Home » Posts tagged 'cobden centre'

Tag Archives: cobden centre

Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

There Will Be No Recovery Without Production


Through most of the coronavirus crisis, those who have made the case for stay-at-home, reduce or stop work, and narrow the range of retail shopping to assure “social distancing” to reduce the spread of the virus have accused their critics of being more interested in preserving livelihoods than “saving lives.” But there is no preservation of any lives if people are not able to produce and work, without which none of the necessities and other wants of any members of society can be fulfilled.

Listening to many politicians and political pundits, and even some “economists,” you could easily think that 250 years of economic understanding had never happened. One of the oldest of economic fallacies is that money is wealth; that is, the notion that if you create pieces of paper, put some kind of government stamp on it announcing that it is “money,” and spread it around among the members of society, you thereby conjure up from nothing actual material and other forms of wealth.

Money is a medium of exchange, some commodity or other useful thing that is found widely advantageous to use as a convenient intermediary to better facilitate the exchange of other goods and services one for the other when more direct barter transactions are found to be impossible to arrange or more costly to carry out.

Printing Money Does Not Magically Create Goods

But increasing the number of units of the particular item used as money does not, in itself, increase the physical quantities of all the other goods that people want to acquire through exchange to satisfy their wants and desires. These other goods that people actually want must be produced, manufactured, transported and made ready in the forms and at the places desired by members of society.

…click on the above link to read the rest of the article…

How to Maintain a Bull Market After Coronavirus


Everyone thinks they know the cause and effect of the Federal Reserve’s response to crises such as 2008 and 2020. The Fed prints money to buy assets. This increases the quantity of money. And this causes prices to rise. The Fed wants this, because it thinks that inflation eases the burden on debtors. The mainstream wants this, because they have been brainwashed into thinking that inflation causes good effects such as employment. The critics decry this, because they see inflation as a tax.

This view is not even wrong.

The dollar is not money. It is just credit. And it’s not printed. It’s borrowed. An increase in the quantity of it does not necessarily cause commodity and consumer prices to rise. Just look at not one, but two drops in the price of oil. And not small drops, but epic collapses. Starting in June 2014, the price began to fall from $108. By January 2016, it had dropped to $26, a crash of 76%. Then it rose for a whole, hitting $77 by October 2018. It has been downward since then, to $66 this January, or -14%. It’s now $25, which is a further loss of 62%. This is not counting the brief plunge to -$38 on April 20—yes, those who had oil were obliged to pay someone to take it off their hands (thus debunking the notion that oil is like gold).

In other words, this not-even-wrong theory predicts a didn’t-even-happen price hike.

When a bank, pension fund, or investor sells a bond to the Fed, they do not go out and buy consumer goods. They buy another asset. This is why the result is not rising consumer prices, but rising asset prices.

…click on the above link to read the rest of the article…

It’s Only Paper


The response to the virus has added a new mechanism of capital consumption to the many we have documented over the years. Businesses are shut down, yet they continue to incur expenses. There is a popular misconception out there that this is merely a paper loss. One can almost picture a neutron bomb that somehow wipes out only paper, leaving all the physical assets and plant unscathed. It’s a pleasant fantasy. And it’s quite a popular one—not only amongst all the usual suspects, but even an Austrian school economist of our acquaintance asserted it.

As an aside, this illustrates that, too often, economists are unfamiliar with business. The economist looks at a closed restaurant and thinks there’s no reason why this restaurant can’t be mothballed for a day, a week, a month, or a year. The owner of the restaurant would object that he’s still paying certain expenses, even if he’s laid off all of his staff. And the economist retorts, “That’s just paper!”

The economist—and politicians—are tempted to think that the government and its central bank can restore the lost paper capital by extending a loan, or even doling out free money. This is simply not true.

One thing should be bloody clear: whatever expenses this restaurant pays, is a transfer of real resources from the restaurant to the recipients. Those recipients are buying food, fuel, clothing, shelter, etc. It’s not just paper.

Looking deeper into the restaurant, we see that, even when it’s closed, it’s still burning some electricity (even if not as much as when it’s operating). There’s insurance premiums. And building maintenance. Over time, exposure to sun, wind, rain, and snow damages the roof, windows, and even the walls.

