Home » Posts tagged 'cobden centre'

Tag Archives: cobden centre

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

Why We Need a Free Market in Money

What is fiat money and what does it do?

This is essential to understand since today’s worldwide unbacked paper, or “fiat,” money regime is an economically and socially destructive scheme—with far-reaching and seriously harmful consequences. There is an answer, though, and this lies in ending the money production monopoly of states.

The Problem of Fiat Money

The US dollar, the Chinese renminbi, the euro, the Japanese yen, the British pound, and the Swiss franc represent fiat money.

Fiat money has three characteristics:

  1. Fiat money is money monopolized by the state’s central bank. It is created by central banks and commercial banks licensed by the state.
  2. Fiat money is mostly produced through bank credit expansion; it is created out of thin air.
  3. Fiat money is dematerialized money, consisting of colorful paper tickets and bits and bytes on computer hard drives.

Fiat money is by no means “harmless.”

Fiat money is inflationary. Its buying power dwindles over time, and history has shown that this entropy is almost as irreversible as gravity. Fiat money makes a select few rich at the expense of many others. The first to get new money benefit to the detriment of those on the bottom rung.

What’s more, fiat money fosters speculative bubbles and capital misallocation, which culminate in crises. This is why economies go through boom and bust cycles. Fiat money lures states, banks, consumers, and firms into the trap of excessive debt. Sooner or later, borrowers find themselves in a deep hole with no way out.

Fiat money is easy to come by, so the government can finance its adventures and misadventures. Easy money; easy come, easy go. And the government keeps growing as it keeps spending…

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

Do Not Trust Governments With the Control of Money

If there one thing that is fairly certain in this life – besides the seeming inescapability of death and taxes – is that once someone is appointed to almost any position in the political and bureaucratic structures of a government they soon discover how important and essential is the organization of which they are a part for the well-being of the nation. The country could not exist without it, along with its increasing budget and expanded authority. This applies to the Federal Reserve, America’s central bank, no less than other parts of government.

The news media has reported that the apparently unlikely appointment of Dr. Judy Shelton to the Federal Reserve Board of Governors probably will be successfully maneuvered through the full Senate confirmation process. Shelton would then sit on the Federal Reserve Board for a 14-year term. Hers has been one of the more controversial nominations to the Fed in recent years, with critics fervently expressing their negative views of her.

For instance, Tony Fratto, a former Treasury official and deputy press secretary under George W. Bush, was recently quoted as saying that Shelton’s appointment would be “a discredit to the Senate and the Fed. It screams. Nothing at all is serious. Not us. Not you. Not them.”

Mainstream Economists Against Anyone for Gold

Back in August of this year, over one hundred academic and business economists issued an open letter to members of the U.S. Senate calling for rejection of her nomination to the Fed. Among those who signed were some economics Nobel Laureates, including Robert Lucas and Joseph Stiglitz. They insisted on her unfitness for such an appointment. Why? They said: “She has advocated a return to the gold standard; she has questioned the need for federal deposit insurance; she has even questioned the need for a central bank at all.”

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

The IMF Chief Economist Sees a Threat to World Economies From a Liquidity Trap

In the Financial Times from November 2 2020, the IMF chief economist Gita Gopinath suggested that world economies at present are likely to be in a global liquidity trap. Gopinath has reached this conclusion because the yearly growth rate of the price indexes has been trending down despite very low interest rates policies. According to the IMF chief economist, central banks have lowered interest rates to below 1 percent and in some countries interest rates are at present negative. In the framework of a liquidity trap, it is held that the ability of central banks to stage an effective defense against various economic shocks weakens significantly. So how then can one resolve the problem of the central banks inability to produce the necessary defense of the economy?

A possible way out of the liquidity trap suggests Gopinath, is to employ aggressive loose fiscal policy. This means an aggressive government spending in order to boost the aggregate demand.

According to Gopinath,

Fiscal authorities can actively support demand through cash transfers to support consumption and large-scale investment in medical facilities, digital infrastructure and environment protection. These expenditures create jobs, stimulate private investment and lay the foundation for a stronger and greener recovery. Governments should look for high-quality projects, while strengthening public investment management to ensure that projects are competitively selected and resources are not lost to inefficiencies.

