1970s Inflation: The Narrative versus the Lie (Pt. 1)

1970s Inflation: The Narrative versus the Lie (Pt. 1)

05/24/2021Robert Aro

In the field of economics, any narrative overly vague, poorly defined, or which cannot be substantiated is probably untrue. The current narrative garnering ever increasing media attention goes something like this:

“Inflation was extremely high in the 1970’s so the Fed raised rates and controlled inflation.”

Specifically, they credit the Fed with taking action which supposedly reigned in or defeated (price) inflation. Like all urban legends, the story changes depending on who tells it. According to Federal Reserve Chair Jerome Powell, in a letter to a US Senator, he wrote:

We understand well the lessons of the high inflation experience in the 1960s and 1970s, and the burdens that experience created for all Americans. We do not anticipate inflation pressures of that type, but we have the tools to address such pressures if they do arise.

Powell, who was 17 years old in 1970, includes the 1960’s in the high inflation experience, noting (price) inflation was both high and burdensome. The lessons learned are not specified, but he’s referring to Fed intervention, which, as the story goes, includes raising interest rates.

Nobel Prize winning economist Paul Krugman of the New York Times also has a take. Just last week he said:

This doesn’t look at all like 1970s stagflation redux; it looks like a temporary blip, reflecting transitory disruptions…

Unfortunately, he too refers to an entire decade, while also managing to include the word “transitory,” or the notion that price surges are acceptable if they occur over a short period of time. Of course, this forgets that without an offsetting transitory “deflation,” all increases to prices remain permanent.

Financial services firm Charles Schwab also recently weighed in:

With commodity prices soaring, money supply growth exploding, and government spending surging, there is a palpable fear of a return to 1970s-style inflation.

The author goes on to say that it was in the late 60’s and into the 70’s the Fed “let” inflation rise, until 1979 when newly appointed Fed Chair Paul Volcker made the “move to squash inflation.” According to legend, the Fed increased rates until the effective federal funds rate hit an all-time high of over 19% in 1981, and this is what helped to put inflation back into the bottle.

When asked if we should be nervous over the prospects of inflation, Federal Reserve Bank President, Neel Kashkari told CBS:

Right now, I'm not concerned about a repeat of the 1970s.

It’s not only America who remembers how bad things were 50 years ago. The Government of Canada’s wholly owned news channel, the CBC suggests to:

find someone, maybe a grandparent, who witnessed the onset of serious inflation in the 1970s and 1980s…

Should someone be lucky enough to have a 71 year-old grandparent who can remember the price of a View-Master, a typewriter or what they called a “Wall Telephone,” in short order it will be clear prices on goods and services of that era are difficult to discern. Technological changes, wages, and shifts in consumer preferences are just some of the problems encountered when trying to compare life then versus now.

Even if the price of more relatable items like tuition or automobiles can be recalled, it would require some calculation, like the purchasing power of the dollar, to understand the experience of the 70’s; that doesn’t take into consideration inherent problems such as bias and data gathering. Unless grandpa lived an “average” life, which adequately represented the nation’s experience as a whole, conveying the difficulties of the decade will prove to be an onerous, if not impossible task, whether anecdotal or statistical methods are applied.

The exact time frame of the inflation also remains elusive and dependent on one’s perception of the experience. Yet, despite pointing out the difficulties in trying to conceptualize how unbearable the inflation era was, that is not what is in dispute. We can accept the narrative that throughout the 70’s, most prices increased year over year in unimaginable ways, caused by countless factors, including an oil crisis. The topic of dispute is the Fed’s response to said crisis. We’ve been told it was the Fed’s diligent action of raising rates to all-time highs which alleviated the burden of inflation. Herein lies the problem.

Fortunately, we can use the Fed’s own data to see how they fought inflation, right? Surely they should be able to substantiate this claim. Now more than ever this becomes of paramount importance as more experts allude to a possible repeat of 70’s inflation; they will undoubtedly look to repeat the supposed solution. This is problematic because few seem to know how the Fed actually solved the crisis.

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Be Very Afraid: Why Today's Bureaucrats Love Fear-Based Politics

06/11/2021Gary Galles

Outside of the D.C. Beltway, state capitols and city halls, bureaucrats receive something less than adulation from citizens. And libertarians often lead the chorus. But some bureau employees are necessary. One libertarian who recognized this long ago was Leonard Read, in “The Worrycrats,” part of his 1972 To Free or to Freeze.

Even when government is limited to codifying the taboos, invoking a common justice, and keeping the peace, there is…an operating staff: a bureaucracy…[following] procedures.

In other words, even a nation of “laws and not men” needs some people to enforce what laws there are, even though those people will often have far worse incentives in their bureaucratic determinations than in their private relationships (why America’s founders were so keen on carefully monitoring their behavior).

However, despite the necessity for some bureaucrats to defend legitimate laws, some clearly deserve our mistrust. Read called them Worrycrats.

Worrycrats…are a special breed of totalitarian bureaucrats who spawn rapidly as society is socialized. These people concern themselves with our health, education, welfare, auto safety, drug intake, diet, and what have you. Worrycrats today outnumber any other professionals in history, so rapidly have they proliferated.

Why should we mistrust them?

The activities of these worrycrats in no way resemble a free market operation. Freedom in transactions has no part in this political procedure. Citizens are coerced to pay these professional worriers whether they want their services or not. A nongovernmental operation of similar nature would be called a racket.

I question the propriety of our being coerced to pay worrycrats to worry about us. We worry enough on our own without paying to have our worries multiplied.

What is the evidence for the plethora of bureaucrats who want us to worry more?

Observe the massive outpourings of the worrycrats—over TV, radio, and in the press—about lung cancer, heart failure, mercury, cranberries, cyclomates, seat belts, groceries, and so on. Unless one sees through all of these unsolicited oral and verbal counsels, he is going to be unnecessarily concerned…ordinary fears and worries substantially multiplied...[but] fear and worry are far deadlier menaces than all the things from which the worrycrats pretend to protect us.

