Power & Market
On September 21st, the Fed announced another 0.75 percent rate hike. The target is 3 percent to 3.25 percent. The annual rate of the CPI went down in July and in August, standing at 8.3 percent. If we consider the methodology used in the 1980’s, the CPI also went down in the last months, but it is still above 15 percent, according to Shadow Government Statistics.
This decrease in the CPI is due, partially, to the use of oil from the Strategic Petroleum Reserve and the fact that the monetary aggregates have stopped increasing. Since the Fed is no longer buying government bonds and mortgage-backed securities (MBSs), the monetary base (M0) and its balance sheet are not expanding. In fact, the balance sheet has been slightly contracting since April, and M0 follows the same pattern (chart 1). M1 and M2 also stopped increasing, with a slight contraction since March after a significant increase in 2020 in 2021.
Chart 1 – Fed’s Balance Sheet and M0
Fed’s Balance Sheet (Green); M0 (Red).
Source: St. Louis Fed.
This latest 0.75 percent rate hike took the IORB (Interest Rate on Reserve Balances), which is the main rate that the Fed uses to influence the FFR (Federal Funds Rate), from 2.4 percent to 3.15 percent.
Chart 2 – FFR, IOER and IORB
FFR (Red); IOER (Green); IORB (Orange).
Source: St. Louis Fed.
Jerome Powell stated in March that, if necessary (to contain the CPI), the FOMC would resort to hikes higher than 0.25 percent in future meetings. And, so far, this is what has happened.
As in Chart 1, by the end of July, the Fed's balance sheet had barely shrunk (the Fed's assets were down by less than 1 percent). And, between the peak reached on April 13 and September 21, it shrunk by “only” $148.7 billion. However, the Fed said it will continue to reduce its assets, as announced in May. It also stated that it is determined to bring the CPI back to the 2 percent target and it is committed to continue raising rates by 0.75 percent.
The peak of the FFR in the last rate hike cycle (2015-2018) was 2.4 percent. In December 2018, there was significant turbulence in the US stock market (and started cutting rates in 2019), and in September 2019 there was a crisis in the repurchase market and the Fed started to inject liquidity into it (doing QE and expanding its balance sheet). The FFR reached 2.4 percent again last July and now it stands at 3.15 percent. Does this mean the Fed can continue raising rates without consequences? Unlikely. In the last rate hike cycle, the Fed was not only raising rates, but also shrinking its balance sheet at a higher pace, which further limited the extent to which the Fed could raise rates (since the sale of assets held by the Fed made its prices go down and its interest go up). The Fed began to shrink its balance sheet in late 2017 (and went back to expanding it in September 2019). As for the FFR, the Fed started raising it in December 2015 (but went back to cutting it in H1 2019).
Real interest rates are still negative. Even if we consider the official CPI of 8.3 percent, the real rate is -5.15 percent. In addition, another important factor that that Fed needs to address in order to bring down the CPI is the money supply. In FY 2022, total government spending was $5.35 billion. The government is still spending money on COVID-related “stimulus”, Congress has passed yet another spending bill, and we have yet to see the impact of student debt forgiveness (as the government will have to borrow more to fund it). And let’s not forget that a higher IORB means that the Fed have to pay more interest on bank reserves, which means lower profits for the Fed, which means less of these profits will be given to the government, which means that the government will have a higher budget deficit if it doesn’t raise taxes, or it doesn’t cut spending.
All this means more indebtedness, that is, more bonds issued by the government that can eventually be purchased by the Fed (since, likely, there will not be enough demand for these bonds at the current FFR level, as expenses that the federal government is incurring with interest on debt are increasing). Even in a scenario in which the central bank does not raise rates, the increase in government indebtedness tends to increase interest expenses. But this is compounded when the central bank is raising rates. If the government continues down this path, the Fed will have to decide whether to continue to raise rates (which will increase the government's interest expenses) and to shrink its balance sheet (which means that the Fed will be increasing the supply of bonds, further decreasing their prices and increasing their interest), or to give up on this plan and go back to cutting rates and increase its balance sheet to prevent the government from being unable to finance these expenditures. Historically, the second option is the one chosen by the Fed. It remains to be seen if the current scenario of a higher CPI will be enough for the Fed to break this tradition.
GDP contracted 1.6 percent in Q1 and 0.6 percent in Q2, which constitutes a recession (two consecutive quarters of negative GDP), despite the fact that the government is trying to change this consensus to deny a recession. And the Atlanta Fed has lowered its Q3 GDP growth forecast to 0.3 percent (it's still positive, but it's common for the Atlanta Fed to lower its forecasts as new data comes in). However, it is true that, if we consider a more “official” definition of recession (from the National Bureau of Economic Research – NBER), the US was not in recession at the end of Q2. The NBER, in addition to considering the period of economic contraction that must take place to be considered a recession (more than a few months), considers the diffusion (the contraction must be spread across many sectors of the economy) and the depth of the contraction. And, from December 2021 to the end of Q2, all variables used by the NBER were positive.
Nonetheless, it is undeniable that the economy is contracting (or at least it is barely growing).
The housing market is contracting (although the Fed has not yet reduced its holdings of MBSs; the Fed has only reduced its holdings of government bonds and even slightly increased its holdings of MBSs – chart 3), as mortgage rates go up.
Chart 3 – Assets in the Fed’s Balance Sheet
Total Assets (Purple); MBSs (Red); Government Bonds (Green); Federal Agency Debt Securities (Orange*).
* It is not possible to see the line at this scale, because it is a figure of “only” US$ 2.3 billion.
Source: St. Louis Fed.