Furthermore, according to Gopinath,

The importance of fiscal stimulus has probably never been greater because the spending multiplier — the pay-off in economic growth from an increase in public investment — is much larger in a prolonged liquidity trap. For the many countries that find themselves at the effective lower bound of interest rates, fiscal stimulus is not just economically sound policy but also the fiscally responsible thing to do.

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

The Consequences of Budget Deficits For International Trade

In all the economic mayhem ahead, no one is yet thinking of the consequences for trade imbalances. The twin deficit hypothesis informs us that skyrocketing US budget deficits will lead to increasing trade deficits, a situation with serious political consequences. Furthermore, with foreign interests already saturated with dollars and financial assets denominated in them, far from investing their growing surpluses in yet more dollars and dollar-denominated investments, they will become increasingly aggressive sellers.

This article walks the reader through the main issues of international trade in a developing slump and finds worrying parallels with the Wall Street crash and subsequent events. While the parallels are worrying, the major differences between then and now suggest that this time outcomes could be even more economically challenging.

Introduction

Following the presidential election this week, the new President of the United States will face an economic slump. Long before the covid-19 lockdowns, economic and financial developments threatened to undermine both the US economy and the dollar.

The similarities between the situation today and the end of the roaring twenties, and the depression that followed, are enormously concerning. Both periods have seen a stock market bubble, fuelled by bank credit and an artificial monetary stimulus by the Fed. Both periods have experienced an increase in trade protectionism:  In October 1929, the month of the crash, after debating it for months Congress finally passed the Smoot Hawley Tariff Act, raising tariffs on all imported goods by an average of about 20%. In 2019, US trade protectionism against China put a stop to the expansion of international trade. These facts, which should continue to concern us, have been buried by the immediacy of the coronavirus crisis, which is an additional burden for the global economy today compared with the situation ninety years ago.

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

The Demon-Haunted World

“We’ve arranged a global civilization in which most crucial elements profoundly depend on science and technology. We have also arranged things so that almost no one understands science and technology. This is a prescription for disaster. We might get away with it for a while, but sooner or later this combustible mixture of ignorance and power is going to blow up in our faces.”

  • Carl Sagan, The Demon-Haunted World: Science as a Candle in the Dark.

The White Sands Proving Ground sits in the Jornada del Muerto desert, southeast of Socorro, New Mexico. On July 16, 1945, it became the test site for the world’s first nuclear detonation. The Manhattan Project – the race to build the bomb – had started modestly enough six years earlier, but as it gained momentum would go on to employ more than 130,000 people and expend the equivalent of $26 billion in today’s money.

Among the scientists and military men in attendance, there was no consensus as to what the results might be. The physicist Norman Ramsey forecast that the bomb would fail to go off completely. Robert Oppenheimer predicted an explosive yield equivalent to 300 tons of TNT. The Ukrainian-American chemist George Kistiakowsky plumped for 1,400 tons of TNT. The German-American physicist Hans Bethe went for 8,000 tons of TNT. The Polish-born physicist Isidor Isaac Rabi chose 18,000 tons of TNT (he would win the bet).

But the Italian physicist Enrico Fermi proposed a different wager altogether. He darkly suggested two options: given that the atmosphere would ignite, would the blast destroy just the state, or would it incinerate the entire planet ?

Fermi’s prediction was not as outlandish as it sounds today. Earlier in the war, in the spring of 1942, German physicists approached Hitler’s Minister for War Production, Albert Speer, to discuss the possibility of their building a nuclear bomb…

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

Japan Embraced Debt As a Way Out of Its Budget Crisis. It’s Not Working.

The sudden resignation of Japans Prime Minister Shinzo Abe has led to evaluations of his so-called Abenomics. Many have praised Abe’s aggressive monetary policy because the long shopping list of the Bank of Japan (government bonds, corporate bonds, ETFs and real estate investment trusts) has inflated stock and real estate prices (Shirai 2020Financial Times 2020). Concerns remain on the fiscal side since Abe’s consumption tax hikes from 5 percent to 8 percent in 2014 and to 10 percent in 2019 are widely seen as a failure (The Economist 2020). Indeed, Abe resolved Japan’s deep-seated fiscal problems only superficially.

Figure 1: Tax Revenues of Japan’s Central Government

gs

Source: Ministry of Finance, Japan.

