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The Austrian School Warned, the ECB Didn’t Listen
The Austrian School Warned, the ECB Didn’t Listen
Looking at the current situation, one can easily perceive that our economic environment is not in the best condition. The whole of Europe is suffering from an economic stagnation, if not in some countries even a slowdown, that could very well turn into an economic recession sooner than later if appropriate measures are not taken to restructure many parts of our monetary system. The US could start experiencing the same effects soon, as we can observe from current trends on employment and productivity. Short-sighted economic policy, as that of President Trump asking the Fed for lower interest rates, or the ECB’s loose monetary policy (necessary in great part due to the lack of structural reforms by European governments), has severe effects -mostly that it only works in the short term, and leaves a tremendous economic hangover, composed of huge debt burdens and skyrocketing deficit levels.
The Austrian Business Cycle Theory (ABCT) can also shed some light on the situation in Europe by looking at how the European Central Bank has acted over the last decade, and how its actions, even if they had mild positive economic effects in the short term, are now slowing down productivity growth, impeding economic reforms, and sending countries into debt oceans – and, thus, finally, potentially accelerating the economic slowdown.
The ABCT is an economic theory primarily developed by the Austrian School of Economics from the 19th century onwards, mainly by Friedrich Hayek and Ludwig von Mises. Briefly explained, this theory is based on the idea that a tinkering with the interest rates, leading to excessive increases in the money supply of a country, by a central bank or through fractional reserve banking, inevitably creates a cycle of economic booms and busts.
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How Is Negative Interest Possible?
HOW IS NEGATIVE INTEREST POSSIBLE?
Germany has recently joined Switzerland in the dubious All Negative Club. The interest rate on every government bond, from short to 30 years, is now negative. Many would say “congratulations”, in the belief that this proves their credit risk is … well … umm … negative(?) And anyways, it will let them borrow more to spend on consumption which will stimulate … umm… well… all of the wasteful consumption for which governments are rightly infamous.
While those who are about to borrow may find cause to cheer (as opposed to those who have already borrowed, at higher rates, who are now disadvantaged by this move), the savers are harmed. How can anyone save in an environment where savings has a cost?
John Maynard Keynes called for the “euthanasia of the rentier”. Congratulations, Germany, we say in all sarcastic seriousness. You have gone even beyond Keynes vicious idea. Your rate is now negative!
The Preference of the Savers
Instead of writing more on the destructiveness of this, we want to tackle a different question today. How is this possible? What are the mechanics? Why don’t savers rebel?
We wrote about the Crime of ’33 a few months ago, and it’s worth re-reading before going on. 1933 is when President Roosevelt made the dollar irredeemable. Prior to that, if you didn’t like the interest rate, you could sell the bond and hold gold coins instead. The gold coin has no default risk. And, back then—in the gold standard–it had no price risk.
Today one can own gold, to avoid default risk. This is a big part of why gold is now $1,500. But one takes price risk. And price volatility to be is considered a feature, not a bug, by the gold bugs!
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Serious Advice
SERIOUS ADVICE
“Given all this, what do MPs do all day? Media manipulation, not operational planning on priorities.
“Unsurprisingly, most senior MPs in all three parties are locked into a game in which they spend most of their time on a) launching gimmicks, and b) coping with crises. These two forms of activity are closely related. The only widely understood model of activity in Westminster (and one which fits well psychologically with the desire for publicity) is a string of gimmicks aimed to manipulate the media (given the label ‘strategy’ to make it sound impressive) which are announced between, and in response to, media crises, some of which are trivial and some of which reflect structural problems. Many, drawing perhaps only on the bluffing skills rewarded by PPE, have no idea what else to do.
“Powerful people rush from meetings about the latest gimmick they are to announce, to meetings about the latest cockup for which they need to try to dodge the blame (possibly caused directly by a previously announced gimmick), to the TV studio, to dinner parties, where they gossip about either a) the daily crisis, or b) vague speculations about the distant future (and give overconfident predictions that are usually wrong but which they later reimagined to have been right – ‘as I’ve always said…’). Ministers’ time is dominated by unfocused panic about the media environment – not focused urgency about the most important problems.
“These gimmicks have obvious costs in the form of money wasted and the ostensible goal unfulfilled. They also have indirect costs that are often higher. 1) They divert the bandwidth of senior people from serious issues. (For example, dealing with No10 gimmicks diverted DfE ministers, spads, and officials from focusing on serious issues such as child protection.) 2) Once announced, they can easily trigger a set of further stupid decisions as the system attempts to evade the humiliation of the gimmick failing.
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The Financial War Escalates
THE FINANCIAL WAR ESCALATES
Behind the scenes, the financial war between America and China is escalating dangerously into a war to secure global financial resources.