Some yield curves are inverted. That is, the difference between the interest rates of bonds of longer maturity and bonds of shorter maturity is negative (usually they should be positive, since bonds of longer maturity must pay more interest as they are riskier than those of lower maturity). Historically, yield curve inversion is a leading indicator of recession (which usually occurs sometime between 6 and 24 months after the inversion). If bond investors expect a recession, they anticipate that the central bank will cut rates. This expectation causes long-term rates (10 or more years) to decrease in relation to those of shorter maturity, inverting the yield curve. Of course, this is not an accurate indicator and does not guarantee that there will be a recession.
Chart 4 – Yield Curves of US Government Bonds
30 Years-10 Years (Blue); 10 Years-5 Years (Orange); 10 Years-2 Years (Green), 10 Years-1 Year (Yellow).
Source: Trading View.
And stock indexes are trending down since last October:
Chart 5 – Stock Indexes
S&P 500 (Blue); Nasdaq (Orange); RUSSEL 2000 (Green); Dow Jones (Yellow).
Source: Trading View.
All these factors are indicators of a weakness in the US economy. The question remains: Will the Fed pivot?
As predicted, Italy made history Sunday, electing its first ever female Prime Minister. Winning a preponderance of the votes cast, the Brothers of Italy’s Georgia Meloni will presumably take the helm of the E.U.’s third largest economy at the head of a coalition right wing government. Facing a daunting economic and geopolitical environment, Meloni’s government-in-waiting hopes its promised mix of policies aimed at supporting households and businesses while toeing the line against Russia will curry favor with Italian voters and the leadership in Brussels.
Or, as CNN and any number of their trusted media allies saw fit to put it in the immediate aftermath: “Georgia Meloni claims victory to become Italy’s most far-right prime minister since Mussolini.”
Cue eye roll.
Much like the also recently victorious Swedish Democrats, the Brothers of Italy and other right-wing populist parties across Europe gave voice to voters’ frustrations over inept policy decisions made by distant elites, whether in the capitals of their respective countries or in Brussels.
In cooperation with the other parties of the coalition, such as the League and Forza Italia, Meloni’s Brothers of Italy proposes supporting the “traditional family unit,” opposing abortion, and securing Italy’s borders, while continuing to support Ukraine in its conflict with Russia.
The last was a particularly contentious point and the subject of much speculation through the spring and summer, when it became clear the Brothers were going to pick up the pieces of the Italian right that had fragmented following the League’s break with the group in 2018. With Europe being absolutely battered by the energy price inflation resultant from sanctions on Russia for its actions in Ukraine, several prominent members of the coalition had voiced a mix of concern, that the sanctions were hurting Italians rather than Russians, and opposition to continuing the policy of the Draghi government, backing continued fighting rather than negotiation.
A full decade of crises has expanded the coercive powers of the E.U. significantly, however. Floating a range of potential carrots over the summer, hinting at a secret plan to hold down Italian bond yields over what is sure to be a terrible winter, by July the Brothers had already effectively made the decision to concede on the major points of European policy in exchange for aid. Apparently not satisfied, or just looking to rub it in, European Commission Chief Ursula von der Leyen let it be known that if the new Italian government after all decided to “go in a different direction” the E.U. “had tools” for applying pressure.
Despite the expressions of public outrage, the comment provoked from, among others League leader Matteo Salvini, the Italy Meloni and her coalition are inheriting is a mess. From government finances to demographic oblivion, sky-rocketing prices, waves of incoming migrants and a structurally disadvantaged private sector, with a possible five years in power stretching out before them the new government in Rome will likely try to put off any confrontation with Brussels as the ECB is the only thing standing between Italians and freezing and the government and its financial solvency.
As such, little is likely to change. Voters seemed to know as much. For all the media hysteria, Italians weren’t flocking to the polls: an historic low 64 percent turned out.
One who didn’t, according to the Wall Street Journal, was a café owner whose restaurant had survived both World Wars and COVID but was now considering closing up permanently after receiving his utility bill: up from a few thousand euros a year ago to literally tens of thousands today. There was no one he saw worth voting for, according to the Journal’s report.
After raising the Funds Rate by 75-basis points last week, Jerome Powell, Chair of the Federal Reserve, gave candid opinions regarding inflation and the detrimental effects on households. It’s rare to agree with a central banker; yet here we are. In his own words:
So, for starters, people are seeing their wage increases, their wage increases eaten up by inflation. So if your family is one where you spend most of your paycheck, every paycheck cycle, on gas, food, transportation, clothing, basics of life, and prices go up the way they've been going up, you're in trouble right away. You don't have a cushion and this is very painful for people at the lower end of the income and wealth spectrum. So, that's what we're hearing from people is very much that inflation is really hurting.
Amazing! This is the type of real-world economic analysis we desperately need. He acknowledges that in spite of higher salaries, the benefits from wage increases are devoured by inflation, or more succinctly: the purchasing power of the dollar is decreasing. While some may have higher bank account balances, it affords them less.
He also acknowledges that many family’s paychecks barely cover basics such as gas and food, and that when “inflation” occurs the impacts are felt immensely and immediately. He’s made it clear he grasps the concept.
Seems weird though. If it’s so obvious, why maintain policies explicitly perpetuating inflation?
Powell then confesses, he has no clue how to stop inflation:
So how do we get rid of inflation? And as I mentioned, it would be nice if there were a way to just wish it away but there isn't.
Incredible! We should send him a copy of journalist and economist Henry Hazlitt’s “What You Should Know About Inflation,” which offers many viable solutions. Powell could also study the countless other Austrian economists who have vehemently spoken out against inflationism as a policy tool for the last 100 years. If that isn’t enough, perhaps reflection on the last century of failed monetary policies: perpetual dollar depreciation, the relentless boom/bust cycle, and ever increasing disparity between America’s have and have nots; in which the haves benefit from large subsidies, bailouts, and access to new money programs at society's expense. However, there seems no legitimate intent to correct course.
