The Fed Unwind

The video exchange between Rick Santelli and Nobel winning economist Eugene Fama is receiving some coverage, mostly – as in this Zero-Hedge piece – to point out the bathwater that mainstream economists drink, for example:

If ever there was a few minutes of television to confirm the deep-seated disconnect between reality and the ivory-tower academics pulling the levers behind the curtain, CNBC's Rick Santelli just exposed it.

…when asked the impact of the Fed 'Tapering' or even selling down its $4 trillion in assets, Fama calmly says "it's basically a neutral event... It's No Big Deal!"

As I have written several times before, I think mainstream economics is quackery and mainstream economists are quacks. However – while there is a good amount of quackery in this interview – it seems to me it is not to be entirely dismissed.

Normally, the issue of tapering would be quite harmful to an economy that has grown fat on Fed stimulus.  Austrian economics suggests that past interventions require further and greater interventions to keep the party going – well, until the crack-up boom.

But what about when much of the Fed bubble-blowing remains as excess reserves – not released into the broader economy? 

The balance of excess reserves today is approaching $2 trillion.  In other words, theoretically the Fed could withdraw $2 trillion without the same (direct) impact normally associated with such an action.  So, to this extent, Fama is correct.

However, there are still open issues:

1)      If it isn’t harmful to withdraw the $2 trillion, a) why did the Fed inject it in the first place (and take significant heat for doing so), and b) why is the Fed hesitant to withdraw it?

2)      To withdraw the $2 trillion, the Fed must sell $2 trillion of securities in its portfolio.  Who will buy these?  At what price?  Crowding out what other investments?

Perhaps part of the answer to item 1) b) can be found in the issues raised in item 2).  It seems to me, additionally, that the banks need the liquidity as they hold other assets that are not performing.

I guess my only point is: this entire discussion is muddled because of the excess reserves.  I don’t know that such a scenario was considered in any of the work done by the likes of Mises, etc. 

So Fama may be a quack, but he isn’t 100% duck.

What seems clear:

1)      If the Fed slows its purchases, bond prices will go lower (and interest rates higher) than they otherwise would.

2)      The Fed will likely never shrink its balance sheet – or if they try it, they will have to quickly revert.

3)      There is some reason why the Fed pumped $2 trillion extra.  What is it?

If anyone can point me to some well thought out articles (with an Austrian slant) on this issue of tapering / reducing the Fed balance sheet in an environment of excess reserves as we have today, I would appreciate it.

James Clapper Speaks the Truth

Surprising, I know.  But you will have to wait awhile to discover this nugget buried under tons of half-truths and parsed statements.

First, a declaration:

The head of the National Security Agency denied Tuesday that the United States collected telephone and e-mail records directly from European citizens, calling reports based on leaks by Edward Snowden "completely false."

Is it OK if I suspect that this is merely the least dishonest answer that they can give at this time?  See, they don’t collect the data directly from European citizens (“Hello, Jean-Claude, this is the NSA calling.  Could you please send us photocopies of all of your telephone bills?”), but only indirectly…you know, from satellites and modems and European telecom providers and all that high-tech stuff.

"To be perfectly clear, this is not information that we collected on European citizens. It represents information that we, and our NATO allies, have collected in defense of our countries and in support of military operations," Army Gen. Keith Alexander, the NSA director, told a House committee reviewing the agency's surveillance activities.

He said the NSA legally collected metadata from some phone calls, and the rest of the metadata came from U.S. allies.

Allow me to translate: You see…it is data collected by your military and then shared with us.

The statement by Alexander before the House Intelligence Committee came even as he and others acknowledged changes must be made to the way intelligence is collected.

Wait a minute.  I thought Snowden did irreparable harm.  Why would they want to change things based on the work of someone who harmed the NSA?

The allegations have rocked U.S.-European relations with a number of countries calling for investigations. Germany has threatened to cut off the ability of the United States to track bank transfers associated with terror groups.

But does this mean that Germany will continue to allow the United States to track bank transfers of those not associated with terror groups?