What are the qualifications of worrycrats as more effective worriers for us than we are? Little more than know-it-all overconfidence, reinforced by ignoring huge differences among individuals.

Are these political saviors really concerned about your welfare and mine? Actually, they do not know that you or I exist…What…[do] they know about what is good or bad for me…What is their competence...they are not experts when it comes to your welfare or mine.

Suppose that these worrycrats are the world’s most advanced physicians and scientists. Would they know enough of what is injurious or helpful to you or me to justify forcing this information upon us or frightening us about it?

Individuals vary widely…there is no average person!

I care not who sits behind the worrycrat desk…Prescribing for and presiding over 200 million distinctive, unique individuals is no more within man’s competence than… directing the Universe. Contrary to socialist doctrine, we are discrete beings—not a mass, a collective.

In fact, those worrying on our behalf may actually be undermining our health and well-being.

[There are] many illustrations of how death is hastened through fears, anxieties, rage, worries…The outpourings of the worrycrats tend to multiply our stresses, anxieties, worries…literally scaring us to death.

That does not mean there is not a role for government with regard to our health, but the role is essentially the same, rather than multiplied compared to other areas of the economy.

Ideally, there is a role for government with respect to health, education, welfare. That role is to inhibit misrepresentation, fraud, violence, predation, whether by doctors…or others. No false labels! No coercive impositions on anyone!...all of us should be prohibited from injuring others. Actions that harm others—not what one does to self—define the limits of the social problem and of governmental scope.

Americans are now confronted with an even vaster crazy-quilt of federal executive agencies, mandates, regulations, czars, etc., than when Read wrote (just under 50 years ago). Those bureaucracies now house phalanxes of worrycrats who inhibit choices individuals and groups would take in search of their own growth, fulfillment and well-being as they saw it, by infringing our right to choose how to live our lives, so long as we do not violate others’ equal rights.

Much that worrycrats do interferes with individual choices and mutual agreements with regard to risk. They try to scare us into “voluntary” compliance with what they decide is good for all of us, despite the huge variance in preferences, circumstances, health histories, etc., among us. Failing that, they move to forcibly override what we would choose because while they may not know us at all, supposedly they still “know better.”

It is not hard to see how such do-gooder regulations harms our economic health. What if mining, logging, cab driving, etc., were hugely restricted because they are “too risky,” even though people chose to take those risks voluntarily. Similarly, aren’t police and fire personnel, health care providers, etc., exposed to elevated risks? Should we ban those jobs? Asking the questions provides the answers. Even though there are vast differences in risks across many professions, that does not justify over-riding the choices adults make to bear those risks.

We are also faced with risk-justified restrictions and impositions that can actually impose greater risks in other areas. A good example is traffic-calming policies that may well increase heart attack deaths more than they decrease traffic deaths, by causing congestion that slows emergency vehicle response times. But there are many more.

Those also include many “green” policies that increase other forms of pollution and environmental hazards, such as wind farms (e.g., disposing of blades or the massive carbon emissions from the cement required) or battery backup systems, electric vehicle mandates, etc. (e.g., with cobalt and rare earth metals), or even kill oil pipeline projects, moving oil transportation into trucks with far greater pollution and risk of environmental harms. FDA regulations that unduly delay life-saving drugs in the name of safety fall in the same category. Similarly, efforts that force up energy costs reduce economic output and incomes, reducing the resources available to improve our health.

Leonard Read described worrycrats as practicing chicanery. And it is striking how much the scope of that chicanery has expanded since he wrote. But many people have started to see that as a result of the multiple forms of malfeasance COVID provided cover for, including a notable increase in more direct coercion and more violations of individual rights (e.g., mask mandates and the CDC’s unconstitutional ban on evictions). And Read ends his article with a good reminder for those thinking of such issues today:

You know yourself better than anyone else does. Better that you turn yourself toward what you think is your advantage than be turned by a worrycrat toward what he thinks is your advantage. You at least know something, whereas he knows nothing of you as an individual.

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The Real Tax Scandal

06/09/2021Jeff Deist

The self-styled investigative journalism outlet ProPublica recently published private IRS tax information—presumably embarrassing private tax information—for a host of ultrawealthy and famous Americans. I say "self-styled" because the organization claims a pretty lofty and self-important mission to use the "moral force" of journalism on behalf of the public interest against abuses of power. But does this apply to state power, such as when a federal agency employee illegally leaks sensitive material to media? And why is it presumed to be in the public's interest to have rich billionaires pay more in taxes? Maybe we'd rather have them investing in their companies, or at least buying megayachts and Gulfstream jets, rather than sending more resources to the black hole of DC? Why is the public interest always defined as "things progressives like"?

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.

And as an aside, it's worthwhile to recall the tremendous whopper of a lie President Franklin Delano Roosevelt told back in 1935—namely that no one other than the program's administrators would ever know your private Social Security number. Today, of course, Social Security numbers are the absolute linchpin of one's entire financial identity, and known by everyone from the IRS to your local credit union.

Yet the real scandal here is not the IRS leak, which was no doubt internal and designed to gin up public support for Biden's proposed tax increases while advancing a progressive inequality narrative. Political capture of federal agencies is nothing new or shocking; that's what presidents do (or have done to them). Nor is it particularly scandalous that the wealthiest people sometime pay little in federal income tax, at least relative to their income. After all, elites by definition tend to wield power rather than fear it, especially when it comes to state power. And they have lobbyists and accountants to make sure taxes remain something the little people pay.

No, the real scandal is this: federal income taxes are almost entirely about control and not revenue. The byzantine rules and selective enforcement are perfectly designed to keep ordinary people with limited means in mortal fear of the IRS. A tax audit, like cancer, can come out of nowhere and ruin your life. In some cases it can land you in jail. Tax enforcement is the ultimate check on the public's behavior; after all, who takes up the cause of a tax cheat? For middle-class Americans the IRS is an existential threat, but for Jeff Bezos it is another business expense to be minimized.