…click on the above link to read the rest of the article…

How the GDP Framework Creates the Illusion That By Means of Money Pumping the Central Bank Can Grow an Economy


In response to a weakening in the yearly growth rate of key economic indicators such as industrial production and real gross domestic product (GDP) some commentators have raised the alarm of the possibility of a recession emerging.

Some other commentators are dismissive of this arguing that the likelihood of a recession ahead is not very high given that other important indicators such as consumer outlays as depicted by the annual growth rate of retail sales and the state of employment appear to be in good shape (see charts).

Most experts tend to assess the strength of an economy in terms of real gross domestic product (GDP), which supposedly mirrors the total amount of final goods and services produced.

To calculate a total, several things must be added together. In order to add things together, they must have some unit in common. It is not possible however to add refrigerators to cars and shirts to obtain the total amount of final goods.

Since total real output cannot be defined in a meaningful way, obviously it cannot be quantified. To overcome this problem economists employ total monetary expenditure on goods, which they divide by an average price of goods. However, is the calculation of an average price possible?

Suppose two transactions are conducted. In the first transaction, one TV set is exchanged for $1,000. In the second transaction, one shirt is exchanged for $40. The price or the rate of exchange in the first transaction is $1000/1TV set. The price in the second transaction is $40/1shirt. In order to calculate the average price, we must add these two ratios and divide them by 2. However, $1000/1TV set cannot be added to $40/1shirt, implying that it is not possible to establish an average price.

 …click on the above link to read the rest of the article…

Do Banks Require Savings to Accommodate Demand for Lending?


There is an emerging view held by many commentators that it is banks and not the central bank that are key for the expansion of money. This way of thinking is promoted these days by the followers of the post Keynesian school of economics (PK).[1] In a research paper by the Bank of England’s Zoltan Jakab and Michael Kurnhof, they suggest that

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations.[2]

It seems that for the researchers at the Bank of England and PK followers the key for money creation is demand for loans, which is accommodated by banks increasing lending. In this framework, banks do not have to be concerned with the means of lending, all that is necessary here that there is a demand for loans, which banks are going to accommodate i.e. demand creates supply.

According to the Bank of England researchers,

In the real world, the key function of banks is the provision of financing, or the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor. The bank therefore creates its own funding, deposits, in the act of lending, in a transaction that involves no intermediation whatsoever. Third parties are only involved in that the borrower/depositor needs to be sure that others will accept his new deposit in payment for goods, services or assets. This is never in question, because bank deposits are any modern economy’s dominant medium of exchange.[3]

 …click on the above link to read the rest of the article…

The Ghost of Failed Banks Returns


Last week’s failure in the US repo market might have had something to do with Deutsche Bank’s disposal of its prime brokerage to BNP, bringing an unwelcome spotlight to the troubled bank and other foreign banks with prime brokerages in America. There are also worrying similarities between Germany’s Deutsche Bank today and Austria’s Credit-Anstalt in 1931, only the scale is far larger and additionally includes derivatives with a gross value of $50 trillion.

If the repo problem spreads, it could also raise questions over the synthetic ETF industry, whose cash and deposits may face escalating counterparty risks in some of the large banks and their prime brokerages. Managers of synthetic ETFs should be urgently re-evaluating their contractual relationships.

Whoever the repo failure involved, it is likely to prove a watershed moment, causing US bankers to more widely consider their exposure to counterparty risk and risky loans, particularly leveraged loans and their collateralised form in CLOs. The deterioration in global trade prospects, as well as the US economic outlook and the likelihood that reducing dollar interest rates to the zero bound will prove insufficient to reverse a decline, will take on a new relevance to their decisions.

Problems under the surface

Last week, something unusual happened: instead of the more normal reverse repurchase agreements, the Fed escalated its repurchase agreements (repos). For the avoidance of doubt, a reverse repo by the Fed involves the Fed borrowing money from commercial banks, secured by collateral held on its balance sheet, typically US Treasury bills. Reverse repos withdraw liquidity from the banking system. With a repo, the opposite happens: the Fed takes in collateral from the banking system and lends money against the collateral, injecting liquidity into the system. The use of reverse repos can be regarded as the Fed’s principal liquidity management tool when the banks have substantial reserves parked with the Fed, which is the case today.

