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Members of the American libertarian movement, particularly extremist preppers, are often associated with a belief that a complete breakdown in society is the only outcome from government economic policies and will lead to complete social disintegration. At the centre of their concerns is monetary destruction, with other issues, such as the erosion of personal freedom and the right to bear arms, important but peripheral. They cite history, particularly the hyperinflationary collapses, from Rome to Zimbabwe, and now Venezuela. They draw on Austrian economic theory, which fans their dislike of government and their expectation of total chaos.

Properly reasoned economic theory certainly reduces the science to one of black and white conclusions, which suits conclusion-jumpers. But the whole point of it is to explain society’s errors, so that they may be corrected. It is only by understanding the errors of state intervention and socialism, both communistic and fascist, that solutions can be found. Solutions then need to be applied, not taken into a mountain or forest retreat never to be implemented.

The real world does not work on black and white economic theories. It progresses along a muddled course, torn between statist mistakes and society’s unending patience with government intervention. Governments are the source of all wars and wealth destruction, but societies tolerate them. Philosophers have argued over this from Plato versus Aristotle onwards, and we are still here, two and a half millennia later, chewing over the same bones.

History records our philosophical chewing, and Man’s continuing conflict with and tolerances of the state. It records the rise and fall of kings, emperors, dictators and governments. Hermits and other preppers come and go, either unrecorded or, like Saint Simeon Stylites, noted as little more than historical footnotes. To future generations, prepping will almost certainly be a bygone curiosity, and humanity will continue despite government suppression.

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Macroeconomics Has Lost Its Way

August 4, 2018

Macroeconomics Has Lost Its Way

The father of modern macroeconomics was Keynes. Before Keynes there were macro considerations, which were firmly grounded in human action, the personal preferences and choices exercised by individuals in the context of their own earnings and profits. In order to give a role to the state, Keynes had to get away from human action and devise a positive management role for central planners. This was the unstated purpose behind his General Theory of Employment, Interest and Money.

To this day, his followers argue that macroeconomics is different from individual actions, and the factors that determine the behaviour of individuals are not the same as those that determine the wider economy. This article explains why it cannot be true, why modern macroeconomic beliefs are fundamentally flawed, and why interventionism has not only failed to produce overall benefits for the wider public, but has been at an unnecessary economic cost.

The basic fallacy

Last week, Martin Wolf (the FT’s chief associate editor and chief economic commentator) presented a programme entitled Economics 101 on BBC Radio 4, in which he raised the question as to whether a democracy can function when voters have little idea of how the economy works and why there has been so little effort to teach economics in schools.^[i] The independent economists interviewed, Larry Summers and Joseph Stiglitz, and Wolf himself are strongly pro-Keynesian, and the programme made no mention of the fact that there are different schools of economic thought. The question as to what information should be given to the public and crammed into the minds of schoolchildren was never addressed, and it was clearly to be the Keynesian view.

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The consequences of leaving the party

June 26, 2016

The consequences of leaving the party

The collective decision of the British electorate is to reject the recommendation of its government, excepting those of its few dissenting ministers, that Britain should remain in Europe.

It is a signal failure of government policy. Above all, it is a failure that undermines the state’s control over ordinary people. Time will tell whether it is just a temporary setback for the world’s economic planners, or the removal of a keystone supporting the whole structure of modern statism.

There are, therefore, two aspects of this development that must be considered, domestic UK politics and the international economic and political consequences.

There can be little doubt that David Cameron and George Osborne the Chancellor are now only caretakers, with the duty of managing a planned withdrawal from Europe until their replacement as executive politicians. The withdrawal will be a lengthy process, which over the next two years at least, will lead to the final, official separation. It is possible there will be attempts by the European elite in Frankfurt and Paris, to come up with proposals to keep Britain in the EU club and to force a second referendum. Any such attempt will fail, because it cannot even be entertained by a caretaker Prime Minister.

David Cameron’s days as Prime Minister are numbered and he now has no real authority. The Conservatives will have to elect a new leader, and the bookies’ favourite is almost certain to be Boris Johnson. He is likely to be elected by the Conservative Party by the end of this year.

