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Bob Dylan as Economic Prophet
Bob Dylan as Economic Prophet
Change is the defining feature of our modern age, from science to business to politics, both in its extraordinary speed and magnitude. But you would never know it when surveying today’s financial market landscape. We are also living in the age of government-mandated financial repression—which has created a forced, false financial stability. These exist like two contradictory, parallel universes.
Thanks to almost a decade of unprecedented market interventions by global central banks (which have collectively acquired assets totaling over $20 trillion), everywhere you look there is repression of yields, repression of market volatility, and their side effects of exploding asset valuations (to heights not seen since shortly before past historic crashes), financial-engineered debt, leverage, stock-buybacks, cryptocurrency-insanity, “short volatility” and all manner of reckless yield-chasing investment schemes. This is an age of massive artificial economic imbalances and systemic risks.
Such powerful interventions hurt the weakest and benefit the strongest (the holders of assets) as they create unsustainable, destructive distortions that ultimately lead to catastrophe. This is a universal historical theme, perhaps nowhere better chronicled than by Bob Dylan starting back in the early 1960s. And underlying Dylan’s theme has been a prophetic message, one that speaks uncannily to today’s incoherently changeless and riskless market climate: Change is irrepressible, whether we accept it or (especially) even if we do not; “the times they are a-changin’.”
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What Has QE Wrought?
What Has QE Wrought?
[Editor’s Note: Watch Ron Paul deliver this Special Report here.]
The Great Recession began in 2007. It didn’t take long for the money managers to recognize its severity, and that a little tinkering with interest rates would not suffice in dealing with the economic downturn. In Dec. 2008, the first of four Quantitative Easing programs began which did not end until Dec. 18, 2013. Some very serious consequences of this policy of unprecedented credit creation have set the stage for a major monetary reform of the fiat dollar system. The dollar’s status as the reserve currency of the world will continue to be undermined. This is not a minor matter. As our financial system unravels, the seriousness of it will become evident to all, as the need to pay for our extravagance becomes obvious. This will make the country much poorer, though the elite class that manages such affairs will suffer the least.
By the time the QE’s ended, the Central banks of the world had increased their balance sheet by $8.3 trillion, with only $2.1 trillion worth of GDP growth to show for it. This left $6.2 trillion of excess liquidity in the banking system that did not go where the economic planners had hoped. Central banks now own $9.7 trillion of negative interest yielding bonds. The financial system has been left with a bubble mania, financed by artificial credit and unsustainable debt. The national debt in 2007 was $8.9 trillion; today it’s $20.5 trillion. Rising interest rates will come and that will be deadly for the economy and the Federal budget.
This inflationary policy is generated by the belief that there is no benefit in allowing the needed economic correction to the problems generated by the Fed to occur. The correction is what the market requires, not the resumption and acceleration of the dangerous inflationary policy that caused the bubble economy.
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Will the Dollar Survive the Rise of the Yuan and the End of the Petrodollar?
Will the Dollar Survive the Rise of the Yuan and the End of the Petrodollar?
This might seem a frivolous question, while the dollar still retains its might, and is universally accepted in preference to other, less stable fiat currencies. However, it is becoming clear, at least to independent monetary observers, that in 2018 the dollar’s primacy will be challenged by the yuan as the pricing medium for energy and other key industrial commodities. After all, the dollar’s role as the legacy trade medium is no longer appropriate, given that China’s trade is now driving the global economy, not America’s.
At the very least, if the dollar’s future role diminishes, then there will be surplus dollars, which unless they are withdrawn from circulation entirely, will result in a lower dollar on the foreign exchanges. While it is possible for the Fed to contract the quantity of base money (indeed this is the implication of its desire to reduce its balance sheet anyway), it would also have to discourage and even reverse the expansion of bank credit, which would be judged by central bankers to be economic suicide. For that to occur, the US Government itself would also have to move firmly and rapidly towards eliminating its budget deficit. But that is being deliberately increased by the Trump administration instead.