And as for revenue, consider that Uncle Sam borrowed nearly half of the dollars spent by Congress in fiscal 2020. With covid shutdowns, federal income taxes amounted to about $3.42 trillion, while spending was $6.55 trillion. If the federal government can finance 50 percent of its annual spending through deficits, why not 80 percent or 100 percent? Why do we need the IRS terror regime at all?

Again, this is about control. Progressives will never give up the income tax for this very reason. Proponents of modern monetary theory, for example, are almost uniformly left progressive in political outlook. These are the people cheering Biden's >$1 trillion infrastructure spending bill because of their fervent belief that deficits don't matter.

MMT rests on two central assertions.1 First, sovereign governments with their own currencies can print as much money as needed to fund operations without fear of insolvency or bankruptcy—unless a purely political decision is made to go broke. Government deficits per se do not matter, because the only real constraint in any economy is the amount of real resources available rather than the amount of money. In fact, MMT views government debt as private financial wealth—money inserted into the economy by the central state but not taxed back. 

Second, sovereign governments with their own currencies can require tax payments to be made in that currency. Therefore any overheating in the economy in the form of inflation resulting from too much money can be fixed by pulling some money back to the Treasury via tax increases. This is the ostensible reason MMTers are not quite ready to give up on taxes altogether.

Yet I've never heard an MMTer express support for even a one-year moratorium on taxes to stimulate a bad economy (after a shock such as a worldwide covid pandemic). Why is this? If inflation really is so low, with the economy struggling in postcovid recovery mode, why pull any money back into federal coffers? Just damn the torpedoes! The bigger the deficit, the more "private wealth" we all have! Perhaps there is a political element to all the MMT jargon after all, one which relies on taxes both for control over people and to advance an advantageous but hollow trope about taxing the rich.

Federal income taxes have always been a tool for compliance. The IRS has always been a tool for presidents to go after rivals—or for rivals to go after presidents. Why would we expect otherwise?

  • 1. See Dr. Robert P. Murphy's definitive critique of MMT and Professor Stephanie Kelton's book here.
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Bond Trading at the Fed

06/08/2021Robert Aro

One of the Federal Reserve’s “temporary emergency lending facilities” is being wound down! As announced on Wednesday, all assets purchased under the Secondary Market Corporate Credit Facility (SMCCF) are expected to be sold. The nearly $14 billion facility holds approximately $8.5 billion corporate bonds, plus various bond Exchange Traded Funds (ETFs) valued at approximately $5.2 billion. Bond ETFs are essentially bonds traded on the stock exchange. As the name of the facility implies, both asset purchases occurred on the secondary market.

This begs the question: Why did the Fed make bond purchases on the secondary market?

The primary market for bonds is one where a corporation issues a debt to investors in exchange for money, similar to an Initial Public Offering (IPO) for stocks. Whereas the secondary market is where bonds are traded between investors with hopes of earning a profit from investment activities, no different than trading stocks on the NASDAQ after an IPO.

Contrast the standard use of the secondary market with what the Fed claims was the purpose for buying these bonds:

The SMCCF proved vital in restoring market functioning last year, supporting the availability of credit for large employers, and bolstering employment through the COVID-19 pandemic.

This restoration of proper “market function” has yet to be examined, while providing credit to large employers and job creation doesn’t quite add up, as the most recent Report to Congress shows. As of May 10, the SMCCF Transaction-specific Disclosures (XLSX) reveals the Fed held or is currently holding bonds of just over 500 companies: mainly large corporations, like Citadel LP, the privately held hedge fund who bailed out Melvin Capital at the start of the GameStop short squeeze, and some of the big automakers such as Honda, Hyundai and Toyota.

Despite the investment choices of the Fed, considering these were all purchased in the secondary market means the money from the Fed did not go to the company whose bonds it was purchasing. Rather, the investor who previously held the bonds in the market were the recipient of the Fed’s payment.

How a central bank trading in the bond market, the payment to investors, or the trading gains or losses translates into supporting credit to large employers, and in the Fed’s own words “bolstering employment” seems strange. One might say the Fed’s intervention and newly created money influenced investor behavior, rates, prices and the bond market itself; but the effect of $14 billion in bond purchases in the $46 trillion US fixed-income market cannot be measured. Since the Fed cannot measure or even clearly identify the effect of its intervention, it becomes impossible to say whether the intervention was a successful endeavor.

With the Fed commencing sales on June 7 and the expectation of completing by the end of this year, it will be interesting to see whether the Fed makes profitable trades or finds ways to lose money. Should trading loses ensue, the fine print in Note 3 on the May 10 Report to Congress explains who will cover the loss:

equity investment from the Department of the Treasury and related reinvestment earnings of $13,897,250,997…

If there is any consolation, understand, it could have been much worse. The SMCCF combined with the Primary Market Corporate Credit Facility (PMCCF) had authorization of up to $750 billion to spend. Comparatively, $14 billion on bonds and another $14 billion of an equity investment from the Treasury is merely a “small” anti-capitalist infringement to benefit a handful of wealthy individuals at society’s expense, a little price we pay to have a central bank.

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Kashkari Said What?

06/08/2021Robert Aro

Right now there’s a big debate happening in economic circles about, is the economy overheating with all of this fiscal stimulus, are these higher inflation readings here to stay or not.

Followed by:

I don’t think they are here to stay because I believe we are going to bring women back into the labor force and workers who have been displaced, but if we fail to do that, then these high inflation readings would become a lot more concerning because then it would signal we are overheating the economy.

This is the exact phrasing Minneapolis Federal Reserve President Neel Kashkari said, according to Reuters. To Kashkari, the “big debate” happening in economic circles centers around an “economy overheating,” and how long prices of goods and services will continue to rise. In one sentence, the President illustrates numerous problems with the mainstream economic narrative.