It's the year 2022 and the Federal Reserve is still trying to unlock the mysteries of inflation, one of the most documented catastrophic policies for quite some time. Even in 1958 Mises reiterated:
The most important thing to remember is that inflation is not an act of God; inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy…
The Fed claims diligence when it comes to meeting their arbitrary 2% annual inflation rate; but it comes at a heavy cost. The stock market will crash and a recession will be announced. Yet, no one can legitimately claim whether 2% inflation again is even possible. Of course, if we miraculously get there, it won’t matter anyway. The Fed will still exist.
A few months ago, a manifesto entitled “National Conservatism: A Statement of Principles” was published by the Edmund Burke Foundation on their natcon website and quickly republished by the American Conservative and the European Conservative.
Among its drafters we could see names such as Viktor Orbán superfan #1 and The Benedict Option author, Rod Dreher, The Virtue of Nationalism and Conservatism: A Rediscovery author, Yoram Hazony, Return of the Strong Gods author, and First Things editor R.R. Reno, and ISI Modern Age editor Daniel McCarthy, and among its signatories, a good list of Hillsdale/Claremont-affiliated Straussians such as Michael Anton, Larry P. Arnn, Tom Klingenstein, Ryan Williams and Scott Yenor, classicist, war scholar and Hoover fellow Victor Davis Hanson, Jagiellonian University professor and Polish member of the European Parliament Ryszard Legutko, TPUSA founder and activist Charlie Kirk and tech entrepreneur and right-wing would-be kingmaker Peter Thiel, among others.
This list would make such a manifesto be authoritative enough for the Right, both in the United States as well as in Europe, to be united behind its claimed principles, but contrary to its purpose, the only thing it has promoted is a plethora of responses and replies, both in its support and many times against it, and while we can dismiss liberal pseudowarnings of fascism supposedly present in the natcon statement, such as the one published in the New York Times, as well as the Washington Post’s whining about its lack of references to human rights and equality, many of the issues raised about it from people in our spheres are enough for us, liberty-minded people to consider the viability of national conservatism as a flag to rally under.
For one, these issues reveal an ideological problem with the natcon statement, for it fails to gather all similarly leaning intellectuals in the Right, with the first noticeable absence being that of the Catholic integralist postliberals (Sohrab Ahmari, Patrick Deneen, Chad Pecknold, Gladden Pappin, and Adrian Vermeule), as noted in a response released the day after by The Bulwark, which could be explained in foreign policy differences over the Russian-Ukrainian war, and on a related note, Peter J. Leithart, of the Theopolis Institute, disparages the manifesto for its excessive reliance over its “national” element over its theological one, which he considers is the actual issue at hand that should be taken care more of.
Others, such as David Tucker, disagree over inconsistencies on the statement’s clauses on religion and race and their intellectual forefather Harry V. Jaffa’s understanding of equality as assimilation under the Declaration of Independence, whereas more free-market-oriented intellectuals, such as Samuel Gregg (formerly from the Acton Institute, now affiliated with the American Institute for Economic Research) noted instead the economic problems with the manifesto, describing what feels like a contradiction between the natcons defense of an enterprise economy, their condemnation of crony capitalism and their embrace of a thinly veiled version of state capitalism, “for the common good.”
Most of these positions were summed up in an article published by National Review by mid-August, and if things weren’t enough with this discussion, the other same outlet that shared the natcon statement alongside the American Conservative in June, that is, the European Conservative, recently published an open letter signed mostly by Catholic and Anglican affiliated thinkers, critiquing the incoherence of arguing against the universalism of globalist ideologies using an equally universalist Anglo-American understanding of national traditions and its apparent elements of “free enterprise” and “individual liberty,” which are more of a feature of conservatism in the United States.
With so many of these issues already laid out in the ground, where does the national conservatism discussion leave us?
Well, for one, national conservatism seems to have left out the paleos, both our paleoconservative friends at Chronicles magazine, and us, paleolibertarians at the Mises Institute, out of the equation, which, to be honest, should not be a surprise, given that in our corner, criticisms of the natcon project have been present at least since 2019, the year where it first appeared, beginning with Chronicles’ Pedro Gonzalez expressing doubts that it might just become another case of controlled right-wing opposition to the growing power of the Left.
Mises Institute president Jeff Deist and associated scholar Allen Mendenhall followed, noting, respectively, that the natcon use of the concept of cosmopolitanism was inadequate, given that Ludwig von Mises had already explained it as “not provincial,” for “Cosmopolitanism does not require a particular worldview or political perspective … but rather respect for others’ political arrangements and cultures” and that the “national” part of national conservatism was completely wrong, for “the United States is not a nation,” but “a country whose people are connected, if at all, by liberalism.”
Does that mean we should be left out of the natcon crowd? Well, it depends, especially given that in our last three years, many things have changed in the world, for we have suffered lockdowns, the expansion of government intervention in society and the economy, contested elections in the US, and the extension of another open conflict (this time, against Russia) in which Western powers, once again, have become involved to intervene, to the detriment of their economies and their peoples.
We have also seen the heating up of our culture wars (marked by the normalization of critical race theory and the George Floyd riots), the rise of the World Economic Forum, with their stakeholder capitalism (explained as woke corporate socialism by Michael Rectenwald), their similarities with the contemporary Chinese model (arguably a form of national socialism) and their influence over Western governments, who seem to either kowtow to their credentialed expert Mandarin class or to the fear of receiving foreign business cycles caused by malinvestment and civilizational misjudgment.