Explaining the consequences of these monetary dynamics was the purpose of an essay written by Ludwig von Mises almost a century ago. At that time, the German hyperinflation was entering its final phase ahead of the mark’s eventual collapse in November 1923. Von Mises had already helped to stabilize the Austrian crown, whose own collapse was stabilized at about the time he wrote his essay, so he wrote with both practical knowledge and authority.
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The Economic Benefits of Ending the Fraud of Fractional Reserve Banking
The Economic Benefits of Ending the Fraud of Fractional Reserve Banking
Fractional reserve banking (FRB) is fraudulent. It should be prosecuted as a crime rather than accepted as normal practice under current banking laws. Any society that respects property rights and the rule of law would not allow it. For those unfamiliar with the term fractional reserve banking or not quite confident of its complete meaning, let’s cover some basics.
What Is Fractional Reserve Banking?
All financial transactions must be settled ultimately by an exchange of standard money, otherwise known as “reserves”. Reserves in the US are composed of federal reserve notes (good old paper money in your wallet, piggy bank, retailers’ cash register tills, or bank vaults) plus reserve account balances held by banks at their local Federal Reserve Bank that may be exchanged for federal reserve notes on demand. The important point is that reserves are not the same thing as the money supply. The money supply is composed of cash outside bank vaults plus demand (checking) accounts at banks. A financial transaction is not complete until reserves are exchanged. For example, accepting a check from your neighbor for selling him your used car is not final settlement, because reserves have not yet been exchanged. The check might bounce. Or the bank upon which the check is drawn might become insolvent ; i.e., it does not have and cannot raise the reserves with which to pay you, the check’s payee, even though the bank balance of the payor, your neighbor, was at least as large as the check.
Most people assume that their money held at banks can always be exchanged for reserves, but such is not the case. Under a fractional reserve banking system banks are not required to keep one hundred percent reserves.
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In a Stateless World, Can You Grow Veggies In Your Front Yard?
In a Stateless World, Can You Grow Veggies In Your Front Yard?
The Miami Herald reports that a local couple is going all the way to the state supreme court to fight a local ordinance banning front-yard vegetable gardens:
Hermine Ricketts and her husband Tom Carroll may grow fruit trees and flowers in the front yard of their Miami Shores house…
Vegetables, however, are not allowed.
Ricketts and Carroll thought they were gardeners when they grew tomatoes, beets, scallions, spinach, kale and multiple varieties of Asian cabbage. But according to a village ordinance that restricts edible plants to backyards only, they were actually criminals.
“That’s what government does – interferes in people’s lives,” Ricketts said. “We had that garden for 17 years. We ate fresh meals every day from that garden. Since the village stepped its big foot in it, they have ruined our garden and my health.”
These sorts of stories pop up several times a year. They are often discussed at free-market oriented and libertarian sites to illustrate just the myriad of ways that the state interferes in our daily lives. Many times, they intervene to prohibit totally innocuous activities like growing a front-yard garden.
What articles like these often fail to point out of course, is that these laws didn’t appear out of nowhere. They are often passed because some voters demanded the city council or the county commission pass laws prohibiting front-yard gardens, or backyard chicken coops, or other non-violent activities deemed by some to be a nuisance to the neighborhood. These laws then persist over time because the majority of voters either agree with the laws, or don’t feel strongly enough about the matter to demand a change.
In Miami Shores, the law against front-yard gardens was likely passed because at least a few people felt that front yard gardens were not so innocuous after all.
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How Central Banks Widen Wealth and Income Gaps
How Central Banks Widen Wealth and Income Gaps
The Federal Reserve’s latest Survey of Consumer Finances, according to Federal Reserve Governor Brainard, shows that the share of income held by the top 1 percent of households has risen from 17 percent in 1988 to 24 percent in 2015, and that the wealth held by that same group rose from 30 percent in 1989 to 39 percent in 2016.
There are many explanations of why the gap between the rich and the poor widens. Governor Brainard attributes some of it to labor market disparities relating to geography and to race and ethnicity. She and Robert Frank say it results from the wealthiest households being much more likely to invest additional money received than those in other income groups. Vincent Del Giudice and Wei Lu blame automation and robotics. John Tamny says it is a consequence of the explosion in entrepreneurship that has benefited us all. A Tax Policy Center report concludes that it will widen even more if the president’s income tax overhaul is enacted.
