Money-Supply Growth Drops Again — Falls to 108-Month Low
Mario Draghi’s Fatal Conceit
On 23 August 2017, the president of the European Central Bank (ECB) gave a speech titled “Connecting research and policy making” at the annual assembly of the winners of the Nobel Price for Economics in Lindau, Germany.1 What Mr Draghi talked about on this occasion — and especially what he didn’t talk about — was quite revealing.
Any analysis of the causes of the latest financial and economic crisis is conspicuously absent from Mr Draghi’s remarks. One gets the impression that the crisis came basically unexpected, out of the blue. There is no mention of the role of central banks, the monopoly producers of unbacked paper (or: fiat) money, played for the crisis.
No word that central banks had for many years manipulated downwards interest rates — accompanied by an excessive increase in credit and money supply — causing an unsustainable “boom.” When the bust set in — triggered by the spreading of the US subprime crisis across the globe — the ugly consequences of this central bank monetary policy came to the surface.
In the bust, many governments, banks and consumers in the euro area found themselves financially overstretched. The economies of Southern Europe especially do not only suffer from malinvestment on a grand scale, they also found themselves in a situation in which they have lost their competitiveness.
Mr Draghi, however, doesn’t deal with such unpleasant details. Instead, he lets his audience know how well the ECB pursued a policy of "crisis solution." His narrative is straightforward: Without the ECB’s bold actions, the euro area would have fallen into recession-depression, perhaps the euro area would have broken apart.
The analogy to such a line of argumentation would be praising a drug dealer, who provides the drug addict (who became a drug addict because of him) with just another shot. Repeated consumption of drugs does not heal but damages drug addict. Who would applaud what the drug dealer does? Likewise: would it be appropriate to praise the ECB’s action?
Mr Draghi presents himself as a fairly modest, intellectually ‘undogmatic’ central bank president stressing the importance of the insights produced by economic research for real life monetary policy making (thereby dutifully applauding the output of the economics profession). But the policy maker’s approach is far from being scientifically impartial.
Draghi's Flawed Methods
Today’s economics research — as it is pursued, and taught, by leading mainstream economists — rests on a scientific method that is borrowed from natural science and builds on positivism-empiricism-falsificationism.2 This approach, used in economics, does not only suffer from logical inconsistencies, its embedded skepticism and relativism has, in fact, has let economics astray.
Under the influence of positivism-empiricism-falsificationism economic theory – in particular monetary theory and financial market theory – has become the intellectual stirrup-holder of central banking, legitimizing the issuance of fiat money, the policy of manipulating the interest rate, the idea of making the financial system ‘safer’ through regulation.
In this vein, Mr Draghi praises especially the independence of central banks — for it would shield central bankers from destabilizing political outside influence. One really wonders how this argument — one-sided as it is — could find acceptance, especially in view of the fact that independent central banks have caused the great crisis in the first place.
The Central Bank's Many Friends
Why is there hardly any public opposition to Mr Draghi’s narrative? Well, a great deal of experts on monetary policy — coming mostly from government sponsored universities and research institutes — tends to be die-hard supporters of central banking. The majority of them would not find any fundamental, that is economic or ethic, flaw with it.
These so-called “monetary policy experts,” devoting so much time and energy for becoming and remaining an expert on monetary policy, unhesitatingly favor and accept without reservation the very principles on which central banking rests: the state’s coercive money production monopoly and all the measures to assert and defend it.
The upshot of such a mindset is this: “Once the apparatus is established, its future development will be shaped by what those who have chosen to serve it regard as its needs,”3 as F.A. Hayek explained the irrepressible expansionary nature of a monopolistic government agency – like a central bank.
Experts, keenly catering to the needs of the state and the banks, will make monetary policy increasingly complex and incomprehensible to the general public. Just think about the confusing abbreviations the ECB uses such as, say, APP, QE, CBPP, OMT, LTRO, TLTRO, ELA etc.4 In this way central bankers effectively sneak themselves out from public and parliamentary control.
Has the ECB Violated its Mandate?
