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Antal Fekete, Gold, and Central Banks
Antal Fekete, Gold, and Central Banks
On the fourteenth of October 2020, Antal E. Fekete, the Hungarian-Canadian economist who saw himself as a monetary theorist following the tradition of Carl Menger, died in Budapest. Behind him was an eventful and fruitful life which was quite typical of the crazy last century. His experiences eventually filled Fekete with dark forebodings for the current century. We can only hope that this crazy year won’t become characteristic of an entire era, as his year of birth did.
Antal Endre Fekete was born on the eighth of December 1932 in Budapest. Mass unemployment was rife in the midst of a deep global economic crisis. Hungary was heading towards National Socialism on the back of a severe banking crisis. The totalitarian, anti-Semite Gyula Gömbös had taken over the government shortly before Fekete’s birth. All around, belief in the omnipotence of politics was leading to a spiral of interventionism and polarization which would ultimately lead to the old Europe being destroyed by totalitarianism and war. Monetary policy played a role in this that is underestimated to this day.
Fekete was one of the few old Europeans to recognize the central role of money, on the positive side as a means of amicable division of labor, on the negative side as a casualty and lever of political intervention spirals. This led the mathematician to monetary theory, in which he sought to expand and update the old Austrian school of economics. As with all original contributions, it is too soon to definitively assess whether he introduced new errors and what these errors were. Yet his prominence as a sharp thinker who combined theory with profound historical knowledge is undervalued. This is partly due to his quarrelsome personality, which came between him and almost all of his comrades in arms and companions…
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How the State Spreads Mass Hysteria
How the State Spreads Mass Hysteria
The history of mass hysteria, or mass sociogenic illness is fascinating. Cases of mass hysteria have been documented since the Middle Ages. Let me just mention a few of the more recent cases.
When a radio play by Orson Welles, War of the Worlds, was broadcasted in 1938 shortly after the suspension of the Munich agreement, the play allegedly caused panic among listeners, who thought that they were under attack by Martians.
Another intriguing case is an episode of a Portuguese TV show called Strawberries with Sugar. In the episode, the characters were infected by a life-threatening virus. After the show, more than three hundred students reported similar symptoms as the ones experienced by the TV show characters such as rashes and difficulty breathing. Some schools even closed. The Portuguese National Institute for Medical Emergency concluded that the virus did not exist in reality and that the symptoms were caused by mass hysteria.Similarly, on Emirates flight 203 in September 2018, dozens of passengers started to believe they were sick after observing other passengers with flu-like symptoms. As a consequence of the panic, the whole flight was quarantined. In the end only a few passengers had a common cold or the seasonal flu.
It is well known that there exist nocebo effects, which are the opposite of placebo effects. Due the placebo effect, a person recovers from an illness because she expects to do so. When we suffer a nocebo effect, on the other hand, we get ill just because we expect to become ill.1 In a self-fulfilling prophecy, the expectation can cause the symptoms. Anxiety and fear exacerbate this process.2
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Too Much Centralization Is Turning Everything into a Political Crisis
Too Much Centralization Is Turning Everything into a Political Crisis
While the study is interesting and well written, the authors completely fail to consider a more fundamental potential explanation of increasing polarization, one that is likely to be understood well by libertarians and federalists, who have long railed against the trend toward ever more usurpation of local and state sovereignty in American politics. I propose that the real culprit behind worsening polarization is the gargantuan federal government that has turned the entire country into an unceasing political battleground. When virtually all political issues are settled at the national level, the whole nation becomes a source of potential political opponents. Centralization changes the scale and with it the locus of political debate and conflict.
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The New COVID-19 Authoritarians Will Only Give Up Power If They Fear Blowback
The New COVID-19 Authoritarians Will Only Give Up Power If They Fear Blowback
It was autumn 1989. Momentous things were taking place in the world.
The Berlin Wall had fallen. The people of the Eastern Bloc had succeeded at getting to the West through Hungary. The firm line between east and west was wavering. The situation was moving away from the course that Warsaw Pact communist governments had charted: that their populations must remain captive within the borders of the Communist Bloc.
It was unclear whether this social contagion for freedom would spread into Czechoslovakia.