All the News That is (Un)Fit to Print

The world of economics is chock-full of ignorant and brain-dead theories – theories designed to skim wealth from the masses, and theories peddled by the anointed elixir peddlers.

One such theory regards inflation, and the New York Times offers a nice example of the sales pitch. The article is referring to price inflation, and I will address the comments accordingly; I will add a few thoughts about monetary inflation at the end; no respectable mainstream outlet would ever broach this subject….

The first twelve words offer the about only sensible thought in the article:

Inflation is widely reviled as a kind of tax on modern life…

It goes downhill fast thereafter:

Some economists say more inflation is just what the American economy needs to escape from a half-decade of sluggish growth and high unemployment.

Then followed by a total lie:

The Fed has worked for decades to suppress inflation…

The Fed exists to create inflation.  It has done a remarkably good job of it: even by official measure the dollar has lost about 95% of its purchasing power since the creation of the Fed.  In the 100 years before this dastardly birthing, prices generally fell slightly.

…economists, including Janet Yellen, President Obama’s nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak.

Does anyone still believe we will see any deflation before we see a significant surge in inflation?  Obama isn’t nominating Jim Grant, for goodness’ sakes.

“Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about,” Kenneth S. Rogoff, a Harvard economist, wrote recently. “It should be embraced.”

Economists believe the economy can be finely tuned and controlled.  Note that Rogoff describes the possibility as a “sustained burst.”  The image is one of a space ship making a course adjustment via a controlled burst from the port thruster.

Whenever I see the economy described in terms suited for either something mechanical or biological, I conclude the purpose is to fool the layman. 

The Fed, in a break from its historic focus on suppressing inflation, has tried since the financial crisis to keep prices rising about 2 percent a year.

What focus on suppressing inflation?  If they were actually attempting this, they have failed miserably without any doubt.  In any case, if the Fed wanted prices to increase today, they could charge the banks for holding excess reserves.

Critics, including Professor Rogoff, say the Fed is being much too meek. He says that inflation should be pushed as high as 6 percent a year for a few years, a rate not seen since the early 1980s.

Rogoff is certainly old enough to recall how miserable economic life was for the average American beginning in the early 1970s and through the early 1980s.  Yet this is his wish for Americans today.  It suggests something about how much he despises humanity, it seems.

And he compared the Fed’s caution to not swinging hard enough at a golf ball in a sand trap. “You need to hit it more firmly to get it up onto the grass,” he said. “As long as you’re in the sand trap, tapping it around is not enough.”

Oh…and sports analogies.  So, when they use mechanical, biological and sports terms to describe the economy, the intent is clearly to fool those dumb enough to read mainstream sources for news.

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.

Robert Morris, Financier of the Revolution?

The New Nation, By Merrill Jensen

The Myth

Robert Morris was “Financier of the Revolution.”

The Reality

To give Morris the title of financier of the revolution is inappropriate.  Jensen suggests the myth is absurd, “if for no other reason than the fact that he did not take office until the revolution was virtually over.”  He took office in September 1781, about one month before Yorktown!

Yet there are other reasons.  At the end of the Confederation, he stilled owed money to the United States.  In 1790, the books of the government showed him to be the largest individual debtor.  (Page 57, 60, emphasis added)

No attack on Morris was more extreme than that by William Lee who declared him a most dangerous man in America.  He said that Morris was bankrupt at the beginning of the war, left the country bankrupt at the end of it, but that at the same time “amassed an immense fortune for himself….” (Page 367)

At least a little justice was served.  Morris lost his fortune in 1798 due to failed land speculation.

The Man who Put Crony in Crony Capital

The concerns about Morris arose as early as 1775:

Laurens swore that men like Morris made “patriotism the stalking horse to their private interests” and hid behind Washington as they did so. (Page 368)

Makes one wonder why Morris signed the Declaration of Independence….