The core of the problem is cheap money issued by the Bank of Japan, which had caused a stock and real estate bubble in the second half of the 1980s. While the bubble had inflated tax revenues, its bursting was followed by an unprecedented economic slump during which the corporate and income tax revenues collapsed from 43 trillion yen (approx. 390 billion dollars) in 1990 to 23 trillion yen (approx. 185 billion dollars) in 2012 (Figure 1), when Abe took office.

Figure 2: Social Security Expenditure and Local Allocation Tax as Share of Total Tax Revenues

gs

Source: Ministry of Finance, Japan. Central Government.

At the same time Japan’s aging population ballooned the government contributions to the public pension and health insurance system, from 12 trillion yen (approx. 110 billion dollars) in 1990 to 36 trillion yen (approx. 327 billion dollars) in 2019. In addition, the so-called local allocation tax grants of around 16 trillion yen per year (approx. 145 billion dollars) to the economically exhausted Japanese periphery continued to constitute a heavy burden for the central government. In the wake of the global financial crisis, both together had increased far beyond the central governments’ tax revenues (Figure 2).

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

Can Constant Money Growth Rule Prevent Boom-Bust Cycles?

According to the Nobel Laureate in Economics, Milton Friedman, the key cause of the business cycles is the fluctuations in the growth rate of money supply. Friedman held that what is required for the elimination of these cycles is for central bank policy makers to aim at a fixed growth rate of money supply:

My choice at the moment would be a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money. For this purpose, I would define the stock of money as including currency outside commercial banks plus all deposits of commercial banks. I would specify that the Reserve System should see to it that the total stock of money so defined rises month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, where X is some number between 3 and 5. The precise definition of money adopted and the precise rate of growth chosen make far less difference than the definite choice of a particular definition and a particular rate of growth.[1]

Could however, the implementation of the constant money supply growth rule eliminate economic fluctuations?

Honest money versus money out of “thin air”

Originally, paper money was not regarded as money but merely as a representation of gold. Various paper money receipts represented claims on gold stored with the banks. The holders of paper receipts could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper receipts to exchange for goods and services, these receipts came to be regarded as money.

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

Keynesian Ideas Can Only Make Things Worse

In the New York Times on September 8, 2020, Paul Krugman suggested that

“The CARES Act, enacted in March, gave the unemployed an extra $600 a week in benefits. This supplement played a crucial role in limiting extreme hardship; poverty may even have gone down”.

For Krugman and many economic commentators, it is the duty of the government to support the economy whenever it falls into an economic slump. Following in the footsteps of John Maynard Keynes, most economists hold that one cannot have complete trust in a market economy, which is seen as inherently unstable.  If left free the market economy could lead to self-destruction. Hence, there is the need for governments and central banks to manage the economy. Successful management in the Keynesian framework is done by influencing overall spending.

It is spending that generates income. Spending by one individual becomes income for another individual according to the Keynesian framework of thinking. Hence the more that is spent the better it is going to be. What drives the economy then is spending. If during a recession, consumers fail to spend then it is the role of the government to step in and boost overall spending in order to grow the economy.

In the Keynesian framework of thinking the output that an economy can generate with a given pool of resources (i.e. labour, tools and machinery, and technology) without causing inflation, is labelled as potential output. Hence the greater the pool of resources, all other things being equal, the more output can be generated.

If for whatever reasons the demand for the produced goods is not strong enough this leads to an economic slump. (Inadequate demand for goods leads to only a partial use of existent labour and capital goods).  In this framework then, it makes a lot of sense to boost government spending in order to strengthen demand and eliminate the economic slump.

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

America’s Fiscal Follies Are Dangerously in the Red

The Congressional Budget Office has recently issued a federal “Budget Outlook Update” for the next ten years in the context of the government’s fiscal condition in the face of the coronavirus and Washington’s spending spree. The message: the deficit for fiscal year 2020 is huge, and the national debt is getting bigger, faster than had been projected before America’s lockdowns that brought much of the economy to a halt.

Normally, serious recessionary downturns are the result of central bank monetary mismanagement that generates unsustainable investment and housing booms and bubbles through money, credit and interest rate manipulation. Eventually, the credit expansion house of cards comes tumbling down as various sectors of the economy discover the need for a rebalancing of resource, labor, and capital uses in the face of numerous mismatches between supplies and demands.