But then November 17, 1989, arrived, a day etched in history. This was Students Day, a legal holiday. Everything had to close under government fiat. People were off school and off work. But some folks were agitated about prior government actions which many saw as abuses.
When the government gave the people of Czechoslovakia that day off, it was like a match to tinder. The small flame grew into a big one.
It was a revolution noted for its bloodlessness. The Velvet Revolution, we call it today, leaning on what the Czechs called it. People, for as far as the eye could see, gathered in a giant square in Prague and called for the ouster of their government.
In the face of the idea that saying the wrong words politically could be toxic to one’s health, much like in America today, some did not resort to speaking words against their government. They merely pulled their keys out of their pockets and jingled them.
The message was clear.
Imagine tens of thousands of people jingling their keys at once.
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The Era of Boom and Bust Isn’t Over
The Era of Boom and Bust Isn’t Over
At the 2020 World Economic Forum in Davos, Bob Prince, co-chief investment officer at Bridgewater Associates, attracted attention when he suggested in a news interview that the boom and bust cycle as we have come to know it in the last decades may have ended. This viewpoint may well have been encouraged by the fact that the latest economic upswing (“boom”) has been going for around a decade and that an end is not in sight as suggested by incoming macro- and microeconomic data.
But would that not reject the key insight of the Austrian business cycle theory (ABCT), which says that a boom, brought about by artificially lowered market interest rates and injections of new credit and money produced “out of thin air,” must eventually end in a bust? In what follows, I will remind us of the key message of the ABCT and outline the “special conditions” which must be taken into account if the ABCT is applied to real-world developments. Against this backdrop, we can then form a view about how the next crisis might look.
What the ABCT Says
The ABCT is actually a “theory of crisis,” and it explains the broader consequences if and when central banks, in close cooperation with commercial banks, increase the amount of money in the economy through credit expansion—that is, an increase in bank lending that is not backed by real savings. The increase in the circulation of credit supply initially lowers the market interest rate below its “natural level,” or, “the originary interest rate level,” to use the Austrian school’s term.
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The Bank of England’s Governor Fears a Liquidity Trap
The Bank of England’s Governor Fears a Liquidity Trap
The global economy is heading towards a “liquidity trap” that could undermine central banks’ efforts to avoid a future recession according to Mark Carney, governor of the Bank of England. In a wide-ranging interview with the Financial Times (January 8, 2020), the outgoing governor warned that central banks were running out of ammunition to combat a downturn:
If there were to be a deeper downturn, more than a conventional recession, then it’s not clear that monetary policy would have sufficient space.
He is of the view that aggressive monetary and fiscal policies will be required to lift the aggregate demand.
What Is a Liquidity Trap?
In the popular framework that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by another individual becomes part of the first individual’s earnings.
Recessions, according to Keynes, are a response to the fact that consumers — for some psychological reasons — have decided to cut down on their expenditure and raise their savings.
For instance, if for some reason people become less confident about the future, they will cut back their outlays and hoard more money. When an individual spends less, this will supposedly worsen the situation of some other individual, who in turn will cut their spending. A vicious cycle sets in. The decline in people’s confidence causes them to spend less and to hoard more money. This lowers economic activity further, causing people to hoard even more, etc.
Following this logic, in order to prevent a recession from getting out of hand, the central bank must lift the growth rate of the money supply and aggressively lower interest rates. Once consumers have more money in their pockets, their confidence will increase, and they will start spending again, reestablishing the circular flow of money, so it is held.
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How the US Wages War to Prop up the Dollar
How the US Wages War to Prop up the Dollar
At Counterpunch, Michael Hudson has penned an important article that outlines the important connections between US foreign policy, oil, and the US dollar.
In short, US foreign policy is geared very much toward controlling oil resources as part of a larger strategy to prop up the US dollar. Hudson writes:
The assassination was intended to escalate America’s presence in Iraq to keep control of the region’s oil reserves, and to back Saudi Arabia’s Wahabi troops (Isis, Al Quaeda in Iraq, Al Nusra and other divisions of what are actually America’s foreign legion) to support U.S. control of Near Eastern oil as a buttress of the U.S. dollar. That remains the key to understanding this policy, and why it is in the process of escalating, not dying down.
The actual context for the neocon’s action was the balance of payments, and the role of oil and energy as a long-term lever of American diplomacy.