Britain’s future will therefore be subject to the policies of a Boris-led government, which it has to be admitted, will have obtained power basically through the failure of the Remain camp to come up with a convincing argument. It was arguably Remain that lost, and not Leave that won.

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The consequences of leaving the party

June 25, 2016

The consequences of leaving the party

The collective decision of the British electorate is to reject the recommendation of its government, excepting those of its few dissenting ministers, that Britain should remain in Europe.

There are, therefore, two aspects of this development that must be considered, domestic UK politics and the international economic and political consequences.

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

Guessing the future without Say’s law

March 26, 2016

Guessing the future without Say’s law

Or some reflections to read over the Easter holidays

With Japanese and Eurozone interest rates becoming increasingly negative, and the Fed backing off from at least some of the planned increases in the Fed funds rate this year, economists are reassessing the interest rate outlook.

Economists lack consensus, with some expecting yet more easing, based on the apparent collapse in cross-border trade last year. The fact that the Bank of Japan and the European Central Bank see fit to pursue increasingly aggressive monetary reflation is taken as evidence of underlying difficulties faced in these key economies. And lingering doubts about the sustainability of China’s credit bubble point to a high risk of a credit-induced slump in the world’s growth engine.

Other economists, citing official US data and relying on the Fed’s statements, point out that unemployment levels have more than satisfied the Fed’s target, and that core inflation has picked up to the point where the Fed would be fully justified to increase interest rates over the course of this year, or risk overheating in 2017.

These two opposite camps conflict in their forecasts, but where they fundamentally differ is in expectations of future economic growth. Far from displaying the highest levels of macroeconomic discipline, their diversity of opinion should alert us that their forecasts may lack sound theoretical foundation. The purpose of reasoned theory is to reduce uncertainty, not promote it. And the explanation for most of the failures behind modern macroeconomic thinking is the substitution of market-based economics by economic planning.

The fact that today’s macroeconomics dismisses the laws of the markets, commonly referred to by economists as Say’s law, explains all. Subsequent errors confirm. The many errors are a vast subject, but they boil down to that one fateful step, and that is denying the universal truth of Say’s law.

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The ECB and John Law

March 21, 2016

The ECB and John Law

Last week, the ECB extended its monetary madness, pushing deposit rates further into negative figures.

It is extending quantitative easing from sovereign debt into non-financial investment grade bonds, while increasing the pace of acquisition to €80bn per month. The ECB also promised to pay the banks to take credit from it in “targeted longer-term refinancing operations”.

Any Frenchman with a knowledge of his country’s history should hear alarm bells ringing. The ECB is running the Eurozone’s money and assets in a similar fashion to that of John Law’s Banque Generale Privée (renamed Banque Royale in 1719), which ran those of France in 1716-20. The scheme at its heart was simple: use the money-issuing monopoly granted to the bank by the state to drive up the value of the Mississippi Company’s shares using paper money created for the purpose. The Duc d’Orleans, regent of France for the young Louis XV, agreed to the scheme because it would provide the Bourbons with much-needed funds.

This is pretty much what the ECB is doing today, except on a far larger Eurozone-wide basis. The need for government funds is of primary importance today, as it was then.

In Law’s day, France did not have a central bank, such as the Bank of England, managing the issue of government debt, let alone a functioning government bond market. The profligate spending of Louis XIV had left the state three billion livres in debt, which was the equivalent of 1,840 tonnes of gold. This was about 85% of the world’s estimated gold stock at that time, at the livre’s conversion rate into Louis d’Or. John Law would almost double that by June 1720, with unbacked livre notes issued by his bank.

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Gold is the only sound money

March 12, 2016

Gold is the only sound money

This article notes that the technical situation for the gold price has sharply improved, to the evident surprise of many mainstream analysts. It discusses possible reasons behind the turnaround, and implications for the future.

The technical situation is shown in the chart below.

Golden Cross

A “golden cross”, with the 55 day moving average crossing above the 200 day moving average with both of them on a rising trend, and the share price above both these moving averages, has now occurred. This is generally taken by traders to indicate the bear trend has reversed, and a bull market is now in place.