For something so technical, mathematical, and statistical in nature, complex economic ideas are reduced to the vaguest of terms. The idea of an “overheating” economy due to fiscal stimulus attributes nothing to the Fed and its role in the money creation process. As for the notion of overheating, it requires some sort of arbitrary barometer, or other indicator allowing economists to know when an economy is “too hot” or “too cold.”

The question of higher (price) inflation readings and whether they are temporary continues to play out for the public while still making little sense. This idea of a transient period was hardly, if ever, mentioned even a few months ago. Now that it’s here, supposedly these price increases are okay, as the increases to follow won’t be as high. This negates the fact that prices are still rising, inflation compounds, and year over year life will continually become less affordable than the year previous.

In his second quote President Kashkari says price increases are not here to stay because women will soon re-enter the labor force…

He does not explicitly blame the lack of women in the labor force for an increase in prices, but presumably, once more women start working again, prices will decrease. Indirectly, this places a burden on women to help resolve rising prices.

In the two quotes above, Kashkari fails to mention central banking, the effects of the Fed or the money supply. The part about women going back to work offers little substance and seems contrived, rather than citing any economic theory or quantifiable data. Hence, he manages to say nothing of merit; yet he says a lot, namely that our central planners seem to be in the habit of making things up as they go.

He ends by claiming these high prices are indicative of an overheating economy. Whether it’s due to fiscal stimulus or the lack of women in the workforce, one thing is certain: any failure in the economy, and especially price increases, are caused by everyone else, except the Fed.

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Pregnant Woman Tries to Comply with Police Orders, Then the Cop Attacks Her

06/08/2021Ryan McMaken

Last June, Arkansas resident Nicole Harper was driving near Jacksonville, Arkansas when Arkansas State Police trooper Rodney Dunn pulled in behind her and signaled to her to pull over.

Nicole Harper then did exactly what the Arkansas Driver License Study Guide tells drivers to do: she slowed down, put on her hazard lights, and looked for a safe place to pull over. Since the highway shoulder was very narrow at that location, Harper began to drive toward a exit ramp.

But although she did what she was supposed to do to "comply," she didn’t comply fast enough for trooper Dunn. Within two minutes of flashing his lights, Dunn used a so-called “PIT” (precision immobilization technique) to cause Harper’s car to spin out and flip over.

Dunn rammed his front bumper into the left rear edge of Harper’s car. Harper, who was pregnant at the time, then careened across three lanes of traffic and flipped over.

Dunn then approached Harper’s car and informed her that she got what she deserved, stating that because she didn’t stop fast enough, “this is where you ended up.”

Harper is now suing Dunn and other members of the Arkansas State Police for “negligently” using a PIT maneuver which put Harper’s life and the life of her unborn child at risk.

Naturally, rather than admit the officer acted rashly in response to what was a “textbook” and recommended response to a police traffic stop, the State of Arkansas will now use taxpayer funds to fight the lawsuit in court.

State police claim that Harper chose to “flee” and that she was a danger to other drivers. Of course, many rational people viewing the dashcam footage of Dunn’s actions could just as easily come to the conclusion that by flipping Harper’s car, it was Dunn who was endangering the public.

Harper’s attorney correctly notes that Dunn chose to use deadly force against a pregnant woman who was in the process of slowing down and looking for a safe place to pull over. Moreover, it is unlikely that Dunn had any knowledge of who was in the car, and whether or not small children were inside.

Unfortunately, this is just the latest case of police employing deadly force on citizens in the process of complying with police orders. For example, in the case of Philandro Castile—who did exactly what he was supposed to do as a concealed-carry driver—was shot dead while complying with police orders. And then there was the case of Atatania Jefferson, who was shot dead in her own living room without even being given the chance to comply. One might also consider the case of Phillip White, a 77-year-old, 140-pound blind man whose face was slammed into a ticket counter by police because he wasn’t complying fast enough with police orders. White was already handcuffed at the time.

In the Arkansas case, Harper's lawsuit is unlikely to have any personal effect on Dunn who, in accordance with Arkansas law, enjoys immunity from any personal responsibility for his actions. Dunn, who has received a taxpayer-funded government salary for more than thirty years, enjoys immunity from any personal liability in virtually all cases.

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El Salvador Blazes the Path to Bitcoinization

06/07/2021Peter St. Onge

On Saturday, El Salvador’s president [Nayib Bukele] shook the Bitcoin world by announcing a plan to make Bitcoin legal tender in his country. Details will emerge over time, but even this early it looks like a very big deal.

So I wanted to get some quick thoughts on paper.

First off, will it happen? Lots of bills are introduced about Bitcoin but few become law. In this case, however, President Bukele sports a 92% approval rating and has a strong majority in the Salvadoran parliament. He’s a right-leaning populist, so he has many enemies in media and abroad, but he seems very secure at home.

So, yes, it’s very likely to become law. We don’t yet know what pressure outside countries, especially the US, will apply—more on that below. But, for now, it looks very much real.

Okay, but is it a big deal? Critics are already laughing off El Salvador as a small and poor country. Of course, Google’s first 10,000 users looked silly compared to Yahoo’s millions. All revolutions start small.
Global Search Market Share

For this revolution, there are two big implications for Bitcoin. First, even if just one country uses Bitcoin as legal tender, it could fundamentally change the regulatory and accounting landscapes worldwide that today stand in the way of much wider Bitcoin adoption.

Second, if Bitcoinization is popular among the Salvadoran people, it will likely spread to other countries in a long-anticipated “domino effect.” This could rapidly raise Bitcoin’s prospects of replacing fiat currency.

What’s El Salvador doing that’s new here? In 2016 Japan made a series of reforms that were widely misreported by journalists as making Bitcoin “legal tender,” but that actually made Bitcoin a “legally acceptable means of payment.” This distinction is very important and is the main way government monies handicap competitors.

To illustrate, if you lend somebody a Bitcoin in the US and they agree to repay you a Bitcoin, under the “legal tender” regime they can change their mind anytime and pay you in USD instead. So it’s long been “legally acceptable” in most countries to have contracts in Bitcoin (ask Russell Okung). But, legally, either party could insist on USD settlement.