It comes therefore as no surprise Mr Draghi hails “non-standard policy measures” such as quantitative easing through which the central bank subsidizes financially ailing governments and banks in particular. Mr Draghi, however, does not leave it at that. He also suggests that monetary policy should shake off remaining restrictions that hamper policy maker’s discretion:
[W]hen the world changes as it did ten years ago, policies, especially monetary policy, need to be adjusted. Such an adjustment, never easy, requires unprejudiced, honest assessment of the new realities with clear eyes, unencumbered by the defence of previously held paradigms that have lost any explanatory power.
These remarks come presumably because the German Constitutional Court has found indications that the ECB’s government bond purchases may violate EU law and has asked the European Court of Justice to make a ruling. The German judges say that ECB bond buys may go beyond the central bank's mandate and inhibit euro zone members' activities.
The issue is no doubt delicate: If the ECB is prohibited from buying government bonds (let alone reverse its purchases), all hell may break loose in the euro area: Many government and banks would find it increasingly difficult to roll-over their maturing debt and take on new loans at affordable interest rates. The euro project would immediately find itself in hot water.
Without a monetary policy of ultra-low interest rates and bailing out struggling borrowers by printing up new money (or promising to do so, if needed) the euro project would already have gone belly up. So far the ECB has indeed successfully concealed that the pipe dream of successfully creating and running a single fiat currency has failed.
The crucial question in this context is, however: What has changed in economics in the last ten years? Unfortunately, economists that follows the doctrine of positivism-empiricism-falsificationism feel encouraged to question, even reject, the idea that there are immutable economic laws, preferring the notion that ‘things change’ that ‘everything is possible’.
However, sound economics tells us that there are iron laws of human action. For instance, a rise in the quantity of money does not make an economy richer, it merely reduces the marginal utility of the money unit, thus reducing its purchasing power; or: suppressing the interest rate through the central bank must result in malinvestments and boom and bust.
In other words: Sound economics tells us that central bankers do not pursue the greater good. They debase the currency; slyly redistribute income and wealth; benefit some groups at the expense of others; help the state to expand, to become a deep state at the expense of individual freedom; make people run into ever greater indebtedness.
What central bankers really do is cause a "planned chaos." Unfortunately, the damages they create — such as, say, inflation, speculation, recession, mass unemployment etc. — are regularly and falsely attributed to the workings of the free market, thereby discouraging and eroding peoples’ confidence in private initiative and free enterprise.
The failure of such interventionism — of which central bank monetary policy is an example par excellence — does not deter its supporters. On the contrary: They feel emboldened to pursue their interventionist course ever more boldly and aggressively to achieve their desired objectives. Mr Draghi made a case in point when he said in July 2012:
“[W]e think the euro is irreversible” and “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”5 Hayek’s warning in his book Fatal Conceit (1988) goes unheard: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."6
Mr Draghi’s speech should not convince us that monetary policy rests on sound economics, or that the ECB works for the greater good. If anything, it shows that economics has been twisted and deformed to service the needs of the state and its central bank – which increasingly erodes what little is left of the free market to keep the fiat money system going.
Holding up the fiat euro will result in a coercive redistribution of income and wealth among people, within and across national borders, to an extent historically unprecedented in times of piece. As a tool of an effectively anti-democratic policy, the single European currency will remain a source of interminable conflict, injustice, and it will be a drag on peoples’ prosperity.
- 1. See Draghi, M., The interdependence of research and policymaking, speech at the Lindau Nobel Laureate Meeting, Lindau, Germany, 23 August 2017.
- 2. For a critical analysis see Hoppe, H.-H. (2006), Austrian Rationalism in the Age of the Decline of Positivism, in: The Economics and Ethics of Private Property. Studies in Political Economy and Philosophy, 2nd edition, Ludwig von Mises Institute, Auburn, US Alabama, pp. 347 – 379.
- 3. Hayek, F. A. v. (1960), The Constitution of Liberty, The University of Chicago Press, Chicago, p. 291.
- 4. APP = Asset Purchase Programme, QE = quantitative easing (issuing new money by purchasing bonds), CBPP = Covered Bond Purchase Programme, OMT = Outright Monetary Transactions, LTRO = Long-term Refinancing Operations, TLTRO = Targeted Long-term Refinancing Operations, ELA = Emergency Liquidity Assistance.
