had spent much of the war years successfully destroying these same transportation networks that must now be utilized for the transfers.  Where would they be housed upon arrival in Germany?  The Allies spent the last several years destroying much of the housing – at times, indiscriminately.

How would they be supported and fed during transit and upon arrival?  What about jobs?  The German economy would be a shambles even for the local population, let alone the untold millions to be transferred.  Most of the transferees spoke little or no German, having lived elsewhere for generations in some cases.

Finally, what to do with this new disgruntled German population, dispossessed of property, forcibly moved from home?  Uprooted and embittered with no ties to the community, might they become a new threat, sowing the roots of disruption and even war?

It will take much longer to outline all of the shortcomings in preparation.  Given the magnitude of the situation, it is noteworthy that virtually no preparations were made in anticipation of the eventuality.  It is not that the Allies did not appreciate the enormity of the task, but that they gave it little weight at all.

David Morgan at The Daily Bell

This is an interesting interview.  I found one comment especially noteworthy:

Daily Bell: Are we headed to a worldwide depression?

David Morgan: We are moving toward an inflationary depression where money promises are largely maintained yet people become poorer and poorer. Even the "rich" suffer at some point because the quality of life is not money dependent − it is integrity dependent.

The bolded section (my emphasis) is worth reflection.  The entire interview is worth reading.  This one sentence is worth the price of admission.