If you’re American, you’ll recognize this dictate from the phrase “this note is legal tender for all debts, public and private,” inscribed on all US currency. And it’s the key mechanism that forces people to use government money under certain circumstances like the payment of debts. Meaning that if a competing media, like Bitcoin, can also stand as a legal tender, then now you go from monopoly to competitive currencies—the ultimate cage fight on equal footing.

So, yes, El Salvador is breaking fresh ground. It’s a true legal tender law, and given El Salvador is dollarized and doesn’t even have a national currency, the country is more likely to treat Bitcoin on an equal regulatory footing as its existing legal tender, the US dollar. For once, Bitcoin may get a level playing field.

What will Bitcoinization mean for average Salvadorans?

The country today is, indeed, poor, and has an underdeveloped financial system, with 70% of the population unbanked. Moreover, the Salvadoran economy is dominated by migrant remittances, which make up fully 22% of El Salvador’s GDP—about the same as oil’s contribution to Saudi Arabia’s national income.

These factors—unbanked population, remittances, and dollarization—combine to make El Salvador a perfect case study for Bitcoinization. After all, international remittances are one of the clearest use cases for Bitcoin; today, these remittances cost over 6% in fees—closer to 9% in sub-Saharan Africa—but can reach “upwards of 20%” for smaller amounts.
Cost of Remittances

Indeed, President Bukele emphasized remittance fees in his legal tender announcement, noting that “[b]y using Bitcoin, the amount received by more than a million low-income families will increase in the equivalent of billions of dollars every year."

So it’s a smart move. Next up, how will it affect regular Salvadorans? A key here is El Salvador’s close partnership, now deepened, with payments firm Zap and their Strike app. Strike works like Venmo or PayPal but, instead of holding US dollars on your behalf, Strike holds Bitcoins. So the process is as easy as using Venmo or Apple Pay, and Strike’s fees are fractions of a penny—far lower than a credit or debit card might charge.

As important as payments are for regular Salvadorans, the bigger impact from changing a nation’s money is impact on savings. Given El Salvador has lacked a national currency for 20 years, all domestic savings are in foreign currencies, particularly in the US dollar that is, after all, El Salvador’s single existing legal tender.

Will all those dollar holders swap for Bitcoin if the legal tender “playing field” is leveled?

I would guess in the medium term, most Salvadorean savings do not swap for Bitcoin. For the paradoxical reason that, because Bitcoin is a superior store of value to the US dollar, it enjoys enormous speculative interest that remains vulnerable to noise, whether from regulatory threats or unstable billionaires.

In practice, Salvadorans will probably mentally break their savings into medium-term savings and long-term savings. In other words, the money you’ll need in the next 2 or 5 years vs. the money you’re setting aside for a decade or longer—for retirement, or for your kids.

For those medium-term savings, most Salvadorans will probably keep the majority in the relatively stable US dollar, while long-term holdings will care more about the superior returns of Bitcoin, even with the roller coaster. We could only guess the proportion, but for scale perhaps 20% of savings go into Bitcoin over the next decade.

At that scale, if Salvadoran uptake of Bitcoin means transaction demand plus, say, 20% of savings, then, considering El Salvador’s population, GDP, and probable money supply, you might be talking about $5 billion over next decade going from US dollars to Bitcoin. About a 1% bump for Bitcoin price, spread over a decade.

Not large by itself, but that’s where the rest of the world enters the picture.
Bitcoin Legality around the World

A key question will be what, if any, “domino effects” come from El Salvador’s move. There are several effects that are pretty interesting, and that get bigger if and when more countries join in.

First, if Bitcoin is recognized as a legitimate currency, which is the custom for legal tender monies, then central banks may open up to holding part of their reserves in Bitcoin. For a sense of scale, if central bankers were to hold Bitcoin like they hold gold today, which notably is not legal tender anywhere, that’s roughly $2 trillion.

That much demand would, all on its own, roughly triple Bitcoin’s existing demand. So, all else equal, it might roughly triple the price of Bitcoin.

Now, this probably won’t happen first in large, conservative central banks like the Federal Reserve or ECB [European Central Bank], rather you’d want to look at other emerging countries. Which countries?
Central Bank Sales and Purchases

And this brings us to the 800-pound gorilla: Will other countries follow El Salvador to Bitcoinization, and in what ways?

The key will be how Salvadorans themselves come to see the reform. After all, politics is the art of finding a parade and getting in front of it. If Salvadorans see Bitcoinization as a good thing, other people will notice. If not, it’s back to the drawing board.

So there is a lot riding on El Salvador, especially on Strike’s team, which happily includes some of the smartest and most altruistic people in Bitcoin, such as Adam Back.

Zooming in on specific countries, if Salvadoran Bitcoinization goes well, who are the most likely next dominos? We might focus on countries in four categories:

  1. Countries that are also dollarized (Ecuador, Panama, Liberia)
  2. Countries with high inflation that are politically free enough to want to fix it (Argentina, Ghana, Nigeria, Turkey, Pakistan)
  3. Countries with high dependence on migrant remittances and substantial inflation risk (India, Philippines, Mexico, most of central America)
  4. Countries targeted by US financial sanctions (about 20 countries including Russia, Iran, Venezuela, Cuba).

Taken together, these and similar countries make up a majority of the world’s population. Not so laughable anymore.

Now, long before any of these “dominos” come—indeed, even if no other country follows El Salvador—this reform alone could bring enormous improvements to the regulatory environment worldwide that has so far handicapped Bitcoinization as a medium of exchange.

The excellent Caitlin Long surveyed some of these potential changes in a thread today. In sum, she thinks there is a good chance this transforms Bitcoin into a foreign currency for regulatory purposes. Which could set in motion a number of important changes.

First, that firms can treat Bitcoin as cash for accounting purposes, which removes the accounting nightmare of dealing with taxable events with unclear bases in your firm’s unit of account.