- 5. Draghi, M., Verbatim of the remarks made by Mario Draghi, speech held at the Global Investment Conference in London, 26 July 2012.
- 6. Hayek, F. A. v. (1988), Fatal Conceit. The Errors of Socialism, edited by W. W. Bartley, III, Routledge, London, p. 76.
Money Supply Growth Falls Again, Dropping to 105-Month Low
Myths Behind the War on Cash
The attacks on physical cash from a phalanx of economists, central bankers, commercial banks, and politicians have not diminished in recent years. On the contrary, in the face of the worldwide increase in terror attacks, particularly in Europe, and ongoing pressure on public budgets, the cash ban issue is increasingly dragged into the spotlight.
In a highly-recommended study entitled “Cash, Freedom and Crime. Use and Impact of Cash in a World Going Digital,” Deutsche Bank Research demolishes numerous popular myths surrounding cash, inter alia in the context of crime and terrorism. Without cash there are no longer bank robberies at gun point, instead there are now electronic bank robberies. Fraud involving credit cards and ATM cards is massively increasing in Sweden, the country considered the pioneer of the cashless society. The argument that adopting a cashless payment system would facilitate the fight against terrorism doesn't hold water either:
As regards terrorism in Europe, an analysis of 40 jihadist attacks in the past 20 years shows that most funding came from delinquents’ own funds and 75% of the attacks cost in total less than USD 10,000 to carry out — sums that will hardly raise suspicions even if paid by card.
Moreover, many terrorists, particularly if they are prepared to risk their own death, won't be deterred by prohibitions, just as stricter gun laws have no impact on people who must use unregistered weapons for their crimes. Often, they are unable to get hold of a weapon by legal means anyway if they have a criminal record. Planned terror attacks are as a rule characterized by a meticulous and careful approach. At best a cash ban might make financing of terrorism more difficult (even that is doubtful), but at the price of subjecting the law-abiding peaceful population at large to even more intrusive surveillance.
Legislators have passed additional regulations in the past 12 months which at least restrict the use of cash; bans of high-denomination banknotes (e.g., the 500 euro note) and (lower) thresholds for legal cash payments. There are however also technological developments that are significantly reducing the transaction costs of cashless payments and are therefore making cash comparatively unattractive.
In Sweden, an app called “Swish” introduced by the country's leading banks has revolutionized cashless payments. To this point, the app has been downloaded 5.5 million times. In the Scandinavian country only 2% of all payments are settled in cash these days.
Sweden's central bank expects that this percentage will decline by another three-quarters to 0.5% by the end of the decade. 900 of the 1,600 bank branch offices in the country no longer have any cash in store.
The academic debate continues unabated. A paper that has recently triggered intense debate is the IMF working paper “The Macroeconomics of De-Cashing,” which was published in March 2017. Its author Alexei Kireyev examines the possible macroeconomic consequences of abolishing cash. His central conclusions are:
- A cashless payment system would make the monetary policy transmission mechanism more efficient, as there would be very little or no cash available anymore. In particular, it would become possible to implement negative interest rates on a broad front, in order to boost consumption.
- Since a decline in cash holdings would go hand in hand with an increase in demand deposits at banks, the banking sector would be able to extend more loans. That would lower the level of interest rates and boost economic growth.
- A sudden increase in the demand for cash is a sign of an imminently impending financial crisis. Shortly before the collapse of Lehman Brothers in September 2008, demand for cash currency increased significantly. That was a sign that bank customers increasingly lost confidence in the solvency and liquidity of commercial banks. This warning signal would no longer be available if cash were abolished.
- A cashless economy makes tax collection easier, as the example of Sweden illustrates.
Regardless of a superficially balanced approach in large parts of the text, the article clearly evinces an underlying bias toward supporting the abolition of cash. Several arguments in the paper are fallacious and represent little more than intellectual kowtowing to the prevailing zeitgeist. Thus a cashless economy is supposedly going to improve “financial inclusiveness” — as every citizen and economic actor would be forced to open a bank account; it would reduce illegal immigration — as employment of illegal immigrants would become more difficult; and it would help protect the environment — because the production of paper or polymers for banknotes has a greater impact on the environment than electronic money.
