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Regular readers of Goldmoney’s Insights should be aware by now that the cycle of business activity is fuelled by monetary policy, and that the periodic booms and slumps experienced since monetary policy has been used in an attempt to manage economic outcomes are the result of monetary policy itself. The link between interest rate suppression in the early stages of the credit cycle, the creation of malinvestments and the subsequent debt dénouement was summed up in Hayek’s illustration of a triangle, which I covered in an earlier article.^[i]

Since Hayek’s time, monetary policy, particularly in America, has evolved away from targeting production and discouraging savings by suppressing interest rates, towards encouraging consumption through expanding consumer finance. American consumers are living beyond their means and have commonly depleted all their liquid savings. But given the variations in the cost of consumer finance (between 0% car loans and 20% credit card and overdraft rates), consumers are generally insensitive to changes in interest rates.

Therefore, despite the rise of consumer finance, we can still regard Hayek’s triangle as illustrating the driving force behind the credit cycle, and the unsustainable excesses of unprofitable debt created by suppressing interest rates as the reason monetary policy always leads to an economic crisis. The chart below shows we could be living dangerously close to another tipping point, whereby the rises in the Fed Funds Rate (FFR) might be about to trigger a new credit and economic crisis.

Previous peaks in the FFR coincided with the onset of economic downturns, because they exposed unsustainable business models. On the basis of simple extrapolation, the area between the two dotted lines, which roughly join these peaks, is where the current FFR cycle can be expected to peak. It is currently standing at about 2% after yesterday’s increase, and the Fed expects the FFR to average 3.1% in 2019.

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

America’s Great Depression and Austrian Business Cycle Theory

January 10, 2018

AMERICA’S GREAT DEPRESSION AND AUSTRIAN BUSINESS CYCLE THEORY

When Murray Rothbard’s America’s Great Depression first appeared in print in 1963, the economics profession was still completely dominated by the Keynesian Revolution that began in the 1930s. Rothbard, instead, employed the “Austrian” approach to money and the business cycle to explain the causes for the Great Depression, and to analyze the misguided and counterproductive policies that were followed in the early 1930s, which, in fact, only intensified and prolonged the economic downturn.

To many of the economists in the early 1960s, Rothbard’s “Austrian” approach seemed out-of-step with the then generally accepted textbook, macroeconomic approach that focused on a highly “aggregate” analysis of economic changes and fluctuations on general output and employment as a whole. There was also the widely held presumption that governments could easily maintain economy-wide growth and stability through the use of a variety of monetary and fiscal policy tools.

Mises, Hayek and the Austrian Theory of Money and the Business Cycle

However, in the early and middle years of the 1930s, the Austrian explanation of the Great Depression was at the forefront of the theoretical and policy debates of the time. Ludwig von Mises (1881-1973), first developed this “Austrian” theory of the causes of inflations and depressions in his book, The Theory of Money and Credit (1912; 2nd revised ed., 1924) and then in his monograph, Monetary Stabilization and Cyclical Policy (1928).

But its international recognition and role in the business cycle debates and controversies in the 1930s were particularly due to Friedrich A. Hayek’s (1899-1992) version of the theory as presented in his works, Prices and Production (1932) Monetary Theory and the Trade Cycle (1933), and Profits, Interest and Investment (1939). A professor of economics at the London School of Economics throughout the 1930s and 1940s, Hayek was, at the time, considered by many to be the main competitor against John Maynard Keynes’s “New Economics” that emerged out of Keynes’s 1936 book, The General Theory of Employment, Interest and Money.

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The International Road to Serfdom

November 29, 2017

The International Road to Serfdom

When a global governing body is the ultimate authority, rather than multiple sovereign nations serving as checks and balances to each other the opportunity for abuse is ripe.

In the previous chapter of The Road to Serfdom, F.A. Hayek spelled out his concerns for the problems facing America in the aftermath of WWII. Moving away from discussing domestic policy, in chapter 15, “The Prospects of International Order” Hayek discusses the grave problems associated with global governance.

