Sunday, March 30, 2014

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. 

AF: Post-Mises Austrian economists have deviated from Menger in dismissing the Gold Bills Doctrine.

This I have addressed above.

AF: I may add that their peculiar aversion to what they call "fractional reserve banking" is another example of deviation that follows from the first.

This is a hot topic within Austrian circles.  If what is meant by fractional reserve banking is a) two individuals b) having identical claim to the identical asset c) at the same time – well, this cannot be, and cannot be subject of contract.  It is an impossibility.

However, if what is meant is something akin to today’s typical bank deposit contract, this is certainly a possibility, and it is subject to contract.  I will not go into detail here, other than to suggest that if the sanctity of contract is to be violated, Austrians who are also libertarian and who would deny the use of such contracts have some explaining to do.  In any case, perhaps my most thorough post on the subject can be found here.

DB: Please try to fully summarize your problem with the business cycle explanation of Mises and Hayek. Why don't you believe it is accurate?

AF: The business cycle theory of Mises and Hayek has been taken over by the post-Mises Austrian school without any change. I have criticized this theory as it assigns a rather low I.Q. to businessmen who allegedly fall victim again and again to the teaser interest rates made available to them by the government and banking system. Misled by false signals they make unsound investments which, in due course, come unstuck.

It has nothing to do with their I.Q.  Not all businessmen have to have the same low I.Q.

I will suggest Mr. Fekete spends some time in the business world.  Many professional investors and money managers today have spoken plainly of the knowledge that the game is rigged, yet they must stay in the game because this is how they earn a living.  Those who have stood outside during the last six-years are certainly no longer employed as money managers.

Or in the industrial world, when a few competitors in a specific industry are taking advantage of the (false) expansion brought on by pumping, others understand that they must grow or die.  Even if they know they may die later because of the false signals, this is better than certain death today.

DB: You believe a so-called 100 percent gold standard is a non-starter. Why?

AF: As I suggested a moment ago, such a monetary system would be too rigid. The demand for circulating media varies with the seasons and culminates when the crop is moved to storage.

Look, rigid or not rigid, I don’t know.  What is certain is that crop cycles are no longer a major driver for credit demand.  Having said that, whatever arises naturally in the market that doesn’t violate the NAP is fine with me.

DB: You also write, "The great quandary in the history of science is how one charlatan could mesmerize an entire profession with his quackery into somnambulance." Please elaborate.

AF: Keynes was a charlatan. A charming one, according to Hayek, to be sure. That may be so. Indeed, he charmed the entire profession of economists like the Pied Piper of Hamelin did in leading the children of the village to their destruction.

It has nothing to do with a charlatan mesmerizing an entire profession (although I don’t doubt there are many true believers).  It has to do with the virtually co-opting of the profession by central banks and universities – both funded by the state.  Do you want to advance in the economics profession today – both financially and reputationally?  There you will find your answer.

DB: You believe that the policy of open market operations of the Fed causes deflation rather than inflation as intended. How is this possible?

I apologize in advance for citing the entire answer.  (In two parts, and emphasis added.)

AF: The Fed is unmindful of the fact that they cannot suppress the rate of interest and the price of marketable bonds at the same time. As a result, the reduction in the rate of interest shows up as an erosion, ultimately destruction, of capital across the board. The capital of every firm is putatively carried in the form of a bond listed in the liability column of the balance sheet. As the interest rate falls, the deficit in capital account grows. This is capital erosion. It is a form of deflation.

I have heard of price deflation.  I have heard of monetary deflation.  This is a new one.  It may be a “form of deflation,” but it is a form foreign to virtually everyone well-read on the topic.  I doubt it is the form DB was considering when asking the question.

If the deficit is ignored, i.e., new capital is not injected then, sooner or later, the critical point will be reached. The firm can no longer stay afloat. It sinks. This is called the "sudden death syndrome." Since this is happening simultaneously across the board, the economy plunges into depression.

A depression and a deflation are not the same thing. At least not in any economic sense – although Keynesians would have you believe this.

As is consistent with my overall view of statements from Antal Fekete, I can find some statements with which I agree, some with which I disagree, and some that just don’t make any sense.

I will say that my thinking about real bills has evolved – not the reality that these are inflationary as they most certainly are, but the reality that there is no reason to deny the utilization of this instrument in a free market.


  1. I still think that Real Bills could be one of the few effective cushions we will use in a full on monetary collapse. I didn't need to study them to know for sure that they are inflationary, at first gasp I realized that there is no way that they could not be. More recently, I've wondered if the neo-Austrians may be theorizing themselves into irrelevance. Instead of Bischcoff sounding like Fekete, as we used to find on the Bell, it seems more like Fekete sounding like Bischoff to me.

    1. Regarding real bills, as an investment vehicle this concept holds interest for me - it is very secure paper, it would seem.

      On a couple of key issues,I have found Fekete far more sensible than Bischoff.

      But Fekete is always confounding on something - as I point out even in this interview.

    2. For me there are two sticking points that cannot be gotten around. The first, "money can only be the most liquid commodity", is said with water is wet certainty. As far as I am concerned, anything used as a medium of exchange on a continuing basis can be considered money. To call fiat simply currency rather than money, yes, ok, of course, but, silver? Absurd.
      The other is that gold (or anything else) has constant marginal utility. Absolute bs.
      I was glad not to see any arguments about intrinsic vs imputed (though I haven't looked today). Have to go with Dr. North, and think that theorizing beyond that is probably pointless. Which is another way of saying that the world would be better off with about 99% less economists, and government and people believing those few with the guts to say publicly, 'no, don't do it because...'
      I certainly don't disagree with Fekete about many things, but he is stubborn enough about those, that I would only argue with others about them. Still, I have to argue about those ideas, because I view their spread as detrimental to us all.
      With age, certainty is protected by an accretion of agreements, both internal and external, any of which, may not be what it seems.

    3. "Have to go with Dr. North..."

      One of the best articles I have ever read; eye opening on both gold and subjective value:

      Probably makes me a simpleton to some, but as you write - for me, anything beyond this is pointless.

    4. That is a nice article but is not the one I was thinking of. I have been looking through the archives but have not figured out which it is. Ostensibly, it is about gold, but explains that all values are imputed, therefore, intrinsic value does not exist.
      DB once suggested that Ingo read it to educate himself, and though unstated, thus stop clogging their threads.