With all these external contingencies, and the rise, although clumsy, of national conservatism in the US and Europe, there might be a chance to begin building bridges between our camp and theirs, and mutually benefit from a larger and organized platform among the intellectuals of the Right.
Our context is better than ever, with a cleaner, healthier image of libertarianism, reminiscent of Ron Paul’s presidential campaigns, being promoted by the Libertarian Party, now under the leadership of its Mises Caucus, something that is being noted by members of religious groups in the Christian Right, washing away the libertine reputation that still followed the LP up to our days and that had already been denounced by Rothbard and Rockwell in the ’80s and ’90s.
For those who belong to the paleo trend in politics, to identify as either a conservative or a libertarian is a difficult task, and many of us simply decide not to use said categories, and simply belong to whatever is identified as “the Right,” and that decision may come in handy when the situation asks for it.
National conservatism is an interesting attempt to appeal to right-minded (pun intended) intellectuals and politicians, but it is lagging in many areas, and it shows. Their manifesto and its many replies demonstrate there is a lack of understanding of their theological, ethical, national, and economic principles, and while we cannot (and should not) comment on the first, we can surely add to a better understanding and a sounder doctrine to the three later.
Austro-libertarianism, many times a trend left in the dark out of misunderstanding or due to the act of bad faith actors, can become the much-needed element to create coherence and cohesion in a movement that still hasn’t decided its path forward.
Our tradition, from Menger and Böhm-Bawerk, through Mises, Hayek and Rothbard, to Hoppe and Salerno, can provide with the necessary takes to make sense of what a nation really is, how to peacefully organize society along the lines of trade for prosperity; free association, and organic, spontaneous institutions; and the meaning of preservation within a long-term, low-time-preference mentality.
The natcons are demanding to expand their horizons from a merely Anglo-American political tradition into one that can truly represent the Western intellectual potential for civilization, and if we’re on character with our capitalist nature, we should be happy to offer what the Austro-libertarian sphere can offer.
The many issues of national conservatism represent an opportunity for us to step out and retake our place among the political families of what used to be, back in the day, the Old Right, and while we recognize our differences, conservatives still need our help to make sense of what they are, and it might be better to give them a hand now that they’re redrafting their doctrine than later when they have retaken all their past vices and gotten new ones from an increasingly radicalized Left.
Over the weekend, Scott Pelley of 60 Minutes held an interview with President Joe Biden. See below for some of the highlights, starting with his thoughts on the annual inflation rate which came in at 8.3% for the month of August.
(Portions of the transcript and interview may have been edited by CBS. There exists these incomplete sentences in the video and transcript. We may never know what the President actually meant).
President Joe Biden: Well, first of all, let's put this in perspective. Inflation rate month to month was just-- just an inch, hardly at all, [Transcript ends].
Scott Pelley asked if this was good news, the President responded:
No, I'm not saying it is good news. But it was 8.2% or-- 8.2% before. I mean, it's not-- you're ac-- we act-- make it sound like all of a sudden, "My god, it went to 8.2%." It's been— [Transcript ends].
In both instances the transcript abruptly ends mid-sentence, which may be unfair to the President. Nonetheless, Scott countered, saying it’s the highest inflation rate in 40 years, at which Biden said:
I got that. But guess what we are. We're in a position where, for the last several months, it hasn't spiked. It has just barely-- it's been basically even. And in the meantime, we created all these jobs and-- and prices-- have-- have gone up, but they've come down for energy.
How exactly (price) inflation is to come under control is never mentioned. To this point, Biden was asked if inflation would “continue to decline,” he answered:
No, I'm telling the American people that we're gonna get control of inflation. And their prescription drug prices are gonna be a hell of a lotta lower. Their health care costs are gonna be a lot lower. Their basic costs for everybody, their energy prices are gonna be lower.
He even invoked Fedspeak, saying:
We hope we can have what they say, "a soft landing," a transition to a place where we don't lose the gains that I ran to make in the first place for middle-class folks, being able to generate good-paying jobs and-- expansion.
This is pretty much the gist of the interview. The reporter asked real questions but was never given honest answers. To be fair, when someone doesn’t understand the cause of inflation, they cannot be expected to know how to resolve the problems inflation creates.
A lot more was discussed, such as the Trump raid, a potential war with China, and banning of assault rifles. But this exchange sticks out the most, invoking ideas that something is not quite right. According to transcript:
Scott Pelley: How would you say your mental focus is?
President Joe Biden: Oh, it's focused. I'd say it's-- I think it's-- I-- I haven't-- look, I have trouble even mentioning, even saying to myself, my own head, the number of years. I no more think of myself as being as old as I am than fly. I mean, it's just not-- I haven't-- observed anything in terms of-- there's not things I don't do now that I did before, whether it's physical, or mental, or anything else.
With Biden in charge of fiscal policy, and Powell overseeing monetary policy, our economic woes shouldn’t be surprising. However, no matter how easy it is to criticize Biden (D) and Powell (R), it’s important to remember they are only mouthpieces to an apparatus much larger. They are the figureheads of “the State,” or an entity that “does not produce anything but rather steals resources from those engaged in production.” Sure, some are better spoken than others, but this provides little comfort, even if it makes for great television.
The European Central Bank (ECB) raised interest rates for the second time this year (by 0.75 percent). The eurozone's CPI was 8.9 percent in July. In that month, the ECB raised rates by 0.5 percent and created a new instrument of monetary policy, the Transmission Protection Instrument (TPI), to counter the 'risk of fragmentation' of the eurozone.
The ECB key interest rates are the Main Refinancing Operations Rate, the Marginal Lending Facility Rate, and the Deposit Facility Rate. These rates were at 0.5 percent, 0.75 percent, and 0 percent, respectively, after the first rate hike in July. And now they are at 1.25 percent, 1.5 percent and 0.75 percent.