The Brookings Institute held a conference to explore whether monetary policy widens the wealth gap. Mainstream economists support expansionary monetary policy because the income gap closes after mortgage payments are lowered when homes are refinanced at lower interest rates. However, a conference panelist and former Federal Reserve (Fed) board member Kevin Warsh referred to the Fed’s monetary policy during the financial crisis as being “reverse Robin Hood.” This view has merit because the Fed’s purchases of securities push interest rates down and expand the money supply. The expansion of money then inflates the prices of financial assets, which are disproportionately owned by the rich.
In a previous article for Mises Wire, I discussed data that seems to support both sides of the Brookings debate.
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Is There Any Way Out of the ECB’s Trap?
Is There Any Way Out of the ECB’s Trap?
The ECB faces the Devil’s Alternative that Frederick Forsyth mentioned in one of his books. All options are potentially riskly. Mario Draghi knows that maintaining the so-called stimuli involves more risks than benefits, but also knows that eliminating them could make the eurozone deck of cards collapse.
Despite the massive injection of liquidity, he knows that he can not disguise political risks such as the secessionist coup in Catalonia. The Ibex reflects this, making it clear that the European Central Bank does not print prosperity, it only puts a floor to valuations.
The ECB wants a weak euro. But it is a game of juggling to pretend a weak euro and at the same time a strong economy. The European Union countries export mostly to themselves. Member countries sell more than two-thirds of their goods and services to other countries in the eurozone. Therefore, the more they export and their economies recover, the stronger the euro, and with it, the risk of losing competitiveness. The ECB has tried to break the euro strength with dovish messages, but it has not worked until political risk reappeared. With the German elections and the prospect of a weak coalition, the results of the Austrian elections and the situation in Spain, market operators have realized – at last – that the mirage of “this time is different “in the European Union was simply that, a mirage.
A weak euro has not helped the EU to export more abroad. Non-EU exports from the member countries have been stagnant since the monetary stimulus program was launched, even though the euro is much weaker than its basket of currencies compared to when the stimulus program began. The Central Bank Trap, which I explain in my new book.
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Is Korea Just a Smokescreen?
Is Korea Just a Smokescreen?
In my last article (Sticking the arson charge on a couple of patsies) I questioned why North Korea’s nuclear program was attracting such attention from the United States. North Korea is a very poor and backwards country whose bellicosity reflects the regime’s need for an external enemy like the United States to galvanize domestic support. Attacking America and its allies in the region is the last thing North Korea’s leaders would want to do as such an attack would guarantee an American response that would be sure to destroy their lives, their government and the lives of millions of innocent Korean civilians.
However, this month I was made aware of another possible reason for the attention being paid to North Korea and its nuclear program. What if the escalating tensions over Korea are just a smokescreen intended to legitimize an American military buildup in the region aimed at intimidating China?
In 2011, former U.S. President Barack Obama announced a change in U.S. foreign policy that was termed a ‘Pivot to Asia.’ The official thinking was that as China and the emerging countries of South-East Asia gained in economic importance, it made sense to devote more military and diplomatic attention to the region while reducing the attention paid to Europe and the Middle East.
Of course, observers also saw the pivot as a response to the rising economic, political and military power of a resurgent China. Just as the U.S. sought to contain the Soviet Union during the Cold War with a string of encircling alliances and economic agreements, so America today seeks to keep China in check through military alliances with East Asian countries like Japan, South Korea and Taiwan and trade agreements such as the Trans-Pacific Partnership (TPP).
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Low Interest Rates Subsidize Wealthy Households
Low Interest Rates Subsidize Wealthy Households
When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.
Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called “discretionary fiscal stimulus.”
While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.
Although the political parties disagree over the type of fiscal stimulus to implement, both support the Fed’s monetary stimulus. Perhaps they do so because lower interest rates lower the cost of the budget deficits their discretionary fiscal stimulus produces. The lower interest rates also reduce the interest Americans pay on their debts. The total of this debt is unevenly distributed across the richest 1 percent, the next 9 percent, and the bottom 90 percent of Americans (as ranked by wealth), according to the following table.