Whether the given objective of fighting crime and black markets can be realized by banning cash remains a highly controversial issue. Thus, Professor Friedrich Schneider, one of the most renowned experts in the areas shadow economy and tax evasion, shows that a cash ban would reduce illicit employment be a mere 10% and organized crime by less than 5%.
The paper's conclusions ultimately read like a political manual for the abolition of cash by means of salami tactics. In other words, to prevent the population from getting alarmed, it is to be weaned off cash in tolerable doses through a piecemeal approach. Economic incentives for cashless payments are to be put in place, i.e., specifically, fees for cash payments are supposed to be introduced or raised. In our assessment, the most important point though concerns the notion that “de-cashing” would be “critical for the efficiency” of a negative interest rate policy.
Monetary Tightening as "Excessive Monetary Action?"
It's a slow week for the Fed as they gear up for next week's FOMC meeting and subsequent announcement. In the days ahead, there will be much commentary about whether or not the Fed is going to raise rates.
For example Tim Duy, who is always happy to support the Fed's inflationary excesses, is worried about the strength of the economy in the case of "excessive monetary action." What he means by this phrase is not the quadrupling of the Fed's balance sheet since 2008, but rather a small tick upwards in the Federal Funds target rate. He doesn't want the Fed to continue "tightening" and refers to this as excessive action.
This framework of the Fed's letting interest rates rise (by not expanding the money supply by as much as previous) as being excessive action implies that it is somehow less excessive (more "normal") for the Fed to keep interest rates low. This is the exact opposite of the reality of monetary policy in light of monetary theory. In a world without monetary interventionism in which a central bank can simply buy assets (with money created out of thin air) and suppress interest rates, the money supply would tend to remain relatively stable. Interest rates would rise and fall in accordance with the time preferences of lenders and borrowers on the market.
It is the central bank's intervention ("monetary action") that causes interest rates to be forced artificially low. If the Fed let go and stopped "acting," if they let the money supply correct to its natural levels, if they let the malinvestments liquidate, interest rates would likely spike. It is not "excessive monetary action" that characterizes rising interest rates in a recessionary scenario but rather it is the suppression of those interest rates that is the example monetary action.
The Fed letting go of the economy's reigns, the opposite of monetary action, is recessionary because it was the Fed's monetary interventionism which created an artificial economic boom in the first place. Of course, this is not a case against the Fed letting go, for the recession is badly needed so that prices and the capital structure can properly adjust.
The Fed keeps interest rates low by continuing to intervene in the market. That is where the true excessive monetary action lies, and this is the source of our true economic woes.
Money-Supply Growth Fell to an 8-year Low in March
More Fed Talk: Mester, Kashkari, Rosengren
Last Friday featured a handful of Fed speeches, and this week began the same.
Cleveland Fed President Loretta Mester warned against "moving too slow" on interest rake hikes, implicating that she would prefer that the Fed hike faster than the Fed's current "gradual" approach. Mester is not a voting member, and one of her statements was particularly interesting. She said that if the delay in rate hikes was too long, recession could loom. This is not Keynesian orthodoxy, which teaches inflation and recession are mutually exclusive. This is why, for the Keynesians, inflation is always and everywhere the remedy for recession. It is odd to hear a Fed President argue for rate hikes on the basis that not raising them will lead to recession.
Minneapolis Fed President Neel Kashkari spoke optimistically on the prospects for the blockchain. As we mentioned in a previous post, there is much incentive for central banks to adopt and monopolize blockchain technology for the sake of increased control. As the New York Times observed:
For the central banks, the promise of the technology is that it would allow them to track every pound or renminbi on every step of its travels through the financial system in real time — something that is impossible now. The goal would be to make the financial system more transparent, fast, efficient and secure.
So naturally, Kaskari sees great promise in adoption of the technology.
Finally, Boston Fed President Eric Rosengren expressed worry that the economy would overheat unless the Fed moved faster on rate hikes. If the unemployment continued to move too low, this would be a sign of overheating (per the economically fallacious Phillips Curve). That is, Rosengren seemed to argue in the opposite way of Mester, though both support hiking rates at a faster pace than current. Yet, he also expressed his belief that the Fed would someday hit a zero rate of interest and a further expanded balance sheet once again to deal with a future recession.