The ECB's balance sheet was just above €8.8 trillion by the end of June. And, in the beginning of July, it slightly decreased, standing at €8.7 trillion on September 9th.
Since 2015, the ECB has not significantly reduced its balance sheet at any time. And, since 2014, it has kept interest rates artificially low, at 0 percent (in the case of the Main Refinancing Operations Rate), close to 0 percent (in the case of the Marginal Lending Facility Rate), and negative (in the case of the Deposit Facility Rate).
Chart 1 – Eurozone Interest Rates and ECB’s Balance Sheet (2012-2022)
Main Refinancing Operations Rate (Red Line, Left Axis); Marginal Lending Facility Rate (Green Line, Left Axis); Deposit Facility Rate (Yellow Line, Left Axis); ECB balance sheet (Purple Line, Right Axis).
Source: St. Louis Fed.
The PTI is a new asset purchase program, focused on bonds of the most indebted eurozone members. As duly noted by Ryan McMaken, this is essentially a new type of QE. In order to buy these bonds, the ECB will have to increase the monetary base. It remains to be seen if the increase in the monetary base arising from this program will be accompanied by a significant increase in M1 and M2 (which are the monetary aggregates that really influence prices in the real economy).
QE, by itself, does not cause prices in the real economy to increase, but it is harmful to the economy by generating distortions in the allocation of resources, making the economy more fragile (more dependent on artificially low interest rates) and susceptible to recessions. These distortions cause resources to be wasted on unprofitable ventures (such as zombie companies), preventing the generation of sustainable ventures and reducing real wages (since indebtedness increases and more money is spent on interest to finance the debt, instead of investing in productivity, which would tend to lower prices and increase real wages). Furthermore, QE makes the prices of financial and real estate assets artificially higher.
The purpose of the PTI is to mitigate the eurozone's 'fragmentation risk'. For example, if the interest on Italy's 10-year government bond (Italy has a debt of 150.8 percent of GDP) was to increase much, it would increase the probability of Italy’s exit of the eurozone (returning to the Lira and expanding the money supply to finance the government debt). This is the so-called 'fragmentation risk'.
The PTI, therefore, is a form of 'yield curve control'. Of course, it's not official, but the effect is similar. The Bank of Japan (BoJ) has been doing a 'yield curve control' since 2016: the BoJ does not let the interest on Japan's 10-year government bond be higher than 0.25 percent. The BoJ buys these bonds, increasing their prices and, consequently, lowering their interest rates. And this is precisely what the ECB intends to do.
Interest rates on 10-year eurozone government bonds have been on an upward trend YTD. The PTI’s goal is to lower interest rates (mainly the ones of the most indebted members), if necessary.
Chart 2 – Interest Rates on 10-Year Government Bonds of Some Eurozone Members
Greece (Blue); Italy (Orange); Portugal (Grey); Germany (Yellow); France (Green); Netherlands (Purple); Ireland (Pink); Spain (Black).
Source: Trading View.
Yes, the PTI also has some eligibility requirements that are supposed to be followed by eurozone members in order for the ECB to buy their bonds under this program. However, we know that governments tend not to follow rules. And countries such as Portugal, Spain, Italy and Greece (which have higher indebtedness and more spendthrift governments) are very dependent on the eurozone’s moral hazard, which does not generate incentives for the most indebted governments to reduce their debt enough for the interest on their bonds to decrease without the intervention of the ECB. At best, in general, governments decrease their debt very gradually (as Portugal did in 2016-2019, and in 2021 after a significant increase in 2020). If governments really followed public debt sustainability rules, the PTI wouldn't even need to exist.
Furthermore, the euro has been devaluing against the US dollar since 2021 and reached parity 1/1 at the end of August, oscillating close to this level since then. This is another factor influencing the rise of the eurozone’s CPI, as a devalued currency makes imports more expensive.
The Governing Council stated that it “stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at its 2 percent target over the medium term.” It also stated that it expects the CPI to remain above 2 percent for an extended period, estimating that the rate (excluding food and energy products) will reach 3.9 percent in 2022, 3.4 percent in 2023 and 2.3 percent in 2024. However, it also stated that the PTI “is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries.” In other words, the ECB states that it is willing to pursue a contractionary monetary policy to bring the CPI back to the target of 2 percent while committing to use the PTI (which, depending on the intensity of its use, can counteract the decrease of the CPI) if the contractionary monetary policy prevents eurozone members from financing their high debts.
Like the Fed, the ECB doesn't have much room to raise rates and shrink its balance sheet (unless these governments significantly reduce their debts). The ECB is being a little less expansionist on the one hand (by making slight increases in interest rates in relation to the high CPI) and may be expansionist on the other (by creating the PTI). Like the Fed, the ECB is just pretending to fight the high CPI. The fact that the ECB's balance sheet has stopped increasing and that eurozone's M2 is increasing at a slower pace than in 2020 and 2021 are factors that reduce the pressure on price increases, but this only means that, best case scenario, the ECB will be able to bring the CPI to lower levels. It is less likely that prices will return to pre-2021 levels. This would require a price deflation.
To really get prices to pre-2021 levels, governments would have to reduce their spending, so that their indebtedness would decrease, and the ECB would not only stop expanding the monetary base to buy government bonds, but also shrink its balance sheet (to contract the money supply). Artificially low interest rates are not the only inflationary factor.
With the August Consumer Price Index (CPI) reaching 8.3% earlier this week, the general public wonders when exactly the Fed rate hikes, to fight (price) inflation, will kick into effect. Meanwhile, the Wall Street Journal offers a unique visualization of (price) inflation over the last year, see below:
Their website includes an interactive map. Hovering a cursor over the varying colored boxes reveals the category and percentage change over the last year. Most of the boxes are orange, indicating inflation is running hot, while the few blue squares mean inflation has cooled and may even be negative... There is no red on this spectrum.