Making no effort to downplay the topic of foreign policy, Hayek says:

In no other field has the world yet paid so dearly for the abandonment of nineteenth-century liberalism as in the field where the retreat began: in international relations.”

Hayek has dedicated the majority of his book to explaining why planned economies on a national scale are bound to fail. You can understand his frustration then, when in the wake of World War II there was a bigger push for international governance.

Global Governance Is Not the Answer

As is understandable, there was an overwhelming desire to make sure the atrocities of WWII were never allowed to happen again. Since Germany’s nationalist sentiment had isolated it from the rest of the world prior to WWII, there was a sense that forced globalization would provide the necessary safeguard.

Hayek writes:

That there is little hope of international order or lasting peace so long as every country is free to employ whatever measures it thinks desirable in its own immediate interest, however damaging they may be to others, needs little emphasis now.”

It was easy, after all, for the Third Reich to take full control of the Germany’s economy when all outside influences were cut off.

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

England Inches Down the Road to Serfdom

November 22, 2017

England Inches Down the Road to Serfdom

Hayek’s whole purpose in writing this chapter, “The Totalitarians in Our Midst,” serves as a warning to his readers.

Hayek has spent the last few chapters of The Road to Serfdom explaining the roots and rise of totalitarian governments. In chapter twelve, Hayek highlighted prominent Marxist theorists who would later lay the roots for the German National Socialist party.

Hayek’s whole purpose in writing this chapter, “The Totalitarians in Our Midst,” serves as a warning to his readers. The mass death of WWII had devastated and shocked the world. But unless individuals were able to identify how totalitarianism had taken over Europe in the first place, they would be ill-prepared to prevent it from happening again.

It was for this reason that Hayek uses chapter thirteen to demonstrate to his readers that a similar perversion of truth was already occurring among England’s intellectual elite as had occurred in the leadup to the Third Reich.

Individualism in Danger

England, which, as explained in the last chapter, represented the origin of individualist thought, had steadily been heading down a similar road as Germany had in the decades prior to WWII. While it may have taken a different form, when looked at from the perspective of totalitarianism in all things economic, England, as it stood in 1944, had taken swift strides away from liberalism and instead found itself headed in the direction of complete central authority.

It is for this reason that Hayek’s writing sounds so urgent in this chapter. As fresh as WWII was in the minds of all people, Hayek is urging them to not become complacent. It was not enough to mourn the recent past; they needed to proceed vigilantly and look to the enemies in their own nations.

As Hayek writes:

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Why the Worst Humans Are Able to Rise to Power

November 14, 2017

Why the Worst Humans Are Able to Rise to Power

In chapter ten of The Road to Serfdom, “Why the Worst Get on Top,” Hayek continues to warn about the dangers of planned economies, but with a slightly different approach from earlier chapters.

Stepping into new territory, here we see Hayek not only identifying economic problems but also discussing the very nature of power itself. Specifically, he addresses how totalitarians are able to rise to power and coerce entire populations into absolute despotism.

What is so fascinating about Hayek’s warnings in this chapter is the fact that they were written at a time when the world was desperately trying to make sense of what had just occurred in Germany during WWII. Hitler and the Third Reich were all too fresh in the minds of all mankind, making Hayek’s warnings extraordinarily relevant.

History’s most notorious dictators did not rise to power randomly.

The world was determined to never let that kind of evil loose on civilization again, but as Hayek warned, it is not merely a matter of making sure “good” people get elected to office; it is making sure totalitarianism is rejected at all corners: economic, political, social and all other forms imaginable.

Three Reasons Why

History’s most notorious dictators did not rise to power randomly. And in this chapter of his book, Hayek explains why the most despicable people always end up with political power and why, to paraphrase Lord Acton, absolute power always corrupts absolutely.

Hayek explains:

There are three main reasons why such a numerous and strong group with fairly homogeneous views is not likely to be formed by the best but rather by the worst elements of any society. By our standards the principles on which such a group would be selected will be almost entirely negative.