Basically, the US’s propensity for driving up massive budget deficits has created a need for immense amounts of deficit spending. This can be handled through selling lots of government debt, or through monetizing the debt. But what if there isn’t enough global demand for US debt? That would mean the US would have to pay more interest on its debt. Or, the US could monetize the debt through the central bank. But that might cause the value of the dollar to crash. So, the US regime realized that it must find ways to prevent the glut of dollars and debt from actually destroying the value of the dollar. Fortunately for the regime, this can be partly managed, it turns out, through foreign policy. Hudson continues:
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What Will It Take to Get the Public to Embrace Sound Money?
What Will It Take to Get the Public to Embrace Sound Money?
In the last decade, the combination of virulent asset price inflation and low reported consumer price inflation crippled sound money as a political force in the US and globally. In the new decade, a different balance between monetary inflation’s “terrible twins” — asset inflation and goods inflation — will create an opportunity for that force to regain strength. Crucial, however, will be how sound money advocacy evolves in the world of ideas and its success in forming an alliance with other causes that could win elections.
It is very likely that the deflationary nonmonetary influences of globalization and digitalization, which camouflaged the activity of the goods-inflation twin during the past decade, are already dissipating.
The pace of globalization may have already peaked, before the Xi-Trump tariff war. Inflation-fueled monetary malinvestment surely contributed to its prior speed. One channel here was the spread of highly speculative narratives about the wonders of global supply chains.
Digitalization’s potential to camouflage monetary inflation in goods and services markets, on the other hand, has come largely via its impact on the dynamics of wage determination. It has forged star firms with considerable monopoly power in each industrial sector. Obstacles preventing their technological and organizational know-how from seeping out to competitors means that wages are not bid higher across labor markets in similar fashion to earlier industrial revolutions. These obstacles reflect the fact that much investment is now in the form of firm-specific intangibles. Even so, such obstacles tend to lose their effectiveness over time.
As deflation fades, monetary repression taxes (collected for governments through central banks’ manipulation of rates to low levels so as to achieve 2 percent inflation despite disinflation as described) will undergo metamorphosis into open inflation taxes as the rate of consumer price inflation accelerates. Governments cannot forego revenue given their ailing finances. Simultaneously, asset inflation will proceed down a new stretch of highway where many crashes occur.
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Hyperinflation, Money Demand, and the Crack-up Boom
Hyperinflation, Money Demand, and the Crack-up Boom
In the early 1920s, Ludwig von Mises became a witness to hyperinflation in Austria and Germany — monetary developments that caused irreparable and (in the German case) cataclysmic damage to civilization.
Mises’s policy advice was instrumental in helping to stop hyperinflation in Austria in 1922. In his Memoirs, however, he expressed the view that his instruction — halting the printing press — was heeded too late:
Austria’s currency did not collapse — as did Germany’s in 1923. The crack up boom did not occur. Nevertheless, the country had to bear the destructive consequences of continuing inflation for many years. Its banking, credit, and insurance systems had suffered wounds that could no longer heal, and no halt could be put to the consumption of capital.1
As Mises noted, hyperinflation in Germany was not stopped before the complete destruction of the reichsmark. To illustrate the monetary catastrophe, one may take a look at the exchange rate of the reichsmark against the US dollar. Before the start of World War I in 1914, around 4.2 marks would buy 1 US dollar. As soon as war action began, the convertibility of the mark was suspended and paper marks (papiermark) were issued, largely for financing war-related outlays. In 1918, after the end of World War I, 8.4marks bought 1 US dollar.2 In December 1919, the mark had depreciated to 46.8 per US dollar, and in December 1920 to 73.4 per dollar.
In July 1922, the US dollar cost 670 marks. When French and Belgian troops occupied the Rhineland at the beginning of 1923, however, the exchange rate of the mark plummeted to 49,000 marks per US dollar. On November 15, 1923, when hyperinflation reached its peak, the currency reform effectively made 1 trillion (1,000,000,000,000) papiermarkequal to 1 rentenmark, and as 4.2 trillion papiermark exchanged for 1 US dollar at that time, 4.2 rentenmark would equal 1 US dollar.3
Increases in the Money Supply
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A History of Inflationary Money: From 1844 to Nixon
A History of Inflationary Money: From 1844 to Nixon
So that we can understand the financial and banking challenges ahead of us, this article provides an historical and technical background. But we must first get an important definition right, and that is the cause of the periodic cycle of boom and bust. The cycle of economic activity is not a trade or business cycle, but a credit cycle. It is caused by fractional reserve banking and by banks loaning money into existence. The effect on business is then observed but is not the underlying cause.