The Government Directly Caused the Downturn of 2020

There were many signs that ten years of nearly zero interest rates and a large expansion of bank credit were setting the stage for an eventual “correction” in the economy. However “inevitable” this might have been at some point, there was no indication at the beginning of 2020 that a serious recession was on the immediate horizon. No, what happened in the first half of 2020 had one source and cause only – the coercive commands of the federal and the state governments ordering people to stay at home, limit their shopping trips to politically-approved “essentials,” and not to go to work, as all part of a counterproductive and damaging attempt to stop the spread of the coronavirus.

Instead, its most important outcome was to wreak havoc on not just the U.S. economy, but much of the world’s economy, as well, as most other governments imposed similar compulsory clampdowns on the citizens of their countries.

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

UNIDOS HACIA EL FUTURO

“The markets are the product of 1999 & 2007 hooking up for a one night stand.”
Tweet by Danielle DiMartino Booth (@DiMartinoBooth), 25th August 2020.

“In the middle of the journey of our life, I came to / Myself in a dark wood, for the straight way was lost.”
Dante, Inferno.

“Zoom is now worth more than IBM.”
“I don’t know if that says more about Zoom or IBM.”
Tweets by Morgan Housel (@morganhousel), 31st August 2020.

By the mid 1970s, film director William Friedkin was on a roll. 1971’s The French Connection bagged him an Oscar and widespread critical acclaim; 1973’s The Exorcist became the highest grossing Warner Bros film of all time. How did Friedkin follow up on all this monstrous success ? He decided to adapt Georges Arnaud’s novel The Wages of Fear (Le Salaire de la peur), in which down-on-their-luck truck drivers in Latin America attempt to ferry nitroglycerine across a treacherous mountain range in order to extinguish an oil well fire. The resultant 1977 release was called Sorcerer. It sank more or less with all hands.

Which is a shame, because Sorcerer – or Wages of Fear as it was somewhat unimaginatively titled in the UK (see poster below) – has moments that are pure cinema. The sequence where Roy Scheider and Francisco Rabal pilot their ramshackle truck over a threadbare rope bridge across a river in flood is one of the most extraordinary in film history (and very Werner Herzog). All of which vindicates screenwriter William Goldman’s assessment that in the movie business, nobody knows anything.

Source: https://www.originalfilmart.com/products/sorcerer-quad

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

Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy

In January, the Congressional Budget Office (CBO) released its Budget and Economic outlook for 2020 to 2030. It is horrific reading. Federal budget deficits are projected to rise from $1.0 trillion this year to $1.3 trillion over the next 10 years.

Federal debt will rise to 98% of GDP by 2030, “its highest percentage since 1946,” the CBO says. “By 2050, debt would be 180% of GDP—far higher than it has ever been.” And that was before Covid-19 hit. Now those numbers will be much, much worse.

On top of this, politicians have been announcing grand schemes for further spending: $47 billion on free college tuition, $1 trillion for new infrastructure, $1.4 trillion to write off student loan debt, at least $7 trillion on the Green New Deal and $32 trillion on Medicare for All. By one estimate, these new proposals total an estimated $42.5 trillion over the next decade.

Adding these new spending proposals to the flood of red ink the CBO projects just from following the current path, the federal government is set to face a serious fiscal crisis in the not-too-distant future.

KEEP PRINTING

Or, perhaps not. There is an idea afoot in economics that, as Bernie Sanders’ former economic advisor Stephanie Kelton argues in her new book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, could revolutionize the field in the same way that Copernicus did to astronomy by showing that the earth orbited the sun.

Modern Monetary Theory (MMT) states that “in almost all instances federal deficits are good for the economy. They are necessary.” That being so, we don’t have to worry about this coming deluge of red ink, indeed:

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

Gold and Free Banking Versus Central Banks

gold bars

In spite of the officially declared “independence” of the Federal Reserve from the immediate political control of either Congress or the White House, America’s central bank is, nonetheless, a branch of the U.S. government that is responsible for setting monetary policy, overseeing a variety of banking regulations, and influencing market interest rates. As a result, politics is always present when it concerns the Federal Reserve, as witnessed in the nomination of Dr. Judy Shelton to serve on the central bank’s board of governors.

Dr. Shelton has become a lightning rod for angry opposition, not only due to Donald Trump, who as president of the United States nominated her to fill one of the seven slots on the Federal Reserve’s Board of Governors, but the fact that she has long been a public and vocal advocate for a return to some version of the gold standard as an “anchor” for limiting discretionary policies by the central bank.