Second, if Bitcoin is treated as a foreign currency, it automatically goes on the same banking footing as, say, Canadian dollars held by a US bank. The discriminatory regime that restricts financial access for Bitcoin-related businesses could be removed in a stroke.

A third question is capital gains; foreign currencies held for investment purposes do pay capital gains, but it’s unclear whether the above accounting changes might make Bitcoin tax compliance easier for firms.

Finally, if Bitcoin is a foreign currency, then the likelihood that it will get effectively outlawed declines substantially, while the more sci-fi scenarios of coordinated worldwide bans become even less likely.

So, taken together, and long before any other countries follow El Salvador to Bitcoinization, we could see a dramatic improvement in the regulatory and accounting treatment of Bitcoin.

This alone could lead to much higher demand and, therefore, much higher Bitcoin prices. Higher prices that would, in a beautiful irony, benefit the very Salvadoran people who contributed to them: a fitting reward for being “first movers” in declaring monetary independence.

Now, what could go wrong?

I imagine many bureaucrats in Washington or Brussels are working this Sunday asking not what could go wrong, but what they could make go wrong. How to stop this.

At the same time, I also imagine El Salvador’s announcement caught them off guard, and they don’t yet know what to do.

The fastest play for a country like the US is to use existing anti-money-laundering regulations (AML) to threaten Salvadoran banks, perhaps accusing them of enabling narcotraffickers or, given the news cycle, ransomware hackers.

If the media plays along—Bukele is an enormously popular right-wing populist, so not a stretch—then they could frame the narrative as dictator trying to partner with cartels and hackers. If the media does go down this route, I hope they’re very clearly called out by Bitcoiners who smell the bullsh*t.

Still, the good news is that one should never underestimate the incompetence of a government caught by surprise. Bitcoin regulation inside the US is very much contested territory, a kind of regulatory no-man’s-land as various agencies do battle with little resolution in sight. Indeed, this lack of oversight has been frustrating for domestic firms who would like a bit more legal certainty than US regulators appear ready to share.

This means it’s entirely possible that, just as the US failed to strangle Bitcoin in its crib, it could fail to strangle Bitcoinization in its crib. The Man may want to kill Bitcoin, but can’t quite herd his cats to get it done.

For the sake of the Salvadoran people, indeed for all those for whom Bitcoin offers a path to freedom, let’s hope enough regulators remember what drew them to public service in the first place: comforting the afflicted, not destroying them on behalf of the corrupt.

[The original text of this article appeared on CryptoEconomy.]

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Biden and the Fed Are Creating an Inflation Crisis

06/03/2021Robert L. Luddy

The Federal Reserve Bank (the Fed) and the Biden administration are systematically undermining the stability of the American economy with a variety of unwise and destructive policies. The Fed and the administration defend these policies by denying obvious economic truths, which include their own inflation data.

Treasury Secretary Janet Yellen asserts that inflation is transitory and shortages are temporary. More than 300 American manufacturers have asked the Biden administration to end disruptive tariffs to ease shortages and reduce costs.

Galvanized steel has doubled in price and is only sold on allocation, resulting in severe shortages. Steel in the EU is 40 percent lower in cost, which provides a huge advantage to our EU competitors. The HVAC industry is experiencing the worst inflation since the mid-1970s. Housing is experiencing shortages and inflation.

Yellen also presses Congress to spend more money to aid the economy. She is likely detached from reality, as the Biden administration policies include massive spending up to a $6 trillion budget for fiscal year 2022, which expands deficits to frightening levels. Modern Monetary Theory, which promotes massive government spending and borrowing, has infected the brains of the Biden administration.

We have been justly proud of our energy independence, but now gas prices have increased 50 percent in just a few months. The Biden administration cancelled the Keystone Pipeline and new fracking on federal lands with the intent of ending the production of fossil fuels. It is clear that green energy is inadequate, but President Biden has made climate change his administration’s most important priority. These policies will not help the climate but will cause lower-income citizens to suffer with high energy, food, and housing costs.

Milton Friedman said many years ago that inflation is “too much money chasing after too few goods.” This assertion has been challenged in recent years, but today’s crises provide plenty of evidence for it: witness the massive inflation of the U.S. stock markets, housing, and most all capital goods. Consumer product inflation has been tame, but now the federal government is wiring money to consumers and states while expanding the federal government. This is why we’re seeing shortages, high demands, and inflation.

Jerome Powell is determined to be the worst Fed chair since Arthur F. Burns (1970–78), who created massive inflation with his policies and arrogance. Burns denied hard, factual data, and now Powell is following in his footsteps by doing the following:

  • Powell’s Fed initially contracted the Fed balance sheet but reversed course and began to buy government and other securities at the rate of $150 billion per month. The balance sheet has expanded from $4 to $7.4 trillion. The impact of these purchases is to destroy market pricing of interest rates.
  • Short-term interest rates are near zero, which denies savers any return and forces speculative investments, undermining orderly, rational markets.
  • The worst Fed policy is their promotion of 2 percent inflation, which undermines the buying power of the lowest-income workers. This policy is cruel and stupid. Once inflation begins, it’s difficult to arrest. Paul Volcker tamed inflation in the ’80s, but very high interest rates crushed economic growth.

The following solutions will be difficult, but necessary, to achieve stable prices and economic growth:

  1. Immediately eliminate tariffs on steel, electronics, and lumber. Unilateral free trade is the best solution for low prices and high quality.
  2. Stop Congress from passing any new trillion-dollar spending bills, using borrowed money.
  3. End the obsession and false god of man-made climate change, and let the market create energy efficiencies.
  4. End deficit spending with the fiscal year 2022 budget, which will reduce the footprint of the federal government.
  5. Make the Fed discontinue purchasing bonds, and let the market determine short- and long-term interest rates.

Policymakers are headed to an economic cliff, which will lead to uncontrolled inflation and a recession. The U.S. dollar could lose its reserve status if the market loses confidence in it. If this happens, we’ll learn the hard way: the U.S. will have a lower standard of living, and the federal largesse will cease to exist.