 …click on the above link to read the rest of the article…

How Fractional Reserve Banking Contributes to Increases in Money Supply


Some commentators consider fractional reserve banking as a major vehicle for the expansion in the money supply growth rate. What is the nature of this vehicle?

We suggest that fractional reserve banking arises because banks legally are permitted to use money placed with them in demand deposits. Banks treat this type of money as if it was loaned to them.  However, is this really the case?

When John places $100 in a safe deposit box with Bank One he does not relinquish his claim over the $100. He has an unlimited claim against his money. Likewise, when he places $100 in a demand deposit at Bank One he also does not relinquish his claim over the deposited $100. Also in this case John has an unlimited claim against his $100.

Now let’s assume that Bank One takes $50 out of John’s demand deposit without getting any consent from John in this regard and lends this to Mike. By lending Mike $50, the bank creates a deposit for $50 that Mike can now use.

Remember that John still has an unlimited claim against the $100 while Mike has now a claim against $50. What we have here that the Bank One has generated an extra spendable power to the tune of $50. We can also say that Bank One has $150 deposits that are Bank’s One liabilities, which are supported by $100 cash, which are Bank’s One reserves. Note that the reserves comprise 66.7% of Bank’s One deposit liabilities. This example indicates that Bank One is practicing fractional reserve banking.

Although the law allows for this type of practice, from an economic point of view, this results in money out of “thin air” which leads to consumption that is not supported by production, i.e., to the dilution of the pool of real wealth.

 …click on the above link to read the rest of the article…

Inflationary Financing and GDP


This article demonstrates that only government borrowing in the US and UK drives GDP growth. This surprising conclusion is confirmed by long-run statistics. GDP does not represent economic progress, nor does it include the expansion of activity in the non-financial private sector, because that marries up with larger trade deficits, which are excluded from GDP. These findings have important implications for how the global downturn will be reflected in national statistics for the US and UK and the eventual prospects for the dollar and sterling.


We tend to think of a nation’s accounts as being split between government and the private sector. It is for this reason that key tests of a nation’s economic sustainability and prospects for the currency are measures such as a government’s share of a nation’s economic output, and the level of government debt relative to gross domestic product.

While there is value in statistics of this sort, it is principally to give a quick overview in comparisons with other nations. For a more valuable analysis it is always worthwhile following different analytical approaches in assessing the prospective evolution of a currency’s future purchasing power.

Bald comparisons between government and non-government activity are a bad indicator of the true position. A more practical approach would admit that government finances are inextricably linked with the private sector. As Robert Louis Stevenson might have put it, a public servant is a Mr Hyde, who is a non-productive cost on productive society, while being a Doctor Jekyll spending his salary into the private sector as a consumer and contributing to a nation’s production in a demand role. The source of Mr Hyde’s income is the production of others, and increasingly his pay is made up by the debasement of everyone’s currency. Governments also spend money acquiring private sector goods and services, further distorting the overall picture. It all takes some untangling, a long way beyond a simplistic or conventional approach.

 …click on the above link to read the rest of the article…

The Bank’s ‘Stress’ Tests



The purpose of the stress tests is, in essence, to persuade us that the banking system is in good shape on the basis of a make-believe exercise which purports to show what might happen in the event of a supposed severe stress scenario as modelled by a central bank with a dodgy model and a vested interest in showing that the banking system is in great shape thanks to its own wise policies.

We are expected to believe that the central bank has managed to rebuild the banking system despite enormous pressure placed on it by the institutions it regulates, whose principal objective is to run down their capital ratios (or equivalently, maximise their leverage) in order to boost their returns on equity and resulting short-term profits, and never mind the systemic risks and associated costs imposed on everyone else or the damage their high leverage did in the Global Financial Crisis.

These latest Bank of England’s stress tests were published in the Bank’s November 2018 Financial Stability Report, the core message of which was that the UK banking system was doing just great, but that a No-Deal Brexit would be a disaster. Wrong on both counts.

I will focus here on the first issue, the state of the banking system.

In essence, the Bank paints a reassuring picture of bank resilience. The message is that the UK banking system is now so strong that it could sail through another crisis that is more severe than the last one and still be in good shape. How do we know this? Because the stress tests tell us, claims the Bank. However, the truth is that the Bank’s stress tests are useless at detecting bank fragility.