There is so much discussion these days about the revolving door between Washington and Wall Street.  Robert Morris didn’t bother with a door; he insisted that there be little more than a breezeway:

He must be allowed to continue his own private business; he must appoint all officers in the department; he must have absolute power to appoint and dismiss anyone having to do with the spending of money.  Unless he had such powers he insisted the “the business of reformation” could not be managed. (Page 57, emphasis added)

Congress agreed to these conditions, although not without opposition.

The multiple hats worn by Morris did not go unnoticed:

…many of the merchants began to look at Mr. Morris with jealous eyes, and conceive that a connection of the financier, the president of the bank, and the receiver of continental taxes have a flow of money at their command which may be employed to the great prejudice of all…. (Page 228)

Their suspicions proved valid:

Morris assured that good bills drawn on Dutch and French banks were applied in favor of his business associates, while other creditors received little, if any, relief. (Page 370)

According to Dr. Edward Bancroft:

…Morris would resign as soon as he could “extricate some of his friends” and that he was endeavoring to do this “by the money borrowing in Holland…” (Page 370)

The man makes Henry Paulson, who also stayed in office long enough to extricate his friends from financial woe, look like an altruistic public servant.

The Libertarian Spectrum and Government

At LRC, Walter Block recently posted an interview he did with the NBC affiliate in Baton Rouge.  Subsequently he posted the background story – a video of apparently the entire, unedited interview.  As with anything Dr. Block writes or says, this longer video is well worth the time.

I will focus on one segment of the interview, where Dr. Block discusses the libertarian spectrum.  It is an interesting topic, especially to those of us who find our way into this political theory and struggle with where exactly in this scale we might find comfort.

I do not have a transcript of the interview, so what I attribute to Dr. Block is paraphrased.

He begins at the top, with what he describes as the most consistent libertarian position, being an anarcho-capitalist position.  As one of the pillars if not the pillar of libertarian theory is the non-aggression principle, Dr. Block points out that there cannot be government.  He places himself within this camp.

Next on the spectrum is the minarchist, one who believes that government exists solely for the purpose of protection of people and property.  Toward this end, appropriate government functions are limited to a defensive military, the police (but only for crimes of aggression), and courts.  He places Ayn Rand in this camp.

Third is described as a Constitutionalist – one who accepts government within a strict reading and understanding of the Constitution – which Dr. Block describes as not authorizing much more than a military, police, and court; but also including a post office and a few other offices.  He suggests that Ron Paul is an example of a libertarian with this position.

Finally he includes classical liberals – those with relatively good free market inclinations and favoring relatively smaller government.  In this context, he mentions Milton Friedman, Friedrich Hayek, and Rand Paul.

As one of the best thinkers in libertarian theory, it seems to me that if Walter Block can be open to such a broad spectrum under the umbrella of “libertarian,” perhaps the myriad internecine struggles within our community on the litmus tests might be seen as petty.  Although Rothbard makes clear that we should regularly remain open to debating such issues amongst us, as it helps both to clear up faulty thinking and to further develop the theory.

The Deaf and Blind

Alan Greenspan is out with a new book, so he is out on the public-appearance tour in order to peddle the book.  The book is entitled "The Map and the Territory," and in it he argues…

…that traditional economic forecasting is no match for the irrational risk-taking that can inflate catastrophic price bubbles in assets like homes or tech stocks.

Duh.

Of course, he has reason to suggest exactly this.

For 18½ years as Federal Reserve chairman, he was celebrated for helping drive a robust U.S. economy.

He came in after Volker, at a time when interest rates were coming down from the high double digits.  He had the good fortune of sitting in the chair during one of the longest stretches of continually declining interest rates in central bank history.  Swimming along with such a current doesn’t make Greenspan a genius.  Just lucky.

Yet in the years after he stepped down in 2006, he was engulfed by accusations that he helped cause the 2008 financial crisis—the worst since the 1930s.

He was the chief bubble-blower, the bar-tender-in-chief at the irrational exuberance party of a lifetime. 

Now, Alan Greenspan has struck back at any notion that he—or anyone—could have known how or when to defuse the threats that triggered the crisis.