Modern banking has its roots in England’s Bank Charter Act of 1844, which led to the practice of loaning money into existence, commonly described as fractional reserve banking. Fractional reserve banking is defined as making loans and taking in customer deposits in quantities that are multiples of the bank’s own capital. Case law in the wake of the 1844 act, having more regard for the status quo as established precedent than for the fundamentals of property law, ruled that irregular deposits (deposits for safekeeping) were no different from a loan. Judge Lord Cottenham’s ruling in Foley v. Hill (1848) 2 HLC 28 is a judicial decision relating to the fundamental nature of a bank which held in effect that
The money placed in the custody of the banker is to all intents and purposes, the money of the banker, to do with it as he pleases. He is guilty of no breach of trust in employing it. He is not answerable to the principal if he puts it into jeopardy, if he engages in haphazardous speculation.
This was undoubtedly the most important ruling of the last two centuries on money. Today, we know of nothing else other than legally confirmed fractional reserve banking. However, sound or honest banking, with banks acting as custodians, had existed in the centuries before the 1844 act and any corruption of the custody status was regarded as fraudulent.
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How Central Banks Fund Our Age of Endless War
How Central Banks Fund Our Age of Endless War
[This talk was delivered at the Mises Circle in New York City on September 14, 2012.]
The 20th century was the century of total war. Limitations on the scope of war, built up over many centuries, had already begun to break down in the 19th century, but they were altogether obliterated in the 20th. And of course the sheer amount of resources that centralized states could bring to bear in war, and the terrible new technologies of killing that became available to them, made the 20th a century of almost unimaginable horror.
It isn’t terribly often that people discuss the development of total war in tandem with the development of modern central banking, which — although antecedents existed long before — also came into its own in the 20th century. It’s no surprise that Ron Paul, the man in public life who has done more than anyone to break through the limits of what is permissible to say in polite society about both these things, has also been so insistent that the twin phenomena of war and central banking are linked. “It is no coincidence,” Dr. Paul said, “that the century of total war coincided with the century of central banking.”
He added:
If every American taxpayer had to submit an extra five or ten thousand dollars to the IRS this April to pay for the war, I’m quite certain it would end very quickly. The problem is that government finances war by borrowing and printing money, rather than presenting a bill directly in the form of higher taxes. When the costs are obscured, the question of whether any war is worth it becomes distorted.
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Central Bank “Stimulus” is Really a Huge Redistribution Scheme
Central Bank “Stimulus” is Really a Huge Redistribution Scheme
When an economy turns from expansion to contraction there is an order of events. The first signs are an unexpected increase in inventories of unsold goods, both accompanied with and followed by business surveys indicating a general softening in demand. For monetarists, this is often confirmed by an inverting yield curve, which tells them that at the margin the short-term rates set by the central bank are becoming too high for business conditions.
That was the position for the US 10-year bond less the 2-year bond very briefly at the end of August, since when this measure, which is often taken to predict recessions, has turned mildly positive again. A generally negative sentiment, fueled mainly by the escalating tariff war between America and China, had earlier alerted investors to an international trade slowdown, expected to undermine the American economy in due course along with all the others. It stands to reason that backward-looking statistics have yet to reflect the global slowdown on the US economy, which is still buoyed up by consumer credit. The German economy, which is driven by production rather than consumption is perhaps a better guide and is already in recession.
After an initial hit, a small recovery in investor sentiment is understandable, with the negative outlook perhaps having got ahead of itself. But we must look beyond that. History shows the combination of a peak in the credit cycle and tariffs can be economically lethal. A brief return to a positive yield curve achieves little more than a sucker rally. It may be enough to put further monetary expansion on pause. But when that is over, and jobs begin to be threatened, there can be no doubt that central banks will ramp up the printing presses.