This gives credence to the idea that the Fed is really pushing to shrink the balance sheet and hike rates so that it can have lots of room to move when the next official recession comes. Such is the state of our "healed" economy.
Money Supply Growth Falls to 17-month Low in February
Monetary Showdown: European Version
We previously mentioned the budding struggle between the Yellen and Trump factions relating to the strength of the dollar and monetary and fiscal policies. It is the monetary status quo versus the populist rhetoric, and the showdown is worldwide. CNBC:
The European Central Bank (ECB) is faced with an unprecedented political challenge this year as key member states prepare to elect new leaders, though not everyone is convinced the central bank has the tools necessary to weather a populist storm.
The CNBC story goes on to explain that the ECB's Mario "whatever it takes" Draghi has unleashed a monetarily "nuclear" option to save the eurozone from the brink of a debt-laden collapse. They've been in crisis mode for four years.
But if the populists take control in France and Marine Le Pen renegotiates their EU membership, another Brexit-Trump moment of official challenge to the monetary establishment would be dealt. And indeed, Maria Demertzis tells CNBC that such victory and challenge to the EU would result in monetary fallout:
"The ECB has several lines of defense if there is a surprise result in the elections this year but if Le Pen is to announce, as she promised, she is going to hold a referendum to quit the EU then I don't see the ECB granting any lines of defense to try and help."
The financial markets worldwide depend heavily on the central bankers giving it all they've got in regards to "accommodative" policies. If the populists continue their success, and the ECB begins to slowdown its monetary efforts in stubborn response, who knows what might happen to the fragile bubbles around the globe.
Central bankers pride themselves in their ability to prop up markets. But regular people just don't care. In fact, worldwide they are boiling mad at the loss of their purchasing power and savings, coupled with their staggering debt levels. They aren't impressed by the self-congratulatory nature of Professional Economists.
And these economists and the bureaucrats they justify didn't even see the populist revolt looming. But now it's here. The showdown builds.
Minouche Shafik: Apologist for the Experts
Minouche Shafik of the Bank of England recently spoke to the Oxford Union in defense of the monetary Experts. The “Experts,” she pointed out, “have come in for a great deal of criticism of late.” She suggests this phenomenon may have something to do with the 2008 financial crisis. She also mentions various currency manipulation and interest rate scandals as possible motivations for public outrage. We applaud her keen insight.
However, she warns, it was due to the Experts that we have “gained about 20 years of life expectancy since 1950,” essentially eradicated polio, seen massive increases in world incomes, experienced a plunge in global poverty, and so on. She also brings up sanitation, roads, and education. Thus, it shouldn’t be surprising that so many decisions have been delegated to experts. Even Caesar (that bastion of freedom) turned to the experts to help him manage the empire.
More specifically to monetary problems, we learn that governments have created independent central banks full of Experts to decide on monetary policy. This was to protect the monetary policy decision making from the influence of politics. Politicians couldn’t adequately run an effective monetary system, so they outsourced it to the Experts. Seriously.
Of course, there’s no mention of how the “experts” got it wrong in 2008, or why we should keep trusting them. We do get some dismissal that the whole thing was a simple “failure of collective imagination of many bright people… to understand the risks to the system.” Presumably, these “bright people” are the experts and one wonders how self-blinded they are to overlook the fact that they caused the very risks they don’t even understand!
The lesson we simpletons are to take from all this is that the experts have everything under control. They are the ones “who sift through all the information and make informed judgments," according to Shafik. We just need to trust them, to keep the faith. Sort of like one of those “let go and let God” kind of things, except the god in this case would be the Experts.
Now, if the reader thinks referring to this special class of officials as “The Experts” is a little creepy, the entire tone of the speech reads the same. She has a self-labeled “agenda” to communicate and speak to the frustrations of the masses in a way that will make them more trusting of what the experts have in store. On one hand, it's the same ancient need of the regime to maintain control via propaganda. But on a more optimistic note, perhaps these speeches are signs of a concerned regime that is aware of an angry populace.
We don't want their expertise, thank you very much. In the words of Mises:
There is no other planning for freedom and general welfare than to let the market system work. There is no other means to attain full employment, rising real wage rates and a high standard of living for the common man than private initiative and free enterprise.