The top left box denotes total inflation or “All Items” at 8.26%. The sub-categories of inflation are found along the top, such as: “Services” at 6.81% or “Commodities” at 10.57%. Vertically appears to list the components of each sub-category. This illustrates one of the problems, as calculating inflation is the art of comparing apples to oranges.
Consider, per the heat map, a random selection which shows:
- Uncooked beef roast: +3.26%
- Lettuce: + 10.67%
- Floor coverings: +14.85%
- Prescription drugs: +3.17%
- Motor fuel: +26.16%
- Daycare and preschool: +3.69%
The above illustrate only six categories, yet there are almost three hundred. Consider questions such as:
*What does the price of beef matter to the vegetarian?
*What exactly comprises floor coverings?
*How can anyone assign a value of importance between prescription drugs, motor fuel and day care, and what if you don’t use any of them?
All these are “averages” of some sort, which must factor in geographic location, such as the price of bread in Alaska versus Idaho, as well as the relative importance that each item places in the “average” person’s life. Because Potatoes were up 15.16%, but Sewing Machines only 8.14%, the statistician must decide which played a bigger impact in people’s lives and then quantify.
Eventually, after various deliberations, the data gets rolled into the 8.26% CPI figure. True, 8.26% is higher than the Fed’s targeted 2%; but the Fed’s target easily could have been 0% or 4% and CPI 16%. They try to make it sound scientific. But it’s really just guess work, estimates, and bias from the central planning committee to arrive at a figure.
What should also be considered are the few categories showing a negative inflation number, such as:
- Television: -19.19%
- Video and audio products: -8.96%
- Car and truck rental: -6.16%
- Uncooked beef steaks: -2.95%
- Jewelry: -1.16%
- Education and communication commodities: -7.33%
For reasons never clear to the public, the Fed always wants some inflation, never zero percent or even negative inflation. Understanding the limitations in the data, the sample above finds that the price of televisions, uncooked beef steaks (as opposed to beef roasts, which increased) and even jewelry prices are said to have decreased in the last year. The alleged harm of these price reductions should be questioned by the public.
It's fair to say, all things being equal, you’d rather buy the same TV at a 20% discount, and you prefer to buy more products when they are on sale; yet mainstream economists and members of the Fed seem to not understand this. Nor are the benefits of a stronger dollar, versus one that depreciates year over year, well understood by them. Conversely, many are fooled into thinking that “high inflation” is good for businesses since they can presumably make more revenue. They fail to factor in that the cost of production also increases. But since the “structure of production” is basically absent from mainstream economic theory, it makes sense that they have an inability to articulate the various negative effects that come with currency debasement.
In the end, the problem with inflation very much resembles the inflation map presented by the Wall Street Journal; messy and difficult to comprehend, yet strangely amusing, until one day all prices become unrecognizable. And no matter what they say in the mainstream media or in a university setting, a policy of inflationism always leads to economic destruction and the degradation of society.
Hans-Hermann Hoppe, despite retiring about fifteen years ago and only publishing lightly since, has an (un)enviable characteristic: he still manages to provoke his opponents to violent and rather silly outbursts from time to time. The most recent round of pearl clutching emanated from the otherwise sound Phillip Magness (via Twitter), who seems to have fallen into the same conspiracy-minded, guilt-by-association way of reasoning (using the term broadly!) he so ably has exposed in left-wing writers like Nancy MacLean (on James Buchanan) or Quinn Slobodian (on Ludwig von Mises).
Stephan Kinsella has answered the personal insinuations against Hoppe and most of the other claims Magness made, and one can hope that is the end of it. Yet something suggests that the Hoppe haters will not be persuaded even now. Recently, in an interview with ReasonTV, Magness again made similar claims against Hoppe so another little essay on the Hoppe question seems warranted, mainly to help the innocent bystander, who might otherwise be frightened away by the hateful rhetoric of the Hoppephobes, understand what’s going on.
I’ll here briefly address three major accusations against Hoppe.
Hoppe the Nazi
Guilt by association plays a major role in the Nazi insinuations against Hoppe—in fact, there is no argument behind it other than that. Hoppe cited David Irving without adequately condemning him for wrongthink; Hoppe refused to accept that Germans are “congenital villains” of world-historic uniqueness. In this, he contradicts what in Germany has been a basic dogma since the Historikerstreit, but it is hard to see that Hoppe said anything objectionable—or why we should simply submit to leftist dogmas. As for Hoppe’s related claim that there was an attempt to brainwash the Germans after the war—well, this is true and simply official history, as detailed, for instance, in Frederick Taylor’s Exorcizing Hitler.
There is more substance, at least on the face of it, to Magness et al.’s claim that a memo Hoppe wrote in 1996, “From Nation to Household,” betrays his sympathy for Nazism. After all, Hoppe clearly writes that what’s wrong with “national socialism” is the socialism part—get rid of that and we’ll have “national capitalism,” and that’s much better. It appears we have to accept that Hoppe really is cheering on mass extermination etc.; he just wants to privatize it (which, presumably, means that he’s really worse than the classic Nazis, since Hoppe’s national capitalism would be much more efficient).