What else could he say besides no one could see it coming?

Well, of course, some did see it coming.  Adherents to one particular school of economics saw it coming.  And we all know that Peter Schiff was right.  At this point, one would have to be deaf and blind not to know this.

In search of his iPhone, he twice asked a staffer where it might be.

Well, there you have it. 

But back to the economics, from the interview of Greenspan:

Q: You write that you were shaken by the 2008 financial crisis because of the failure of one of the pillars of a stable financial market—"rational financial risk management." What did you discover in your research for the book about this issue?

A: Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.

Fear hits…a contagion….critical phenomenon…things fall apart.

Is this a virus he is describing?  Somehow, all businessmen everywhere come to the exact same conclusion about market prospects such that all decide at the same time to shut it down?  This is the best he has to offer?

Rothbard’s Libertarian Roots

This is a fascinating video of Murray Rothbard speaking about his libertarian roots.  It is worth every minute of the 90 or so you will spend to watch it.

I offer a few comments….

The speech was given in 1981 at the Libertarian Party convention in Denver.  This was a nice time capsule – consider the progress that has been made since then.  Yet Rothbard goes back decades earlier regarding his gradual intellectual enlightenment – to a time when there may have been all of five libertarians actually known to each other.

I think about this in the context of criticisms toward Rothbard regarding certain political views.  How could he support so-and-so, etc.?  I won’t speak for Rothbard, but offer my view on this.

First and foremost, I care very little about such issues when it comes to people like Murray Rothbard (I would include Ron Paul and Lew Rockwell as well).  The work men like Rothbard have done to develop and expand libertarian and anarcho-capitalist thought as well as Austrian economics (to say nothing of his equally valuable work on revisionist history) is so supremely significant, that spending any energy on trying to split the hairs on seemingly controversial subjects is wasted.

I have written before regarding Ron Paul, and the same applies to Rothbard – he has done enough good to earn nine-lives worth of goodwill in my book.

Second: When Rothbard began his intellectual and philosophical journey, there was virtually no one to show him the way toward integrating libertarian, anarchism, and Austrian thought in an ethical and moral framework.  He looked at this from a sense of justice, not a sense of pragmatism – a free market and private property is best because it is just, not because it produces the best overall outcomes. 

He began with an almost clean sheet of paper on this.  That some steps or some conclusions might be seen in hindsight as mis-steps seems meaningless within the context of the vast fields he has both cleared and plowed. 

I hold views different than Rothbard holds on a few subjects.  This diminishes him not one iota in my mind.  Listen to the man in the speech, and consider that this was over 30 years ago and that he began his journey decades before this and that he integrated several disciplines into a consistent political and economic philosophy.

On to a couple of other comments made during the speech.  Paraphrasing Rothbard, he commented that many libertarians looked at the election of Nixon in 1968 with hope – that he was actually a libertarian in hiding.  He has to act this way to get elected, but his true libertarian colors will show once he wins.

Sadly, we hear this too often about many pseudo-libertarian candidates.  It is enough said that Ron Paul may be the only politician in the history of the national stage that consistently talked the talk and walked the walk of libertarian philosophy within a Constitutional context.

Finally, Rothbard makes the point in this 1981 speech that it was clear that the communist empire was breaking up – ten years before the event.  I guess he knew to bet on the laws of economics doing their slow but steady work.

But, to return to my main observation – the speech is a wonderful glimpse into the history of the libertarian movement as well as the key if not paramount role that Rothbard played in it.

We are all better off because he lived in this world.

German-Russo Alliance

While reading this Ambrose Evans-Pritchard piece about the growing mainstream dialogue of the break-up of the Euro currency block, I came across these gems:

Reading between the lines, he seems to have been shocked into writing this book by Germany's role in the Libyan crisis, its refusal to provide transport planes (a routine courtesy for Nato allies) to help France "stop another Srebrenica massacre" in Benghazi, even after intervention had been approved by the UN Security Council and the Arab League.