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

What Hayek Tells Us About the Link Between Ultra-Loose Monetary Policy and Political Instability

November 8, 2017

WHAT HAYEK TELLS US ABOUT THE LINK BETWEEN ULTRA-LOOSE MONETARY POLICY AND POLITICAL INSTABILITY

The European Central Bank will increase the overall volume of its bond purchase program to 2.550.000.000.000 euros by September 2018. The main refinancing rate will remain at zero. Mario Draghi has stressed that this policy shall continue until inflation picks up sustainably (which is unlikely to happen in the foreseeable future). The works of Friedrich August von Hayek (1931, 1944, 1976) help to explain why the tremendous monetary expansion is increasingly causing growing economic and political instability in Europe.

Hayek’s (1931) Production and Prices explains boom and bust with central bank mistakes. During the upswing, the central bank keeps the interest rate too low. Investment projects with comparatively low marginal efficiency are launched, financed by credit creation of the banking sector. Share prices hike, because profit opportunities of enterprises and banks increase, while deposit rates are low. Wages do not rise as long as idle capacities in the labor market exist. As soon as wages start to rise, enterprises lift prices and inflation picks up. When the central bank increases the interest rate to contain inflation, investment projects with low marginal efficiency have to be dismantled. The boom turns into bust. The central bank aggravates the recession by keeping the interest rate too high.

To understand the economic development of the industrialized countries since the mid 1980s Hayek (1931) is important, but two modifications have to be made (Schnabl 2016). In line with Hayek, central banks around the globe have tended to keep interest rates too low during upswings, thereby causing exuberant booms. In contrast to Hayek’s theory, they cut interest rates fast during crisis to avoid painful recessions. In addition, increasingly expansionary monetary policies became visible in rising asset rather than goods prices (see Figure). Therefore, interest rates could converge towards zero and central bank balance sheet could be inflated without inflation targeting central banks being forced to tighten monetary policy.

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

Why the Rule of Law Matters, Even If It Doesn’t Exist

October 26, 2017

Why the Rule of Law Matters, Even If It Doesn’t Exist

Hayek uses the sixth chapter of The Road to Serfdom to discuss the concept of the rule of law.

Young Americans like myself have come of age in a climate where arbitrary rule has steadily become the norm. Civil liberties, once guaranteed by the Bill of Rights, are now conditional; they are regularly disregarded in the pursuit of a specific end.

The war on terror, for example, ushered in an era where the government was given the power, or rather gave itself the power, to do anything it needed in order to keep the country secure. As long as the state’s violations against our inalienable rights were done in the name of national security, or prosperity, they were considered just, necessary even.

The Constitution that was specifically intended to protect the American people against this kind of rule has now just become a list of suggestions. President Bush is even rumored to have referred to it as a “goddamn piece of paper,” when confronted about his refusal to act within its bounds during the height of the War on Terror.

And in the wake of this “anything goes” rhetoric, the War on Terror was and continues to be used to suspend free speech, restrict travel, detain American citizens indefinitely, and even defend the American President’s use of a “secret kill list.”

Hayek and the rest of the world watched Hitler rise to power through legal means.

It was with this jaded view of government restraint that I began reading the Sixth Chapter of The Road to Serfdom. Hayek uses this chapter to dig into the concept of the rule of law.

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

Neoliberalism Was Never about Free Markets

October 14, 2017

From the beginning, it was about watering down classical liberalism.

One of the most accusatory and negative words currently in use in various politically “progressive” circles is that of “neoliberalism.” To be called a “neoliberal” is to stand condemned of being against “the poor,” an apologist for the “the rich” and a proponent of economic policies leading to greater income inequality.

The term is also used to condemn all those who consider the market economy to be the central institution of human society as being against “community,” shared caring, and concern for anything beyond supply and demand. A neoliberal, say critics, is one who reduces everything to market-based dollars and cents and disregards the “humane” side of mankind.