 …click on the above link to read the rest of the article…

Low Yield, No Yield, Negative Yield–Buy Now But Don’t Forget to Sell


  • The amount of negative yielding fixed securities has hit a new record
  • The Federal Reserve and the ECB are expected to resume easing of interest rates
  • Secondary market liquidity for many fixed income securities is dying
  • Outstanding debt is setting all-time highs

To many onlookers, since the great financial crisis, the world of fixed income securities has become an alien landscape. Yields on government bonds have fallen steadily across all developed markets. As the chart below reveals, there is now a record US$13trln+ of negative yielding fixed income paper, most of it issued by the governments’ of Switzerland, Japan and the Eurozone: –

Bloomberg - Negative Yield - 21st June 2019

Source: Bloomberg  

The percentage of Eurozone government bonds with negative yields is now well above 50% (Eur4.3trln) and more than 35% trades with yields which are more negative than the ECB deposit rate (-0,40%). If one adds in investment grade corporates the total amount of negative yielding bonds rises to Eur5.3trln. Earlier this month, German 10yr Bund yields dipped below the deposit rate for the first time, amid expectations that the ECB will cut rates by another 10 basis points, perhaps as early as September.

The idea that one should make a long-term investment in an asset which will, cumulatively, return less at the end of the investment period, seems nonsensical, except in a deflationary environment. With most central banks committed to an inflation target of around 2%, the Chinese proverb, ‘we live in interesting times,’ springs to mind, yet, negative yielding government bonds are now ‘normal times’ whilst, to the normal fixed income investor, they are anything but interesting. As Keynes famously observed, ‘Markets can remain irrational longer than I can remain solvent.’ Do not fight this trend, yields will probably turn more negative, especially if the ECB cuts rates and a global recession arrives regardless.

 …click on the above link to read the rest of the article…

For Those Who Don’t Understand Inflation


This article is a wake-up call for those who do not understand the true purpose of monetary inflation, and do not realise they are the suckers being robbed by monetary policy. With the world facing a deepening recession, monetary inflation will accelerate again. It is time for everyone to recognise the consequences.


All this year I have been warning in a series of Goldmoney Insight articles that the turn of the credit cycle and the rise of American protectionism was the same combination that led to the Wall Street crash in 1929-32 and the depression that both accompanied and followed it. Those who follow statistics are now seeing the depressing evidence that history is rhyming, though they have yet to connect the dots. Understandably, their own experience is more relevant to them than the empirical evidence in history books.

They would benefit hugely from a study of the destructive power of the Smoot-Hawley Tariff Act combining with the end of the 1920s credit expansion. The devastating synergy between the two is what crippled the American and global economy. And as we slide into a renewed economic torpor, contemporary experience tells us the Fed and all the other central banks will coordinate their efforts to restore economic growth, cutting interest rates while accelerating the expansion of money and credit. The current generation of investors argues that this policy has always worked in the past (at least in the past they have experienced) so the valuation-basis for financial assets and property should stabilise and improve.

This brief summary of current thinking in financial markets ignores the fact that a catastrophic tariff-cum-credit-cycle mixture is baking in the economic cake. Crashing government bond yields, reflecting a flight to relative safety, are only the start of it.

 …click on the above link to read the rest of the article…

Debt, Deficits and the Cost of Free Lunches


It seems that every generation or two, fundamental economic ideas are questioned and challenged. The reasonable and important idea that governments should balance their budgets on an annual basis was challenged in the 1930s by the rise of Keynesian Economics and the counter-argument that deficit spending was desirable, if it was used to maintain full employment. Now it seems that any defense or desire for fiscal restraint and less government spending and borrowing are entirely out the window. Fiscal folly is the watchword of the day.

It is not surprising that politicians care little about annual budget deficits and growing debt, since spending money is their way of buying votes from interest groups wanting to eat at the government trough. In America today, it is all a political game by which Democrats and Republicans pander to their respective voting blocs, especially in an upcoming presidential and congressional election year like 2020.

On the one hand, the danger of a looming political crisis is warned about in the media when they point to the coming budgetary circus that will most likely start playing out toward the end of the summer of 2019, when Congress comes back into full session and the new federal budget year that begins on October 1, 2019, will have to be handled in some way.