Most academic and policy-oriented economists apparently are both flabbergasted and fearful that if she were to serve on the Fed board, she might actually attempt to limit the virtually unrestrained latitude the central bank currently has to seemingly create money and bank credit in practically any quantity, and, in the process, influence the level of interest rates at which banks make money available for borrowing purposes.

What is clearly horrifying to so many in the wide mainstream of the economics profession is the notion of a check on the powers and prerogatives of what amounts to America’s system of monetary central planning. But that is the very point of a commodity-based monetary system such as a gold standard, to limit abuse of the monetary printing press.

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

Explaining the Credit Cycle

EXPLAINING THE CREDIT CYCLE

This article summarises why the credit cycle leads to alternate booms and slumps. It is only with this in mind that they can be properly understood as current economic conditions evolve.

The reader is taken through three monetary models: a fixed money economy, one governed by changes in bank credit, and finally the consequences of central bank intervention.

Classical economics provided the basis for an understanding of the effects of bank credit expansion. The theory, embodied in the division of labour, eluded Keynes, who was determined to justify an interventionist role in the economy for the state.

 Neo-Keynesian policies have been responsible for growing monetary intervention. This article serves as a reminder of the distortions introduced by the credit cycle and why central bank monetary policies are fundamentally destructive of the settled economic order that exists without monetary expansion.

Defining the problem

The credit cycle drives the business, or trade cycle. It should be obvious that changes in the quantity of money, mostly in the form of bank credit, has an effect on business conditions. Indeed, that is why central banks implement a monetary policy. By increasing the quantity of money in circulation and by encouraging the banks to lend, a central bank aims to achieve full employment. Other than quantitative easing, the principal policy tool is management of interest rates on the assumption that they represent the “price” of money.

But there is also a cyclical effect of boom and bust, linked to changes in the availability of bank credit, and so modern central banks have tried to foster the boom and avoid the slump.

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

Money Supply Growth in May Again Surges to an All-Time High

MONEY SUPPLY GROWTH IN MAY AGAIN SURGES TO AN ALL-TIME HIGH

Money supply growth surged to another all-time high in May, following April’s all-time high that came in the wake of unprecedented quantitative easing, central bank asset purchases, and various stimulus packages.

The growth rate has never been higher, with the 1970s the only period that comes close. It was expected that money supply growth would surge in recent months. This usually happens in the wake of the early months of a recession or financial crisis. The magnitude of the growth rate, however, was unexpected.

During May 2020, year-over-year (YOY) growth in the money supply was at 29.8 percent. That’s up from April’s rate of 21.3 percent, and up from May 2019’s rate of 2.15 percent. Historically, this is a very large surge in growth both month over month and year over year. It is also quite a reversal from the trend that only just ended in August of last year, when growth rates were nearly bottoming out around 2 percent. In August, the growth rate hit a 120-month low, falling to the lowest growth rates we’d seen since 2007.

tms1.png

tms

The money supply metric used here—the “true” or Rothbard-Salerno money supply measure (TMS)—is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure of money supply fluctuations than M2. The Mises Institute now offers regular updates on this metric and its growth. This measure of the money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits, traveler’s checks, and retail money funds).

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

Can An Increase In the Demand For Money Neutralize the Effect of a Corresponding Increase in Money Supply?

CAN AN INCREASE IN THE DEMAND FOR MONEY NEUTRALIZE THE EFFECT OF A CORRESPONDING INCREASE IN MONEY SUPPLY?

According to popular thinking, not every increase in the supply of money will have an effect on the production of goods. For instance, if an increase in the supply is matched by a corresponding increase in the demand for money then there will be no effect on the economy. The increase in the supply of money is neutralized so to speak by an increase in the demand for money or the willingness to hold a greater amount of money than before.

What do we mean by demand for money? In addition, how does this demand differ from the demand for goods and services?

Demand for money versus demand for good

The demand for a good is not essentially the demand for a particular good as such but the demand for the services that the good offers. For instance, an individuals’ demand for food is on account of the fact that food provides the necessary elements that sustain an individual’s life and wellbeing.

Demand here means that people want to consume the food in order to secure the necessary elements that sustain life and wellbeing.

Likewise, the demand for money arises on account of the services that money provides. However, instead of consuming money people demand money in order to exchange it for goods and services.

With the help of money, various goods become more marketable – they can secure more goods than in the barter economy. What enables this is the fact that money is the most marketable commodity.

…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