Right? Not really. It’s a basic case of omitting crucial context. The memo is an extended critique of Samuel Francis’s and Pat Buchanan’s proposed economic policies, which Hoppe characterizes as socialism. The other part of the program, the cultural or social part, with which he agrees, Hoppe calls nationalism; hence the conclusion that Francis advocates national socialism. Hoppe explicitly states, however, that there is nothing anti-Semitic or racist in Francis’s program—it’s simply a rejection of political correctness and a call for return to normalcy and traditional middle-class values. In the same memo, Hoppe goes on to criticize the socialistic aspects of the Francis program and in its stead proposes “national capitalism”: in short, liberal economic policies that are better suited to Francis’s and Buchanan’s cultural and social aims. Reading any kinship to German Nazis into this is simply baffling—unless one thinks the real evil part of Nazism was not their socialism, or their racism, or their anti-Semitism, but their support for more traditional morality and normalcy (not to mention the fact that the Nazis did not even really promote traditional values).
Ironically, there is a much better case for calling Mises a Fascist sympathizer than Hoppe. After all, Mises explicitly wrote: “It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.” Anyone with a brain will recognize that Mises was not a fascist and that this statement occurs in the context of a thorough refutation of fascism (nor can anyone deny that at the time of writing, in 1927, it was obviously true). However, when it comes to Hoppe, the most innocuous statement is used to paint him as a fascist or worse.
It’s thus hard to see any Nazism or fascism in either Hoppe or Mises—unless, of course, one adopts the more descriptive definition of fascism once proposed: fascism is whatever Stalin doesn’t like!
Hoppe the Critical Theorist
Magness has repeatedly accused Hoppe of not being an Austrian economist but rather a critical theorist. The evidence for this claim is Hoppe’s close personal connection to the German philosopher Jürgen Habermas, one of the leading lights of the Frankfurt school. Hoppe’s work on argumentation ethics is also replete with references to Habermas and especially to Karl-Otto Apel, whose communicative ethics Hoppe refashioned into his own argumentation ethics along Misesian lines. Yet does this make Hoppe a critical theorist? What, exactly, did he take from Habermas, the bête noire in Magness’s depiction of Hoppe? Why don’t we simply listen to what Hoppe himself says:
My relationship with Habermas, while not close, was cordial, and I learned quite a bit from him, especially from his earlier works such as Erkenntnis und Interesse (Knowledge and Interest). (Since the late 1970s I essentially stopped following his work, as it was increasingly tedious and murky.) In any case, it was Habermas who introduced me to the Anglo-Saxon tradition of analytic philosophy and the philosophy of language. He helped me understand “methodological dualism,” i.e., that the study of objects with which we can communicate (and communicative action) requires different methods than those appropriate for the study of noncommunicative objects (and instrumental action). And contra all empiricist and relativist claims, Habermas always defended the notion of some sort of synthetic a priori truths.
Analytic philosophy, philosophy of language, methodological dualism, and the existence of a priori truths—if this be critical theory, make the most of it! There is nothing here incompatible with Austrian economics, no materialism or polylogism, and in fact there are plenty of building blocks for Mises’s praxeological system.
Still, Hoppe may be tainted by personal exposure to Habermas, and he may thereby unconsciously bring critical theory into his work on Austrian economics. Perhaps. Magness and others should then consider the person of Carl Grünberg. Grünberg was the founder of the Frankfurt school, as in 1924 he was the first director of the Frankfurt Institute for Social Research. So what? Before going to Frankfurt, Grünberg taught in Vienna, and among his doctoral students was … Ludwig von Mises. According to Guido Hülsmann, Mises learned a lot from the Grünberg seminar and published papers along the lines of Grünberg’s more historicist approach. If Magness is concerned about cultural Marxism tainting Austrian economics, and if learning from Marxists is enough to irrevocably taint a person, then he will have to excise a substantial portion of the Austrian tradition.
Hoppe the Anti-immigrationist
Hoppe’s views on immigration are well-known, if often misrepresented. In short, he argues that in a free society, immigration can be by invitation only. Private property owners and covenant communities will simply decide who they want to accept and how many immigrants they want. This does not imply, however, that under current conditions open borders—that is, no control on immigration—are the best policy. The state both coercively limits the number of desired immigrants and coercively imposes undesired immigration on the population. Hoppe’s more practical proposal is to limit the externalization of immigration’s costs, by limiting migrants’ access to state services, adopting some kind of sponsor system, and requiring a host to post a bond for each immigrant he invites into the country.
This proposal, we are told, is both illiberal and at odds with Mises’s views on immigration. Now, it is certainly true that Mises wrote favorably about free migration. Looking simply at incomes and production, free immigration is optimal. Workers will move where wages are highest, and since wage differentials reflect the underlying differences in productivity and in the value of the output, the free movement of labor leads to an overall increase in social production. Restrictions on migration thus make some countries relatively underpopulated, driving up wages, and other countries relatively overpopulated, driving wages down.
However, Mises was not for open borders, even at his most optimistic. In Liberalism, he clearly states that freedom of movement is incompatible with an interventionist or socialist state. Given the all-pervasive influence of the state under such conditions, Mises argues that national minorities are bound to be persecuted in such states. Therefore Mises thinks the decision of, say, the Australians to keep out immigrants to avoid being inundated by Asians and non-English Europeans and becoming a minority is fully understandable. Only if we insist on a purely economic conception of man can we enlist Mises under the banner of open borders and against Hoppe. Since this was clearly not Mises’s conception, we cannot do so.
The More Things Change
Hoppe can of course be criticized. But the attempt to paint him as some kind of evil interloper, an agent of Nazism and critical theory flying under the radar and corrupting Austrian economics, is simply laughably wrong. As I’ve tried to show here, none of the points raised against Hoppe can withstand scrutiny, and on all the substantial issues, Hoppe is much closer to Mises than the critics will accept.
With primaries having concluded, the stage is set for an uncertain midterm election just six weeks from now. Whereas even six months ago the betting money would have been on the Democrats receiving an historic two-chamber shellacking, a combination of factors have resulted in the tables possibly having turned, with the Democrats now projected to keep control of the Senate. Of those factors, several stand out.