Total household debt averaged $11.295 trillion dollars over the four quarters in 2013, according to the Federal Reserve Bank of New York. Multiplying this value by the percentages in the above table indicates that the richest 1 percent, the next 9 percent, and the bottom 90 percent have aggregate debts of $610 billion, $2.383 trillion, and $8.302 trillion, respectively. These values are listed in the Total Debt column below.
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Europe’s Secession Problems Aren’t Going Away
Europe’s Secession Problems Aren’t Going Away
Earlier this week, The New York Times noted that movements for greater local autonomy appear to be spreading throughout Europe. In some ways, the conflict in Catalonia is just the tip of the iceberg. The Times reports:
Coming on the heels of the Catalan vote, the Lombardy and Veneto referendums are yet another signal of the homegrown conflicts that persist in many of the European Union’s member states. Separatist movements are also simmering in Britain — where voters in Scotland rejected independence in a 2014 referendum but continue to debate the issue — as well as France, Germany, Belgium and Romania.
Like Catalonia — and unlike Scotland — the Lombardy and Veneto regions of Italy are among the wealthiest regions, and send enormous amounts of tax revenue to Rome. Italy’s southern regions, which are significantly poorer than northern Italy, have benefited from Northern wealth ever since Italians were all forced into a single nation-state in the late nineteenth century.
This has never been forgotten by Italians from Veneto, many of whom participated in a referendum in 2014 to declare Independence. Naturally, the Italian government in Rome declared the vote invalid. At the time, however, I interviewed one of the organizers Paolo Bernardini about the referendum. (See “Inside Venice’s Secession Movement.”) At the time, secessionists liek Bernardini appeared to be pursuing immediate and total independence from Rome, while remaining inside the EU:
A tiny majority of Veneto people are in favor both of the EU and of the Euro as a currency. So I envisage a little, rich state, playing a major economic and political role in the EU, a stabilizing role. It will interact naturally with other rich and similar states, Bavaria (still part of Germany), Austria, and the Netherlands. It will be a Finland in the Adriatic.
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Krugman and the “Heroic” Fed
Krugman and the “Heroic” Fed
Once an avid reader of Paul Krugman’s New York Times twice-weekly columns, I admit to rarely even glancing at his work now, since I know that anything he writes is going to have the theme of “Trump evil, Democrats good” each time, and it doesn’t take long to get one’s fill of that, even if one disagrees with Donald Trump’s policies or cringes at some of his public statements. The real problem, however, is that Krugman also manages to endorse unsound and inflationary economic policies as a “solution” to what he calls “Trumpism.”
If one reads Krugman to see what “vulgar” Keynesian fallacies he is promoting, the man rarely disappoints, and a recent column in which he attacks what he believes will be Trump’s future choice to head the Federal Reserve System only burnishes Krugman’s Keynesian credentials. After claiming that Trump has been like a “Category 5 hurricane sweeping through the U.S. government, leaving devastation in his wake,” Krugman then worries if the Fed will suffer the same fate. One only could hope….
Before looking at Krugman’s worshipful commentary on the current Fed leadership, a brief point is in order regarding the rest of official Washington that Trump allegedly has devastated. People like Krugman believe that Washington and its gaggle of Alphabet-Soup agencies regulating nearly every aspect of individual lives is the very source of social stability and economic prosperity in this country – provided there are little or no restraints on what government agents can do. As Krugman and his fellow progressives see it, we need more, not less, bureaucratic control of our lives, and especially control by people of progressive bent with “elite” academic credentials, since they are smarter than the rest of us, so they should be able to tell us what to do.
…click on the above link to read the rest of the article…
Shooting War in North Korea? History says Yes.
Shooting War in North Korea? History says Yes.
Washington insider Jim Rickards says a shooting war with North Korea is inevitable within the next six months. “Nobody wants the war. Nobody is rooting for the war, but it’s coming.”
Rickards believes Kim Jong Un will launch another missile any day. The following explains why.
“In the case of the bombing of North Korea,” Blaine Harden wrote in 2015, “[the American] people never really became conscious of a major war crime committed in their name.”