Originally published at the American Spectator. Republished with permission of the author.
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Can the Fed's Portfolio Ever Return to Normal?

06/02/2021Robert Aro

They call it “easy money.”  We live in a world where the flick of a switch or click of a mouse can create billions to trillions of dollars which are then loaned out to certain members of our society. That said, paying back that money is not as easy…

In the case of the Fed’s $7.9 trillion balance sheet, when will this get repaid? Where will that money come from?

The Federal Reserve buys approximately $80 billion US Treasury and $40 billion Mortgage-Backed Securities (MBS) a month. These “temporary” purchases are claimed to provide market liquidity during times of crisis to help correct for errors caused by the free market.

Over the last week, we were given hints of things to come. In Monday’s publication of the Open Market Operations During 2020 report, by the Federal Reserve Bank of New York much was said about the System Open Market Account (SOMA), the portfolio which includes both domestic and foreign assets. Per projections in the report:

Treasury and agency MBS purchases continue at the current pace through 2021 before gradually reducing to zero at the end of 2022.

If reducing purchases of treasuries and MBS to NIL at the end of 2022, after hitting $9 trillion in assets seems unbelievable, understand it doesn’t end there. More details of the plan are provided:

By the end of the projection horizon, the size of the portfolio could be as low as $6.6 trillion or as high as $9.0 trillion…

They included a chart showing the high and low ranges in the shaded region below:


The notion of tightening the balance sheet continues to gain in popularity among prominent central bankers. Even Vice Chair Richard Clarida gave an interview to Yahoo Finance saying:

There will come a time in upcoming meetings where we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases…

The Philadelphia Fed President, Patrick Harker, was more descriptive suggesting a discussion regarding tapering should happen:

sooner rather than later.

How soon is “sooner” and how late is “later?” Everyone knows the Fed cannot continue to buy assets indefinitely; yet, it’s difficult to picture a world where the Fed does not buy assets indefinitely. The effects on various markets, such as stock, bonds, or housing seem unfathomable.

Without the Fed buying bonds, interest rates will likely go up... unless another entity such as another central bank or the public steps in to fill the void. Considering an ever-growing government debt and stimulus programs now seemingly permanent, few could imagine where this easy money would be without the help of the Fed.

As for the stock market, higher rates change valuations and investment decisions, as well as the cost of borrowing. But this goes beyond rates. The Fed’s $7.9 trillion balance sheet, or portfolio holding, as mentioned before is really an account receivable balance. The existing $7.9 trillion means someone owes the Fed this money. By 2023, should the Fed decide to “taper,” i.e. shrink its balance sheet by $2 trillion until 2030, this money will have to be withdrawn from the system...somehow.

Whether from reserves held at the Fed, bank institution balance sheets, or the stock market itself remains to be seen. As of May 25, the total reserves of depository institutions, i.e., money banks held at the Federal Reserve, stood at a whopping $3.89 trillion!


Untangling which entities have money parked at the Fed and who has a claim on the funds would take deciphering, if even possible for the public to ever know. But the point is: to reduce the Fed’s balance sheet by $2 trillion requires $2 trillion to come from somewhere; yet, there are only so many places a few trillion dollars can be housed. If funds are not withdrawn from Fed deposits to pay back the Fed, it must be withdrawn from other markets, such as stocks or bonds. When, if ever, the debt is called to be repaid, we can expect to see some “interesting changes” to all financial markets… and that’s putting it mildly.

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Democracy According to The Office

06/01/2021Kollin Fields

It’s been said by democracy’s critics that the system is essentially two wolves and a sheep deciding what’s for dinner. But to its defenders, democracy has been described as an ethical ideal and a way of life—these conceptions nearly implying a metaphysical manifestation. While we have no way of knowing whether or not we’re living up to democracy as an ethical ideal, we do have evidence of its effectiveness as an electoral system, or lack thereof. If the goal is to secure good governance, then democracy generally fails. But democracy not only pertains to presidents and congressmen, but also down to the local town hall, school board, and mayor. Each of these political actors possesses power purportedly on behalf of “the people.” But I wouldn’t be the first to point out that when someone whom I didn’t vote for wields political power over me, they are not doing so with my consent; in this case, their exercise of power is not literally on my behalf. Libertarians are trapped in a by now obvious dilemma: vote as often as we can for the most “proliberty candidate,” or generally abstain from voting on the grounds that there’s no good candidates or that we refuse to give any kind of consent to broad political power. There is an illustrative example of this dilemma in an episode of The Office.

Later in the series (S8, EP19), a woman named Nellie declares she is the new manager after the real manager—Andy—leaves for several weeks. Everyone in the office is confused by her claim to authority, especially since she didn’t earn the position and no one consented to her newfound power. The main character, Jim, tries to convince everyone to just act as though she has no authority. Nellie, however, starts doing performance reviews and giving out raises based on who will accept her as the new boss. Once a few workers in the office begin accepting the idea that she has authority to issue raises, everyone else has a choice: continue to reject her authority, or accept it for the potential benefits it brings them. In addition to giving raises, she actually cuts the pay of a few skeptical workers who won’t consent to her new authority as boss. There are some interesting assumptions at play in this episode: the workers are so conditioned to having a boss that if their options are between an absentee manager and Nellie—the latter of whom is offering raises—there seems to be an obvious incentive to prefer Nellie, even though having no boss extends their personal freedom at work. But other than Jim and a few others, most of the workers in the office never consider rejecting the idea of a boss altogether.

This is how democracy works. Firstly, most assume there has to be a government, which represents the will of the people and enforces the law: this could be a local sheriff, state governor, or even the US president. The cost of trying to convince everyone else that this position or source of power shouldn’t exist is prohibitively high, so the next best option is to choose someone who we think will do the least amount of damage. But—and this is the rub of democracy—in so voting, just as some office workers began accepting Nellie’s raises, we imply a tacit endorsement or acceptance of political power. We have no way of indicating that we’re voting out of self-defense or that, all things considered, we wish something like school board seat 7 or county tax assessor didn’t exist in the first place; power is placed over us with no real alternative.