The splendid Joschka Fischer called Germany’s decision to line up with Russia and China “a scandalous mistake,” warning that Germany risked waking up one day to find itself in "a very precarious position” if it continued to play this game.

I commented on this event at the time:

It is quite interesting; Germany went its separate way on the Libya vote. Go to sleep and rise again in about 30 years. Would you be terribly surprised to find Germany in an alliance with Russia and China (perhaps Australia as well)? Economically a wonderfully perfect fit for all parties. Militarily, also able to hold their own. Not so difficult to fathom, once the dollar loses it role of prominence.

Back to the AEP article:

You can perhaps read too much into the Libya episode, but the Franco-German body language has not improved much over Syria. Or as my esteemed Telegraph colleague Con Coughlin puts it: that Germany's default position is now pro-Moscow.

You might conclude – though Prof Heisbourg does not go so far – that Germany is no longer an ally of France in any meaningful sense in defence and foreign policy (or indeed trade), and if so that has shattering implications. You might even conclude that the EU is already dead, an empty shell.

Germany, Russia, and China.  I throw in the possibility of Japan and Australia.  I first wrote of this (as best as I can remember) here.  I most recently updated my thoughts here.  No need to click through for the regular readers.

I guess it is noteworthy that the dialogue has made the mainstream media.

The Future of the Empire

This is what it will come to for fedgov in every one of its endeavors, ever-expanding failure as it increasingly tries to devour ever-greater segments of the population and economy:

With the website for the nation’s new healthcare program mired in structural problems that could take weeks — if not months — to fix, President Obama appealed to his supporters in a video Tuesday to join “Team Obamacare” and help counter the law’s critics.

Setting aside that it will not be fixed, even in months…Is the big-O calling for the brightest-of-the-bright tech minds to come join the party?

In the meantime, Obama reminds his supporters that consumers can buy insurance “the old-fashioned way” over the phone or in person. “That’s where I’m asking for your help,” Obama says to the camera in the video from Organizing for Action, the group that was formed from supporters and volunteers in his 2012 campaign.

The old-fashioned way?!?!?!?  Was this in the bill that had to be passed before we were supposed to know what was in it?

Obama asks OFA supporters to get out into their communities to assist individuals who need help signing up for coverage.

Door to door sign ups?  Manual labor?  In the greatest age of communication ever known to man?

This is the de-evolution of fedgov, in its most visible form to date.  Smoke signals in the age of instant, global communication.

“We won’t be able to reach everyone who deserves the safety and security of affordable health insurance without you,” Obama says. “Fortunately that’s what you do best: organizing. So I’m asking you to help tell your friends, families, co-workers, classmates, neighbors and anyone else about what the Affordable Care Act can mean for them.”

Perhaps they could hire the people who took the last census.  They already understand government-level productivity and technology, such as it is.

In recent months, Organizing for Action has sought to galvanize the president’s supporters around a variety of issues including climate change and gun control.

I am quite sure that OFA will fail equally as miserably in their new assignment as they have in the two mentioned above.

Wait a minute – they do have a technology plan:

For now, Organizing for Action officials are asking supporters to tweet about Obamacare and usher others into the effort by liking the Obamacare page on Facebook.

That’s the plan?  Hash tag Obamacare?  Yup, that’s the ticket.

Now, in all seriousness…as the government takes over more and more of the economy – both directly such as with this farce, and indirectly through regulations and other market interventions, price signals and profit-and-loss are less and less able to perform their necessary functions.  This leads to failure and breakdown.

We are living through the failure and breakdown in the greater economy.  Obamacare offers us the most visible fedgov failure and breakdown.

Those of us on this side often use the quote attributed to Mahatma Ghandi:

First they ignore you, then they laugh at you, then they fight you, then you win.

With fedgov, it will be just the opposite – they won, as early as 1789.  They fought the people in 1861.  We are moving into the “laugh at you” stage.  Soon enough, as more failures become visible (broken promises of every sort), many will simply ignore them.