On the Republican side, battles for influence between Trump and McConnell have been a microcosm of the no love lost contests between competing Republicans in places like Maryland, Michigan, and Florida. With Trump having given indications he might run again in 2024, and prominent GOP regulars such as Marco Rubio saying Trump would be the presumptive nominee, the many wins his endorsed candidates have racked up suggests his ability to command votes among Republican voters remains strong.
This, in McConnell’s view, is what will cost Republicans in November. With competitive districts near a record low, with just thirty-two races considered tossups, Trump’s choices were seen as alienating to the median voter. Two polls by the Wall Street Journal suggest McConnell may have been right, with the findings suggesting so-called independent voters have increasingly tilted toward Democrats over the course of the summer.
The Democrats, for all their jeremiads about Trump’s election-denying candidates being “threats to democracy,” have for months been helping Trump’s preferred candidates in their often uphill battles: such as in Michigan, where they spent almost half a million dollars helping former Trump political appointee John Gibbs defeat the moderate incumbent Pete Meijer, one of the small handful that had voted to impeach Trump. Not missing a beat, Michigan Democrats wasted no time unleashing a barrage of attack ads on John Gibbs once the primary was finished, calling him a, wait for it, threat to democracy.
As for themselves, the fight between centrists and progressives within the Democratic party has continued. But having gotten much of what they had wanted passed during the past term, from infrastructure and social welfare spending, to greening the economy and competing with China, Democrats have largely avoided any acrimonious clashes during the primaries. With the economy not visibly collapsing and the Ukrainians pushing back against the Russians, the party is counting on the Trump Threat narrative and the post-Roe backlash to get out the necessary votes.
According to a survey of the most recent polls, the combined strategy of sabotaging Republicans and stoking the hottest rails of the political divide is paying dividends. Despite Joe Biden’s still depressed approval ratings, polls from July and August estimate Democrats have seen an eleven point swing in their favor from the end of June. This was in questionnaires pitting so-called “generic” Democratic and Republican candidates against one another. Special election wins in Alaska and New York also suggest an improving outlook for the party’s midterm prospects.
Of course, there is still much that could happen in the six weeks before the election. For example, this past Tuesday’s inflation reading defied market expectations of inflation having peaked, sending every major index plunging. Though consumers have continued spending and had over the summer reported progressively lower forecasts for future inflation, the reading may cause consumers to revise their beliefs about inflation’s entrenchment. Further, while markets had already significantly priced in the now certain 0.75 increase in the federal funds rate at the Fed’s meeting next week, companies continue to revise their growth estimates down. A string of bad earnings reports during October could further sap what confidence had begun building up through the summer in the runup to the election.
Even if everything were to go right for the Democrats between now and November 8th, the math is solidly against them in the House. With Republicans holding an almost certain 213 seats to the Democrats 190, they need to win only nine of the thirty-two swing district races to capture the chamber.
For its part, Ukraine and the rest of U.S. foreign policy ranks just eleventh in voter’s priorities according to the latest Pew Research poll: a fact which, though unsurprising, is scary as it is just now that the moment of maximum danger may be approaching.
It could be a coincidence, but probably not, that Joseph Stiglitz commented on corporate profit margins then the following week Federal Reserve Vice Chair Lael Brainard wrote about Bringing Inflation Down, where she too mentioned the problem with high profit margins.
In her own words, she found that:
Reductions in markups could also make an important contribution to reduced pricing pressures.
This is true. But a lot of things could reduce a firm’s cost structure such as outsourcing or mass layoffs. As for final prices, a company could also make inferior products and the market might pay less for this as well. Countless things can be done to change prices. Her comment doesn’t carry much weight.
It goes against common sense, that a for profit enterprise should simply reduce prices because a central planner asks them too. And it leads to questions such as “how” much should a company make, and does this universally apply to all companies or just the largest ones? Measurability is also a concern:
Using the available macroeconomic data, it is challenging to measure directly how much firms mark up their prices relative to their costs. That said, there is evidence at the sectoral level that margins remain high in areas such as motor vehicles and retail.
Contrast this to a truly unhampered free market, where no company would own a government granted monopoly or have support from a central bank. If one firm was making “too much profit,” then a new firm would eventually enter the marketplace and offer lower prices. Unfortunately, we live in a world very much removed from this.
She could only arrive at these conclusions by looking at data that showed average profit margins didn’t agree with her idea of what was fair or correct. Hence she says things like:
…overall retail margins—the difference between the price retailers charge for a good and the price retailers paid for that good—have risen significantly more than the average hourly wage that retailers pay workers to stock shelves and serve customers over the past year, suggesting that there may also be scope for reductions in retail margins.
It all seems very strange and unnecessary, leading back to the fact that the increase in the money supply and forced shutdown was caused by the central bank and government. Now, because prices have gotten out of line with the planners’ expectations, it behooves corporations to fix this by reducing margins to a more acceptable level.
Notice how they lack any “merit of a theory.” If bringing down inflation was so easy, then in countries across the world, from Venezuela to Zimbabwe, corporations could simply take less profit margins and help lower inflation. Of course it doesn’t work that way, and it isn’t as easy or even a viable solution. Yet these are the solutions being offered from some of America’s most highly decorated, and paid, economists.
Brainard ends by reminding us that it’s not over yet:
We are in this for as long as it takes to get inflation down. So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further. As of this month, the maximum monthly reduction in the balance sheet will be nearly double the level of the previous cycle.
If anything she said is true, it’s that we are in this for the long haul. For better or for worse, but probably for worse, so long as everyone in charge continues to invent ad hoc economic theories while ignoring the root cause of “inflation.”