More interestingly, this change of direction is combined with a bullish pennant pattern, which commenced on 11th February and completed on 3rd March, taking precisely three weeks. This is shown by the dotted lines. The intraday price movements (not shown) conform exactly to the pattern, and the break-out on 4th March saw high volume with an increase to a record amount of outstanding Comex contracts.

The other technical qualifications for a pennant are also fully satisfied. It follows a sharp rise, is a consolidation lasting no more than three or at most four weeks, volume diminished while the pattern played out (taking Comex volumes as proxy), and the break-out was a resumption of the trend. It therefore appears to be a text-book example.

Pennants give us a price objective, which equates to the preceding rise from its breakout point. This yields a minimum price target of approximately $1400, which with pennants can happen quite quickly. And that helps explain, from a purely technical point of view, the seemingly unstoppable strength in the gold price.

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Out of the mouths of babes….

January 24, 2016

Out of the mouths of babes….

Parents will tell you the most difficult questions to answer sometimes come from their children.

Here are some apparently innocent questions to ask of economists, journalists, financial commentators and central bankers, which are designed to expose the contradictions in their economic beliefs. They are at their most effective using a combination of empirical evidence and simple, unarguable logic. References to economic theory are minimal, but in all cases, the respondent is invited to present a valid theoretical justification for what invariably are little more than baseless assumptions.

A pretence of economic ignorance by the questioner is best, because it is most disarming. Avoid asking questions couched in anything but the simplest logical terms. You will probably only get two or three questions in before the respondent sees you as a trouble-maker and refuses to cooperate further.

The nine questions that follow are best asked so that they are answered in front of witnesses, adding to the respondent’s discomfort. Equally, journalists and financial commentators, who make a living from mindlessly recycling others’ beliefs, can be great sport for an interrogator. The game is simple: we know that macroeconomics is a fiction from top to bottom, the challenge is to expose it as such. If appropriate, preface the question with an earlier statement by the respondent, which he cannot deny; i.e. “Last week you said that…”

Commentary follows each question, which is in bold.

1. How do you improve economic prospects when monetary policy destroys wealth by devaluing earnings and savings?

Central bankers and financial commentators are always ready to point out the supposed merits of monetary expansion, but are never willing to admit to the true cost. You can add that Lenin, Keynes and Friedman agreed that debasing money destroyed wealth for the masses, if the respondent prevaricates. Often politicians will duck the question with the excuse that monetary policy is delegated to the central bank.

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Why the Fed Will Never Succeed

December 24, 2015

Why the Fed Will Never Succeed

The Fed will never succeed in its attempt to manage inflation and unemployment by varying interest rates.

This is because it and its economists do not accept the relationship between, on one side, the money it creates and the bank credit its commercial banks issue out of thin air, and on the other the disruption unsound money causes in the economy. This has been going on since the Fed was created, which makes the question as to whether the Fed was right to raise interest rates recently irrelevant.

Furthermore, it’s not just the American people who are affected by the Fed’s monetary management, because the Fed’s actions affect nearly everyone on the planet. The Fed does not even admit to having this wider responsibility, except to the extent that it might have an impact on the US economy.

That the Fed thinks it is only responsible to the American people for its actions when they affect all nations is an abrogation of its duty as issuer of the reserve currency to the rest of the world, and it is therefore not surprising that the new kids on the block, such as China, Russia and their Asian friends, are laying plans to gain independence from the dollar-dominated system. The absence of comment from other central banks in the advanced nations on this important subject should also worry us, because they appear to be acting as mute supporters for the Fed’s group-think.

This is the context in which we need to clarify the effects of the Fed’s monetary policy. The fundamental question is actually far broader than whether or not the Fed should be raising rates: rather, should the Fed be managing interest rates at all? Before we can answer this question, we have to understand the relationship between credit and the business cycle.
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China and the dollar

October 11, 2015

China and the dollar

With the benefit of hindsight, the two-day devaluation of the yuan in mid-August might have been a masterstroke of strategy.

China executed a financial move that appeared to undermine its own position but instead created trouble for the US; how much is still to be played out. So was the devaluation a well-executed move against the dollar, or are the Chinese authorities as clueless as any other government?