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Markets Rely on Accurate and Honest Information — But Governments Want the Opposite
Markets Rely on Accurate and Honest Information — But Governments Want the Opposite
Have you ever worked with people you couldn’t trust to tell you the truth? It isn’t pretty. Without the ability to rely on what you’ve been told (or that you’ve been told everything relevant), effective cooperation at almost every margin of choice is reduced, because its foundation has been undermined. A new episode of To Tell the Truthmust precede every decision.
That problem of effective cooperation is exponentially increased when we expand our horizons to the many margins of choice at which people in society, the vast majority of which do not even know each other, interact. In a modern economy, all of us are dependent on multitudes of strangers not just for our prospering, but our survival.
The reason people don’t always communicate truthfully is that our reason serves our self-interest. Sometimes we perceive a strategic advantage at other people’s expense from intentionally deceiving them. Our words are also often ex post rationalizations to ourselves and others of why whatever we chose or did was a good idea. But that often makes what people say a frail reed to rely upon. And when political power is involved, the incentives for such deception and self-delusion are put on steroids, because the payoffs are far greater when backed by government’s coercive power.
As a consequence, accurate information about the issues most important to our ability to co-operate with others is often among the scarcest and most valuable of goods. Making it worse, the unknowably vast amount of potentially useful information—the infinite permutations of who, what, when, where, why and how–exceeds any individual or group’s ability to comprehend and integrate it. But voluntary market arrangements based on private property rights provide a powerful mechanism of cutting that problem down to manageable size.
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Negative Interest Rates are the Price We Pay for De-Civilization
Negative Interest Rates are the Price We Pay for De-Civilization
Do central bankers really think negative interest rates are rational?
“Calculation Error,” which Bloomberg terminals sometimes display1, is an apt metaphor for the current state of central bank policy. Both Europe and Asia are now awash in $13 trillion worth of negative-yielding sovereign and corporate bonds, and Alan Greenspan suggests negative interest rates soon will arrive in the US. Despite claims by both Mr. Trump and Fed Chair Jerome Powell concerning the health of the American economy, the Fed’s Open Market Committee moved closer to negative territory today — with another quarter-point cut in the Fed Funds rate, below even a measly 2%.
Negative interest rates are just the latest front in the post-2008 era of “extraordinary” monetary policy. They represent a Hail Mary pass from central bankers to stimulate more borrowing and more debt, though there is far more global debt today than in 2007. Stimulus is the assumed goal of all economic policy, both fiscal and monetary. Demand-side stimulus is the mania bequeathed to us by Keynes, or more accurately by his followers. It is the absurd idea, that an economy prospers by consuming and borrowing instead of producing and saving. Negative interest rates turn everything we know about economics upside down.
Under what scenario would anyone lend $1,000 to receive $900 in return at some point in the future? Only when the alternative is to receive $800 back instead, due to the predicted interventions of central banks and governments. Only then would locking in a set rate of capital loss make sense. By “capital loss” I mean just that; when there is no positive interest paid, the principal itself must be consumed. There is no “market” for negative rates.
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Why the Dollar Rules the World — And Why Its Reign Could End
Why the Dollar Rules the World — And Why Its Reign Could End
President Donald Trump wants a lower US dollar. He complains about the over-valuation of the American currency. Yet, is he right to accuse other countries of a “currency manipulation”? Is the position of the US dollar in the international monetary arena not a manipulation in its own right? How much has the United States benefitted from the global role of the dollar, and is this “exorbitant privilege” coming to end? In order to find an answer to these questions, we must take a look at the monetary side of the rise of the American Empire.
Trump is right. The American dollar is overvalued. According to the latest version of the Economist’s “ Big Mac Index,” for example, only three currencies rank higher than the US dollar. Yet the main reason for this is not currency manipulation but the fact that the US dollar serves as the main international reserve currency.
This is both a boon and a curse. It is a boon because the country that emits the leading international reserve currency can have trade deficits without worrying about a growing foreign debt. Because the American foreign debt is in the country’s own currency, the government can always honor its foreign obligations as it can produce any amount of money that it wants in its own currency.
Yet the international reserve status comes also with the curse that the persistent trade deficits weaken the country’s industrial base. Instead of paying for the import of foreign goods with the export of domestic production, the United States can simply export money.
American Supremacy
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