In this episode of The Office, the aspirational Dwight is likewise in a bind: either he accepts what he otherwise deems to be illegitimate authority, or he remains in the minority. In a democracy, we are all like Dwight: we can either “get a raise” (that is, vote for the candidate whose policies promise to benefit us), or be relegated to powerlessness through our inaction, accepting the dictates of the Nellies of the world. For instance, about a third of eligible voters didn’t vote in 2020, and yet Joe Biden is now their president, just as Trump was everyone’s president before him, including his most impassioned political enemies. Plenty of Americans engaged in hashtag activism to say that Trump was #NotMyPresident, but … he was. In a democracy, we all have little recourse against authority after the election is over. And if we don’t participate at all, we really have no say, since we are not factored into the “will of the people.”

But unlike an office manager, a politician could have control over our very life or death, or at the very least, our livelihoods. The state can send us to fight in wars, raise our taxes, and as covid policies have shown, they can force us to shut down our businesses and our very means of existence. Democracy means that if we never vote, or even if we do vote but our candidate never wins, all of these measures over our lives can be controlled by people to whom we never conceded authority. We are all Dwight in The Office, on the precipice of accepting Nellie’s authority or having it imposed on us regardless. She can give us a raise, but she can also reduce our pay. The American state can reduce our taxes or send out “stimulus checks,” but they can also send us to die in the sands of Afghanistan. The stakes are enormous in our modern democracy.

Like many workers in The Office, most people are too conditioned to think we need a boss, and that Nellie, or Joe Biden, is as good as any other. But if the fictitious world of Dunder Mifflin tells us anything, the workers’ most productive period was later in the series when their manager (played by Will Ferrell) was hospitalized after trying to dunk a basketball. After weeks without a boss, Jim says, “So as it turns out, unless you're a young child or a prison inmate, you don't need anyone supervising you. People just come in and do their work on their schedule. Imagine that. People like us allowed to sell paper. Unsupervised. And yet, somehow it works.”

We too might consider a world without arbitrary political power. Imagine that.

Image source:
TheMuuj via Flickr
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Government Schools Use Covid as an Excuse to Tighten Totalitarian Grip

While the recent clamp-down on power from public universities has mainly been in the realm of speech and expression, like almost every other government institution, they have used covid-19 as an opportunity to control students further. Much to my dismay, this week I learned that my alma mater, Indiana University, has instituted a “COVID-19 Vaccine Requirement,” their website stating:

With the ultimate goal of returning our campuses to normal operations, beginning with the fall 2021 semester, all Indiana University (including IUPUI) students, faculty and staff will be required to have a COVID-19 vaccine and be fully vaccinated before returning to campus.

I was shocked that this was mandatory, as opposed to a mere recommendation, but slightly further down the page, it is abundantly clear—comply or leave:

If you choose not to meet the requirement

IU has outlined strong consequences for those who choose not to meet the COVID-19 vaccine requirement and do not receive an exemption. Everyone is strongly encouraged to get the vaccine as soon as possible not only for your own health and safety but for those around you as well.

For students, they will see their class registration cancelled, CrimsonCard access terminated, access to IU systems (Canvas, email, etc.) terminated, and will not be allowed to participate in any on campus activity.

Faculty and staff who choose not to meet the requirement will no longer be able to be employed by Indiana University. Working remotely and not meeting the COVID-19 vaccine requirement is not an option.

While forced vaccination is completely totalitarian, the argument could be made that new students were made aware of the university’s vaccine requirements and could make a voluntary decision to attend or not, given the information. What really strikes me is the nerve the university has forcing the vaccine on students already attending.

Suppose a student has spent three years of his life working toward his degree. Entering his final year, he doesn’t wish to receive the vaccine. Then what? His choice is to get a vaccine he doesn’t want so that he can finish his degree, or leave. This violates fundamental concepts of contract law. When the student undertook the education at the university three years ago, he was not aware that a new vaccine would be imposed on him in the final year of his education. With this knowledge, he might have chosen to attend a different university, or none at all. Of course, he may have gone to the university anyway, but he would have had this knowledge beforehand, and voluntarily agreed to those terms. Enforcing a new requirement unilaterally upon these students is an audacious power grasp, even for these institutions. One would expect to see a plethora of lawsuits in the future, but we all know how well the court system has prioritized essential liberties during the covid era.

Further down the page, Indiana University makes the same sales pitch that the vaccine is “safe, effective, and free, as is seen in TV ads and elsewhere that we are endlessly bombarded by. It is downright creepy that they are trying to convince students of the veracity of something they don’t have a choice to get. Another Orwellian aspect of the policy is the “COVID-19 vaccine report form.” Through the porthole, students can apparently login through their account and submit documentation proving they’ve received the vaccine and complied with all university requirements.

Indiana University isn’t alone in these requirements; the Chronicle of Higher Education indicates that more than three hundred colleges will require a covid vaccine. More are expected to follow.

So Much for Informed Consent

The Nuremberg Code (1947) states that legal capacity to give consent involves the ability “to exercise free power of choice, without the intervention of any element of force, fraud, deceit, duress, overreaching, or other ulterior form of constraint or coercion.” Students are coerced with the threat of being dismissed from the universities if they do not receive the covid vaccine—a clear violation of the Nuremberg Code.

It is no surprise that government schools are such heavy proponents of the agenda promulgated by the federal government and the pharmaceutical industrial complex, using their authority to indoctrinate a generation to not question authority—even when it comes to some of the most personal decisions an individual makes, such as essential health decisions.

Hopefully, students will resist the tyranny of having personal health decisions dictated to them. If enough refuse, administrations will be forced to change their policies. Enrollment numbers decreasing in these indoctrination stations as a result would be even better yet. One thing is for certain, without a clear repudiation of measures like mandatory covid vaccination, government schools will continue to tighten their totalitarian grip on young minds, creating more easily controlled subjects of the state.

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