For a clue about how the Chinese might approach these matters, I am indebted to Simon Hunt of Simon Hunt Strategic Services for drawing my attention to a speech by General Qiao Liang, the Peoples Liberation Army’s military strategist, delivered about six months ago. The General makes it clear that China’s external relationships are pursued through financial, not military means. China pits subtle tai chi against America’s brash pugilism. It is therefore quite possible that China’s August devaluation was planned and timed to undermine America’s financial position.

This possibility is disregarded by nearly all financial commentators, who have been fixated on the bursting of China’s credit bubble. This would be a major crisis for a western economy, but it allows China to reallocate economic resources from legacy industries towards the monumental task of developing Asia’s infrastructure with the promise of its future markets.

Regarding the August devaluation as designed to enhance the competitiveness of the Chinese currency is too simplistic. The way to look at it is China actually triggered a wide-spread revaluation of the dollar. By undermining US export markets, China has effectively taken control of America’s interest rate policy from the Fed. She has shown that China, not America, now sets the pace in the global economy. General Qiao made an interesting point in his speech: China’s Alipay alone settled more purchases by value in just one day over China’s “Valentine” holiday last November, than all US online and retail outlets over the three-day Thanksgiving holiday.

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From ZIRP to NIRP

September 26, 2015

From ZIRP to NIRP

The sudden end of the Fed’s ambition to raise interest rates above the zero bound, coupled with the FOMC’s minutes, which expressed concerns about emerging market economies, has got financial scribblers writing about negative interest rate policies (NIRP).

Coincidentally, Andrew Haldane, the chief economist at the Bank of England, published a much commented-on speech giving us a window into the minds of central bankers, with zero interest rate policies (ZIRP) having failed in their objectives.

Of course, Haldane does not openly admit to ZIRP failing, but the fact that we are where we are is hardly an advertisement for successful monetary policies. The bare statistical recovery in the UK, Germany and possibly the US is slender evidence of some result, but whether or not that is solely due to interest rate policies cannot be convincingly proved. And now, exogenous factors, such as China’s deflating credit bubble and its knock-on effect on other emerging market economies, are being blamed for the deteriorating economic outlook faced by the welfare states, and the possible contribution of monetary policy to this failure is never discussed.

Anyway, the relative stability in the welfare economies appears to be coming to an end. Worryingly for central bankers, with interest rates at the zero bound, their conventional interest rate weapon is out of ammunition. They appear to now believe in only two broad options if a slump is to be avoided: more quantitative easing and NIRP. There is however a market problem with QE, not mentioned by Haldane, in that it is counterpart to a withdrawal of high quality financial collateral, which raises liquidity issues in the shadow banking system. This leaves NIRP, which central bankers hope will succeed where ZIRP failed.

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Equity markets and credit contraction

September 13, 2015

Equity markets and credit contraction

There is one class of money that is constantly being created and destroyed, and that is bank credit.

Bank credit is created when a bank lends money to a customer; it becomes money because the customer draws down this credit to deposit in other bank accounts and to pay creditors. It is not money that is created by a central bank; it is money that is created out of thin air by commercial banks to lend. Its contraction comes about when it is repaid, or if a customer defaults.

The recent sharp fall in equity markets is leading to two levels of contraction of bank credit. Brokers’ loans to speculating investors are being unwound from record levels, notably in China and also in the US where in July they hit an all-time record of $487bn. Then there is the secondary effect, likely to kick in if there are further falls in equity prices, when equities held as loan collateral are liquidated. This is when falling stock prices can be so destructive of bank credit, and as the US economist Irving Fisher warned in 1933, a wider cycle of collateral liquidation can ensue leading to economic depression.

Fear of an escalating debt liquidation cycle is always a major concern for central bankers, so ensuring the secondary effect described above does not occur is their ultimate priority. Macroeconomic policy is centred on ensuring that bank credit grows continually, so since the Lehman crisis any tendency for bank credit to contract has been offset by central banks creating money. The bald fact that equity markets have now lost upside momentum and appear to be at risk of a self-feeding collapse will be viewed by central bankers with increasing alarm.

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China chooses her weapons

August 23, 2015

China chooses her weapons

China’s recent mini-devaluations had less to do with her mounting economic challenges, and more to do with a statement from the IMF on 4 August, that it was proposing to defer the decision to include the yuan in the SDR until next October.