At a time of growing liquidation of dollar assets by foreigners, the US Treasury’s internal analysis will highlight future government funding problems in the light of a developing US recession. This will result in an overdependency on inflationary financing, threatening to destabilise the dollar’s purchasing power. For these reasons, America needs foreign portfolios to invest in US Treasuries, at a time when China also needs them to help finance her infrastructure plans and future development. We face a battle for these funds, and the outcome will determine all our futures.
Introduction
When you see a rash, you should look beyond the skin for a cause. It has been like this with Hong Kong over the last few weeks. On the surface we see impressively organised demonstrations to stop the executive from introducing extradition laws to China. We observe that university students and others not much older are running the demonstrations with military precision. The Mainland Chinese should be impressed.
They are unlikely to see it that way. The build-up of riots against Hong Kong’s proposed extradition treaty with the Mainland started months ago, supported and driven by commentary in the Land of the Free. America is now coming out in the open as China’s adversary, no longer just a trading partner worried by the trade imbalances. And Hong Kong is the pressure point.
This happened before, in 2014. The Chinese leadership was certain the riots in Hong Kong reflected the work of American agencies. The following is an extract translated from a speech by Major-General Qiao Liang, a leading strategist for the Peoples’ Liberation Army, addressing the Chinese Communist Party’s Central Committee in 2015:
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Time to End Monetary Central Planning
Time to End Monetary Central Planning
There is no way to describe current Federal Reserve policy other than as monetary confusion and misdirection. In a nutshell, Janet Yellen and the other members of the Fed’s Board of Governors have no idea what to do. Do they raise certain interest rates over which they have some direct influence? Do they keep them at their current rock bottom levels, as they have for the last six years?
On the one hand, government measured unemployment levels have fallen from their high of over 10 percent at the depth of the recent recession to 5.1 percent in September 2015.
However, there is an alternative measure of unemployment also calculated by the U.S. Bureau of Labor Statistics. It includes not only those currently unemployed and looking for work during the previous four weeks, but also “discourage workers” who have stopped looking for jobs who would be interested in working if they found a suitable employment; and those who are part-time who would prefer to be employed full-time. If these two additional groups are included, the U.S. unemployment rate is 10 percent, double the headline “official” level of unemployment the administration touts as a “positive” sign of the economy’s recovery.
On the other hand, price inflation as measured by the Consumer Price Index seems to be barely rising. According to the Bureau of Labor Statistics, price inflation in August 2015 was .02 percent higher than twelve months earlier.
Again, however, when food and energy prices are subtracted out of the Consumer Price Index to leave what the government statisticians call “core” inflation, prices in August were 1.8 percent higher than a year ago. Certainly not a “galloping” inflation, but not the nearly zero price inflation rate the highline number suggests, particularly since food prices were up 1.6 percent over the year; the “drag” on measured price inflation was all due to a 15 percent decline in energy prices compared to twelve months earlier.
– See more at: http://www.cobdencentre.org/2015/10/time-to-end-monetary-central-planning/#sthash.FAcXDBZp.dpuf
Jackson Hole: Cherry Flavored Cyanide, or Strawberry
Jackson Hole: Cherry Flavored Cyanide, or Strawberry
The Federal Reserve puts on a conference in the idyllic location of Jackson Hole, Wyoming. Of course it’s all about how best to centrally plan our little lives for us, and who is to be sacrificed to whom.
The American Principles Project and the Atlas Network Sound Money Project, provided a much needed alternative in the Jackson Hole Summit. By choosing the same time and place as the Fed, Steve Lonegan capitalized on the publicity. In fact, the #jacksonholesummit hashtag was trending on Twitter the first day of the conference, so it was a big success.
There were many great talks. Larry White observed that the government used to weaken the banks with restrictions, but now does it with privileges (think about that for a moment). MP Kwasi Kwarteng talked about fiscal discipline as a prerequisite for the gold standard. Judy Shelton asked the question that should be on top of everyone’s mind: what if central banks are wrong?
Forget the blah blah of the Fed, this is what the world needs to hear. From the turnout and energy, I believe next year will be even bigger and better.
One idea always comes up in a discussion of sound money. The Fed manages the dollar based on (in theory) unemployment and consumer prices (CPI). Instead, couldn’t it just use the gold price?
In my talk, I explained why not.
A few months ago, the Supreme Court struck down an unjust New Deal era raisin planning board. This committee takes grapes from farmers, to drive up the price. If it later sells the grapes, the farmers may get paid. It’s looting, plain and simple, and the Court rightly tossed it into the dustbin of history.
– See more at: http://www.cobdencentre.org/2015/09/jackson-hole-cherry-flavored-cyanide-or-strawberry/#sthash.0YnAIgIg.dpuf