To most Americans, the North Korean leader is some nutty kid who will only speak to one American, Dennis Rodman, and can’t seem to find a decent barber. To threaten the U.S. of A for no good reason proves he’s a psychopath. North Korea must be a nut-case state.
Donald Trump channeling the American Zeitgeist, calls Un “Little Rocket Man” and threatens to unleash fire and fury on the North Koreans. Trump supporters wonder why Tennessee Senator Bob Corker, chairman of the Senate Foreign Relations Committee, is in the President’s face about all of this. He must just be disloyal. Right?
“I think when you’re in a situation that is as real as this one is and as sensitive as this one is, the lesser public comments you can make, the better,” Corker said. Secretary of State Rex Tillerson, who reportedly called the President a F*****g Moron, was trying to do what business people do and attempt negotiating with Un. Trump tweeted that Tillerson was “wasting his time trying to negotiate with Little Rocket Man.”
A little history provides a clue as to why Un and the North Koreans are steadfast in their wariness of Uncle Sam. Blaine Harden wrote in 2015 for The Washington Post,
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In a Cashless World, You’d Better Pray the Power Never Goes Out
In a Cashless World, You’d Better Pray the Power Never Goes Out
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America: The Dictatress of the World
America: The Dictatress of the World
On July 21, 1821, John Quincy Adams, who would go on to become the sixth president of the United States, warned that if America were ever to abandon its founding principle of non-interventionism in foreign affairs, she might well become the dictatress of the world.
Adams issued his warning in a speech he delivered to Congress, a speech that has gone down in history with the title “In Search of Monsters to Destroy.”
Adams was referring to the fact that the United States was founded as a constitutional republic, one whose military forces did not go around the world helping people who were suffering the horrors of dictators, despots, civil wars, revolutions, famines, oppression, or anything else. That’s not to say that America didn’t sympathize with people struggling to experience lives of freedom, peace, and prosperity. It was simply that the US government would not go abroad to slay such monsters.
Here is how Adams expressed it:
Wherever the standard of freedom and independence has been or shall be unfurled, there will her heart, her benedictions and her prayers be. But she goes not abroad in search of monsters to destroy. She is the well-wisher to the freedom and independence of all. She is the champion and vindicator only of her own. She will recommend the general cause, by the countenance of her voice, and the benignant sympathy of her example.
Adams was summing up the founding foreign policy of the United States, a policy of non-interventionism in the affairs of other nations, specifically Europe and Asia.
And that’s the way the American people wanted it. If Americans had been told after the Constitutional Convention that the US government would be intervening around the world, there is no way that they would have ever approved the Constitution.
…click on the above link to read the rest of the article…
Why Small States Are Better
Why Small States Are Better
Andreas Marquart and Philipp Bagus (see their mises.org author pageshere and here) were recently interviewed about their new book by the Austrian Economics Center. Unfortunately for English-language readers, the book is only available in German. Nevertheless, the interview offers some valuable insights.
Mr. Marquart, Mr. Bagus, you have released your new book „Wir schaffen das – alleine!” (“We can do it – alone!”) this spring. The subtitle says: “Why small states are just better.” To begin: Why are small states generally better than larger ones?
Andreas Marquart (AM): In small states the government is closer to its citizens and by that better observable and controllable by the populace. Small states are more flexible and are better at reacting and adapting to challenges. Furthermore, there is a tendency that small states are more peaceful, because they can’t produce all goods and services by themselves and are thereby dependent on undisturbed trade.
How far can the principle of small states go? You are for example open to the idea of Bavaria seceding from Germany, or Upper Bavaria then from the rest of Bavaria. Ludwig von Mises stopped at the communal level, thinking that the secession of individuals would be unrealistic. You as well? Is there a point when your rule – the more decentralized the better – is not true anymore?
Philipp Bagus (PB): In principle not. We don’t want to arrogate, however, to know the optimal size and to say that this state is too small and that one too big. The optimal size would be determined in competition through the right of secession. If an apartment tower or street secedes from its municipality and then concludes that there are problems which were previously done better, then the secession could be revoked and the two entities reunited.
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