The IMF’s excuse was to avoid changes at the calendar year-end and to allow users of the SDR time to “adjust to a potential changed basket composition”. It was a poor explanation that was hardly credible, given that SDR users have already had five years to prepare; but the decision confirming the delay was finally released by the IMF in a statement on Wednesday 19th.

One cannot blame China for taking the view that these are delaying tactics designed to keep the yuan out, and if so suspicion falls squarely on the US as instigators. America has most to lose, because if the yuan is accepted in the SDR the dollar’s future hegemony will be compromised, and everyone knows it. The final decision as to whether the yuan will be included is not due to be taken until later this year, so China still has time to persuade, by any means at her disposal, all the IMF members to agree to include the yuan in the SDR as originally proposed, even if its inclusion is temporarily deferred.

China was first rejected in this quest in 2010 and since then has worked hard to address the deficiencies raised at that time by the IMF’s executive board. That is the background to China’s new currency policy and what also looks like becoming frequent updates on her gold reserves. It bears repeating that these moves had little to do with her domestic economic conditions, for the following reasons:

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Welcome to the world of ZIRP zombies

August 15, 2015

Welcome to the world of ZIRP zombies

Interest rates in the US, Europe and the UK were reduced to close to zero in the wake of the Lehman crisis nearly seven years ago.

Initially zero interest rate policy (ZIRP) was a temporary measure to counter the price deflation that immediately followed the crisis, but since then interest rates have been kept suppressed at the zero bound. It had been hoped that the stimulus of close-to-zero interest rates would also guarantee economic recovery. It has failed in this respect and the low bond yields that result have only encouraged the rapid expansion of government debt.

It is clear that monetary policies of central banks are the problem. Instead of boosting recovery they have simply destroyed the mechanism which recycles savings into capital for production. They have brought about Keynes’s wish, expressed in his General Theory that he “looked forward to the euthanasia of the rentier”, whose function in providing finance for entrepreneurs is to be replaced by the state: entrepreneurs “who are so fond of their craft that their labour could be obtained much cheaper than at present.”[1]

Instead of storing the fruits of his labour in the form of bank deposits to be made available to the investing entrepreneur, the saver is discouraged from saving, instead being forced to speculate for capital gain. In that sense, ZIRP is the logical end-point of Keynes’s ideal.

The mistake is to subscribe to the ancient view that interest is usury and that it only benefits the idle rich, a stance that appeared to be taken by Keynes. What Keynes missed is that interest rates are an expression of time preference, or the compensation for making money available today in return for a reward tomorrow. If you try to ban interest rates by imposing ZIRP, then the vital function of distributing savings in the interests of progress simply ceases. An economy with ZIRP joins the ranks of the living dead.

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China’s 1929 moment

August 2, 2015

China’s 1929 moment

Anyone with a nose for markets will tell you that the Chinese government’s attempt to rescue the country’s stock markets from collapse is far from succeeding.

Bubbles collapse, period; and government interventions don’t stop them. Furthermore, we are beginning to see a crack widen in the foundations of China’s capital markets that could end up undermining the whole economy.

Since the government owns the banking system, some of the knock-on effects will doubtless be concealed. A consequence for China is that domestic financial instability could threaten her current plans for the international development of her currency. Here the timing couldn’t be worse, because in a few months the IMF is due to announce its decision about the inclusion of the renminbi in the SDR*. The odds were in favour of China succeeding in this quest, on the basis that China was deemed to have fulfilled the necessary conditions, and the IMF itself has been supportive.

A 1929-style collapse in China’s stock markets would change this delicate balance. In mainstream macroeconomic theory, the only way China can resolve her excessive financial imbalances is to devalue the renminbi against other SDR currencies, hardly a good start for a new member. The IMF, probably egged on by the Americans, could be forced to defer its decision again, reviewing it in 2020.

This would be a bad outcome, given China has set her sights on joining the IMF’s top table. There can be little doubt that the recent announcement increasing her gold reserves by only 600 tonnes was made in the context of her desire for the currency to be included in the SDR. If she is rejected, China could swing the emphasis more firmly towards gold, which she owns and mines in abundance.

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