The opponents of neoliberalism, so defined, claim that its proponents are rabid, “extremist” advocates of laissez-faire, that is, a market economy unrestrained by government regulations or redistributive fiscal policies. It calls for the return of the worst features of the “bad old days” before socialism and the interventionist-welfare state attempted to abolish or rein in unbridled “anti-social” capitalism.

The Birth of Neoliberalism: Walter Lippmann and a Paris Conference

He warned of the complementary danger from “creeping collectivism” in the form of the regulatory and interventionist policies.

The historical fact is that these descriptions have little or nothing to do with the origin of neoliberalism, or what it meant to those who formulated it and its policy agenda. It all dates from about eighty years ago, with the publication in 1937 of a book by the American journalist and author, Walter Lippmann (1889-1974), entitled, An Inquiry into the Principles of the Good Society, and an international conference held in Paris, France in August of 1938 organized by the French philosopher and classical liberal economist, Louis Rougier, centered around the themes in Lippmann’s book. A transcript of the conference proceedings was published later in 1938 (in French) under the title, Colloquium Walter Lippmann.

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If You Give the State an Inch, It Will Take a Mile

October 12, 2017

If You Give the State an Inch, It Will Take a Mile

There’s No Such Thing as Neutral Intervention

Humans are imperfect beings. Try as we may, each of us is subject to some degree of inconsistency in our own thought patterns. Even the greatest champions of liberty who have made invaluable contributions to the study of classical liberalism have fallen prey to error. And while these heroes and geniuses may come to an inconsistent conclusion every now and then, our admiration continues.

Hayek wasn’t infallible. And in chapter three of The Road to Serfdom, he makes some arguments in favor of “harmless” market intervention that call for scrutiny.

No Such Thing as Harmless Regulation

As I made my way through chapter three, I did a doubletake after coming across this passage:

To prohibit the use of certain poisonous substances or to require special precautions in their use, to limit working hours or to require certain sanitary arrangements is fully compatible with the preservation of competition.”

In this chapter, Hayek regularly uses the word “competition” to mean free market. He also asserts that “planning” is, in and of itself, the enemy of competition. Hayek argues that not all state action qualifies as “planning” and as an encroachment on “competition.”

Hayek reasons that since these types of regulation do not interfere with the means of production themselves, it is fully compatible with free market capitalism. He has also argued that since these are “blanket” regulations—no one can use these substances— and not individual regulations—only this group can’t use them—they do not inhibit the market’s ability to function freely. In Hayek’s mind, for example, the state limiting the number of widgets you can produce is far more intrusive than outlawing certain harmful substances.

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Do As You’re Told! – The Case For Social Engineering

January 15, 2016

Do As You’re Told! – The Case For Social Engineering

Wherever we turn we are confronted with politicians, political pundits, television talking heads, and editorial page commentators, all of whom offer an array of plans, programs, and projects that will solve the problems of the world – if only government is given the power and authority to remake society in the design proposed.

Even many of those who claim to be suspicious of “big government” and the Washington beltway powers-that-be, invariably offer their own versions of plans, programs, and projects they assert are compatible with or complementary to a free society.

The differences too often boil down simply to matters of how the proposer wants to use government to remake or modify people and society. The idea that people should or could be left alone to design, undertake and manage their own plans and interactions with others is sometimes given lip service, but never entirely advocated or proposed in practice.

In this sense, all those participating in contemporary politics are advocates of social engineering, that is, the modifying or remaking of part or all of society according to an imposed plan or set of plans.

The idea that such an approach to social matters is inconsistent with both individual liberty and any proper functioning of a free society is beyond the pale of political and policy discourse. We live in a time of piecemeal planning and incremental interventionism.

The Reasonableness of Individual Planning

It is worthwhile, perhaps, to question this “spirit of the times,” and to do so in the context of marking an anniversary. Slightly over 70 years ago, on December 17, 1945, the Austrian economist (and much later economics Nobel Prize winner), Friedrich A. Hayek, delivered a lecture at University College in Dublin, Ireland on, “Individualism: True and False.”

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