Budgetary Brinkmanship and Political Plunder

Will the country be facing another federal government shutdown threat like the one in late 2018 and early 2019? Will the national debt limit be raised to permit the spending of the huge sums of money needed to fulfill all the demands for other people’s money above actual taxes collected through the syphoning off of private sector resources by continued government borrowing in the financial markets?

 …click on the above link to read the rest of the article…

Should the Fed Tamper With the Quantity of Money?


Most economists are of the view that a growing economy requires a growing money stock, because economic growth gives rise to a greater demand for money, which must be accommodated.

Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession or, even worse, depression.

For most economists and commentators the main role of the Fed is to keep the supply and the demand for money in equilibrium. Whenever an increase in the demand for money occurs, to maintain the state of equilibrium the accommodation of the demand for money by the Fed is considered a necessary action to keep the economy on a path of economic and price stability.

As long as the growth rate of money supply does not exceed the growth rate of the demand for money, then the accommodation of the increase in the demand for money is not considered as money printing and therefore harmful to the economy.

Note that on this way of thinking the growth rate in the demand for money absorbs the growth rate of the supply of money hence no effective increase in the supply of money occurs. So from this perspective, no harm is inflicted on the economy.

Historically, many different goods have been used as money. On this, Mises observed that, over time,

. . . there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money[1].

 …click on the above link to read the rest of the article…

In Praise of Hayek’s Masterwork


Friedrich von Hayek first published The Road to Serfdom in 1944. His book was subsequently popularised by a condensed version in The Reader’s Digest. This article re-examines Hayek’s theme in the context of today’s economics and politics to see what lessons we can learn from it, and whether personal freedom can survive.

Why personal freedom is important and the treat to it

Destroy personal freedom, and ultimately the state destroys itself. No state succeeds in the long run by taking away freedom from individuals, other than those strictly necessary for guaranteeing individualism. And unless the state recognises this established fact its destruction will be both certain and brutal. Alternatively, a state that steps back from the edge of collectivism and reinstates individual freedoms will survive. This is the theoretical advantage offered by democracy, when the people can peacefully rebel against the state, compared with dictatorships when they cannot.

Nevertheless, democracies are rarely free from the drift into collectivism. They socialise our efforts by taxing profits excessively and limiting free market competition, which is the driving force behind the creation and accumulation of personal wealth and the advancement of the human condition. At least democracies periodically offer the electorate an opportunity to throw out a government sliding into socialism. A Reagan or Thatcher can then materialise to save the nation by reversing or at least stemming the tide of collectivism.

Dictatorships are different, often ending in revolution, the condition in which chaos thrives. If the governed are lucky, out of chaos emerges freedom; much more likely they face more intense suppression and even civil war. We remember dictatorships through a figurehead, a Hitler or Mussolini. But these are just the leaders in a party of like-minded statists.

 …click on the above link to read the rest of the article…

Debasing the Baseless–Modern Monetary Theory


  • Populist politicians are turning to Modern Monetary Theory
  • Fiscal stimulus has not led to significant inflation during the last decade
  • MMT is too radical to be adopted in full but the allure of fiscal expansion is great
  • Asset markets will benefit over the medium-term

A recent post from the Peterson Institute – Further Thinking on the Costs and Benefits of Deficits – follows on from the Presidential Lecture given by Olivier Blanchard at the annual gathering of the American Economic Association (AEA) Public Debt and Low Interest Rates. The article discusses a number of issues which are linked to Blanchard’s speech: –

  1. Is the political system so biased towards deficit increases that economists have a responsibility to overemphasize the cost of deficits?
  2. Do the changing economics of deficits mean that anything goes and we do not need to pay attention to fiscal constraints, as some have inferred from modern monetary theory (MMT)?
  3. You advocate doing no harm, but is that enough to stabilize the debt at a reasonable level?
  4. Isn’t action on the deficit urgent in order to reduce the risk of a fiscal crisis?
  5. Do you think anything about fiscal policy is urgent?

Their answers are 1. Sometimes, although they question whether it is the role of economists to lean against the political wind. 2. No, which is a relief to those of a more puritanical disposition towards debt. The authors’ argument, however, omits any discussion of the function of interest rates in an unfettered market, to act as a signal about the merit of an investment. When interest rates are manipulated, malinvestment flourishes. They propose: –

 …click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
Click on image to purchase